Registration333-268196
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NEPTUNE WELLNESS SOLUTIONS INC.
(Exact name of registrant as specified in its charter)
Quebec | 2836 | Not Applicable | ||
(State or Other Jurisdiction of Incorporation or Organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification No.) |
545 Promenade du Centropolis
Suite 100
Laval, Quebec, Canada H7T 0A3
(450)
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
CT Corporation System
28 Liberty Street
New York, NY 10005
(212)
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies of all communications, including communication sent to agent for service, should be sent to
François Paradis | ||||
Osler, Hoskin & Harcourt LLP | ||||
1000 De La Suite 2100 Montréal, Québec, H3B 4W5 Canada (514) 904-8100 | John S. Wirt 545 Promenade du Centropolis, Suite 100 Laval, Quebec, H7T 0A3 Canada (450) 687-2262 | Thomas M. Rose | ||
401 9th Street, NW, Suite 1000 | ||||
Washington, DC 20004 | ||||
United States | ||||
(757) 687-7715 | [●] |
Approximate date of commencement of proposed sale to the public:
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated | ☒ | Smaller reporting company | ☒ | |||
Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. The securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion. Dated January 30,July 31, 2023.
PRELIMINARY PROSPECTUS
Neptune Wellness Solutions Inc.
Up to 7,267,114[●] Common Shares
[Up to [●] Pre-Funded Warrants to Purchase up to [●] Common Shares]
Up to [●] Common Warrants to Purchase up to [●] Common Shares
[Up to [●] Common Shares Underlying the Common Warrants
and Pre-Funded Warrants]
This prospectus relates to the issuance by us and the resale by the selling security holders named in this prospectus (the “Selling Shareholders”) ofWe are offering [on a “reasonable best efforts basis”] up to an aggregate of 7,267,114[$[●] million of our common shares, no par value per share (“Common Shares”Shares”), upontogether with warrants (“Common Warrants”) to purchase up to [●] common shares pursuant to this prospectus at an assumed public offering price of $[●] per Common Share and accompanying Common Warrant, which was the exerciseclosing price of warrants to purchase our common shares on The Nasdaq Capital Market of the Nasdaq Stock Market LLC (“Nasdaq”) on [●], 2023. Each Common Share, or a pre-funded warrant in lieu thereof, is being sold together with a Common Warrant to purchase one Common Share. Each Common Warrant is exercisable to purchase one Common Share at an exercise price of $[●] will be exercisable upon issuance and will expire [●] years from the date of issuance.
[We are also offering to certain purchasers whose purchase of Common Shares in this offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding Common Shares immediately following the consummation of this offering or if the purchaser shall otherwise elect, the opportunity to purchase, if any such purchaser so chooses, pre-funded warrants (“Pre-Funded Warrants” and, collectively with the Common Warrants, the “Warrants”), in lieu of Common Shares that would otherwise result in such purchaser’s beneficial ownership exceeding 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding Common Shares or as such purchaser shall otherwise elect. Each Pre-Funded Warrant will be exercisable for one Common Share. The purchase price of each Pre-Funded Warrant and the accompanying Common Warrant will be equal to the price at which (i) 6,417,114one Common Share and the accompanying Common Warrant are sold to the public in this offering, minus $[0.0001], and the exercise price of each Pre-Funded Warrant will be $[0.0001] per Common Share. The Pre-Funded Warrants (the “October 2022 Warrants”) were issued to Selling Shareholderswill be immediately exercisable and may be exercised at any time until all of the Pre-Funded Warrants are exercised in full. For each Pre-Funded Warrant we sell, the number of Common Shares we are offering will be decreased on a private placement that closed pursuant to that certain Securities Purchase Agreement dated October 6, 2022 (the “Purchase Agreement”) with certain institutional investors, pursuant to which Neptune Wellness Solutions Inc. (the “Company”) agreed toone-for-one basis. Because we will issue one Common Warrant for each Common Share and sell,for each Pre-Funded Warrant sold in this offering, the number of Common Warrants sold in this offering will not change as a registered direct offering, 3,208,557result of itsa change in the mix of the Common Shares and Pre-Funded Warrants sold. The Common Shares and Common Warrants will be separately issued, but the Common Shares and Common Warrants will be issued and sold together to purchasers as common units (“Common Units”), and the Pre-Funded Warrants and Common Warrants will be separately issued, but the Pre-Funded Warrants and Common Warrants will be issued and sold together to purchasers as pre-funded units (“Pre-Funded Units”).]
This offering will terminate on [●], 2023, unless we decide to terminate the offering (which we may do at any time in a concurrent private placement (the “Private Placement”) and (ii) 850,000 Warrants (the “January 2023 Warrants” and together with the “Series E Warrants,” the “Warrants”) were issued to Selling Shareholders in a private placement that closed pursuantour discretion) prior to that certain Note Purchase Agreement, dated asdate. We will have one closing for all the securities purchased in this offering. The combined public offering price per Common Share [(or Pre-Funded Warrant)] and Common Warrants will be fixed for the duration of January 12, 2023 (the “Loan”).this offering.
Our registrationThis prospectus also relates to the offering of the securities covered by this prospectus does not mean that either we or the Selling Shareholders will issue, offer or sell, as applicable, anyCommon Shares issuable upon exercise of the securities hereby registered. The Selling Shareholders may offer, sell, or distribute all or a portion ofCommon Warrants [and the securities hereby registered publicly or through private transactions at prevailing market prices or at negotiated prices. We will not receive any of the proceeds from such sales of our Common Shares by the Selling Shareholders pursuant to this prospectus. We will, however, receive the net proceeds of any Warrants exercised for cash. We will bear all costs, expenses and fees in connection with the registration of these securities, including with regard to compliance with state securities or “blue sky” laws. The Selling Shareholders will bear all commissions and discounts, if any, attributable to their sale of our common shares. See “Plan of Distribution” beginning on page 105 of this prospectus.Pre-Funded Warrants].
You should read this prospectus and any prospectus supplement or amendment carefully before you invest in our securities.
We have engaged [●] (the “[Placement Agent]”) to act as our exclusive [Placement Agent] in connection with this offering. The [Placement Agent] has agreed to use its [reasonable best efforts] to arrange for the sale of the securities offered by this prospectus. The [Placement Agent] is not purchasing or selling any of the securities we are offering and the [Placement Agent] is not required to arrange the purchase or sale of any specific number of securities or dollar amount. We have agreed to pay to the [Placement Agent] the fees set
forth in the table below, which assumes that we sell all of the securities offered by this prospectus. There is no arrangement for funds to be received in escrow, trust or similar arrangement. There is no minimum offering requirement. We will bear all costs associated with the offering. See “Plan of Distribution” on page [●] of this prospectus for more information regarding these arrangements.
Our Common Shares are listed on The Nasdaq Capital Market (“Nasdaq”) under the symbol “NEPT”. On January 27,[●], 2023, the last reported sale price of our Common Shares was $0.77$[●] per share on the Nasdaq. The combined public offering price per Common Shares [(or Pre-Funded Warrant)] and accompanying Common Warrants will be determined between us and investors based on market conditions at the time of pricing, and may be at a discount to the current market price of our common shares. Therefore, the recent market price used throughout this prospectus may not be indicative of the actual offering price. There is no established public trading market for the [Pre-Funded Warrants or] Common Warrants, and we do not expect a market to develop. In addition, we do not intend to apply for a listing of the [Pre-Funded Warrants or] Common Warrants on any national securities exchange.
Our business and investing in our securities involve a high degree of risk. See “Risk Factors” beginning on page 15[●] of this prospectus and in the other documents that are incorporated by reference in this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
| Per | [Per Pre- | | | ||||||
| | Common | | Funded | | | | | ||
| | Share and | | Warrant and | | | | | ||
| | Common Warrant | | Common Warrant] | | Total | | |||
Public offering price | | $ | | | $ | | | $ | | |
[Placement Agent]’s fees(1) | | $ | | | $ | | | $ | | |
Net proceeds to us, before expenses(1) | | $ | | | $ | | | $ | | |
(1) | We have agreed to pay the [Placement Agent] a total cash fee equal to [●]% of the gross proceeds of the offering. We will also reimburse the [Placement Agent] for [expenses in the amount of $[●] and for legal and out-of-pocket expenses in the amount of $[●]]. See “Plan of Distribution”. |
The [Placement Agent] expects to deliver the securities to the purchasers in the offering on or about , 2023, subject to satisfaction of certain conditions.
Sole [Placement Agent]
[●]
The date of this prospectus is January 30,, 2023.
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4 | ||||
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5 | ||||
7 | ||||
10 | ||||
15 | ||||
17 | ||||
36 | ||||
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39 | ||||
40 | ||||
41 | ||||
53 | ||||
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 55 | |||
CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS, AND DIRECTOR INDEPENDENCE | 75 | |||
76 | ||||
79 | ||||
83 | ||||
88 | ||||
90 | ||||
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT | 99 | |||
102 | ||||
103 | ||||
104 | ||||
105 | ||||
F-1 |
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MARKET AND OTHER INDUSTRY DATA
Certain market and industry data included in this prospectus, including the size of certain markets and our size or position within these markets, including our products, are based on estimates of our management and third-party reports. Management estimates have been derived from our management’s knowledge and experience in the markets in which we operate, as well as information obtained from surveys, reports by market research firms, our customers, distributors, suppliers, trade and business organizations and other contacts in the markets in which we operate, which, in each case, we believe are reliable.
We are responsible for all of the disclosure in this prospectus and while we believe the data from these sources to be accurate and complete, we have not independently verified data from these sources or obtained third-party verification of market share data and this information may not be reliable. In addition, these sources may use different definitions of the relevant markets. Data regarding our industry is intended to provide general guidance but is inherently imprecise.
Assumptions and estimates of our future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk“Risk Factors-Risks Relating to our Business and Industry.Industry.” These and other factors could cause our future performance to differ materially from our assumptions and estimates. See “Cautionary Note Regarding Forward-Looking Statements.”
TRADEMARKS AND COPYRIGHTS
We own or have rights to trademarks or trade names that we use in connection with the operation of our business, including our corporate names, logos and website names. In addition, we own or have the rights to copyrights, trade secrets and other proprietary rights that protect the services that we offer. This prospectus may also contain trademarks, service marks and trade names of other companies, which are the property of their respective owners. Our use or display of third parties’ trademarks, service marks, trade names or products in this prospectus is not intended to, and should not be read to, imply a relationship with or endorsement or sponsorship of us. Solely for convenience, some of the copyrights, trade names and trademarks referred to in this prospectus are listed without their ©, ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our copyrights, trade names and trademarks. All other trademarks, service marks and trade names are the property of their respective owners.
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ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement on Form S-1 that we filed with the Securities and Exchange Commission (the “Commission”“Commission” or the “SEC”“SEC”) using the “shelf” registration process. Under this shelf registration process, the Selling Shareholders may, from time to time, sellregister the securities offered by them described in this prospectus. We will not receive any proceeds fromhereby under the sale by such Selling ShareholdersSecurities Act of the securities offered by them described in this prospectus. We will not receive any proceeds from the sale of Common Shares underlying the Warrants pursuant to this prospectus, except with respect to amounts received by us upon the exercise of the Warrants.
1933, as amended (the “Securities Act”). We may also file a prospectus supplement or post-effective amendment to the registration statement of which this prospectus forms a part that may contain material information relating to these offerings. The prospectus supplement or post-effective amendment may also add, update or change information contained in this prospectus with respect to that offering. If there is any inconsistency between the information in this prospectus and the applicable prospectus supplement or post-effective amendment, you should rely on the prospectus supplement or post-effective amendment, as applicable. Before purchasing any securities, you should carefully read this prospectus, any post-effective amendment, and any applicable prospectus supplement, together with the additional information described under the heading “Where You Can Find More Information.”
Neither we, nor the Selling Shareholders,[Placement Agent], have authorized anyone to provide you with any information or to make any representations other than those contained in this prospectus, any post-effective amendment, or any applicable prospectus supplement prepared by or on behalf of us or to which we have referred you. We and the Selling Shareholders[Placement Agent] take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the Selling Shareholders[Placement Agent] will not make an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus, any post-effective amendment and any applicable prospectus supplement to this prospectus is accurate only as of the date on its respective cover. Our business, financial condition, results of operations and prospects may have changed since those dates. This prospectus contains, and any post-effective amendment or any prospectus supplement may contain, market data and industry statistics and forecasts that are based on independent industry publications and other publicly available information. Although we believe these sources are reliable, we do not guarantee the accuracy or completeness of this information and we have not independently verified this information. In addition, the market and industry data and forecasts that may be included in this prospectus, any post-effective amendment or any prospectus supplement may involve estimates, assumptions and other risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors” contained in this prospectus, any post-effective amendment and the applicable prospectus supplement. Accordingly, investors should not place undue reliance on this information.
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This prospectus contains summaries of certain provisions contained in some of the documents described herein, but reference is made to the actual documents for complete information. All of the summaries are qualified in their entirety by the actual documents. Copies of some of the documents referred to herein have been filed, will be filed or will be incorporated by reference as exhibits to the registration statement of which this prospectus is a part, and you may obtain copies of those documents as described below under “Where You Can Find More Information.”
Unless otherwise indicated, all references to “$” or “US$” in this registration statement refer to U.S. dollars, and all references to “C$” refer to Canadian dollars.
We own or have rights to trademarks, trade names and service marks that we use in connection with the operation of our business. In addition, our name, logos and website name and address are our trademarks or service marks. Solely for convenience, in some cases, the trademarks, trade names and service marks referred to in this prospectus are listed without the applicable ®, ™ and SM symbols, but we will assert, to the fullest extent under applicable law, our rights to these trademarks, trade names and service marks. Other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners.
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Unless the context indicates otherwise, references in this prospectus to the “Company,” the “Corporation,” “Neptune,” “we,” “us,” “our,” and similar terms refer to Neptune Wellness Solutions Inc. and its consolidated subsidiaries.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains or incorporates by reference certain information and statements that may constitute forward-looking information within the meaning of Canadian securities laws and forward-looking statements within the meaning of U.S. federal securities laws, both of which we refer to as forward-looking statements, including, without limitation, statements relating to certain expectations, projections, new or improved product introductions, market expansion efforts, and other information related to our business strategy and future plans. Forward-looking statements can, but may not always, be identified by the use of words such as “seek”, “anticipate”, “plan”, “continue”, “estimate”, “expect”, “may”, “will”, “project”, “predict”, “potential”, “targeting”, “intend”, “could”, “might”, “would”, “should”, “believe”, “objective”, “ongoing”, “assumes”, “goal”, “likely” and similar references to future periods or the negatives of these words and expressions and by the fact that these statements do not relate strictly to historical or current matters. The statements we make regarding the following matters are forward-looking by their nature and are based on certain of the assumptions noted below. Forward-looking statements in this prospectus may include, but are not limited to, statements about expectations regarding being subject to taxation in both Canada and the United States; our ability to obtain additional financing in the future and continue as a going concern; uncertainties related to general economic, political, business, industry, and market conditions, including the ongoing COVID-19 pandemic and military conflict between Russia and Ukraine, inflationary pressures, and geopolitical conflicts, the anticipated benefits from the divestiture of our cannabis business, our estimates regarding expenses, future revenues, capital requirements and needs for additional financing; our expectations regarding potential pursuit of strategic acquisitions, joint venture or partnerships, our ability to retain members of our management team and our employees; competition existing today or that will likely arise in the future; and our ability to satisfy the continued listing requirements of the NASDAQ Capital MarketNasdaq or any other exchange on which our securities may trade on.
These forward-looking statements are based on management’s current expectations and are subject to a number of risks, uncertainties, and assumptions, including market and economic conditions, the effect of the COVID-19 pandemic, business prospects or opportunities, future plans and strategies, projections, technological developments, anticipated events and trends and regulatory changes that affect us, our customers and our industries. Although the Company and management believe that the expectations reflected in such forward-looking statements are reasonable and based on reasonable assumptions and estimates, there can be no assurance that these assumptions or estimates are accurate or that any of these expectations will prove accurate. Forward-looking statements are inherently subject to significant business, economic and competitive risks, uncertainties and contingencies that could cause actual events to differ materially from those expressed or implied in such statement.
Undue reliance should not be placed on forward-looking statements. Actual results and developments are likely to differ, and may differ materially, from those anticipated by the Company and expressed or implied by the forward-looking statements contained or incorporated by reference in this prospectus. Such statements are based on a number of assumptions and risks that may prove to be incorrect, including, without limitation, assumptions about:
● | our ability to successfully manage our liquidity and expenses, and continue as a going concern; |
● | the anticipated benefits of the divestiture of our cannabis business; |
● | our ability to maintain customer relationships and demand for our products; |
● | the impact of current and future substantial litigation, investigations and proceedings; |
● | the overall business and economic conditions; |
● | the potential financial opportunity of our addressable markets; |
● | the competitive environment; |
● | the protection of our current and future intellectual property rights; |
● | our ability to recruit and retain the services of our key personnel; |
● | our ability to develop commercially viable products; |
our ability to successfully manage our liquidity and expenses, and continue as a going concern;5
the anticipated benefitsTable of the divestiture of our cannabis business;Contents
our ability to maintain customer relationships and demand for our products;
● | our ability to pursue new business opportunities; |
● | our ability to obtain financing on reasonable terms or at all; |
● | our ability to integrate our acquisitions and generate synergies; and |
● | the impact of new laws and regulations in Canada, the United States or any other jurisdiction in which we currently do or intend to do business. |
the impact of current and future substantial litigation, investigations and proceedings;
the overall business and economic conditions;
the potential financial opportunity of our addressable markets;
the competitive environment;
the protection of our current and future intellectual property rights;
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our ability to recruit and retain the services of our key personnel;
our ability to develop commercially viable products;
our ability to pursue new business opportunities;
our ability to obtain financing on reasonable terms or at all;
our ability to integrate our acquisitions and generate synergies; and
the impact of new laws and regulations in Canada, the United States or any other jurisdiction in which we currently do or intend to do business.
Certain forward-looking statements contained herein and incorporated by reference concerning the cannabis industry and the general expectations of the Company concerning the cannabis industry and the Company’s business and operations are based on estimates prepared by the Company using data from publicly available governmental sources as well as from market research and industry analysis and on assumptions based on data and knowledge of thisthe industry in which the Company operates which the Company believes to be reasonable. However, although generally indicative of relative market positions, market shares and performance characteristics, such data is inherently imprecise. While the Company is not aware of any misstatement regarding any industry or government data presented herein, the cannabis industry in which the Company operates involves risks and uncertainties and is subject to change based on various factors.
Many factors could cause our actual results, level of activity, performance, achievements, future events or developments to differ materially from those expressed or implied by forward-looking statements, including, without limitation, the factors discussed under “Risk Factors” beginning on page 15 and[●], in our Annual Report on Form 10-K for the year ended March 31, 2022, as amended, and our Quarterly Report on Form 10-Q for the quarter ended September 30, 2022.2023. In particular, you should consider the following risks that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements:
● | our inability to achieve the anticipated benefits of the divestiture of our cannabis business; |
● | our inability to continue as a going concern; |
● | geopolitical events, such as terrorism, war or other military conflict, including increased uncertainty regarding the ongoing hostility between Russia and the Ukraine and the related impact on macroeconomic conditions as a result of such conflict; |
● | changes in our industry; |
● | increased competition within the industries that we operate, particularly the nutraceutical, beauty & personal care and organic foods and beverages industries; |
● | changes in laws and/or government regulations affecting our business, including tax laws; |
● | the political environments in the U.S. and Canada; |
● | the COVID-19 pandemic and the efforts to mitigate its effects; |
● | systems failures or cybersecurity incidents; |
● | exposure to current and future claims and litigation, including product liability claims; |
● | exposure to currency fluctuations and restrictions as well as credit risks; |
● | potential significant increases in tax liabilities; |
● | product liability claims; |
● | our inability to attract or retain key personnel or additional employees required for the development and future success of our business; |
● | our inability to protect our intellectual property rights; |
● | changes in intellectual property laws; |
● | our inability to obtain adequate insurance coverage; |
● | our reliance on sales to a limited number of customers; |
● | our failure to maintain any regulatory approvals, licenses and/or permits required for operating our business; |
● | adverse actions by governmental bodies that regulate our products, business or operations; |
● | our inability to maintain our liquidity position and manage expenses; and |
● | our failure to comply with, or remedy deficiencies with, the listing standards of Nasdaq or other securities exchanges on which our Common Shares are listed and trade. |
our inability to achieve the anticipated benefits of the divestiture of our cannabis business;
our inability to continue as a going concern;
geopolitical events, such as terrorism, war or other military conflict, including increased uncertainty regarding the ongoing hostility between Russia and the Ukraine and the related impact on macroeconomic conditions as a result of such conflict;
changes in our industry;
increased competition within the industries that we operate, particularly the nutraceutical, beauty & personal care and organic foods and beverages industries;
changes in laws and/or government regulations affecting our business;
the political environments in the U.S. and Canada;
systems failures or cybersecurity incidents;
exposure to current and future claims and litigation, including product liability claims;
exposure to currency fluctuations and restrictions as well as credit risks;
potential significant increases in tax liabilities;
product liability claims;
our inability to attract or retain key personnel or additional employees required for the development and future success of our business;
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our inability to protect our intellectual property rights;
changes in intellectual property laws;
our inability to obtain adequate insurance coverage;
significant sales to a limited number of customers;
our failure to maintain any regulatory approvals, licenses and/or permits required for operating our business;
adverse actions by governmental bodies that regulate our products, business or operations;
our inability to maintain our liquidity position and manage expenses; and
our failure to comply with, or remedy deficiencies with, the listing standards of The Nasdaq Capital Market or other securities exchanges on which our Common Shares are listed and trade.
There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those expressly or impliedly expected or estimated in such statements. Shareholders and investors should not place undue reliance on forward-looking statements as the plans, intentions or expectations upon which they are based might not occur. Although the Company cautions that the foregoing list of risk factors, as well as those risk factors presented under the heading “Risk Factors” and elsewhere in this prospectus, are not exhaustive, shareholders and investors should carefully consider them and the uncertainties they represent and the risks they entail. The forward-looking statements contained in this prospectus are expressly qualified in their entirety by this cautionary statement. Unless otherwise indicated, forward-looking statements in this prospectus describe our expectations as of the date of this prospectus and, accordingly, are subject to change after such date. We do not undertake to update or revise any forward-looking statements for any reason, except as required by applicable securities laws.
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RISK FACTORS SUMMARY
Investing in our securities involves risks. You should carefully consider the risks described under the heading “Risk Factors” beginning on page 15[●] before deciding to invest in our securities. If any of these risks actually occurs, our business, financial condition and results of operations would likely be materially adversely affected. In such case, the trading price of our securities would likely decline, and you may lose all or part of your investment. Set forth below is a summary of the principal risks we face:
Risks Relating to our Business and Industry
The success of our business depends, in part, on maintaining a strong sourcing and manufacturing platform and efficient distribution channels.
Inflation in the cost of commodities and inputs into our products have, and may continue, to directly affect our business.
We are exposed to risks associated with the divestiture of our cannabis business. |
● | The terms of our indebtedness restrict our current and future operations, particularly our ability to respond to changes or to take certain actions. |
● | If we do not manage our supply chain effectively or if there are disruptions in our supply chain, our business and results of operations may be adversely affected. |
● | Our future results of operations may be adversely affected by input cost inflation. |
● | Our future results of operations may be adversely affected by the availability of natural and organic ingredients. |
● | We may not be successful in achieving savings and efficiencies from cost reduction initiatives and related strategic initiatives. |
● | COVID-19 has and will continue to impact our operations and could have a material adverse effect on our business, results of operations and financial condition. |
● | Increasing awareness of health and wellness are driving changes in the consumer products industry, and if we are unable to react in a timely and cost-effective manner, our results of operations and future growth may be adversely affected. |
● | Markets for our products and services are highly competitive, and we may be unable to compete effectively. |
● | We may be unable to manage our growth effectively. |
● | We depend on a few significant customers for a substantial portion of our revenue. If we fail to retain or expand our customer relationships or significant customers reduce their purchases, our revenue could decline significantly. |
● | Significant interruptions in our access to certain supply chains, for key inputs such as raw materials, electricity, water, and other utilities may impair our operations. |
● | Our future success depends on the sales of our consumer products and turnkey solutions products. |
● | Our activities rely on certain third-party suppliers, contract manufacturers and distributors, and such reliance may adversely affect us if the third parties are unable or unwilling to fulfill their obligations. |
● | Our products may be subject to recalls for a variety of reasons, which could require us to expend significant management and capital resources. |
● | We may not meet timelines for project development. |
● | Product contamination or tampering or issues or concerns with respect to product quality, safety and integrity could adversely affect our business, reputation, financial condition or results of operations. |
● | The Company may have difficulty obtaining insurance to cover its operational risks and, even where available, may not be sufficient to cover losses we may incur. |
Increasing awareness of health and wellness are driving changes in the consumer products industry, and if we are unable to react in a timely and cost-effective manner, our results of operations and future growth may be adversely affected.
Markets for our products and services are highly competitive, and we may be unable to compete effectively.
We may be unable to manage our growth effectively.
We depend on significant customers for a substantial portion of our revenue. If we fail to retain or expand our customer relationships or significant customers reduce their purchases, our revenue could decline significantly.
Significant interruptions in our access to certain supply chains, for key inputs such as raw materials, electricity, water, and other utilities may impair our operations.
Our future success depends on the sales of our consumer products and turnkey solutions products.
Our activities rely on certain third-party suppliers, contract manufacturers and distributors, and such reliance may adversely affect us if the third parties are unable or unwilling to fulfill their obligations.
Our products may be subject to recalls for a variety of reasons, which could require us to expend significant management and capital resources.
We may not meet timelines for project development.
Product contamination or tampering or issues or concerns with respect to product quality, safety and integrity could adversely affect our business, reputation, financial condition or results of operations.
The Company may have difficulty obtaining insurance to cover its operational risks and, even where available, may not be sufficient to cover losses we may incur.
Risks Relating to Our Accounting and Financial Policies
● | Although our consolidated financial statements have been prepared on a going concern basis, our management believe that our recurring losses and negative cash flows from operations and other factors have raised substantial doubt about our ability to continue as a going concern. |
● | We have recorded significant long-lived asset impairment charges and may be required to record additional charges to future earnings if our long-lived assets become impaired. |
Although our consolidated financial statements have been prepared on a going concern basis, our management believe that our recurring losses and negative cash flows from operations and other factors have raised substantial doubt about our ability to continue as a going concern for the twelve-month period ended March 31, 2022 and three- and six-month period ended September 30, 2022.
We have recorded long-lived asset impairment charges and may be required to record additional charges to future earnings if our long-lived assets become impaired.
Risks Relating to Our Liquidity
● | We are actively managing our liquidity and expenses, including by extending payables due and reducing investment in our businesses, and it is not certain that we will be ultimately successful in developing our business and remaining a going concern. |
● | As a result of our failure to timely file our Quarterly Report on Form 10-Q for the quarter ended December 31, 2022, we are currently ineligible to file new short form registration statements on Form S-3, which may impair our ability to raise capital on terms favorable to us, in a timely manner or at all. |
● | The Company may have difficulty accessing public and private capital and banking services, which could negatively impact its ability to finance its operations. |
We are actively managing our liquidity and expenses, including by extending payables due and reducing investment in our businesses, and it is not certain that we will be ultimately successful in developing our business and remaining a going concern.7
We are actively managing our liquidity and expenses, including by extending payables due and reducing investment in our businesses, and it is not certain that we will be ultimately successful in developing our business and remaining a going concern.Table of Contents
The Company may have difficulty accessing public and private capital and banking services, which could negatively impact its ability to finance its operations.
● | The issuance and sale of common shares upon exercise of outstanding warrants may cause substantial dilution to existing shareholders and may also depress the market price of our common shares. Certain outstanding warrants to purchase shares of our common stock have cashless exercise rights. |
Legal and Regulatory Risks Relating to Our Business
We identified material weaknesses in our internal control over financial reporting. This may adversely affect the accuracy and reliability of our financial statements and, if we fail to maintain effective internal control over financial reporting, it could impact our reputation, business, and the price of our common shares, as well as lead to a loss of investor confidence in us.
We identified material weaknesses in our internal control over financial reporting. This may adversely affect the accuracy and reliability of our financial statements and, if we fail to maintain effective internal control over financial reporting, it could impact our reputation, business, and the price of our common shares, as well as lead to a loss of investor confidence in us. |
● | As a non-accelerated filer, we are not required to comply with the auditor attestation requirements of the Sarbanes-Oxley Act. |
● | The Company may be classified as a “passive foreign investment company” for U.S. federal income tax purposes, which would subject U.S. investors that hold the Company’s Common Shares to potentially significant adverse U.S. federal income tax consequences. |
● | We are subject to laws and regulations and guidelines, changes in which could increase our costs and individually or in the aggregate adversely affect our business. |
● | We are subject to risks inherent to the nutraceutical industry. |
● | We are subject to anti-money laundering laws and regulations in multiple jurisdictions. |
● | Our inability to maintain our regulatory approvals and permits or failure to comply with applicable regulations could adversely affect our business and financial results. |
● | We are currently, and may in the future be, subject to substantial litigation, investigations and proceedings that could cause us to incur significant legal expenses and result in harm to our business. |
Sources of hemp-derived CBD depend upon legality of cultivation, processing, marketing and sales of products derived from those plants under state law.
We must comply with requirements for licenses and permits in Canada and the failure to maintain these could adversely affect our operations.
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We expect to be subject to taxation in both Canada and the United States, which could have a material adverse effect on our financial condition and results of operations.
We are subject to laws and regulations and guidelines, changes in which could increase our costs and individually or in the aggregate adversely affect our business.
We are subject to risks inherent to the nutraceutical industry.
We are subject to anti-money laundering laws and regulations in multiple jurisdictions.
Potential regulation by the FDA could have a material adverse effect on our business, financial condition and results of operations.
We could be materially adversely impacted due to restrictions under U.S. border entry laws.
There is doubt regarding our ability to enforce contracts.
Our inability to maintain our regulatory approvals and permits could adversely affect our business and financial results.
We are currently, and may in the future be, subject to substantial litigation, investigations and proceedings that could cause us to incur significant legal expenses and result in harm to our business.
Risks Relating to Our Human Resources
● | We may be unable to attract or retain key personnel, and we may be unable to attract, develop and retain additional employees required for our development and future success. |
● | We face exposure to fraudulent or illegal activity by officers, directors, employees, contractors, consultants and agents, which may subject us to investigations and legal actions. |
We may be unable to attract or retain key personnel, and we may be unable to attract, develop and retain additional employees required for our development and future success.
We face exposure to fraudulent or illegal activity by employees, contractors, consultants and agents, which may subject us to investigations and actions.
Risks Relating to Our Information Technology
● | We must successfully maintain and/or upgrade our information technology systems, and our failure to do so could have a material adverse effect on our business, financial condition or results of operations. |
● | We may be exposed to risks and costs associated with security breaches, data loss, credit card fraud and identity theft that could cause us to incur unexpected expenses and loss of revenue as well as other risks. |
We must successfully maintain and/or upgrade our information technology systems, and our failure to do so could have a material adverse effect on our business, financial condition or results of operations.
We may be exposed to risks and costs associated with security breaches, data loss, credit card fraud and identity theft that could cause us to incur unexpected expenses and loss of revenue as well as other risks.
Risks Relating to Our Intellectual Property
● | Our commercial success depends, in part, on our intellectual property rights and a failure by us to protect our intellectual property may have a material adverse effect on our ability to develop and commercialize our products. |
Our commercial success depends, in part, on our intellectual property rights and a failure by us to protect our intellectual property may have a material adverse effect on our ability to develop and commercialize our products.
We have limited trademark protection.
Risks Relating to This Offering and Ownership of Our Common Shares
We do not currently intend to pay any cash dividends on our Common Shares in the foreseeable future.
If there is insufficient liquidity in our Common Shares, it could adversely affect your ability to sell your shares.
U.S. investors may be unable to enforce certain judgments against us in Canada.
Certain Canadian laws could delay or deter a change of control.
Our shareholders may be subject to dilution resulting from future offerings of Common Shares by us.
We do not currently intend to pay any cash dividends on our Common Shares in the foreseeable future. |
● | We have broad discretion in the use of proceeds from the offering. |
● | If there is insufficient liquidity in our Common Shares, it could adversely affect your ability to sell your shares. |
● | There is currently no established public trading market for the Warrants. |
● | U.S. investors may be unable to enforce certain judgments against us in Canada. |
● | Certain Canadian laws could delay or deter a change of control. |
● | Our failure to meet the continued listing requirements of Nasdaq could result in a de-listing of our Common Shares. |
● | Our shareholders may be subject to dilution resulting from this offering and future offerings of Common Shares by us. |
● | Our constating documents permit us to issue an unlimited amount of additional Common Shares or Preferred Shares, which may prevent a third-party takeover or cause our shareholders to experience dilution in the future. |
Our constating documents permit us to issue an unlimited amount8
Because the Company is a “smaller reporting company,” we may take advantage of certain scaled disclosures available to us, resulting in holders of our securities receiving less Company information than they would receive from a public company that is not a smaller reporting company
● | Because the Company is a “smaller reporting company,” we may take advantage of certain scaled disclosures available to us, resulting in holders of our securities receiving less Company information than they would receive from a public company that is not a smaller reporting company. |
● | Any acquisitions, strategic investments, divestures, mergers, or joint ventures we make may require the issuance of a significant amount of equity or debt securities and may not be successful. |
● | We have reported negative cash flows from operating activities and may do so in future periods. |
● | We may not be able to maintain our operations without additional funding. |
● | We are subject to foreign currency fluctuations, which could adversely affect our financial results. |
● | [This is a reasonable best-efforts offering, no minimum amount of securities is required to be sold, and we may not raise the amount of capital we believe is required for our business plans, including our near-term business plans.] |
● | [Purchasers who purchase our securities in this offering pursuant to a securities purchase agreement may have rights not available to purchasers that purchase without the benefit of a securities purchase agreement.] |
Any acquisitions, strategic investments, divestures, mergers, or joint ventures we make may require the issuance of a significant amount of equity or debt securities and may not be successful.
We have reported negative cash flows from operating activities and may do so in future periods.
We may not be able to maintain our operations without additional funding.
We are subject to foreign currency fluctuations, which could adversely affect our financial results.
General Risk Factors
● | Catastrophic events outside of our control, including pandemics, may harm our results of operations or damage our facilities. |
● | The market price of the Company’s Common Shares may be highly volatile. |
Catastrophic events outside of our control, including pandemics, may harm our results of operations or damage our facilities.
The market price of the Company’s Common Shares may be highly volatile.
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PROSPECTUS SUMMARY
The following summary highlights selected information included in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider or that may be important to you in making an investment decision. You should carefully read the entire prospectus before making an investment in our common shares. You should carefully read this entire prospectus, including the information under, “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements included elsewhere in this prospectus.
Overview
We are a modern consumer packaged goods (“CPG”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 efficientcost-efficient manufacturing and supply chain infrastructure that can be scaled up and down or into adjacent product categories to identify new innovation opportunities, quickly adapt to consumer preferences and demand, and bring new products to market through its mass retail partners and e-commerce channels. Leveraging decades of expertise in extraction and product formulation, Neptune is a provider of turnkey product development and supply chain solutions to business customers across several health and wellness verticals, including nutraceuticals and white label consumer packaged goods. Neptune has expanded its operations since June 2020 into several brand units in order to better address its markets. The main brand units are the following: Nutraceuticals Beauty & Personal Care, and Organic Foods & Beverages. All amounts in this prospectus are in US dollars, unless otherwise noted.
Our Business Strategy
Neptune’s vision is to change consumer habits through the creation and distribution of environmentally friendly, ethical and innovative consumer product goods. Our mission is to redefine health and wellness and help humanity thrive by providing sustainable consumer focused solutions. Despite the decline in global economic activity since the outbreak of the COVID-19 virus, Neptune has taken transformative, and successful, actions to increase its sales, distribution and reach in both the business-to-business (“B2B”B2B”) and business-to-consumer (“B2C”B2C”) modelmodels in the consumer-packaged goods (“CPG”)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®Sprout®, Neptune Wellness™Wellness™, Forest Remedies®Remedies®, and MaxSimil®MaxSimil®.
Neptune’s future will be focused on brand creation, accelerating organic growth with emphasis on increased efficiency and margin expansion.
Our Products and Markets
Our Nutraceutical Beauty and Personal Care products and Organic Foods and Beverages are manufactured by third party manufacturers. In order to meet demand for our products, we have developed relationships with selected contract manufacturers. 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 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 of quality procedures and certifications 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.
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Canadian Cannabis Products - Extracts and Formulations
On October 16, 2022, Neptune entered into an asset sale and purchase agreement (the “ASPA”) with a third-party, for its Canadian cannabis business including the Sherbrooke facility, following the planned divestiture of this business announced on June 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 on November 9, 2022. Some assets were excluded from the ASPA and were written down accordingly. On November 10, 2022, the Company filed a notice of cessation of cannabis activities with Health Canada and requested that its cannabis processing and research licenses be revoked. As of November 11, 2022, all cannabis was removed from the Sherbrooke facility and the Company no longer possesses or conducts any activities with cannabis.
Nutraceuticals
Neptune offers a variety of specialty ingredients, including our licensed specialty ingredient MaxSimil®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®MaxSimil® while improving growth and profitability in its Nutraceuticals vertical through its brand Biodroga.
Neptune’s core strength is product innovation with a focus on specialty ingredients offered in bulk soft gels and liquid delivery systems. The Company continues to expand its delivery system capabilities with projects for pumps, sprays roll-onsand CBD enhancements.roll-ons. All of Neptune’s Nutraceutical products are available under distributors’ private labels, primarily sold in the Canadian and U.S. nutraceutical markets. Neptune, through its nutraceuticals products business, also formulates, develops and provides customers with turnkey nutrition solutions.
Beauty & Personal Care
The Company sells wellness products to the Beauty & Personal CareNutraceutical market through its Forest Remedies brand. Forest Remedies offers plant-based supplements, including first-of-its kind multi-omega gummies and soft gels with packaging that is 100% plastic-free. Neptune announced, on March 10, 2022, the launch of its Forest Remedies Multi Omega 3-6-9 line of supplements. This distribution agreement marks another important milestone in our efforts to transform Neptune into a high-growth branded CPG company.
Organic Foods and Beverages
In February 2021, Neptune acquired a controlling interest in Sprout Foods, Inc., an organic plant-based baby food and toddler snack company. Sprout is an integral piece of Neptune’s health and wellness portfolio and represents a key brand within the Organic Foods and Beverages vertical. Since completing the Sprout acquisition, the Company has begun expansion efforts in Sprout’s distribution across substantially all of Target’s U.S. retail stores. The Company also announced, on July 27, 2021, the initial launch of Sprout products into Canada, in Metro grocery stores in the province of Ontario. Neptune further expects to launch Sprout products in North America throughout the remainder of the fiscal year. The Company expects the Neptune/Sprout combination to result in significant incremental revenue growth, with several near and long-term revenue synergy opportunities identified within Neptune’s existing relationships and current sales channels. As described above, Neptune also announced on June 9, 2021, an exclusive multi-year licensing agreement between Sprout and CoComelon, the #1 children’s entertainment and educational show in the world with more than 110 million subscribers worldwide. This co-branded product line is now available on Walmart.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 the U.S., accounting for approximately 90 percent of the overall market.
On May 2, 2023, Neptune announced that four of its most popular Sprout Organics x CoComelon co-branded, organic toddler pouches have been picked up by Target and are now available in select Target Stores across the United States, and Target.com. The Sprout Organics x CoComelon line includes 15 SKU’s that are made up of toddler pouches, Wafflez snacks, and plant-based snack bars, each leveraging CoComelon’s brand as the #1 Kids YouTube Channel in the world. In addition to the CoComelon partnership, Sprout Organics SKU’s consist of organic toddler pouches, toddler meals, toddler snacks and the newly launched Big Kid Mealz; Sprouts first product out of the baby aisle.
In the last year, Sprout has made the following major distribution gains and sales milestones:
Distribution: Now available in 90% of the organic baby food market, Sprout x CoComelon being a key driver of sales velocity.
Target SKU Count: 4 Sprout x CoComelon SKUs launched in select Target stores nationwide and Target.com.
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Added Distribution: In the last year, Sprout has established substantial distribution gains with leading retailers, and Target has contributed to that growth.
CoComelon Co-Brand: Yes Yes Veggie product is now Sprout’s #1 highest selling pouch in the latest 26 weeks in Total US xAOC*.
Geographic Presence: Now available in all 50 states, as well as in Canada.
*Sales velocity: Sales dollars per total point of distribution; Nielsen AOD; Total US x AOC Latest 26 weeks W/E 3-25-23
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”.
Recent Developments
Liquidity and Going Concern—We are actively managing our liquidity and expenses, including by extending payables due and reducing investment in our businesses. There is substantial doubt about our ability to continue as a going concern. As of January 22,July 25, 2023, we had approximately $6.3$0.7 million in cash and cash equivalents. We believe our current cash position will be sufficient to operate our business for three to six monthsless than one month under our current business plan. In addition, we are pursuing several cash generating transactions as well as planning for further expense reductions. There can be no assurance that any cash generating transaction will be completed or that our expense reductions measures will be sufficient to allow as to continue operating our business. We need substantial additional funding to continue operating our business. If we are unable to continue as a going concern, we may have to liquidate our assets, and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements. We may have to liquidate our assets in the very near term if additional funding is not received in the upcoming months.
Our management has concluded that substantial doubt exists about our ability to continue as a going concern for one year from the issuance date of our latest financial statements, which substantial doubt continues to exist. The net proceeds from this offering are not expected to remove that substantial doubt and as such, there will remain substantial doubt about our ability to continue as a going concern after this offering. If we were to receive net proceeds of $[●] million from this offering, we believe that the net proceeds from this offering, together with our existing cash and cash equivalents, will meet our cash needs for approximately [●].
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On July 13, 2022, Sprout Foods, Inc., a Delaware corporation (“Sprout”), a subsidiaryApril 17, 2023, the Company entered into an agreement that fixed the purchase price for the exercise of the Call Option to acquire the remaining 49.9% minority share of Sprout, pursuant to the Call Option agreement entered into with the minority stockholders of Sprout. If the Call Option had been exercised prior to June 15, 2023, the purchase price would have been $13.0 million, consisting of at least $10.5 million in cash with the remainder payable in Common Shares. No acquisition was completed by June 15, 2023. The original Call Option remains outstanding until December 31, 2023.
On April 27, 2023, the Company issued an amended and restatedannounced that Sprout extended the maturity of its existing $13 million secured promissory note (the “Amended Note”) in favor of NH Expansion Credit Fund Holdings LP, an investment fund managed bywith Morgan Stanley Expansion Capital (“MSEC”), in the principal amount of $13,000,000.. The Amended Note amended and restated the prior promissory note in the principal amount of $10,000,00 in connection with a loan of an additional $3,000,000maturity has been extended from February 1, 2024 to Sprout from MSEC. The $13,000,000 NotesDecember 31, 2024, which will bear interest at 10%the rate of 15.0% per annum increasing by 1.00% every three months duringthrough and including December 31, 2023, payable in kind, and 10.0% per annum, payable in kind, and 5.0% per annum payable in cash, from and after January 1, 2024.
On May 10, 2023, Neptune announced that Sprout has secured inventory financing through an Invoice Purchase and Security Agreement partnership with Alterna Capital Solutions LLC, effective April 21, 2023. The inventory line will provide Sprout with working capital. The maximum available has been amended to $7.5 million, from $5.0 million previously announced on January 25, 2023 (see note 13), adding a line of inventory to the termaccounts receivable factoring facility that is already in place.
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On May 11, 2023, the Company announced its public offering of 12,121,212 of its common shares (or common share equivalents in lieu thereof) and accompanying warrants to purchase up to an aggregate of 12,121,212 common shares at a combined public offering price of $0.33 per share and accompanying warrant, resulting in gross proceeds of approximately $4.0 million. The warrants have an exercise price of $0.33 per share, are immediately exercisable upon issuance and will expire five years following the date of issuance. The closing of the Notes.offering occurred on May 15, 2023. On that day, the Company issued 4,415,162 common shares and 7,706,050 pre-funded warrants, along with 12,121,212 warrants (the “May 2023 Warrants”). As of the date of this prospectus, 5,410,600 common shares were issued upon exercise of pre-funded warrants, leaving 2,295,450 pre-funded warrants outstanding; none of the May 2023 Warrants have been exercised to date.
In connection with this offering, the Company has agreed that certain existing warrants to purchase up to an aggregate of 8,423,733 common shares that were previously issued in March 2022, June 2022, and October 2022, at exercise prices ranging from $1.62 to $11.20 per share and expiration dates ranging from September 14, 2023 to June 23, 2029, were amended to reduce the exercise prices of the applicable warrants to $0.33, with expiration dates five years following the closing of the offering, i.e. on May 15, 2028, with the exception of warrants to purchase up to 972,763 common shares which will expire on June 23, 2029 as currently contemplated.
On October 16, 2022, NeptuneMay 22, 2023, the Company entered into a Waiver and Second Amendment to Note Purchase Agreement (the “Waiver Agreement”), with CCUR Holdings, Inc. and the purchasers named therein, related to the Note Purchase Agreement dated as of January 12, 2023 (see note 13). The Waiver Agreement provides that the required prepayment of $2.0 million (the “Mandatory Prepayment”), due as of May 15, 2023, is waived, in part, until July 31, 2023, or for an asset saleadditional thirty days thereafter if the Company has filed a Registration on Form S-1 with the Securities and purchase agreement (the “ASPA”) with a third-party, for its Canadian cannabis businessExchange Commission by July 31, 2023. Pursuant to the Waiver Agreement, the Company was required to pay, and has paid, $1.0 million of the Mandatory Prepayment. For the period beginning on March 31, 2023, through and including the Sherbrooke facility, followingdate that the planned divestiture of this business announcedentire Mandatory Prepayment, including interest and fees is paid, interest on June 8, 2022. The aggregate purchase pricethe sum of the assets sold, netoutstanding principal amounts will accrue at the rate of liabilities assumed, amountedtwenty four percent (24%) per annum. Thereafter, interest will revert to $3.7 million ($5,15 million CAD). The ASPA closed on November 9, 2022. Some assets were excluded from the ASPA and were written down accordingly.rate otherwise provided under the Note Purchase Agreement. The Company recordedalso agreed to pay an impairment loss on assets held for saleextension fee in an aggregate amount of $14.5 million in$138,606, which was added to the second quarter interim financial statements for the three and six-months ended September 30, 2022. On November 10, 2022, the Company filed a notice of cessation of cannabis activities with Health Canada and requested that its cannabis processing and research licenses be revoked. As of November 11, 2022, all cannabis was removed from the Sherbrooke 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. The Company remains liable for the pre-closing activities of the divested cannabis business.principal amount due.
On October 11, 2022,July 21, 2023, the Company announced the closingreceipt of a registered direct offeringletter from Nasdaq notifying the Company that, based on the reported stockholders' equity of 3,208,557Neptune as reported in its Annual Report on Form 10-K for the year ended March 31, 2023, the Company does not meet the minimum stockholders' equity requirement for continued listing on the Nasdaq Capital Market under the equity criteria under Nasdaq Listing Rule 5550(b)(1) stating listed companies must maintain stockholders' equity of its Common Sharesat least $2,500,000. The Nasdaq notification letter has no immediate effect on the Company's business operations or the listing of the Company's common shares, and they will continue to trade on Nasdaq. Pursuant to the Warrants inNasdaq Listing Rule 5550(b)(1) the concurrent Private Placement.Company has 45 calendar days, or until September 5, 2023, to submit a plan to regain compliance. If the plan is accepted, Nasdaq can grant an extension of 180 calendar days from the date of the letter to evidence compliance. The Company received gross proceedsintends to regain compliance within the applicable compliance period and is currently working on a plan to submit to Nasdaq.
Legal Proceedings—We and our subsidiaries are engaged in significant legal proceedings and claims that may result in payments, fines and penalties that could adversely affect our business, results of approximately $6.0 million in connection with the offering, before deducting placement agent feesoperations and related offering expenses. The net proceeds to the Company from the offering, after deducting the placement agent fees and expenses, and the Company’s estimated offering expenses, were approximately $5.15 million.
financial condition. These legal proceedings include a purported class action, captioned Marvin Gong v. Neptune Wellness Solutions, et al. On October 21, 2022, the Company announced that it had agreed to settle and resolve a putative shareholder class action lawsuit filed againstthe lawsuit. As part of this settlement, Neptune and certain of its current and former officers and directors, captioned Gong v. Neptune Wellness Solutions, Inc. (Case No. 2:21-cv-01386-ENV-ARL) pendingintends to issue securities worth $2,750,000 within 31 days after the final order is entered, which is expected to occur in the United States District Court for the Eastern Districtcoming days, which may result in a substantial number of New York, for a gross paymentshares being issued, and such an issuance may result in substantial dilution to the classexisting holders of between $4 and $4.25 million, with the exact amount being within the Company’s control and dependent on the type of consideration used. The settlement is subject to court approval and certification by the court of the class. The Company recorded a litigation settlement expense of $4,000,000 in the second quarter interim financial statements for the three and six-months ended September 30, 2022.
On January 12, 2023, the Company entered into a Note Purchase Agreement among the purchasers named therein and the Company, pursuant to which the Company issued and sold $4 million in aggregate principal amount of senior secured promissory notes. The Company may also issue and sell, and the purchasers have agreed to purchase, up to an additional $1 million in aggregate principal amount of senior secured promissory notes to occur not later than February 28, 2023. The second closing will occur only in the event that the Company completes an incremental equity issuance by February 28, 2023, and the aggregate principal amount of the second closing will not exceed the lesser of $1 million or 25% of the proceeds actually received from any such incremental equity issuance. The notes may be prepaid or redeemed in whole or in part by the Company, subject to the payment of a premium in an amount equal to ten percent (10%) of the principal amount of notes being repaid (other than principal in respect of PIK interest), less the aggregate amount of cash interest paid on the Notes being repaid on or before the date of such prepayment.
The notes are due and payable no later than January 12, 2024, unless earlier accelerated in accordance with the terms of the Note Purchase Agreement, with interest accruing at a rate of 16.5% per annum from the date of issuance and payable on the last business day of each calendar month in which the notes are outstanding. For the first six interest payment dates following the initial closing, interest will be paid in kind and thereafter payments shall be made in cash on the interest payment date in arrears. Under the terms of the Note Purchase Agreement,
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the Company issued to the purchasers of the initial notes warrants to purchase a total of 850,000our common shares of the Company exercisable at an exercise price of $0.53 per share at any time until January 12, 2028.shares.
On January 23, 2023, Sprout entered into an accounts receivable factoring facility with Alterna Capital Solutions, LLC (“Alterna”), pursuant to which Sprout agreed to sell certain of its accounts receivable to Alterna. The maximum amount available to Sprout under the facility is $5 million, and funds deployed to Sprout incur a usage fee of the primate rate plus 1%, with a minimum interest rate of 8% per annum. The facility has a one-year term and renews automatically. The Company provided a commercial guaranty in connection with this agreement.
History of the Company
Neptune was incorporated under Part IA of the Companies Act (Québec) on October 9, 1998 under the name Neptune Technologies & Bioressources Inc. Since its incorporation, Neptune has amended its articles of incorporation on numerous occasions. The Company first amended its articles on May 30, 2000Risks Relating to convert its then issuedOur Accounting and outstanding shares into newly-created classes of shares. The Company’s articles were also amended on May 31, 2000 to create Series A Preferred Shares. On August 29, 2000, the Company converted all its issued and outstanding Class A shares into Class B subordinate shares. On September 25, 2000, the Company further amended its share capital to eliminate its Class A shares and converted its Class B subordinate shares into Common Shares. On November 1, 2013, the Company amended its articles of incorporation to reflect certain changes to items relating to board matters. On June 9, 2022, we effected a one for thirty-five (1-for-35) reverse split of our common shares, which we refer to as the “Share Consolidation,” as approved by our Board of Directors. Trading of our common shares on both the Toronto Stock Exchange (“TSX”) and Nasdaq on a post-consolidated basis commenced as of the open of markets on June 13, 2022. On August 15, 2022, the Company voluntarily delisted its Common Shares from the TSX.
Corporate Information
Our principal executive offices are located at 545 Promenade du Centropolis, Suite 100, Laval, Québec, Canada, H7T 0A3 and the telephone number to our offices is (450) 687-2262.
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THE OFFERING
Financial Policies
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| Although our consolidated financial statements have been prepared on a going concern basis, our management believe that our recurring losses and negative cash flows from operations and other factors have raised substantial doubt about our ability to continue as a going concern. |
● | We have recorded significant long-lived asset impairment charges and may be required to record additional charges to future earnings if our long-lived assets become impaired. |
Risks Relating to Our Liquidity
● | We are actively managing our liquidity and expenses, including by extending payables due and reducing investment in our businesses, and it is not certain that we will be ultimately successful in developing our business and remaining a going concern. |
● | As a result of our failure to timely file our Quarterly Report on Form 10-Q for the quarter ended December 31, 2022, we are currently ineligible to file new short form registration statements on Form S-3, which may impair our ability to raise capital on terms favorable to us, in a timely manner or at all. |
● | The Company may have difficulty accessing public and private capital and banking services, which could negatively impact its ability to finance its operations. |
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Legal and Regulatory Risks Relating to Our Business
| ● | We identified material weaknesses in our internal control over financial reporting. This may adversely affect the accuracy and reliability of our financial statements and, if we fail to maintain effective internal control over financial reporting, it could impact our reputation, business, and the price of our common shares, as well as lead to a loss of investor confidence in us. |
● | As a non-accelerated filer, we are not required to comply with the auditor attestation requirements of the |
● | The |
● | We are subject to laws and regulations and guidelines, changes in which could increase our costs and individually or in the aggregate adversely affect our business. |
● | We are subject to risks inherent to the nutraceutical industry. |
● | We are subject to anti-money laundering laws and regulations in multiple jurisdictions. |
● | Our inability to maintain our regulatory approvals and permits or failure to comply with applicable regulations could adversely affect our business and financial results. |
● | We are currently, and may in the future be, subject to substantial litigation, investigations and proceedings that could cause us to incur significant legal expenses and result in harm to our business. |
Risks Relating to Our Human Resources
| ● | We may be unable to attract or retain key personnel, and we may be unable to attract, develop and retain additional employees required for our development and future success. |
● | We face exposure to fraudulent or illegal activity by officers, directors, employees, contractors, consultants and agents, which may subject us to investigations and legal actions. |
Risks Relating to Our Information Technology
● | We must successfully maintain and/or upgrade our information technology systems, and our failure to do so could have a material adverse effect on our business, financial condition or results of |
| We may be exposed to risks and costs associated with security breaches, data loss, credit card fraud and identity theft that could cause us to incur unexpected expenses and loss of revenue as well as other risks. |
Risks Relating to Our Intellectual Property
● | Our commercial success depends, in part, on our intellectual property rights and a failure by us to protect our intellectual property may have a material adverse effect on our ability to develop and commercialize our products. |
Risks Relating to This Offering and Ownership of Our Common Shares
● | We do not currently intend to pay any cash dividends on our Common Shares in the foreseeable future. |
● | We have broad discretion in the use of proceeds from the |
● | If there is insufficient liquidity in our Common Shares, it could adversely affect your ability to sell your shares. |
● | There is currently no established public trading market for the Warrants. |
● | U.S. investors may be unable to enforce certain judgments against us in Canada. |
● | Certain Canadian laws could delay or deter a change of |
● | Our failure to meet the continued listing requirements of |
● | Our shareholders may be subject to dilution resulting from |
● | Our constating documents permit us to issue an unlimited amount of additional Common Shares or Preferred Shares, which may prevent a third-party takeover or cause our shareholders to experience dilution in the future. |
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● | Any acquisitions, strategic investments, divestures, mergers, or joint ventures we make may require the issuance of a significant amount of equity or debt securities and |
● | We have reported negative cash flows from operating activities and may do so in future periods. |
● | We may not be able to maintain our operations without additional funding. |
● | We are subject to foreign currency fluctuations, which could adversely affect our financial results. |
● | [This is a reasonable best-efforts offering, no minimum amount of securities is required to be sold, and we may not raise the amount of capital we believe is required for our business plans, including our near-term business plans.] |
● | [Purchasers who purchase our securities in this |
General Risk Factors
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| Catastrophic events outside of our control, including pandemics, may harm our results of operations or damage our facilities. |
● | The market price of the Company’s Common Shares |
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MARKET AND INDUSTRY DATA AND FORECASTSTable of Contents
PROSPECTUS SUMMARY
We obtained the industry and market data used throughout this prospectus from our own internal estimates and research, as well as from independent market research, industry and general publications and surveys, governmental agencies, publicly availableThe following summary highlights selected information and research, surveys and studies conducted by third parties. Internal estimates are derived from publicly available information released by industry analysts and third-party sources, our internal research and our industry experience, and are based on assumptions made by us based on such data and our knowledge of our industry and market, which we believe to be reasonable. In some cases, we do not expressly refer to the sources from which this data is derived. In addition, while we believe the industry and market data included in greater detail elsewhere in this prospectusprospectus. This summary is reliablenot complete and based on reasonable assumptions, such data involve material risks and other uncertainties and are subject to change based on various factors, including those discussed in the section entitled “Risk Factors.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties or by us.
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RISK FACTORS
Investing in our securities involves a high degree of risk. Investors should carefully consider the risks described below anddoes not contain all of the other information set forthyou should consider or that may be important to you in making an investment decision. You should carefully read the entire prospectus before making an investment in our common shares. You should carefully read this registration statement,entire prospectus, including our financial statements and related notes andthe information under, “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,Operations” and the financial statements included elsewhere in this prospectus.
Overview
We are a modern consumer packaged goods (“CPG” before deciding) company driven by a singular purpose: to investtransform 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 our Common Shares. If anyresponse to long-term secular trends and market demand for natural, plant-based, sustainable and purpose-driven lifestyle brands. The Company utilizes a highly flexible, cost-efficient manufacturing and supply chain infrastructure that can be scaled up and down or into adjacent product categories to identify new innovation opportunities, quickly adapt to consumer preferences and demand, and bring new products to market through its mass retail partners and e-commerce channels. Leveraging decades of expertise in extraction and product formulation, Neptune is a provider of turnkey product development and supply chain solutions to business customers across several health and wellness verticals, including nutraceuticals and white label consumer packaged goods. Neptune has expanded its operations since June 2020 into brand units in order to better address its markets. The main brand units are Nutraceuticals and Organic Foods & Beverages. All amounts in this prospectus are in US dollars, unless otherwise noted.
Our Business Strategy
Neptune’s vision is to change consumer habits through the creation and distribution of environmentally friendly, ethical and innovative consumer product goods. Our mission is to redefine health and wellness and help humanity thrive by providing sustainable consumer focused solutions. Despite the decline in global economic activity since the outbreak of the events or developments described below occur,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”) models in the 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 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.
Our Products and Markets
Our Nutraceutical products and Organic Foods and Beverages are manufactured by third party manufacturers. In order to meet demand for our business, financial condition, or resultsproducts, 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 operationsour annual production requirements. For Sprout, 90% of raw materials are purchased by 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 materially or adversely affected. As a result,replaced with minimal disruption to our operations.
Our quality control staff requires full disclosure of quality procedures and certifications on the market pricepart of our Common Shares could decline,suppliers and investors could lose all or partwe periodically conduct on-site audits of their investment. The risks and uncertainties described belowfacilities. For strategic reasons, certain of our key raw materials are notsourced from single suppliers. However, in the only risks and uncertaintiesevent that we face. Additional risks and uncertainties not presently knownwere unable to us orsource an ingredient from a current supplier, we believe that we currently deem immaterial may also impair our business operations. The risks discussed below also include forward-looking statements, and our actual results may differ substantiallycould generally obtain the same ingredient or an equivalent from those discussed in these forward-looking statements. See “Cautionary Notes Regarding Forward-Looking Statements.”
Risks Relatingan alternative supplier, with minimal disruption to our Businessoperations.
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Canadian Cannabis Products - Extracts and Industry
We are exposed to risks associated withthe divestiture of our cannabis business.Formulations
On October 16, 2022, weNeptune entered into an Asset Purchase Agreementasset sale and purchase agreement (the “ASPA”) with PurCann Pharma, Inc. (“Purchaser”), pursuant to which Purchaser agreed to purchase substantially all of the assets relating to oura third-party, for its Canadian cannabis business including our processing plant and property located inthe Sherbrooke Quebec.facility, following the planned divestiture of this business announced on June 8, 2022. The saleaggregate purchase price of our cannabis businessthe assets sold, net of liabilities assumed, amounted to $3.8 million ($5.15 million CAD). The ASPA closed on November 9, 2022. We may not fully realizeSome assets were excluded from the anticipated benefitsASPA and were written down accordingly. On November 10, 2022, the Company filed a notice of this disposition. Further, we face continued liabilitycessation of cannabis activities with Health Canada and requested that its cannabis processing and research licenses be revoked. As of November 11, 2022, all cannabis was removed from the Sherbrooke facility and the Company no longer possesses or conducts any activities with cannabis.
Nutraceuticals
Neptune offers a variety of specialty ingredients, including our licensed specialty ingredient MaxSimil®, a technology that helps increase digestion and absorption of fat-soluble and nutritional ingredients. Additionally, the Company sources a variety of other marine oils, seed oils and specialty ingredients that are available for sale as raw material or transformed into finished products. The Company has recently launched a new line of Vitamin Sprays and Pumps for both children and adults. Neptune is focused on expanding its exclusive Omega-3 delivery technology MaxSimil® while improving growth and profitability in its Nutraceuticals vertical through its brand Biodroga.
Neptune’s core strength is product innovation with a focus on specialty ingredients offered in bulk soft gels and liquid delivery systems. The Company continues to expand its delivery system capabilities with projects for pumps, sprays and roll-ons. All of Neptune’s Nutraceutical products are available under distributors’ private labels, primarily sold in the pre-closing activitiesCanadian and U.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 Nutraceutical market through its Forest Remedies brand. Forest Remedies offers plant-based supplements, including first-of-its kind multi-omega gummies and soft gels with packaging that is 100% plastic-free. Neptune announced, on March 10, 2022, the launch of its Forest Remedies Multi Omega 3-6-9 line of supplements. This distribution agreement marks another important milestone in our efforts to transform Neptune into a high-growth branded CPG company.
Organic Foods and Beverages
In February 2021, Neptune acquired a controlling interest in Sprout Foods, Inc., an organic plant-based baby food and toddler snack company. Sprout is an integral piece of Neptune’s health and wellness portfolio and represents a key brand within the Organic Foods and Beverages vertical. Since completing the Sprout acquisition, the Company has begun expansion efforts in Sprout’s distribution across substantially all of Target’s U.S. retail stores. The Company also announced, on July 27, 2021, the initial launch of Sprout products into Canada, in Metro grocery stores in the province of Ontario. Neptune further expects to launch Sprout products in North America throughout the remainder of the divested cannabis business, which we agreedfiscal year. The Company expects the Neptune/Sprout combination to assume as partresult in significant incremental revenue growth, with several near and long-term revenue synergy opportunities identified within Neptune’s existing relationships and current sales channels. As described above, Neptune also announced on June 9, 2021, an exclusive multi-year licensing agreement between Sprout and CoComelon, the #1 children’s entertainment and educational show in the world with more than 110 million subscribers worldwide. This co-branded product line is now available on Walmart.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 the U.S., accounting for approximately 90 percent of the transaction. Additionally, weoverall market.
On May 2, 2023, Neptune announced that four of its most popular Sprout Organics x CoComelon co-branded, organic toddler pouches have been picked up by Target and are now available in select Target Stores across the United States, and Target.com. The Sprout Organics x CoComelon line includes 15 SKU’s that are made up of toddler pouches, Wafflez snacks, and plant-based snack bars, each leveraging CoComelon’s brand as the #1 Kids YouTube Channel in the world. In addition to the CoComelon partnership, Sprout Organics SKU’s consist of organic toddler pouches, toddler meals, toddler snacks and the newly launched Big Kid Mealz; Sprouts first product out of the baby aisle.
In the last year, Sprout has made the following major distribution gains and sales milestones:
Distribution: Now available in 90% of the organic baby food market, Sprout x CoComelon being a key driver of sales velocity.
Target SKU Count: 4 Sprout x CoComelon SKUs launched in select Target stores nationwide and Target.com.
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Added Distribution: In the last year, Sprout has established substantial distribution gains with leading retailers, and Target has contributed to that growth.
CoComelon Co-Brand: Yes Yes Veggie product is now Sprout’s #1 highest selling pouch in the latest 26 weeks in Total US xAOC*.
Geographic Presence: Now available in all 50 states, as well as in Canada.
*Sales velocity: Sales dollars per total point of distribution; Nielsen AOD; Total US x AOC Latest 26 weeks W/E 3-25-23
Competition
The nutraceutical 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 unablesimilar to collect any accounts receivable retained from our cannabis business.
If we do not manage our supply chain effectively or if there are disruptions in our supply chain, our business and resultsproducts. It is probable that the number of operations may be adversely affected.
The success of our business depends, in part, on maintaining a strong sourcing and manufacturing platform and efficient distribution channels. The inability of any supplier of raw materials, independent contract manufacturer or third-party distributorcompanies seeking to deliver or perform for us in a timely or cost-effective manner could cause our operating costs to increase and our profit margins to decrease, especially as it relatesdevelop 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 haveour 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”.
Recent Developments
Liquidity and Going Concern—We are actively managing our liquidity and expenses, including by extending payables due and reducing investment in our businesses. There is substantial doubt about our ability to continue as a short shelf life.going concern. As of July 25, 2023, we had approximately $0.7 million in cash and cash equivalents. We must continuously monitorbelieve our inventory and product mix against forecasted demand or risk having inadequate suppliescurrent cash position will be sufficient to meet consumer demandoperate our business for less than one month under our current business plan. In addition, we are pursuing several cash generating transactions as well as having too much inventory on hand that may reach its expiration date and become unsaleable.
We must also manage our third-party distribution, warehouse and transportation providers to ensure they are able to support the efficient distribution of our products to retailers. A disruption in transportation services could result in an inability to supply materials to our or our co-manufacturers’ facilities or finished products to our distribution centers or customers. Activity at third-party distribution centers could be disrupted by a number of factors, including labor issues, failure to meet customer standards, natural disasters or financial issues affecting the third-party providers. In particular, the Russia-Ukraine war and recent labor market shortages impacting our industry have created operating challenges in making our products available to customers and consumers, and such challenges may persist.
Our future results of operations may be adversely affected by input cost inflation.
Many aspects of our business have been, and may continue to be, directly affected by volatile commodity costs and other inflationary pressures. Agricultural commodities and ingredients are subject to price volatility whichplanning for further expense reductions. There can be caused by commodity market fluctuations, crop yields, seasonal cycles, weather conditions, temperature extremes and natural disasters (including dueno assurance that any cash generating transaction will be completed or that our expense reductions measures will be sufficient to the effects of climate change), pest and disease problems,
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changes in currency exchange rates, imbalances between supply and demand, and government programs and policies among other factors. Volatile fuel costs translate into unpredictable costs for the products and services we receive fromallow as to continue operating our third-party providers including, but not limitedbusiness. We need substantial additional funding to distribution costs forcontinue operating our products and packaging costs.
Our future results of operations may be adversely affected by the availability of natural and organic ingredients.
Our ability to ensure a continuing supply of natural and organic ingredients at competitive prices depends on many factors beyond our control, such as the number and size of farms that grow natural and organic crops, climate conditions, increased demand for natural and organic ingredients by our competitors, changes in national and world economic conditions, currency fluctuations and forecasting adequate need of seasonal ingredients.
The natural and organic ingredients that we use in the production of our products (including, among others, vegetables, fruits, nuts and grains) are vulnerable to adverse weather conditions and natural disasters, such as floods, droughts, water scarcity, temperature extremes, wildfires, frosts, earthquakes and pestilences. Natural disasters and adverse weather conditions can lower crop yields and reduce crop size and crop quality, which in turn could reduce our supplies of natural and organic ingredients or increase the prices of those ingredients. Such natural disasters and adverse weather conditions can be caused or exacerbated by climate change, and the spate of recent extreme weather events, including historic droughts, heatwaves, extreme cold and flooding, presents an alarming trend. If our supplies of natural and organic ingredients are reduced, we may not be able to find enough supplemental supply sources on favorable terms, if at all, which could impact our ability to supply products to our customers and adversely affect our business, financial condition and results of operations.
We also compete with other manufacturers in the procurement of natural and organic product ingredients, which may be less plentiful in the open market than conventional product ingredients. This competition may increase in the future if consumer demand for natural and organic products increases. This could cause our expenses to increase or could limit the amount of products that we can manufacture and sell.
We may not be successful in achieving savings and efficiencies from cost reduction initiatives and related strategic initiatives.
Our strategy includes identifying areas of cost savings and operating efficiencies to expand profit margins and cash flow. As part of our identification of operating efficiencies, we may continue to seek to dispose of businesses and brands that are less profitable or are otherwise less of a strategic fit within our core portfolio.
We may not be successful in fully implementing our productivity plans or realizing our anticipated savings and efficiencies, including potentially as a result of factors outside our control. Additionally, we may not be able to identify or negotiate divestiture opportunities on terms acceptable to us.business. If we are unable to fully realizecontinue as a going concern, we may have to liquidate our assets, and the anticipated savings and efficienciesvalues we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements. We may have to liquidate our assets in the very near term if additional funding is not received in the upcoming months.
Our management has concluded that substantial doubt exists about our ability to continue as a going concern for one year from the issuance date of our cost reduction initiativeslatest financial statements, which substantial doubt continues to exist. The net proceeds from this offering are not expected to remove that substantial doubt and as such, there will remain substantial doubt about our ability to continue as a going concern after this offering. If we were to receive net proceeds of $[●] million from this offering, we believe that the net proceeds from this offering, together with our existing cash and cash equivalents, will meet our cash needs for approximately [●].
On April 17, 2023, the Company entered into an agreement that fixed the purchase price for the exercise of the Call Option to acquire the remaining 49.9% minority share of Sprout, pursuant to the Call Option agreement entered into with the minority stockholders of Sprout. If the Call Option had been exercised prior to June 15, 2023, the purchase price would have been $13.0 million, consisting of at least $10.5 million in cash with the remainder payable in Common Shares. No acquisition was completed by June 15, 2023. The original Call Option remains outstanding until December 31, 2023.
On April 27, 2023, the Company announced that Sprout extended the maturity of its existing $13 million secured promissory note with Morgan Stanley Expansion Capital (“MSEC”). The note maturity has been extended from February 1, 2024 to December 31, 2024, which will bear interest at the rate of 15.0% per annum through and including December 31, 2023, payable in kind, and 10.0% per annum, payable in kind, and 5.0% per annum payable in cash, from and after January 1, 2024.
On May 10, 2023, Neptune announced that Sprout has secured inventory financing through an Invoice Purchase and Security Agreement partnership with Alterna Capital Solutions LLC, effective April 21, 2023. The inventory line will provide Sprout with working capital. The maximum available has been amended to $7.5 million, from $5.0 million previously announced on January 25, 2023 (see note 13), adding a line of inventory to the accounts receivable factoring facility that is already in place.
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On May 11, 2023, the Company announced its public offering of 12,121,212 of its common shares (or common share equivalents in lieu thereof) and accompanying warrants to purchase up to an aggregate of 12,121,212 common shares at a combined public offering price of $0.33 per share and accompanying warrant, resulting in gross proceeds of approximately $4.0 million. The warrants have an exercise price of $0.33 per share, are immediately exercisable upon issuance and will expire five years following the date of issuance. The closing of the offering occurred on May 15, 2023. On that day, the Company issued 4,415,162 common shares and 7,706,050 pre-funded warrants, along with 12,121,212 warrants (the “May 2023 Warrants”). As of the date of this prospectus, 5,410,600 common shares were issued upon exercise of pre-funded warrants, leaving 2,295,450 pre-funded warrants outstanding; none of the May 2023 Warrants have been exercised to date.
In connection with this offering, the Company has agreed that certain existing warrants to purchase up to an aggregate of 8,423,733 common shares that were previously issued in March 2022, June 2022, and October 2022, at exercise prices ranging from $1.62 to $11.20 per share and expiration dates ranging from September 14, 2023 to June 23, 2029, were amended to reduce the exercise prices of the applicable warrants to $0.33, with expiration dates five years following the closing of the offering, i.e. on May 15, 2028, with the exception of warrants to purchase up to 972,763 common shares which will expire on June 23, 2029 as currently contemplated.
On May 22, 2023, the Company entered into a Waiver and Second Amendment to Note Purchase Agreement (the “Waiver Agreement”), with CCUR Holdings, Inc. and the purchasers named therein, related strategic initiatives, our profitability may be materiallyto the Note Purchase Agreement dated as of January 12, 2023 (see note 13). The Waiver Agreement provides that the required prepayment of $2.0 million (the “Mandatory Prepayment”), due as of May 15, 2023, is waived, in part, until July 31, 2023, or for an additional thirty days thereafter if the Company has filed a Registration on Form S-1 with the Securities and adversely impacted.
COVID-19Exchange Commission by July 31, 2023. Pursuant to the Waiver Agreement, the Company was required to pay, and has paid, $1.0 million of the Mandatory Prepayment. For the period beginning on March 31, 2023, through and including the date that the entire Mandatory Prepayment, including interest and fees is paid, interest on the sum of the outstanding principal amounts will accrue at the rate of twenty four percent (24%) per annum. Thereafter, interest will revert to the rate otherwise provided under the Note Purchase Agreement. The Company also agreed to pay an extension fee in an aggregate amount of $138,606, which was added to the principal amount due.
On July 21, 2023, the Company announced the receipt of a letter from Nasdaq notifying the Company that, based on the reported stockholders' equity of Neptune as reported in its Annual Report on Form 10-K for the year ended March 31, 2023, the Company does not meet the minimum stockholders' equity requirement for continued listing on the Nasdaq Capital Market under the equity criteria under Nasdaq Listing Rule 5550(b)(1) stating listed companies must maintain stockholders' equity of at least $2,500,000. The Nasdaq notification letter has no immediate effect on the Company's business operations or the listing of the Company's common shares, and they will continue to impacttrade on Nasdaq. Pursuant to the Nasdaq Listing Rule 5550(b)(1) the Company has 45 calendar days, or until September 5, 2023, to submit a plan to regain compliance. If the plan is accepted, Nasdaq can grant an extension of 180 calendar days from the date of the letter to evidence compliance. The Company intends to regain compliance within the applicable compliance period and is currently working on a plan to submit to Nasdaq.
Legal Proceedings—We and our operationssubsidiaries are engaged in significant legal proceedings and claims that may result in payments, fines and penalties that could have a material adverse effect onadversely affect our business, results of operations and financial condition.
The global outbreak These legal proceedings include a purported class action, captioned Marvin Gong v. Neptune Wellness Solutions, et al. On October 21, 2022, the Company announced that it had agreed to settle and resolve the lawsuit. As part of this settlement, Neptune intends to issue securities worth $2,750,000 within 31 days after the novel strain of the coronavirus known as COVID-19 has resulted in governments worldwide enacting emergency measuresfinal order is entered, which is expected to combat the spread of the virus, including public health directives and ordersoccur in the United States, or the U.S., Canada and the European Union that, among other things and for various periods of time, directed individuals to shelter at their places of residence, directed businesses and governmental agencies to cease non-essential operations at physical locations, prohibited certain non-essential gatherings and events and ordered cessation of non-essential travel. The public health crisis caused by COVID-19 and the measures taken and continuing to be taken by governments, businesses and the public have, and we expect will
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continue to have, certain negative impacts on our business operations, and could have a material adverse effect on our business, results of operations and financial condition. The duration and impact of the COVID-19 outbreak is unknown at this time, as is the efficacy of the government and central bank interventions.
The full extent tocoming days, whichCOVID-19 may impact our business, including our operations and the market for our securities and our financial condition, will depend on future developments, which are highly uncertain and cannot be predicted at this time. These include the duration, severity and scope of the outbreak, and further action taken by the government and other third parties in response to COVID-19 or new variants thereof. In particular, COVID-19 and government efforts to curtail COVID-19 could impede our production facilities, increase operating expenses, result in loss of sales, affect our supply chains, impact performance of contractual obligations or could require additional expenditures to be incurred. While most of these restrictions have since been lifted or eased, increases in new COVID-19 cases, including as a result of new COVID-19 variants, may lead to restrictions being reinstated, or new restrictions imposed.
Future remote work policies and similar government orders or other restrictions on the conduct of business operations related to the COVID-19 pandemic may negatively impact productivity and may disrupt our ongoing research and development activities and our clinical programs and timelines, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on our ability to conduct our business in the ordinary course. We have and continue to update our operational procedures and safety protocols at our facilities to comply with mandates and guidance from governmental authorities. If such measures are not effective or governmental authorities implement further restrictions, we may be required to take more extreme action, which could include short or long-term closures of our facilities or reductions in workforce. These measures may impair our production levels or cause us to close or severely limit production at one or more facilities. Further, our operations could be adversely impacted if suppliers, contractors, customers and/or transportation carriers are restricted or prevented from conducting business activities.
Consumer demand for our products may also be impacted by COVID-19 as a result of reductions in consumers’ disposable income associated with layoffs, and work or pay limitations due to mandatory social distancing and lockdown measures implemented by government authorities. As demand for our products decreases, we may be required to record additional asset impairments, including an impairment of the carrying value of our goodwill, along with other accounting charges.
Given the ongoing and dynamic nature and significance of COVID-19 and its impact globally, we are not able to enumerate all potential risks and uncertainties to our business or financial condition. Any of the negative impacts of COVID-19, including those described above, alone or in combination with others, may have a material adverse effects on our business, results of operations or financial condition. Further, any of these negative impacts, alone or in combination with others, could exacerbate many of the other risk factors outlined in this prospectus, our annual report on Form 10-K filed with the Commission on July 8, 2022 and in other reports that we file with the Commission from time to time.
Increasing awareness of health and wellness are driving changes in the consumer products industry, and if we are unable to react in a timely and cost-effective manner, our results of operations and future growth may be adversely affected.
We must continually anticipate and react, in a timely and cost-effective manner, to changes in consumer preferences and demands, including changes in demand driven by increasing awareness of health and wellness and demands for transparency or cleaner labels with respect to product ingredients by consumers and regulators. Consumers, especially in developed economies such as the U.S. and Canada, are rapidly shifting away from products containing artificial ingredients to all-natural, healthier alternatives. In addition, there has been a growing demand by consumers, non-governmental organizations and, to a lesser extent, governmental agencies to provide more transparency in product labeling and our customers have been taking steps to address this demand, including by voluntarily providing product-specific ingredients disclosure. These two trends could
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affect the types and volumes of our ingredients and compounds that our customers include in their consumer product offerings and, therefore, affect the demand for our products. If we are unable to react to or anticipate these trends in a timely and cost-effective manner, our results of operations and future growth may be materially adversely affected.
Markets for our products and services are highly competitive, and we may be unable to compete effectively.
Our products and services, including our consumer products, are offered in highly competitive markets that may be characterized by aggressive price competition and resulting downward pressure on gross margins, frequent introduction of new products and services, short product life cycles, evolving industry standards, continual improvement in product price and performance characteristics, rapid adoption of technological advancements by competitors and price sensitivity on the part of consumers and businesses.
Additionally, our consumer products may compete on the basis of product performance, brand recognition and price. Advertising, promotion, merchandising and packaging also have significant impacts on consumer purchasing decisions. A newly introduced consumer product (whether improved or newly developed) usually encounters intense competition requiring substantial expenditures for advertising, sales promotion and trade merchandising. If a product gains consumer acceptance, it typically requires continued advertising, promotional support and product innovations to maintain its relative market position. If our advertising, marketing and promotional programs are not effective or adequate, our net sales may be negatively impacted.
Some of our competitors are larger than us and have greater financial resources. These competitors may be able to spend more aggressively on advertising and promotional activities, introduce competing products more quickly and respond more effectively to changing business and economic conditions than we can. Competitive activity may require the Company to increase its spending on advertising and promotions and/or reduce prices, which could lead to reduced sales, margins and net earnings.
We may be unable to manage our growth effectively.
Our future financial performance and our ability to commercialize our products and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to continue to improve our operational and financial systems, managerial controls and procedures and we will need to continue to expand, train and manage our technology and workforce. We must also maintain close coordination among our technology, compliance, accounting, finance, marketing and sales functions. We cannot assure you that we will manage our growth effectively. If we fail to do so, our business could be materially harmed.
To support our growth, we may have to further increase our investment in technology, facilities, personnel and financial and management systems and controls. We may also have to further expand our procedures for monitoring and assuring our compliance with applicable regulations, and may need to integrate, train and manage a growing employee base. The expansion of our existing businesses, and expansion into new businesses and the resulting growth of our employee base will increase our need for internal audit and monitoring processes that are more extensive and broader in scope than those we have historically required. We may not be successful in identifying or implementing all of the processes that are necessary. Further, unless our growth results in an increase in our revenues that is proportionate to the increase in our costs associated with this growth, our operating margins and profitability will be adversely affected.
We depend on significant customers for a substantial portion of our revenue. If we fail to retain or expand our customer relationships or significant customers reduce their purchases, our revenue could decline significantly.
For the twelve-month period ended March 31, 2022 and three-month period ended September 30, 2022, one customer accounted for 10.26% and 8.67% of revenue, respectively, and one customer accounted for 14.86% and 9.9% of revenue for the twelve-month period ended March 31, 2021 and three-month period ended September 30, 2021, respectively.
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We believe that our operating results for the foreseeable future will continue to depend on sales to a small number of customers. These customers have no purchase commitments and may cancel, change or delay purchases with little or no notice or penalty. As a result of this customer concentration, our revenue could fluctuate materially and could be materially and disproportionately impacted by purchasing decisions of these customers or any other significant customer. In the future, these customers may decide to purchase less product from us than they have in the past, may alter purchasing patterns at any time with limited notice, or may decide not to continue to purchase our products at all, any of which could cause our revenue to decline materially and materially harm our financial condition and results of operations. If we are unable to diversify our customer base, we will continue to be susceptible to risks associated with customer concentration.
In addition, the Company is subject to credit risk of its customers, and its profitability and cash flow are dependent on receipt of timely payments from clients. Any delay in payment by the Company’s customers may have an adverse effect on the Company’s profitability, working capital and cash flow. There is no assurance that the Company will be able to collect all or any of its trade receivables in a timely matter. If any of the Company’s clients face unexpected situations such as financial difficulties, the Company may not be able to receive full or any payment of the uncollected sums or enforce any judgment debts against such clients, and the Company’s business, results of operations and financial condition could be materially and adversely affected.
Significant interruptions in our access to certain supply chains, for key inputs such as raw materials, electricity, water, and other utilities may impair our operations.
Our business is dependent on a number of key inputs and their related costs (certain of which are sourced in other countries and on different continents), including raw materials, supplies and equipment related to our operations, as well as electricity, water and other utilities. Governments may regulate or restrict the flow of our labor or our products, and the Company’s operations, suppliers, customers, and distribution channels could be severely impacted. Any significant future government-mandated or market-related interruption, price increase or negative change in the availability or economics of the supply chain for key inputs and, in particular, rising or volatile energy costs could curtail or preclude our ability to continue production. In addition, our operations would be significantly affected by a prolonged power outage.
No assurances can be given that we will be successful in maintaining our required supply of materials, labor, equipment, parts, and components. See also “COVID-19 has and will continue to impact our operations and could have a material adverse effect on our business, results of operations and financial condition”.
Our future success depends on the sales of our consumer products and turnkey solutions products.
We derive a large portion of our revenues from the sale of our turnkey solutions products and expect to derive an increasing portion of our revenues from the sale of consumer products. Our investments in and strategies used for our brand marketing are critical to achieve brand awareness with current customers, educate potential new customers and convert potential new customers into customers. However, there can be no assurance that our principal products will continue to receive, maintain or increase market acceptance. The inability to successfully commercialize our turnkey solutions and specialty ingredient products, in the future, for any reason, would have a material adverse effect on our financial condition, prospects and ability to continue operations. The overall commercialization success of our products depends on several factors, including:
continued market acceptance of our products by the nutraceutical market;
the amount of resources devoted by our distribution partners to continue the commercialization efforts of our products in our core geographic markets;
maintaining supply of our products to meet the purchase orders of our distribution partners;
receipt of regulatory approvals for our products from regulatory agencies in certain territories in which we wish to expand our commercialization efforts;
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the number of competitors in our market; and
protecting and enforcing our intellectual property and avoiding patent infringement claims.
Our activities rely on certain third-party suppliers, contract manufacturers and distributors, and such reliance may adversely affect us if the third parties are unable or unwilling to fulfill their obligations.
For our consumer product and nutraceutical activities, we purchase certain important ingredients and raw materials from third-party suppliers and, in certain cases, we engage contract manufacturers to supply us with finished products. Part of our strategy is to enter into and maintain arrangements with third parties related to the development, testing, production, packaging, and commercialization of our products to our customers which are then responsible for the marketing and distribution of the products. Our revenues are dependent to a great extent on the successful efforts of these third parties. Entering into strategic relationships can be a complex process and our interests and the interests of our partners may not be or remain aligned with our interests.
Real or perceived quality control problems with raw materials outsourced from certain regions or finished products manufactured by contract manufacturers could negatively impact consumer confidence in our products or expose us to liability. In addition, disruption in the operations of any such supplier or manufacturer or material increases in the price of raw materials, for any reason, such as changes in economic and political conditions, tariffs, trade disputes, regulatory requirements, import restrictions, loss of certifications, power interruptions, fires, hurricanes, drought or other climate-related events, war, or other events, could have a material adverse effect on our business, results of operations, financial condition and cash flows. Also, currency fluctuations could result in higher costs for raw materials purchased abroad.
The Company’s third-party manufacturers are subject to laws and regulations, including current Good Manufacturing Practices regulations (“cGMP”), which are enforced by the U.S. Food and Drug Administration, or the FDA, and other regulatory authorities. The Company’s third-party manufacturers may be unable to comply with cGMP or other regulatory requirements. A failure to comply with these requirements may result in fines, product recalls or seizuresa substantial number of shares being issued, and related publicity requirements, injunctions, total or partial suspension of production, civil penalties, warning or untitled letters, import or export bans or restrictions and criminal prosecution and penalties. Any of these penalties could delay or prevent the promotion, marketing, or sale of the Company’s products. If the safety of any products suppliedsuch an issuance may result in substantial dilution to the Company is compromised due to a third-party manufacturer’s failure to adhere to applicable laws or for other reasons, the Company may not be able to successfully sell its products and our business, financial condition and operations may be materially adversely affected.
Someexisting holders of our current and future partners may decide to compete with us, refuse or be unable to fulfill or honor their contractual obligations to us, or change their plans to reduce their commitment to, or even abandon, their relationships with us. There can be no assurance that our partners will market our products successfully or that any such third-party collaboration will be on favorable terms. We may not be able to control the amount and timing of resources our partners devote to our potential products. In addition, we may incur liabilities relating to the distribution and commercialization of our products. While the agreements with such customers generally include customary indemnification provisions indemnifying us for liabilities relating to third-party manufacturing or packaging of our potential products, there can be no assurance that these indemnification rights will be sufficient in amount, scope or duration to fully offset the potential liabilities associated with our potential products. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business, financial condition or results of operations.common shares.
Our products may be subject to recalls for a variety of reasons, which could require us to expend significant management and capital resources.
Manufacturers and distributors of products are sometimes subject to the recall or return of their products for a variety of reasons, including product defects, such as contamination, adulteration, unintended harmful side
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effects, or interactions with other substances, packaging safety, and inadequate or inaccurate labeling disclosure. If any of the products produced by or for us are recalled due to an alleged product defect or for any other reason, we could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. As a result of any such recall, our sales may be significantly affected and may not be able to replace those sales at an acceptable margin or at all. In addition, a product recall may require significant management attention or damage our reputation and goodwill or that of our products or brands.
Additionally, product recalls may lead to increased scrutiny of our operations by regulatory agencies and authorities, requiring further management attention, increased compliance costs and potential legal fees, fines, penalties and other expenses. Any product recall affecting the hemp industry, whether or not involving us, could also lead consumers to lose confidence in the safety and security of the products sold by us generally.
We may not meet timelines for project development.
The Company’s business is dependent on a number of key inputs and their related costs including raw materials and supplies related to its operations, as well as electricity, water and other utilities. Any significant interruption or negative change in the availability or economics of the supply chain for key inputs could materially impact the business, financial condition operating results, and timelines for project development of the Company. Any inability to secure required supplies and services or to do so on appropriate terms could have a materially adverse impact on the business, financial condition, operating results, and timelines for project development of the Company.
Product contamination or tampering or issues or concerns with respect to product quality, safety and integrity could adversely affect our business, reputation, financial condition or results of operations.
Product contamination or tampering, or allegations of product contamination or tampering or product quality issues (whether or not valid) with respect to products in our portfolio may reduce demand for such products, and cause production and delivery disruptions or increase costs, which could adversely affect our business, reputation, financial condition or results of operations. Moreover, even if allegations of product contamination or tampering or suggestions that our products were not fit for consumption or use are meritless, the negative publicity surrounding assertions against us or products in our portfolio or processes could adversely affect our reputation or brands. Our business could also be adversely affected if consumers lose confidence in product quality, safety and integrity generally, even if such loss of confidence is unrelated to products in our portfolio.
Any of the foregoing could adversely affect our business, reputation, financial condition or results of operations. In addition, if we do not have adequate insurance, if we do not have enforceable indemnification from suppliers, manufacturers, distributors, joint venture partners or other third parties or if indemnification is not available, the liability relating to such product claims or disruption as a result of recall efforts could materially adversely affect our business, financial condition or results of operations.
The Company may have difficulty obtaining insurance to cover its operational risks and, even where available, may not be sufficient to cover losses we may incur.
Due to the Company’s involvement in the hemp industry, it may have difficulty obtaining the various insurances that are desired to operate its business, which may expose the Company to additional risk and financial liability. Insurance that is otherwise readily available, such as general liability, and directors’ and officers’ insurance, may be more difficult to find, and more expensive, because of the regulatory regime applicable to our industry. There are no guarantees that the Company will be able to find such insurance coverage in the future, or that the cost will be affordable. If the Company is unable to obtain insurance coverage on acceptable terms, it may prevent it from entering into certain business sectors, may inhibit growth, and may expose the Company to additional risks and financial liabilities.
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Moreover, our current and expected business activities expose us to the risk of liabilities arising from our operations. For example, we may be liable for claims brought by users of our products or by employees, customers or other third parties for personal injury or property damage occurring in the course of our operations. We seek to minimize these risks through various insurance contracts from third-party insurance carriers. However, our insurance coverage is subject to large individual claim deductibles, individual claim and aggregate policy limits, and other terms and conditions. We retain an insurance risk for the deductible portion of each claim and for any gaps in insurance coverage. We do not view insurance, by itself, as a material mitigant to these business risks.
We cannot assure that our insurance will be sufficient to cover our losses. Any losses that insurance does not substantially cover could have a material adverse effect on our business, results of operations, financial condition and cash flows. The insurance industry has become more selective in offering some types of insurance, such as product liability, product recall, property and directors’ and officers’ liability insurance. Our current insurance program is consistent with both our past level of coverage and our risk management policies. However, we cannot assure that we will be able to obtain comparable insurance coverage on favorable terms, or at all, in the future.
Risks Relating to Our Accounting and Financial Policies
● | Although our consolidated financial statements have been prepared on a going concern basis, our management believe that our recurring losses and negative cash flows from operations and other factors have raised substantial doubt about our ability to continue as a going concern. |
● | We have recorded significant long-lived asset impairment charges and may be required to record additional charges to future earnings if our long-lived assets become impaired. |
Risks Relating to Our Liquidity
● | We are actively managing our liquidity and expenses, including by extending payables due and reducing investment in our businesses, and it is not certain that we will be ultimately successful in developing our business and remaining a going concern. |
● | As a result of our failure to timely file our Quarterly Report on Form 10-Q for the quarter ended December 31, 2022, we are currently ineligible to file new short form registration statements on Form S-3, which may impair our ability to raise capital on terms favorable to us, in a timely manner or at all. |
● | The Company may have difficulty accessing public and private capital and banking services, which could negatively impact its ability to finance its operations. |
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● | The issuance and sale of common shares upon exercise of outstanding warrants may cause substantial dilution to existing shareholders and may also depress the market price of our common shares. Certain outstanding warrants to purchase shares of our common stock have cashless exercise rights. |
Legal and Regulatory Risks Relating to Our Business
● | We identified material weaknesses in our internal control over financial reporting. This may adversely affect the accuracy and reliability of our financial statements and, if we fail to maintain effective internal control over financial reporting, it could impact our reputation, business, and the price of our common shares, as well as lead to a loss of investor confidence in us. |
● | As a non-accelerated filer, we are not required to comply with the auditor attestation requirements of the Sarbanes-Oxley Act. |
● | The Company may be classified as a “passive foreign investment company” for U.S. federal income tax purposes, which would subject U.S. investors that hold the Company’s Common Shares to potentially significant adverse U.S. federal income tax consequences. |
● | We are subject to laws and regulations and guidelines, changes in which could increase our costs and individually or in the aggregate adversely affect our business. |
● | We are subject to risks inherent to the nutraceutical industry. |
● | We are subject to anti-money laundering laws and regulations in multiple jurisdictions. |
● | Our inability to maintain our regulatory approvals and permits or failure to comply with applicable regulations could adversely affect our business and financial results. |
● | We are currently, and may in the future be, subject to substantial litigation, investigations and proceedings that could cause us to incur significant legal expenses and result in harm to our business. |
Risks Relating to Our Human Resources
● | We may be unable to attract or retain key personnel, and we may be unable to attract, develop and retain additional employees required for our development and future success. |
● | We face exposure to fraudulent or illegal activity by officers, directors, employees, contractors, consultants and agents, which may subject us to investigations and legal actions. |
Risks Relating to Our Information Technology
● | We must successfully maintain and/or upgrade our information technology systems, and our failure to do so could have a material adverse effect on our business, financial condition or results of operations. |
● | We may be exposed to risks and costs associated with security breaches, data loss, credit card fraud and identity theft that could cause us to incur unexpected expenses and loss of revenue as well as other risks. |
Risks Relating to Our Intellectual Property
● | Our commercial success depends, in part, on our intellectual property rights and a failure by us to protect our intellectual property may have a material adverse effect on our ability to develop and commercialize our products. |
Risks Relating to This Offering and Ownership of Our Common Shares
● | We do not currently intend to pay any cash dividends on our Common Shares in the foreseeable future. |
● | We have broad discretion in the use of proceeds from the offering. |
● | If there is insufficient liquidity in our Common Shares, it could adversely affect your ability to sell your shares. |
● | There is currently no established public trading market for the Warrants. |
● | U.S. investors may be unable to enforce certain judgments against us in Canada. |
● | Certain Canadian laws could delay or deter a change of control. |
● | Our failure to meet the continued listing requirements of Nasdaq could result in a de-listing of our Common Shares. |
● | Our shareholders may be subject to dilution resulting from this offering and future offerings of Common Shares by us. |
● | Our constating documents permit us to issue an unlimited amount of additional Common Shares or Preferred Shares, which may prevent a third-party takeover or cause our shareholders to experience dilution in the future. |
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● | Because the Company is a “smaller reporting company,” we may take advantage of certain scaled disclosures available to us, resulting in holders of our securities receiving less Company information than they would receive from a public company that is not a smaller reporting company. |
● | Any acquisitions, strategic investments, divestures, mergers, or joint ventures we make may require the issuance of a significant amount of equity or debt securities and may not be successful. |
● | We have reported negative cash flows from operating activities and may do so in future periods. |
● | We may not be able to maintain our operations without additional funding. |
● | We are subject to foreign currency fluctuations, which could adversely affect our financial results. |
● | [This is a reasonable best-efforts offering, no minimum amount of securities is required to be sold, and we may not raise the amount of capital we believe is required for our business plans, including our near-term business plans.] |
● | [Purchasers who purchase our securities in this offering pursuant to a securities purchase agreement may have rights not available to purchasers that purchase without the benefit of a securities purchase agreement.] |
General Risk Factors
● | Catastrophic events outside of our control, including pandemics, may harm our results of operations or damage our facilities. |
● | The market price of the Company’s Common Shares may be highly volatile. |
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PROSPECTUS SUMMARY
The following summary highlights selected information included in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider or that may be important to you in making an investment decision. You should carefully read the entire prospectus before making an investment in our common shares. You should carefully read this entire prospectus, including the information under, “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements included elsewhere in this prospectus.
Overview
We are 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 since June 2020 into brand units in order to better address its markets. The main brand units are Nutraceuticals and Organic Foods & Beverages. All amounts in this prospectus are in US dollars, unless otherwise noted.
Our Business Strategy
Neptune’s vision is to change consumer habits through the creation and distribution of environmentally friendly, ethical and innovative consumer product goods. Our mission is to redefine health and wellness and help humanity thrive by providing sustainable consumer focused solutions. Despite the decline in global economic activity since the outbreak of the COVID-19 virus, Neptune has taken transformative, and successful, actions to increase its sales, distribution and reach in both the business-to-business (“B2B”) and business-to-consumer (“B2C”) models in the 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 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.
Our Products and Markets
Our Nutraceutical products and Organic Foods and Beverages are manufactured by third party manufacturers. In order to meet demand for our products, we have developed relationships with selected contract manufacturers. 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 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 of quality procedures and certifications 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.
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Canadian Cannabis Products - Extracts and Formulations
On October 16, 2022, Neptune entered into an asset sale and purchase agreement (the “ASPA”) with a third-party, for its Canadian cannabis business including the Sherbrooke facility, following the planned divestiture of this business announced on June 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 on November 9, 2022. Some assets were excluded from the ASPA and were written down accordingly. On November 10, 2022, the Company filed a notice of cessation of cannabis activities with Health Canada and requested that its cannabis processing and research licenses be revoked. As of November 11, 2022, all cannabis was removed from the Sherbrooke facility and the Company no longer possesses or conducts any activities with cannabis.
Nutraceuticals
Neptune offers a variety of specialty ingredients, including our licensed specialty ingredient MaxSimil®, a technology that helps increase digestion and absorption of fat-soluble and nutritional ingredients. Additionally, the Company sources a variety of other marine oils, seed oils and specialty ingredients that are available for sale as raw material or transformed into finished products. The Company has recently launched a new line of Vitamin Sprays and Pumps for both children and adults. Neptune is focused on expanding its exclusive Omega-3 delivery technology MaxSimil® while improving growth and profitability in its Nutraceuticals vertical through its brand Biodroga.
Neptune’s core strength is product innovation with a focus on specialty ingredients offered in bulk soft gels and liquid delivery systems. The Company continues to expand its delivery system capabilities with projects for pumps, sprays and roll-ons. All of Neptune’s Nutraceutical products are available under distributors’ private labels, primarily sold in the Canadian and U.S. nutraceutical markets. Neptune, through its nutraceuticals products business, also formulates, develops and provides customers with turnkey nutrition solutions.
The Company sells wellness products to the Nutraceutical market through its Forest Remedies brand. Forest Remedies offers plant-based supplements, including first-of-its kind multi-omega gummies and soft gels with packaging that is 100% plastic-free. Neptune announced, on March 10, 2022, the launch of its Forest Remedies Multi Omega 3-6-9 line of supplements. This distribution agreement marks another important milestone in our efforts to transform Neptune into a high-growth branded CPG company.
Organic Foods and Beverages
In February 2021, Neptune acquired a controlling interest in Sprout Foods, Inc., an organic plant-based baby food and toddler snack company. Sprout is an integral piece of Neptune’s health and wellness portfolio and represents a key brand within the Organic Foods and Beverages vertical. Since completing the Sprout acquisition, the Company has begun expansion efforts in Sprout’s distribution across substantially all of Target’s U.S. retail stores. The Company also announced, on July 27, 2021, the initial launch of Sprout products into Canada, in Metro grocery stores in the province of Ontario. Neptune further expects to launch Sprout products in North America throughout the remainder of the fiscal year. The Company expects the Neptune/Sprout combination to result in significant incremental revenue growth, with several near and long-term revenue synergy opportunities identified within Neptune’s existing relationships and current sales channels. As described above, Neptune also announced on June 9, 2021, an exclusive multi-year licensing agreement between Sprout and CoComelon, the #1 children’s entertainment and educational show in the world with more than 110 million subscribers worldwide. This co-branded product line is now available on Walmart.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 the U.S., accounting for approximately 90 percent of the overall market.
On May 2, 2023, Neptune announced that four of its most popular Sprout Organics x CoComelon co-branded, organic toddler pouches have been picked up by Target and are now available in select Target Stores across the United States, and Target.com. The Sprout Organics x CoComelon line includes 15 SKU’s that are made up of toddler pouches, Wafflez snacks, and plant-based snack bars, each leveraging CoComelon’s brand as the #1 Kids YouTube Channel in the world. In addition to the CoComelon partnership, Sprout Organics SKU’s consist of organic toddler pouches, toddler meals, toddler snacks and the newly launched Big Kid Mealz; Sprouts first product out of the baby aisle.
In the last year, Sprout has made the following major distribution gains and sales milestones:
Distribution: Now available in 90% of the organic baby food market, Sprout x CoComelon being a key driver of sales velocity.
Target SKU Count: 4 Sprout x CoComelon SKUs launched in select Target stores nationwide and Target.com.
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Added Distribution: In the last year, Sprout has established substantial distribution gains with leading retailers, and Target has contributed to that growth.
CoComelon Co-Brand: Yes Yes Veggie product is now Sprout’s #1 highest selling pouch in the latest 26 weeks in Total US xAOC*.
Geographic Presence: Now available in all 50 states, as well as in Canada.
*Sales velocity: Sales dollars per total point of distribution; Nielsen AOD; Total US x AOC Latest 26 weeks W/E 3-25-23
Competition
The nutraceutical 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”.
Recent Developments
Liquidity and Going Concern—We are actively managing our liquidity and expenses, including by extending payables due and reducing investment in our businesses. There is substantial doubt about our ability to continue as a going concern. As of July 25, 2023, we had approximately $0.7 million in cash and cash equivalents. We believe our current cash position will be sufficient to operate our business for less than one month under our current business plan. In addition, we are pursuing several cash generating transactions as well as planning for further expense reductions. There can be no assurance that any cash generating transaction will be completed or that our expense reductions measures will be sufficient to allow as to continue operating our business. We need substantial additional funding to continue operating our business. If we are unable to continue as a going concern, we may have to liquidate our assets, and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements. We may have to liquidate our assets in the very near term if additional funding is not received in the upcoming months.
Our management has concluded that substantial doubt exists about our ability to continue as a going concern for one year from the issuance date of our latest financial statements, which substantial doubt continues to exist. The net proceeds from this offering are not expected to remove that substantial doubt and as such, there will remain substantial doubt about our ability to continue as a going concern after this offering. If we were to receive net proceeds of $[●] million from this offering, we believe that the net proceeds from this offering, together with our existing cash and cash equivalents, will meet our cash needs for approximately [●].
On April 17, 2023, the Company entered into an agreement that fixed the purchase price for the exercise of the Call Option to acquire the remaining 49.9% minority share of Sprout, pursuant to the Call Option agreement entered into with the minority stockholders of Sprout. If the Call Option had been exercised prior to June 15, 2023, the purchase price would have been $13.0 million, consisting of at least $10.5 million in cash with the remainder payable in Common Shares. No acquisition was completed by June 15, 2023. The original Call Option remains outstanding until December 31, 2023.
On April 27, 2023, the Company announced that Sprout extended the maturity of its existing $13 million secured promissory note with Morgan Stanley Expansion Capital (“MSEC”). The note maturity has been extended from February 1, 2024 to December 31, 2024, which will bear interest at the rate of 15.0% per annum through and including December 31, 2023, payable in kind, and 10.0% per annum, payable in kind, and 5.0% per annum payable in cash, from and after January 1, 2024.
On May 10, 2023, Neptune announced that Sprout has secured inventory financing through an Invoice Purchase and Security Agreement partnership with Alterna Capital Solutions LLC, effective April 21, 2023. The inventory line will provide Sprout with working capital. The maximum available has been amended to $7.5 million, from $5.0 million previously announced on January 25, 2023 (see note 13), adding a line of inventory to the accounts receivable factoring facility that is already in place.
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On May 11, 2023, the Company announced its public offering of 12,121,212 of its common shares (or common share equivalents in lieu thereof) and accompanying warrants to purchase up to an aggregate of 12,121,212 common shares at a combined public offering price of $0.33 per share and accompanying warrant, resulting in gross proceeds of approximately $4.0 million. The warrants have an exercise price of $0.33 per share, are immediately exercisable upon issuance and will expire five years following the date of issuance. The closing of the offering occurred on May 15, 2023. On that day, the Company issued 4,415,162 common shares and 7,706,050 pre-funded warrants, along with 12,121,212 warrants (the “May 2023 Warrants”). As of the date of this prospectus, 5,410,600 common shares were issued upon exercise of pre-funded warrants, leaving 2,295,450 pre-funded warrants outstanding; none of the May 2023 Warrants have been exercised to date.
In connection with this offering, the Company has agreed that certain existing warrants to purchase up to an aggregate of 8,423,733 common shares that were previously issued in March 2022, June 2022, and October 2022, at exercise prices ranging from $1.62 to $11.20 per share and expiration dates ranging from September 14, 2023 to June 23, 2029, were amended to reduce the exercise prices of the applicable warrants to $0.33, with expiration dates five years following the closing of the offering, i.e. on May 15, 2028, with the exception of warrants to purchase up to 972,763 common shares which will expire on June 23, 2029 as currently contemplated.
On May 22, 2023, the Company entered into a Waiver and Second Amendment to Note Purchase Agreement (the “Waiver Agreement”), with CCUR Holdings, Inc. and the purchasers named therein, related to the Note Purchase Agreement dated as of January 12, 2023 (see note 13). The Waiver Agreement provides that the required prepayment of $2.0 million (the “Mandatory Prepayment”), due as of May 15, 2023, is waived, in part, until July 31, 2023, or for an additional thirty days thereafter if the Company has filed a Registration on Form S-1 with the Securities and Exchange Commission by July 31, 2023. Pursuant to the Waiver Agreement, the Company was required to pay, and has paid, $1.0 million of the Mandatory Prepayment. For the period beginning on March 31, 2023, through and including the date that the entire Mandatory Prepayment, including interest and fees is paid, interest on the sum of the outstanding principal amounts will accrue at the rate of twenty four percent (24%) per annum. Thereafter, interest will revert to the rate otherwise provided under the Note Purchase Agreement. The Company also agreed to pay an extension fee in an aggregate amount of $138,606, which was added to the principal amount due.
On July 21, 2023, the Company announced the receipt of a letter from Nasdaq notifying the Company that, based on the reported stockholders' equity of Neptune as reported in its Annual Report on Form 10-K for the year ended March 31, 2023, the Company does not meet the minimum stockholders' equity requirement for continued listing on the Nasdaq Capital Market under the equity criteria under Nasdaq Listing Rule 5550(b)(1) stating listed companies must maintain stockholders' equity of at least $2,500,000. The Nasdaq notification letter has no immediate effect on the Company's business operations or the listing of the Company's common shares, and they will continue to trade on Nasdaq. Pursuant to the Nasdaq Listing Rule 5550(b)(1) the Company has 45 calendar days, or until September 5, 2023, to submit a plan to regain compliance. If the plan is accepted, Nasdaq can grant an extension of 180 calendar days from the date of the letter to evidence compliance. The Company intends to regain compliance within the applicable compliance period and is currently working on a plan to submit to Nasdaq.
Legal Proceedings—We and our subsidiaries are engaged in significant legal proceedings and claims that may result in payments, fines and penalties that could adversely affect our business, results of operations and financial condition. These legal proceedings include a purported class action, captioned Marvin Gong v. Neptune Wellness Solutions, et al. On October 21, 2022, the Company announced that it had agreed to settle and resolve the lawsuit. As part of this settlement, Neptune intends to issue securities worth $2,750,000 within 31 days after the final order is entered, which is expected to occur in the coming days, which may result in a substantial number of shares being issued, and such an issuance may result in substantial dilution to the existing holders of our common shares.
History of the Company
Neptune was incorporated under Part IA of the Companies Act (Québec) on October 9, 1998 under the name Neptune Technologies & Bioresources Inc. Since its incorporation, Neptune has amended its articles of incorporation on numerous occasions. The Company first amended its articles on May 30, 2000 to convert its then issued and outstanding shares into newly-created classes of shares. The Company’s articles were also amended on May 31, 2000 to create Series A Preferred Shares. On August 29, 2000, the Company converted all its issued and outstanding Class A shares into Class B subordinate shares. On September 25, 2000, the Company further amended its share capital to eliminate its Class A shares and converted its Class B subordinate shares into Common Shares. On November 1, 2013, the Company amended its articles of incorporation to reflect certain changes to items relating to board matters. On June 9, 2022, we effected a one for thirty-five (1-for-35) reverse split of our common shares, which we refer to as the “Share Consolidation,” as approved by our board of directors. Trading of our common shares on both the Toronto Stock Exchange (“TSX”) and Nasdaq on a post-consolidated basis commenced as of the open of markets on June 13, 2022. On August 15, 2022, the Company voluntarily delisted its Common Shares from the TSX.
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Corporate Information
Our principal executive offices are located at 545 Promenade du Centropolis, Suite 100, Laval, Québec, Canada, H7T 0A3 and the telephone number to our offices is (450) 687-2262.
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THE OFFERING
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Issuer: | Neptune Wellness Solutions Inc. | |
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Common Shares offered by us: | | Up to [●] Common Shares based on the sale of our Common Shares at an assumed combined public offering price of $[●] per Common Share and accompanying Common Warrants, which is the closing price of our common stock on [●], 2023. |
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[Pre-Funded Warrants offered by us: | | We are also offering each purchaser the opportunity to purchase, if the purchaser so chooses, Pre-Funded Warrants, in lieu of Common Shares, exercisable into up to an aggregate of [●] Common Shares. Each Pre-Funded Warrant will be exercisable for one Common Share. The purchase price of each Pre-Funded Warrant will equal the price per share at which the Common Shares are being sold to the public in this offering, minus [$0.0001], and the exercise price of each Pre-Funded Warrant will be [$0.0001] per Common Share. For additional information, see “Description of the Registrant’s Securities to be Registered — Pre-Funded Warrants” on page [●] of this prospectus. This prospectus also relates to the offering of the Common Shares issuable upon exercise of the Pre-Funded Warrants.] |
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Common Warrants offered by us: | | We are also offering Common Warrants exercisable into an aggregate of up to [●] common shares. Each Common Warrant will have an exercise price of $[●] per share, will be exercisable upon issuance and will expire on the [●]-year anniversary of the original issuance date. The Common Shares and Common Warrants can only be purchased together in this offering but will be issued separately and will be immediately separable upon issuance. For additional information, see “Description of the Registrant’s Securities to be Registered — Common Warrants” on page [●] of this prospectus. This prospectus also relates to the offering of the Common Shares issuable upon exercise of the Common Warrants. |
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Common Shares outstanding after this offering:(1) | | [●] Common Shares (assuming none of the Common Warrants issued in this offering are exercised [and the exercise in full of any Pre-Funded Warrants]) |
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Use of proceeds: | | We estimate that the net proceeds to us from the sale of our Common Shares in this offering will be approximately $[●] million, and after deducting estimated [Placement Agent] fees and expenses and estimated offering expenses payable by us. We plan to use the proceeds of the offering, after repayment of debt, for general corporate purposes and working capital. See “Use of Proceeds.” |
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Risk factors: | | See “Risk Factors” on page [●] and other information included in this prospectus for a discussion of factors you should consider before investing in our securities. |
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[Reasonable best efforts: | | We have agreed to issue and sell the securities offered hereby to the purchasers through the [Placement Agent]. The [Placement Agent] is not required to buy or sell any specific number or dollar amount of the securities offered hereby, but it will use its [reasonable best efforts] to solicit offers to purchase the securities offered by this prospectus. See “Plan of Distribution” on page [●] of this prospectus.] |
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Ticker symbol: | | Our Common Shares are listed on the Nasdaq under the symbol “NEPT”. There is no established trading market for the Warrants and we do not expect a market to develop. In addition, we do not intend to apply for the listing of the Warrants on any national securities exchange or other trading market. Without an active trading market, the liquidity of the Warrants will be limited. |
(1) | The number of Common Shares to be outstanding immediately after this offering as shown above is based on 21,822,149 Common Shares outstanding as of [●], 2023. Unless otherwise indicated, the number of Common Shares presented in this prospectus excludes: |
● | [●] Common Shares issuable upon the exercise of outstanding stock options having a weighted-average exercise price of $[●] per Common Share; |
● | [●] Common Shares issuable upon the exercise of outstanding warrants having a weighted-average exercise price of $[●] per Common Share; |
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● | [●] deferred share units; |
● | [●] restricted share units; and |
● | any additional Common Shares that are available for future issuance under our equity compensation plans. |
Unless otherwise indicated, this prospectus assumes no exercise of the Common Warrants [or Pre-Funded Warrants].
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RISK FACTORS
Investing in our securities involves a high degree of risk. Investors should carefully consider the risks described below and all of the other information set forth in this registration statement, including our financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding to invest in our Common Shares. If any of the events or developments described below occur, our business, financial condition, or results of operations could be materially or adversely affected. As a result, the market price of our Common Shares could decline, and investors could lose all or part of their investment. The risks and uncertainties described below are not the only risks and uncertainties that we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. See “Cautionary Notes Regarding Forward-Looking Statements.”
Risks Relating to our Business and Industry
We are exposed to risks associated with the divestiture of our cannabis business.
On October 16, 2022, we entered into an Asset Purchase Agreement with PurCann Pharma, Inc., pursuant to which PurCann Pharma, Inc. agreed to purchase substantially all of the assets relating to our Canadian cannabis business, including our processing plant and property located in Sherbrooke, Quebec. The sale of our cannabis business closed on November 9, 2022. We may not fully realize the anticipated benefits of this disposition. Further, we face continued liability for the pre-closing activities of the divested cannabis business, which we agreed to assume as part of the transaction. Additionally, we may be unable to collect any accounts receivable retained from our cannabis business.
The terms of our indebtedness restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.
The Note Purchase Agreement, as amended (the “Note Purchase Agreement”), governing the promissory notes (the “2023 Notes”) that we issued on January 12, 2023 contain a number of restrictive covenants, including covenants related to financial statement filing deadlines, that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on our ability to incur liens, make investments, loans, advances and acquisitions, incur additional indebtedness or guarantees, pay dividends on capital stock or redeem, repurchase or retire capital stock, engage in transactions with affiliates, sell assets, including capital stock of our subsidiaries, alter the business we conduct, alter their organizational documents, and consolidate or merge.
We defaulted on the conditions of the Note Purchase Agreement and entered into a Waiver and First Amendment to the Notes (the “First Waiver Agreement”) on March 9, 2023. The First Waiver Agreement waives certain administrative, regulatory and financial statement related covenants as required by the terms of the Notes. Furthermore, in connection with the First Waiver Agreement, the Notes were amended to provide that the Purchasers shall be paid an exit fee in the aggregate amount of $200,000, payable as follows: (i) on or prior to May 15, 2023, $100,000 and (ii) on the Maturity Date (as defined in the Note Purchase Agreement), $100,000 and the interest rate has increased to 24% for a period extending until the Company meets specified criteria in the First Waiver Agreement.
On May 22, 2023, the Company entered into a Waiver and Second Amendment to Note Purchase Agreement (the “Waiver Agreement”), with CCUR Holdings, Inc. and the purchasers named therein, related to the Note Purchase Agreement dated as of January 12, 2023 (see Note 13 to the consolidated financial statements as at and for the year ended March 31, 2023). The Waiver Agreement provides that the required prepayment of $2.0 million (the “Mandatory Prepayment”), due as of May 15, 2023, is waived, in part, until July 31, 2023, or for an additional thirty days thereafter if the Company has filed a Registration on Form S-1 with the Securities and Exchange Commission by July 31, 2023. Pursuant to the Waiver Agreement, the Company was required to pay, and has paid, $1.0 million of the Mandatory Prepayment. For the period beginning on March 31, 2023, through and including the date that the entire Mandatory Prepayment, including interest and fees is paid, interest on the sum of the outstanding principal amounts will accrue at the rate of twenty four percent (24%) per annum. Thereafter, interest will revert to the rate otherwise provided under the Note Purchase Agreement. The Company also agreed to pay an extension fee in an aggregate amount of $138,606, which was added to the principal amount due.
A breach of the covenants under the Note Purchase Agreement, or any replacement facility, could result in an event of default under the applicable indebtedness, unless we obtain a waiver to avoid such default. If we are unable to obtain a waiver, such an event of default may allow the creditors to accelerate the related debt and may result in the acceleration of or default under any other debt to which a
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cross-acceleration or cross-default provision applies. In the event that we breach one or more covenants, our lender may declare an event of default and require that we immediately repay all amounts outstanding, terminate any commitment to extend further credit and foreclose on the collateral granted to it to collateralize such indebtedness. The occurrence of any of these events could restrict our operations, which could have a material adverse effect on our business, financial condition and results of operations. In the event our lenders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness. If we are not able to pay our debts as they become due, we will be required to pursue one or more alternative strategies, such as refinancing or restructuring our indebtedness, selling assets or selling additional debt or equity securities. We may not be able to refinance our debt or sell additional debt or equity securities or our assets on favorable terms, if at all, and if we must sell our assets, it may negatively affect our ability to generate revenues.
While the Note Purchase Agreement was amended to provide for a waiver of certain defaults, there can be no guarantee that we will not breach covenants in the Note Purchase Agreement or the 2023 Notes in the future. In the event that we breach one or more covenants, our lender may declare an event of default, increase the interest rate to 24% and require that we immediately repay all amounts outstanding, terminate any commitment to extend further credit and foreclose on the collateral granted to it to collateralize such indebtedness. The occurrence of any of these events could restrict our operations, which could have a material adverse effect on our business, financial condition and results of operations.
If we do not manage our supply chain effectively or if there are disruptions in our supply chain, our business and results of operations may be adversely affected.
The success of our business depends, in part, on maintaining a strong sourcing and manufacturing platform and efficient distribution channels. The inability of any supplier of raw materials, independent contract manufacturer or third-party distributor to deliver or perform for us in a timely or cost-effective manner could cause our operating costs to increase and our profit margins to decrease, especially as it relates to our products that have a short shelf life. We must continuously monitor our inventory and product mix against forecasted demand or risk having inadequate supplies to meet consumer demand as well as having too much inventory on hand that may reach its expiration date and become unsaleable.
We must also manage our third-party distribution, warehouse and transportation providers to ensure they are able to support the efficient distribution of our products to retailers. A disruption in transportation services could result in an inability to supply materials to our or our co-manufacturers’ facilities or finished products to our distribution centers or customers. Activity at third-party distribution centers could be disrupted by a number of factors, including labor issues, failure to meet customer standards, natural disasters or financial issues affecting the third-party providers. In particular, the Russia-Ukraine war and recent labor market shortages impacting our industry have created operating challenges in making our products available to customers and consumers, and such challenges may persist.
Our future results of operations may be adversely affected by input cost inflation.
Many aspects of our business have been, and may continue to be, directly affected by volatile commodity costs and other inflationary pressures. Agricultural commodities and ingredients are subject to price volatility which can be caused by commodity market fluctuations, crop yields, seasonal cycles, weather conditions, temperature extremes and natural disasters (including due to the effects of climate change), pest and disease problems, changes in currency exchange rates, imbalances between supply and demand, and government programs and policies among other factors. Volatile fuel costs translate into unpredictable costs for the products and services we receive from our third-party providers including, but not limited to, distribution costs for our products and packaging costs.
Our future results of operations may be adversely affected by the availability of natural and organic ingredients.
Our ability to ensure a continuing supply of natural and organic ingredients at competitive prices depends on many factors beyond our control, such as the number and size of farms that grow natural and organic crops, climate conditions, increased demand for natural and organic ingredients by our competitors, changes in national and world economic conditions, currency fluctuations and forecasting adequate need of seasonal ingredients.
The natural and organic ingredients that we use in the production of our products (including, among others, vegetables, fruits, nuts and grains) are vulnerable to adverse weather conditions and natural disasters, such as floods, droughts, water scarcity, temperature extremes, wildfires, frosts, earthquakes and pestilences. Natural disasters and adverse weather conditions can lower crop yields and reduce crop size and crop quality, which in turn could reduce our supplies of natural and organic ingredients or increase the prices of those ingredients. Such natural disasters and adverse weather conditions can be caused or exacerbated by climate change, and the spate of recent extreme weather events, including historic droughts, heatwaves, extreme cold and flooding, presents an alarming trend. If our
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supplies of natural and organic ingredients are reduced, we may not be able to find enough supplemental supply sources on favorable terms, if at all, which could impact our ability to supply products to our customers and adversely affect our business, financial condition and results of operations.
We also compete with other manufacturers in the procurement of natural and organic product ingredients, which may be less plentiful in the open market than conventional product ingredients. This competition may increase in the future if consumer demand for natural and organic products increases. This could cause our expenses to increase or could limit the amount of products that we can manufacture and sell.
We may not be successful in achieving savings and efficiencies from cost reduction initiatives and related strategic initiatives.
Our strategy includes identifying areas of cost savings and operating efficiencies to expand profit margins and cash flow. As part of our identification of operating efficiencies, we may continue to seek to dispose of businesses and brands that are less profitable or are otherwise less of a strategic fit within our core portfolio.
We may not be successful in fully implementing our productivity plans or realizing our anticipated savings and efficiencies, including potentially as a result of factors outside our control. Additionally, we may not be able to identify or negotiate divestiture opportunities on terms acceptable to us. If we are unable to fully realize the anticipated savings and efficiencies of our cost reduction initiatives and related strategic initiatives, our profitability may be materially and adversely impacted.
COVID-19 has and will continue to impact our operations and could have a material adverse effect on our business, results of operations and financial condition.
The global outbreak of the novel strain of the coronavirus known as COVID-19 has resulted in governments worldwide enacting emergency measures to combat the spread of the virus, including public health directives and orders in the United States, or the U.S., Canada and the European Union that, among other things and for various periods of time, directed individuals to shelter at their places of residence, directed businesses and governmental agencies to cease non-essential operations at physical locations, prohibited certain non-essential gatherings and events and ordered cessation of non-essential travel. The public health crisis caused by COVID-19 and the measures taken and continuing to be taken by governments, businesses and the public have, and we expect will continue to have, certain negative impacts on our business operations, and could have a material adverse effect on our business, results of operations and financial condition. The duration and impact of the COVID-19 outbreak is unknown at this time, as is the efficacy of the government and central bank interventions.
The full extent to which COVID-19 may impact our business, including our operations and the market for our securities and our financial condition, will depend on future developments, which are highly uncertain and cannot be predicted at this time. These include the duration, severity and scope of the outbreak, and further action taken by the government and other third parties in response to COVID-19 or new variants thereof. In particular, COVID-19 and government efforts to curtail COVID-19 could impede our production facilities, increase operating expenses, result in loss of sales, affect our supply chains, impact performance of contractual obligations or could require additional expenditures to be incurred. While most of these restrictions have since been lifted or eased, increases in new COVID-19 cases, including as a result of new COVID-19 variants, may lead to restrictions being reinstated, or new restrictions imposed.
Future remote work policies and similar government orders or other restrictions on the conduct of business operations related to the COVID-19 pandemic may negatively impact productivity and may disrupt our ongoing research and development activities, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on our ability to conduct our business in the ordinary course. We have and continue to update our operational procedures and safety protocols at our facilities to comply with mandates and guidance from governmental authorities. If such measures are not effective or governmental authorities implement further restrictions, we may be required to take more extreme action, which could include short or long-term closures of our facilities or reductions in workforce. These measures may impair our production levels or cause us to close or severely limit production at one or more facilities. Further, our operations could be adversely impacted if suppliers, contractors, customers and/or transportation carriers are restricted or prevented from conducting business activities.
Consumer demand for our products may also be impacted by COVID-19 as a result of reductions in consumers’ disposable income associated with layoffs, and work or pay limitations due to mandatory social distancing and lockdown measures implemented by government authorities. As demand for our products decreases, we may be required to record additional asset impairments, including an impairment of the carrying value of our goodwill, along with other accounting charges.
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Given the ongoing and dynamic nature and significance of COVID-19 and its impact globally, we are not able to enumerate all potential risks and uncertainties to our business or financial condition. Any of the negative impacts of COVID-19, including those described above, alone or in combination with others, may have a material adverse effect on our business, results of operations or financial condition. Further, any of these negative impacts, alone or in combination with others, could exacerbate many of the other risk factors outlined in this prospectus, our annual report on Form 10-K filed with the Commission on July 17, 2023 and in other reports that we file with the Commission from time to time.
Increasing awareness of health and wellness are driving changes in the consumer products industry, and if we are unable to react in a timely and cost-effective manner, our results of operations and future growth may be adversely affected.
We must continually anticipate and react, in a timely and cost-effective manner, to changes in consumer preferences and demands, including changes in demand driven by increasing awareness of health and wellness and demands for transparency or cleaner labels with respect to product ingredients by consumers and regulators. Consumers, especially in developed economies such as the U.S. and Canada, are rapidly shifting away from products containing artificial ingredients to all-natural, healthier alternatives. In addition, there has been a growing demand by consumers, non-governmental organizations and, to a lesser extent, governmental agencies to provide more transparency in product labeling and our customers have been taking steps to address this demand, including by voluntarily providing product-specific ingredients disclosure. These two trends could affect the types and volumes of our ingredients and compounds that our customers include in their consumer product offerings and, therefore, affect the demand for our products. If we are unable to react to or anticipate these trends in a timely and cost-effective manner, our results of operations and future growth may be materially adversely affected.
Markets for our products and services are highly competitive, and we may be unable to compete effectively.
Our products and services, including our consumer products, are offered in highly competitive markets that may be characterized by aggressive price competition and resulting downward pressure on gross margins, frequent introduction of new products and services, short product life cycles, evolving industry standards and government regulations, continual improvement in product price and performance characteristics, rapid adoption of technological advancements by competitors and price sensitivity on the part of consumers and businesses.
Additionally, our consumer products may compete on the basis of product performance, brand recognition and price. Advertising, promotion, merchandising and packaging also have significant impacts on consumer purchasing decisions. A newly introduced consumer product (whether improved or newly developed) usually encounters intense competition requiring substantial expenditures for advertising, sales promotion and trade merchandising. If a product gains consumer acceptance, it typically requires continued advertising, promotional support and product innovations to maintain its relative market position. If our advertising, marketing and promotional programs are not effective or adequate, our net sales may be negatively impacted.
Some of our competitors are larger than us and have greater financial resources. These competitors may be able to spend more aggressively on advertising and promotional activities, introduce competing products more quickly and respond more effectively to changing business and economic conditions than we can. Competitive activity may require the Company to increase its spending on advertising and promotions and/or reduce prices, which could lead to reduced sales, margins and net earnings.
We may be unable to manage our growth effectively.
Our future financial performance and our ability to commercialize our products and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to continue to improve our operational and financial systems, managerial controls and procedures and we will need to continue to expand, train and manage our technology and workforce. We must also maintain close coordination among our technology, compliance, accounting, finance, marketing and sales functions. We cannot assure you that we will manage our growth effectively. If we fail to do so, our business could be materially harmed.
To support our growth, we may have to further increase our investment in technology, facilities, personnel and financial and management systems and controls. We may also have to further expand our procedures for monitoring and assuring our compliance with applicable regulations, and may need to integrate, train and manage a growing employee base. The expansion of our existing businesses, and expansion into new businesses and the resulting growth of our employee base will increase our need for internal audit and monitoring processes that are more extensive and broader in scope than those we have historically required. We may not be successful in identifying or implementing all of the processes that are necessary. Further, unless our growth results in an increase in our revenues that is proportionate to the increase in our costs associated with this growth, our operating margins and profitability will be adversely affected.
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We depend on a few significant customers for a substantial portion of our revenue. If we fail to retain or expand our customer relationships or significant customers reduce their purchases, our revenue could decline significantly.
For the twelve-month period ended March 31, 2023, one customer accounted for 10.66% of revenue, and one customer accounted for 10.26% of revenue for the twelve-month period ended March 31, 2022.
We believe that our operating results for the foreseeable future will continue to depend on sales to a small number of customers. These customers have no purchase commitments and may cancel, change or delay purchases with little or no notice or penalty. As a result of this customer concentration, our revenue could fluctuate materially and could be materially and disproportionately impacted by purchasing decisions of these customers or any other significant customer. In the future, these customers may decide to purchase less product from us than they have in the past, may alter purchasing patterns at any time with limited notice, or may decide not to continue to purchase our products at all, any of which could cause our revenue to decline materially and materially harm our financial condition and results of operations. If we are unable to diversify our customer base, we will continue to be susceptible to risks associated with customer concentration.
In addition, the Company is subject to credit risk of its customers, and its profitability and cash flow are dependent on receipt of timely payments from clients. Any delay in payment by the Company’s customers may have an adverse effect on the Company’s profitability, working capital and cash flow. There is no assurance that the Company will be able to collect all or any of its trade receivables in a timely matter. If any of the Company’s clients face unexpected situations such as financial difficulties, the Company may not be able to receive full or any payment of the uncollected sums or enforce any judgment debts against such clients, and the Company’s business, results of operations and financial condition could be materially and adversely affected.
Significant interruptions in our access to certain supply chains, for key inputs such as raw materials, electricity, water, and other utilities may impair our operations.
Our business is dependent on a number of key inputs and their related costs (certain of which are sourced in other countries and on different continents), including raw materials, supplies and equipment related to our operations, as well as electricity, water and other utilities. Governments may regulate or restrict the flow of our labor or our products, and the Company’s operations, suppliers, customers, and distribution channels could be severely impacted. Any significant future government-mandated or market-related interruption, price increase or negative change in the availability or economics of the supply chain for key inputs and, in particular, rising or volatile energy costs could curtail or preclude our ability to continue production. In addition, our operations would be significantly affected by a prolonged power outage.
No assurances can be given that we will be successful in maintaining our required supply of materials, labor, equipment, parts, and components. See also “COVID-19 has and will continue to impact our operations and could have a material adverse effect on our business, results of operations and financial condition”.
Our future success depends on the sales of our consumer products and turnkey solutions products.
We derive a large portion of our revenues from the sale of our turnkey solutions products and expect to derive an increasing portion of our revenues from the sale of consumer products. Our investments in and strategies used for our brand marketing are critical to achieve brand awareness with current customers, educate potential new customers and convert potential new customers into customers. However, there can be no assurance that our principal products will continue to receive, maintain or increase market acceptance. The inability to successfully commercialize our turnkey solutions and specialty ingredient products, in the future, for any reason, would have a material adverse effect on our financial condition, prospects and ability to continue operations. The overall commercialization success of our products depends on several factors, including:
● | continued market acceptance of our products by the nutraceutical market; |
● | the amount of resources devoted by our distribution partners to continue the commercialization efforts of our products in our core geographic markets; |
● | maintaining supply of our products to meet the purchase orders of our distribution partners; |
● | receipt of regulatory approvals, as applicable, for our products from regulatory agencies in certain territories in which we wish to expand our commercialization efforts; |
● | continuing compliance with applicable regulations; |
● | the number of competitors in our market; and |
● | protecting and enforcing our intellectual property and avoiding patent infringement claims. |
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Our activities rely on certain third-party suppliers, contract manufacturers and distributors, and such reliance may adversely affect us if the third parties are unable or unwilling to fulfill their obligations.
For our consumer product and nutraceutical activities, we purchase certain important ingredients and raw materials from third-party suppliers and, in certain cases, we engage contract manufacturers to supply us with finished products. Part of our strategy is to enter into and maintain arrangements with third parties related to the development, testing, production, packaging, and commercialization of our products to our customers which are then responsible for the marketing and distribution of the products. Our revenues are dependent to a great extent on the successful efforts of these third parties. Entering into strategic relationships can be a complex process and our interests and the interests of our partners may not be or remain aligned with our interests.
Real or perceived quality control problems with raw materials outsourced from certain regions or finished products manufactured by contract manufacturers could negatively impact consumer confidence in our products or expose us to liability. In addition, disruption in the operations of any such supplier or manufacturer or material increases in the price of raw materials, for any reason, such as changes in economic and political conditions, tariffs, trade disputes, regulatory requirements, import restrictions, loss of certifications, power interruptions, fires, hurricanes, drought or other climate-related events, war, or other events, could have a material adverse effect on our business, results of operations, financial condition and cash flows. Also, currency fluctuations could result in higher costs for raw materials purchased abroad.
The Company and any third-party manufacturers engaged by the Company to perform manufacturing services are subject to laws and regulations, including current Good Manufacturing Practices regulations (“cGMP”), which are enforced by the U.S. Food and Drug Administration, or the FDA, and other regulatory authorities. The Company and its third-party manufacturers may be unable to comply with cGMP or other regulatory requirements. A failure to comply with these requirements may result in fines, product recalls or seizures and related publicity requirements, injunctions, total or partial suspension of production, civil penalties, warning or untitled letters, import or export bans or restrictions and criminal prosecution and penalties. Any of these penalties could delay or prevent the promotion, marketing, or sale of the Company’s products. If the safety of any products manufactured by or supplied to the Company is compromised due to the manufacturer’s failure to adhere to applicable laws or for other reasons, the Company may not be able to successfully sell its products and our business, financial condition and operations may be materially adversely affected.
Some of our current and future partners may decide to compete with us, refuse or be unable to fulfill or honor their contractual obligations to us, or change their plans to reduce their commitment to, or even abandon, their relationships with us. There can be no assurance that our partners will market our products successfully or that any such third-party collaboration will be on favorable terms. We may not be able to control the amount and timing of resources our partners devote to our potential products. In addition, we may incur liabilities relating to the distribution and commercialization of our products. While the agreements with such customers generally include customary indemnification provisions indemnifying us for liabilities relating to third-party manufacturing or packaging of our potential products, there can be no assurance that these indemnification rights will be sufficient in amount, scope or duration to fully offset the potential liabilities associated with our potential products. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business, financial condition or results of operations.
Our products may be subject to recalls for a variety of reasons, which could require us to expend significant management and capital resources.
Manufacturers and distributors of products are sometimes subject to the recall or return of their products for a variety of reasons, including product defects, such as contamination, adulteration, unintended harmful side effects, or interactions with other substances, packaging safety, and inadequate or inaccurate labeling disclosure. If any of the products produced by or for us are recalled due to an alleged product defect or for any other reason, we could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. As a result of any such recall, our sales may be significantly affected and may not be able to replace those sales at an acceptable margin or at all. In addition, a product recall may require significant management attention or damage our reputation and goodwill or that of our products or brands.
Additionally, product recalls may lead to increased scrutiny of our operations by regulatory agencies and authorities, requiring further management attention, increased compliance costs and potential legal fees, fines, penalties and other expenses.
We may not meet timelines for project development.
The Company’s business is dependent on a number of key inputs and their related costs including raw materials and supplies related to its operations, as well as electricity, water and other utilities. Any significant interruption or negative change in the availability or
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economics of the supply chain for key inputs could materially impact the business, financial condition operating results, and timelines for project development of the Company. Any inability to secure required supplies and services or to do so on appropriate terms could have a materially adverse impact on the business, financial condition, operating results, and timelines for project development of the Company.
Product contamination or tampering or issues or concerns with respect to product quality, safety and integrity could adversely affect our business, reputation, financial condition or results of operations.
Product contamination or tampering, or allegations of product contamination or tampering or product quality issues (whether or not valid) with respect to products in our portfolio may reduce demand for such products, and cause production and delivery disruptions or increase costs, which could adversely affect our business, reputation, financial condition or results of operations. Moreover, even if allegations of product contamination or tampering or suggestions that our products were not fit for consumption or use are meritless, the negative publicity surrounding assertions against us or products in our portfolio or processes could adversely affect our reputation or brands. Our business could also be adversely affected if consumers lose confidence in product quality, safety and integrity generally, even if such loss of confidence is unrelated to products in our portfolio.
Any of the foregoing could adversely affect our business, reputation, financial condition or results of operations. In addition, if we do not have adequate insurance, if we do not have enforceable indemnification from suppliers, manufacturers, distributors, joint venture partners or other third parties or if indemnification is not available, the liability relating to such product claims or disruption as a result of recall efforts could materially adversely affect our business, financial condition or results of operations.
We may have difficulty obtaining insurance to cover its operational risks and, even where available, may not be sufficient to cover losses we may incur.
We may have difficulty obtaining the various insurances that are desired to operate its business, which may expose the Company to additional risk and financial liability. Insurance that is otherwise readily available, such as general liability, and directors’ and officers’ insurance, may be more difficult to find, and more expensive, because of the regulatory regime applicable to our industry. There are no guarantees that the Company will be able to find such insurance coverage in the future, or that the cost will be affordable. If the Company is unable to obtain insurance coverage on acceptable terms, it may prevent it from entering into certain business sectors, may inhibit growth, and may expose the Company to additional risks and financial liabilities.
Moreover, our current and expected business activities expose us to the risk of liabilities arising from our operations. For example, we may be liable for claims brought by users of our products or by employees, customers or other third parties for personal injury or property damage occurring in the course of our operations. We seek to minimize these risks through various insurance contracts from third-party insurance carriers. However, our insurance coverage is subject to large individual claim deductibles, individual claim and aggregate policy limits, and other terms and conditions. We retain an insurance risk for the deductible portion of each claim and for any gaps in insurance coverage. We do not view insurance, by itself, as a material mitigant to these business risks.
We cannot assure that our insurance will be sufficient to cover our losses. Any losses that insurance does not substantially cover could have a material adverse effect on our business, results of operations, financial condition and cash flows. The insurance industry has become more selective in offering some types of insurance, such as product liability, product recall, property and directors’ and officers’ liability insurance. Our current insurance program is consistent with both our past level of coverage and our risk management policies. However, we cannot assure that we will be able to obtain comparable insurance coverage on favorable terms, or at all, in the future.
Risks Relating to Our Accounting and Financial Activities
Although our consolidated financial statements have been prepared on a going concern basis, our management believe that our recurring losses and negative cash flows from operations and other factors have raised substantial doubt about our ability to continue as a going concern.concern as of March 31, 2023.
Our consolidated financial statements for the twelve-month period ended March 31, 2022 and three and six-month periods ended September 30, 20222023 were 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. Thus, our consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. Our recurring losses, negative cash flow, need for additional financing and the uncertainties surrounding our ability to raise such financing, raise substantial doubt about our ability to continue as a going concern. For the twelve-month period ended March 31, 2022 and six-month period ended September 30, 2022,2023, the Company incurred a net loss of $84.4$88.8 million, and $43.8 million, respectively, negative cash flows from operations of $54.3$28.6 million, and $14.1 million, respectively, and had
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an accumulated deficit of $323.2 million and $358.4$383.6 million as at March 31, 2022 and September 30, 2022, respectively.2023. Our lack of cash resources and our potential inability to continue as a going concern may materially adversely affect our share price and our ability to raise new capital, enter into critical contractual relations with third parties, meet our obligations as they become due and otherwise execute our business strategy. The Company currently has no committed sources of financing available. If we are unable to raise additional financing, increase sales orand reduce expenses we will be unable to continue to fund our operations, develop our products, realize value from our assets, or discharge our liabilities in the normal course of business. If we become unable to continue as a going concern, we could have to liquidate our assets, and potentially realize significantly less than the values at which they are carried on our financial statements, and shareholders could lose all or part of their investment in our Common Shares.
This offering is being made on a [reasonable best-efforts] basis and we may sell fewer than all of the securities offered hereby and may receive significantly less in net proceeds from this offering. Assuming that we receive net proceeds of $[●] million from this offering (assuming an offering with gross proceeds of $[●] million), we believe that the net proceeds from this offering will meet our cash needs for approximately [●]. The net proceeds from this offering will not significantly improve the Company’s working capital. The Company’s trade and other payables will continue to significantly exceed its cash balance. After receipt of the net proceeds from this offering the Company will still be required to actively manage its liquidity and expenses and payments of payables will continue to not be made as the amounts become due. Nor will the receipt of the net proceeds from this offering remove that substantial doubt and as such, there will remain substantial doubt about our ability to continue as a going concern after this offering. If we have insufficient capital to operate our business under our current business plan, we have contingency plans for our business that include, among other things, the delay of the introduction of new products, a reduction in headcount, and a reduction of the expansion of our distribution networks, which is expected to substantially reduce revenue growth and delay our profitability. There can be no assurance that our implementation of these contingency plans will not have a material adverse effect on our business. We may need to liquidate our assets, and potentially realize significantly less than the values at which they are carried on our financial statements, and shareholders could lose all or part of their investment in our Common Shares.
We have recorded significant long-lived asset impairment charges and may be required to record additional charges to future earnings if our long-lived assets become impaired.
As of September 30, 2022,March 31, 2023, our goodwill balance was $14.4$2.4 million and our intangible asset balance was $17.8$1.6 million, which represented 22.1%7.8% and 27.4%5.2% respectively of total consolidated assets. The Company recorded an impairment loss of $7.6$19.5 million for goodwill and $2.6$18.0 million for intangibles in the six monthstwelve-month period ended September 30, 2022.March 31, 2023. We are required to review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our intangible assets and/or goodwill may not be recoverable include a decline in share price
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and market capitalization, slower growth rates in our industry or our own operations, and/or other materially adverse events that have implications on the profitability of our business or business verticals.
In addition, the Company announced that it had entered into a binding agreement for the sale of its Canadian cannabis business, including the Sherbrooke building, for C$5.15 million to be paid to the Company in cash, which transaction closed on November 9, 2022. The Company recorded a loss on remeasurement of the assets to fair value less cost of sale in the amount of $15.3 million in six-monthsthe twelve-month period ended September 30, 2022.March 31, 2023.
We may be required to record additional charges during the period in which any impairment of our goodwill, intangible assets or other long-lived assets is determined which could have a material adverse impact on our results of operations. Even though these charges may be non-cash items and may not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about us or our securities.
In some cases, we cannot determine with any certainty whether we have priority of invention in relation to any new product or new process covered by a patent application or if we were the first to file a patent application for any such new invention. Furthermore, in the event of patent litigation there can be no assurance that our patents would be held valid or enforceable by a court of competent jurisdiction or that a court would rule that the competitor’s products or technologies constitute patent infringement.
Moreover, part of our technological know-how constitutes trade secrets. We require that our employees, consultants, advisers and collaborators sign confidentiality agreements. However, these agreements may not provide adequate protection in the event of unauthorized use or disclosure of our trade secrets, know-how or other proprietary information.
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Claims that our technology or products infringe on intellectual property rights of others could be costly to defend or settle, could cause reputational injury and would divert the attention of our management and key personnel, which in turn could have a material adverse effect on our business, results of operations, financial condition and cash flows. Any adverse outcome of such litigation or settlement of such a dispute could subject us to significant liabilities, could put one or more of our patents at risk of being invalidated or interpreted narrowly, could put one or more of our pending patent applications at risk of not issuing, or could facilitate the entry of generic products. Any such litigation could also divert our research, technical and management personnel from their normal responsibilities.
Risks Relating to Our Liquidity
We are actively managing our liquidity and expenses, including by extending payables due and reducing investment in our businesses, and it is not certain that we will be ultimately successful in developing our business and remaining a going concern.
As of the date of this prospectus, we are actively managing our liquidity and expenses, and there is substantial doubt that our current cash position will be sufficient to continue as a going concern. The Company currently has minimal available cash balances, and we are also continuing to incur expenses that will cause us to expend cash in the short term. 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.due. As of the date of this prospectus,[July 14], 2023, we havehad approximately $6.3$1.3 million in cash and cash equivalents, which is expected to be sufficient to operate the business for the next three to six monthsless than one month 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. We have no arranged sources of financing available to us. Our failure to obtain any required additional financing on favorable terms, or at all, would have a material adverse effect on our business, financial condition and results of operations. We are pursuing several cash generating transactions, including the strategic plan described herein, as well as further expense reduction measures, but there can be no assurance that any transaction will be completed or that our expense reduction measures will be sufficient to continue as a going concern.
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As a result of our failure to timely file our Quarterly Report on Form 10-Q for the quarter ended September 30,December 31, 2022, we are currently ineligible to file new short form registration statements on Form S-3, which may impair our ability to raise capital on terms favorable to us, in a timely manner or at all.
Form S-3 permits eligible issuers to conduct registered offerings using a short form registration statement that allows the issuer to incorporate by reference its past and future filings and reports made under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In addition, Form S-3 enables eligible issuers to conduct primary offerings “off the shelf” under Rule 415 of the Securities Act of 1933, as amended (the “Securities Act”).Act. The shelf registration process, combined with the ability to forward incorporate information, allows issuers to avoid delays and interruptions in the offering process and to access the capital markets in a more expeditious and efficient manner than raising capital in a standard registered offering pursuant to a Registration Statement on Form S-1. The ability to register securities for resale may also be limited as a result of the loss of Form S-3 eligibility.
As a result of our failure to timely file our Quarterly Report on Form 10-Q for the quarter ended September 30,December 31, 2022, we are currently ineligible to file new short form registration statements on Form S-3 and, absent a waiver of the Form S-3 eligibility requirements, we will no longer be permitted to use our existing registration statement on Form S-3. As a consequence, we might not be permitted to sell all of the amount of securities we could otherwise sell prior to such time, subject to the limits of General Instruction I.B.6. of Form S-3, which could adversely affect our operations and financial results.
Our inability to use Form S-3 may significantly impair our ability to raise necessary capital to run our operations and execute on our strategy. If we seek to access the capital markets through a registered offering during the period of time that we are unable to use Form S-3, we may be required to publicly disclose the proposed offering and the material terms thereof before the offering commences, we may experience delays in the offering process due to SEC review of a Form S-1 registration statement and we may incur increased offering and transaction costs and other considerations. Disclosing a public offering prior to the formal commencement of an offering may result in downward pressure on our share price. If we are unable to raise capital through a registered offering, we would be required to conduct our equity financing transactions on a private placement basis, which may be subject to pricing, size and other limitations imposed under Nasdaq rules, or seek other sources of capital.
The CompanyWe may have difficulty accessing public and private capital and banking services, which could negatively impact its ability to finance its operations.
The Company anticipatesWe anticipate that funding sources may be available pursuant to private and public offerings of equity and/or debt and bank lending. However, if equity and/or debt financing was not available in the public capital markets, then the Company expects that it would have
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access to raise equity and/or debt financing privately. There can be no assurance that additional financing, if raised privately or publicly, will be available to the Company when needed or on terms which are acceptable.acceptable, or that the Company’s existing indebtedness would not impact its ability to obtain such additional financing. The Company’s inability to raise financing to fund working capital, capital expenditures or acquisitions could limit its growth and may have a material adverse effect upon future profitability. If the Company cannot achieve profitability, it may be forced to cease operations and you may suffer a total loss of your investment.
The issuance and sale of common shares upon exercise of outstanding warrants may cause substantial dilution to existing shareholders and may also depress the market price of our common shares. Certain outstanding warrants to purchase shares of our common stock have cashless exercise rights.
24As at March 31, 2023, the Company had a total of 12,197,665 warrants outstanding, representing 101.7% of the common shares issued at that date. If the holders of the warrants choose to exercise the warrants, it will cause substantial dilution to the holders of our common shares. If exercises of the warrants and sales of such shares issuable upon exercise thereof take place, the price of our common shares may decline. In addition, the common shares issuable upon exercise of the warrants may represent overhang that may also adversely affect the market price of our common shares. Overhang occurs when there is a greater supply of a company’s stock in the market than there is demand for that stock. When this happens the price of our common shares may decrease, and any additional shares which shareholders attempt to sell in the market will only further decrease the share price. If the share volume of our common shares cannot absorb shares sold by the warrant holders, then the value of our common shares will likely decrease.
Certain of the warrants discussed above allow for cashless exercise rights. In a ‘cashless exercise’, the holder reduces the number of shares of common shares issuable upon exercise of the warrants in amount equal to the aggregate value of the exercise price of the exercised warrants. For example, if our common shares were trading at $10 per share and a holder desires to exercise warrants to purchase 100 common shares with an exercise price of $1.00 per share on a cashless basis, the number of common shares issuable to the holder upon such exercise would be reduced by 10 shares, equal in value to $100 ($10 per share x 10 shares), and the holder would receive 90 common shares upon such exercise. We do not receive any cash upon a cashless exercise and as such, while a cashless exercise reduces the dilution which would otherwise exist upon a warrant exercise, it is also not as beneficial to us, as it does not bring in any new investment proceeds. Additionally, holders of warrants with cashless exercise provisions may be more likely to exercise their warrants as they do not have to come out of pocket with any cash exercise payments.
Legal and Regulatory Risks Relating to Our Business
We identified material weaknesses in our internal control over financial reporting. This may adversely affect the accuracy and reliability of our financial statements and, if we fail to maintain effective internal control over financial reporting, it could impact our reputation, business, and the price of our common shares, as well as lead to a loss of investor confidence in us.
The Company has and may continue to fail to maintain the adequacy of its internal controls over financial reporting as such standards are modified, supplemented or amended from time to time, and the Company cannot ensure that it will conclude on an ongoing basis that it has effective internal controls over financial reporting. The Company’s failure to satisfy the requirements of Canadian and United States legislation on an ongoing, timely basis could result in the loss of investor confidence in the reliability of its financial statements or in a cease trade order, which in turn could harm the Company’s business and negatively impact the trading price and market value of its shares or other securities. In addition, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm the Company’s operating results or cause it to fail to meet its reporting obligations.
The Company also has and may continue to fail to maintain the adequacy of its disclosure controls. Disclosure controls and procedures are designed to ensure that the information required to be disclosed by the Company in reports filed with securities regulatory agencies is recorded, processed, summarized and reported on a timely basis and is accumulated and communicated to the Company’s management, as appropriate, to allow timely decisions regarding required disclosure.
No evaluation can provide complete assurance that the Company’s financial and disclosure controls will detect or uncover all failures of persons within the Company to disclose material information otherwise required to be reported. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance with respect to the reliability of financial reporting and financial statement preparation. The effectiveness of the Company’s controls and procedures could also be limited by simple errors or faulty judgements.
Material weaknesses in the Company’s internal control over financial reporting were determined to exist at March 31, 20222023 and these material weaknesses have not been remediated to date. The Company’s management, including the Chief Executive Officer and Chief
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Financial Officer, concluded that our internal control over financial reporting was not effective as of March 31, 20222023 due to the presence of these material weaknesses. While we intend to adopt new and revised controls to remediate these weaknesses, if these and other controls fail to adequately remediate these material weaknesses, it could result loss of investor confidence, which could lead to a decline in our share price. In addition, if we do not maintain adequate financial and management personnel, processes, and controls, we may not be able to accurately report our financial performance on a timely basis, which could cause a decline in our share price and harm our ability to raise capital. Failure to accurately report our financial performance on a timely basis could also jeopardize our continued listing on Nasdaq or any other exchange on which our common shares may be listed.
As a non-accelerated filer, we are not required to comply with the auditor attestation requirements of the Sarbanes-Oxley Act.
We are a non-accelerated filer under the Exchange Act and we are not required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002. Therefore, our internal controls over financial reporting will not receive the level of review provided by the process relating to the auditor attestation included in annual reports of issuers that are subject to the auditor attestation requirements. In addition, we cannot predict if investors will find our common shares less attractive because we are not required to comply with the auditor attestation requirements. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and trading price for our common shares may be negatively affected.
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Sources of hemp-derived CBD depend upon legality of cultivation, processing, marketing and sales of products derived from those plants under state law.
Hemp-derived cannabidiol, or CBD, can only be legally produced in states that have laws and regulations that allow for such production and that comply with the Agricultural Improvement Act of 2018 (the “2018 Farm Act”), apart from state laws legalizing and regulating medical and recreational cannabis or marijuana, which remains illegal under federal law and regulations. We purchase all of our hemp-derived CBD from licensed growers and processors in states where such production is legal. In the event of repeal or amendment of laws and regulations which are now favorable to the cannabis/hemp industry in such states, we would be required to locate new suppliers in states with laws and regulations that qualify under the 2018 Farm Act. If we were to be unsuccessful in arranging new sources of supply of our raw ingredients, or if our raw ingredients were to become legally unavailable, our intended business plan with respect to such products could be adversely impacted.
We expect to be subject to taxation in both Canada and the United States, which could have a material adverse effect on our financial condition and results of operations.
We are a Canadian corporation, and as a result generally wouldThe Company may be classified as a non-United States corporation under the general rules of U.S. federal income taxation. Section 7874 of the Code, however, contains rules that can cause a non-United States corporation to be taxed as a United States corporation for U.S. federal income tax purposes. Under Section 7874 of the Code, a corporation created or organized outside of the United States will nevertheless be treated as a United States corporation“passive foreign investment company” for U.S. federal income tax purposes, which is referredwould subject U.S. investors that hold the Company’s Common Shares to as an inversion, if each ofpotentially significant adverse U.S. federal income tax consequences.
If the following three conditions are met: (i) the non-United States corporation acquires, directly or indirectly, orCompany is treated as acquiring under applicable U.S. Treasury regulations, substantially all of the assets held, directly or indirectly, by a United States corporation, (ii) after the acquisition, the former shareholders of the acquired United States corporation hold at least 80% (by vote or value) of the shares of the non-United States corporation by reason of holding shares of the acquired United States corporation, and (iii) after the acquisition, the non-United States corporation’s expanded affiliated group does not have substantial business activities in the non-United States corporation’s country of organization or incorporation when compared to the expanded affiliated group’s total business activities.
Pursuant to Section 7874 of the Code, we are classified as a U.S. corporationpassive foreign investment company (“PFIC”) for U.S. federal income tax purposes in any taxable year, U.S. investors holding the Company’s Common Shares generally will be subject, in that taxable year and are subjectall subsequent taxable years (whether or not the Company continued to be a PFIC), to certain adverse U.S. federal income tax consequences. The Company will be classified as a PFIC in respect of any taxable year in which, after taking into account its income and gross assets (including the income and assets of 25% or more owned subsidiaries), either (i) 75% or more of its gross income consists of certain types of “passive income” or (ii) 50% or more of the average quarterly value of its assets is attributable to “passive assets” (assets that produce or are held for the production of passive income). Based on our worldwide income. Regardlesscurrent operations, income, assets and certain estimates and projections, including as to the relative values of our assets, including goodwill, which is based on the expected price of our Common Shares, the Company believes that it was not a PFIC for the taxable year ended March 31, 2022. The determination of the Company’s status as a PFIC for the fiscal year ending March 31, 2023 cannot be made at this time. Because the Company’s PFIC status must be determined annually with respect to each taxable year and will depend on the composition and character of the Company’s assets and income, including the Company’s use of proceeds from offerings, and the value of the Company’s assets (which may be determined, in part, by reference to the market value of Common Shares, which may be volatile) over the course of such taxable year, the Company may be a PFIC in any taxable year. Because there are uncertainties in the application of Section 7874, however, we expectthe relevant rules and PFIC status is a factual determination made annually after the close of each taxable year, there can be no assurance that the Company will not be a PFIC for any future taxable year. In addition, it is possible that the U.S. Internal Revenue Service may challenge the Company’s classification of certain income and assets as non-passive, which may result in the Company being or becoming a PFIC in the current or subsequent years.
If the Company is a PFIC for any year during a U.S. Holder’s (as defined below in “Certain U.S. Federal Income Tax Considerations”) holding period, then such U.S. Holder generally will be required to be treatedtreat any gain realized upon a disposition of Common Shares, or any “excess distribution” received on its Common Shares, as ordinary income, and to pay an interest charge on a Canadian resident company for purposesportion of such gain or distribution, unless the U.S. Holder makes a timely and effective “qualified electing fund” election (“QEF Election”) or a “mark-to-market” election with respect to its Common Shares. A U.S. Holder who makes a QEF Election generally must report on a current basis its share of the Canadian Income Tax Act,Company’s net capital gain and ordinary earnings for any year in which the Company is a PFIC, whether or not the Company distributes any amounts to its shareholders. However, U.S. Holders should be aware that if the Company determines that it is a PFIC for this year or any future taxable year, the Company can make no assurances that it would provide the information necessary for U.S. Holders to make a QEF Election. Thus, U.S. Holders may not be able to make a QEF Election with respect to their Common Shares. A U.S. Holder who makes a mark-to-market election generally must include as amended. As a result, we are subject to taxation both in Canadaordinary income each year the excess of the fair market value of the Common Shares over the taxpayer’s basis therein. Each U.S. Holder should consult its own tax advisors regarding the PFIC rules and the U.S., which could have a material adverse effect on our financial condition federal income tax consequences of the acquisition, ownership, and resultsdisposition of operations.Common Shares.
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We are subject to laws and regulations and guidelines, changes in which could increase our costs and individually or in the aggregate adversely affect our business.
We are subject to laws and regulations affecting our operations in a number of areas. These laws and regulations affect the Company’s activities in areas including, but not limited to, the hemp, organic food and beverage products, dietary supplements, consumer protection, labor, intellectual property ownership and infringement, import and export requirements, and environmental, health and safety.
The successful execution of our business objectives is contingent upon compliance with all applicable laws and regulatory requirements and obtaining all other required regulatory approvals, which may be onerous and expensive. Any such costs, which may rise in the future as a result of changes in these laws and regulations or in their interpretation and the expansion of the Company’s business, could individually or in the aggregate make the Company’s products and services less attractive to our customers, delay the introduction of new products, or cause the Company to implement policies and procedures designed to ensure compliance with applicable laws and regulations. There can be no assurance that the Company’s officers, directors, employees, contractors, or agents will not violate such laws and regulations or our policies and procedures.
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We are subject to risks inherent to the nutraceutical industry.
We are heavily dependent on the export of products to the United States. The FDA is able to block the import entry of any product that “appears”violates or appears to violate U.S. law, which represents a low evidentiary standard for the FDA.law. Future changes in U.S. requirements and interpretations of those requirements, coupled with the “appears”FDA’s authority to violateblock import entry based only on an apparent violation of the law, standard for refusing entry of imported products, increases the possibility that our products may not have full access to the U.S. market and poses additional risks to our business.
We are subject to anti-money laundering laws and regulations in multiple jurisdictions.
The Company will be subject to a variety of laws and regulations in Canada and in the United States that involve money laundering, financial recordkeeping and proceeds of crime, including the U.S. Currency and Foreign Transactions Reporting Act of 1970 (commonly known as the Bank Secrecy Act), as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), the Criminal Code (Canada), as amended and the rules and regulations thereunder, and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the United States and Canada.
If any of the Company’s investments, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such investments in the United States or Canada were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize the ability of the Company to declare or pay dividends, effect other distributions or subsequently repatriate such funds back to Canada. Furthermore, while the Company haswe have no current intention to declare or pay dividends on its Common Shares in the foreseeable future, the Companywe may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.
Our inability to maintain our regulatory approvals and permits or failure to comply with applicable regulations could adversely affect our business and financial results.
The Company is required to obtain and maintain certain federal and state permits, licenses and approvals in the jurisdictions where its products are manufactured and/or sold.sold and to comply with extensive regulations governing its business, including FDA regulations. There can be no assurance that the Company will be able to obtain or maintain necessary licenses, permits or approvals.approvals or continue to comply with applicable regulations. Any material delay or inability to receive these items is likely to delay and/or inhibit the Company’s ability to conduct its business, and would have an adverse effect on its business, financial condition and results of operations.
We are currently, and may in the future be, subject to substantial litigation, investigations and proceedings that could cause us to incur significant legal expenses and result in harm to our business.
We and our subsidiaries are subject to federal, state, local, foreign and provincial health, safety, and labeling laws and regulations, including but not limited to the federal Food, Drug, and Cosmetic Act and regulations promulgated by the federal Food and Drug Administration;FDA; laws and regulations promulgated by the United States Department of Agriculture; the National Organic Program; and state, local, foreign, and provincial law equivalents. In addition, the California Safe Drinking Water and Toxic Enforcement Act of 1986 (Proposition 65) and implementing
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regulations impose testing and warning requirements for products containing any chemical known to the State of California to cause cancer and/or reproductive toxicity. Product recall laws and regulations also apply to our products.
The failure by us to comply with applicable health, safety, and labeling requirements could result in fines, penalties, injunctions, product recalls, enforcement actions, third-party claims for property damage and personal injury, regulatory or judicial orders requiring corrective measures, and attorneys’ fees associated with prosecuting such actions, which could have a material adverse effect on our business, financial condition, or results of operations.
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We rely on contract manufacturers to produce products in compliance with applicable health, safety, and labeling requirements. Further, as with any consumer-facing company selling food or nutraceutical products, there is always a chance of microbial contamination even under the most stringent manufacturing practices; thus, the risk of fines, penalties, injunctions, product recalls, enforcement actions, third-party claims for property damage and personal injury, regulatory or judicial orders requiring corrective measures, and attorneys’ fees associated with prosecuting such actions is heightened where the company is not actively involved in the manufacturing practices.
On February 4, 2021, the United States House of Representatives Subcommittee on Economic and Consumer Policy, Committee on Oversight and Reform (“Subcommittee”Subcommittee”), published a report, “Baby Foods Are Tainted with Dangerous Levels of Arsenic, Lead, Cadmium, and Mercury” (the “Report”“Report”), which stated that, with respect to Sprout, a company in which Neptune acquired a 50.1% stake, “Independent testing of Sprout Organic Foods”Foods has confirmed that their baby foods contain concerning levels of toxic heavy metals.” The Report further stated that after receiving reports alleging high levels of toxic metals in baby foods, the Subcommittee requested information from Sprout but did not receive a response. On February 11, 2021, the Subcommittee contacted Sprout, reiterating its requests for documents and information about toxic heavy metals in Sprout’s baby foods.
Sprout provided an initial response to the Subcommittee on February 25, 2021. The pending inquiries and potential findings could have a material adverse effect on our business, financial condition, or results of operations.
On March 16, 2021, a purported class action, captioned Marvin Gong v. Neptune Wellness Solutions, et al., was filed in the United States District Court for the Eastern District of New York against the Company and certain of its current and former officers. On October 21, 2022, the Company announced that it had agreed to settle and resolve the lawsuit for a gross payment to the class of between $4 and $4.25 million, with the exact amount being within the Company’s control and dependent on the type of consideration used. The settlement iswas subject to court approval and certification by the court of the class,class. On March 16, 2023, the settlement offer was accepted and the first two payments in the amount of $500,000 each were subsequently paid. The remainder is payable either in cash ($2,500,000) or in common shares ($2,750,000) at Neptune’s election, within 31 days after the Final Approval Order is entered. The Company hasintends to pay the remainder in common shares, which may result in a rightsubstantial number of shares being issued, and such an issuance may result in substantial dilution to terminate the agreement within 30 days under certain circumstances.existing holders of our common shares.
We also are subject to federal, state, local, foreign and provincial laws, rules and regulations concerning advertising and marketing, including but not limited to those prohibiting unfair, deceptive, and/or abusive trade practices. Violations of advertising and marketing requirements can result in fines, penalties, injunctions, disgorgement of profits, full restitution for injury suffered by consumers, rescission of contracts, enforcement actions, regulatory or judicial orders requiring corrective measures, and attorneys’ fees associated with prosecuting such actions.
Accordingly, we are exposed to potential liabilities and reputational risk associated with litigation, regulatory proceedings and government investigations and enforcement actions for the failure of us to comply with applicable health, safety, and labeling requirements and advertising and marketing requirements. Any adverse judgment in or settlement of any pending or any future litigation or investigation could result in payments, fines and penalties that could adversely affect our business, results of operations and financial condition and which may not be covered by insurance. Regardless of the merits of the claims and the outcome, legal proceedings have resulted in, and may continue to result in, significant legal fees and expenses as well as diversion of management’s and employee time and other resources, and adverse publicity. Such proceedings could also adversely affect our business, results of operations and financial condition. If the Company is unsuccessful in its defense of material litigation claims or is unable to settle the claims, the Company may be faced with significant monetary damage awards or other remedies against it including injunctive relief that could have a material adverse effect on the Company’s business, financial condition and results of operations. Administrative or regulatory actions against the Company or its employees could also have a material adverse effect on the Company’s business, financial condition and results of operations. For more information on our pending legal proceedings, see “Legal Proceedings.”
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Risks Relating to Our Human Resources
We may be unable to attract or retain key personnel, and we may be unable to attract, develop and retain additional employees required for our development and future success.
Our success is largely dependent on the performance of our management team and certain employees and our continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. Qualified individuals are in high demand, and we may incur significant costs to attract and retain them. The loss of the services of any key personnel, or an inability to attract other suitably qualified persons when needed, could prevent us from executing on our business plan and strategy, and we may be unable to find adequate replacements on a timely basis, or at all. We do not currently maintain key-person insurance on the lives of any of our key personnel.
or may in the future require a security clearance will be able to obtain or renew such clearances or that new personnel who require a security clearance will be able to obtain one. A failure by an individual in a key operational position to maintain or renew his or her security clearance could result in a reduction or complete suspension of our operations. In addition, if an individual in a key operational position leaves us, and we are unable to find a suitable replacement who is able to obtain a security clearance in a timely manner, or at all, we may not be able to conduct our operations at planned production volume levels or at all.
We face exposure to fraudulent or illegal activity by officers, directors, employees, contractors, consultants and agents, which may subject us to investigations and actions.
We are exposed to the risk that any of our officers, directors, employees, independent contractors and consultants and our subsidiaries may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to us that violate (i) government regulations, (ii) manufacturing standards, (iii) federal, state, local, and localforeign healthcare fraud and abuse laws and regulations, or (iv) laws that require the true, complete and accurate reporting of financial information or data. It may not always be possible for us to identify and deter misconduct by our officers, directors, employees and other third parties, and the precautions taken by us to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. We cannot provide assurance that our internal controls and compliance systems will protect us from acts committed by our officers, directors, employees, agents or business partners in violation of U.S. or Canadian federal, provincial or state or local laws. If any such actions are instituted against us, and we are not successful in defending or asserting our rights, those actions could have a material impact on our business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could have a material adverse effect on our business, financial condition, results of operations or prospects.
Risks Relating to Our Information Technology
We must successfully maintain and/or upgrade our information technology systems, and our failure to do so could have a material adverse effect on our business, financial condition or results of operations.
We rely on various information technology systems to manage our operations. Over the last several years, we have implemented, and we continue to implement, modifications and upgrades to such systems, including changes to legacy systems, replacing legacy systems with successor systems with new functionality, and acquiring new systems with new functionality. These types of activities subject us to inherent costs and risks associated with replacing and changing these systems, including impairment of our ability to fulfill customer orders, potential disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, retention of sufficiently skilled personnel to implement and operate the new systems, demands on management time and other risks and costs of delays or difficulties in transitioning to
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or integrating new systems into our current systems. These implementations, modifications, and upgrades may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. In addition, the difficulties with implementing new technology systems may cause disruptions in our business operations and have a material adverse effect on our business, financial condition, or results of operations.
We may be exposed to risks and costs associated with security breaches, data loss, credit card fraud and identity theft that could cause us to incur unexpected expenses and loss of revenue as well as other risks.
The Company’s operations are increasingly dependent on IT systems and the management of information; thus, the protection of customers, employees, suppliers and other business data is critical. A portion of our sales require the collection of certain customer data, such as credit card information. In order for our sales channel to function, we and other parties involved in processing customer transactions must be able to transmit confidential information, including credit card information, securely over public networks. The use of credit payment systems makes us more susceptible to a risk of loss, particularly with respect to an external security breach of customer information controlled by us, or by third parties under arrangements with us (including those with whom we have strategic alliances). Despite of allour efforts, the Company experienced a cyber-attack in July 2021 as a consequence of increased digital interactions with customers, suppliers and consumers, and changes in ways of working of our employees and these external stakeholders due to the
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COVID-19 outbreak. Also, we are particularly reliant on service providers and thus the impact of COVID-19 on their operations also imposed a risk for us. Cyber-attacks will continue to impose threats to our operations.
In addition, federal, state, provincial and international laws and regulations govern the collection, retention, sharing, and security of data that we manage. The regulatory environment surrounding information security and privacy has been increasingly demanding in recent years and may see the imposition of new and additional requirements by provincial, state, and federal governments as well as foreign jurisdictions in which we do business. Compliance with these requirements may result in cost increases due to necessary systems changes and the development of new processes to meet these requirements by us.
In the event of a security breach, theft, leakage, accidental release or other illegal activity with respect to employees, customers, suppliers or other company data, we could become subject to various claims, including those arising out of thefts and fraudulent transactions, and may also result in the suspension of credit card services. This could cause consumers to lose confidence in our security measures, harm our reputation as well as divert management attention, and expose us to potentially unreserved claims and litigation. Any loss in connection with these types of claims could be substantial. If our electronic payment systems are damaged or cease to function properly, we may have to make significant investments to fix or replace them, and we may suffer interruptions in our operations in the interim. In addition, we are reliant on these systems, not only to protect the security of the information stored, but also to appropriately track and record data. Any failures or inadequacies in these systems could expose us to significant unreserved losses, which could materially and adversely affect our earnings and the market price of securities. Our brand reputation would likely be damaged as well.
Risks Relating to Our Intellectual Property
Our commercial success depends, in part, on our intellectual property rights and a failure by us to protect our intellectual property may have a material adverse effect on our ability to develop and commercialize our products.
Our success depends in part on our ability to develop products, obtain patents, protect our trade secrets and operate without infringing third-party exclusive rights or without others infringing our exclusive rights or those granted to us under license. The patent position of a corporation is generally uncertain and involves complex legal, factual and scientific issues, several of which remain unresolved. We do not know whether we will be able to develop other patentable proprietary technology and/or products. Furthermore, we cannot be completely certain that our future patents, if any, will provide a definitive and competitive advantage or afford protection
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against competitors with similar technology. Furthermore, we cannot give any assurance that such patents will not be challenged or circumvented by others using alternative technology or whether existing third-party patents will prevent us from marketing our products. In addition, competitors or potential competitors may independently develop, or have independently developed products as effective as ours or invent or have invented other products based on our patented products.
If third-party licenses are required, we may not be able to obtain them, or if obtainable, they may not be available on reasonable terms. Furthermore, we could develop or obtain alternative technologies related to third-party patents that may inadvertently cover their products. Inability to obtain such licenses or alternative technologies could delay the market launch of certain of our products, or even prevent us from developing, manufacturing or selling certain products. In addition, we could incur significant costs in defending ourselves in patent infringement proceedings initiated against us or in bringing infringement proceedings against others.
Risks Relating to This Offering and Ownership of Our Common Shares
We do not currently intend to pay any cash dividends on our Common Shares in the foreseeable future.
We have never paid any cash dividends on our Common Shares. We do not anticipate paying any cash dividends on our Common Shares in the foreseeable future because, among other reasons, we currently intend to retain any future earnings to finance our business. The future payment of cash dividends will be dependent on factors such as cash on hand and achieving profitability, the financial requirements to fund growth, our general financial condition and other factors our board of directors may consider appropriate in the circumstances. Until we pay cash dividends, which we may never do, our shareholders will not be able to receive a return on their Common Shares unless they sell them.
We have broad discretion in the use of proceeds from the offering.
Our management will have broad discretion with respect to the application of net proceeds received by us from the sale of the Common Shares and Warrants under this prospectus and may spend such proceeds in ways that do not improve our results of operations or enhance
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the value of the Common Shares and Warrants. Any failure by management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business or cause the price of our Common Shares to decline.
If there is insufficient liquidity in our Common Shares, it could adversely affect your ability to sell your shares.
Shareholders of the Company may be unable to sell significant quantities of Common Shares into the public trading markets without a significant reduction in the price of their Common Shares, or at all. There can be no assurance that there will be sufficient liquidity of the Common Shares on the trading market, and that the Company will continue to meet the listing requirements of the NASDAQNasdaq or achieve listing on any other public stock exchange. There can be no assurance that an active and liquid market for the Common Shares will be maintained and an investor may find it difficult to resell Common Shares.
There is currently no established public trading market for the Warrants.
There is no established public trading market for the Warrants, and we do not expect such a market to develop. In addition, we do not plan on making an application to list the Warrants on the Nasdaq, or any other securities exchange or other trading system. This may affect the pricing of the Warrants in the secondary market, the transparency and availability of trading prices, the liquidity of the Warrants, and the extent of issuer regulation. Except in limited circumstances specified in the Warrants, holders of the Warrants will not be entitled to any voting rights, dividends or other rights as shareholders of the Company, prior to the exercise of their Warrants. In addition, the Warrants have an exercise price of $[●] per Common Share, will be exercisable immediately, and will expire five years following the date of issuance. If the price of the Common Shares does not exceed the exercise price of the Warrants during the period when the Warrants are exercisable, the Warrants may not have any value.
U.S. investors may be unable to enforce certain judgments against us in Canada.
Neptune is a corporation existing under the Business Corporations Act (Québec). A number of our directors and officers are residents of Canada or other jurisdictions outside of the United States, and substantially all of our assets are located outside the United States. As a result, it may be difficult to effect service within the United States upon the Company or upon its directors and officers. Execution by United States courts of any judgment obtained against the Company or any of the Company’s directors or officers in United States courts may be limited to the assets of such companies or such persons, as the case may be, located in the United States. It may also be difficult for holders of securities who reside in the United States to realize in the United States upon judgments of courts of the United States predicated upon civil liability and the civil liability of the Company’s directors and executive officers under the United StatesU.S. federal securities laws. The Company has been advised that a judgment of a U.S. court predicated solely upon civil liability under U.S.United States federal securities laws or the securities or “blue sky” laws of any state within the United States, would likely be enforceable in Canada if the United States court in which the judgment was obtained has a basis for jurisdiction in the matter that would be recognized by a Canadian court for the same purposes. However, there may be doubt as to the enforceability in Canada against these non-U.S. entities or their controlling persons, directors and officers who are not residents of the United States, in original actions or in actions for enforcement of judgments of courts of the United States, of liabilities predicated solely upon U.S. federal or state securities laws.
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Certain Canadian laws could delay or deter a change of control.
The Investment Canada Act (Canada) subjects an acquisition of control of a corporation by a non-Canadian to government review if the value of the assets as calculated pursuant to the legislation exceeds a threshold amount.
A reviewable acquisition may not proceed unless the relevant minister is satisfied that the investment is likely to be a net benefit to Canada. Any of the foregoing could prevent or delay a change of control and may deprive or limit strategic opportunities for our shareholders to sell their shares.
Our failure to meet the continued listing requirements of Nasdaq could result in a de-listing of our Common Shares.
If we fail to continue to satisfy the continued listing requirements of Nasdaq, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq will take steps to de-list our Common Shares. The per share price of our Common Shares has declined below the minimum bid price threshold required for continued listing. Such aIn addition, our shareholders’ equity has decreased below the minimum threshold under the equity standard for listing on Nasdaq. Amu such de-listing would likely have a negative effect on the price of our Common Shares and would impair your ability to sell or purchase our Common Shares when you wish to do so, as well as adversely affect our ability to issue additional securities and obtain additional financing in the future.
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On December 29, 2022, we received a deficiency notice from Nasdaq (the “Deficiency Notice”“Deficiency Notice”) informing us that our Common Shares have failed to comply with the $1.00 minimum bid price required for continued listing under Nasdaq Listing Rule 5550(a)(2) (“Rule 5550(a)(2)”) based upon the closing bid price of our Common Shares for the 30 consecutive business days prior to the date of the Deficiency Notice. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we were given 180 calendar days from December 29, 2022, or until June 27, 2023, to regain compliance with Rule 5550(a)(2). On June 27, 2023, the Company filed for an extension to this deadline and the Nasdaq has determined that the Company is eligible for an additional 180 calendar day period, or until December 26, 2023, to regain compliance. If at any time before June 27,December 26, 2023, the bid price of our Common Shares closes at $1.00 per share or more for a minimum of 10 consecutive business days, the Nasdaq will provide written confirmation that we have regained compliance.
On July 19, 2023, we received a deficiency notice from Nasdaq informing us that our reported stockholders’ equity as reported in our recent Annual Report on Form 10-K has decreased below the minimum stockholders’ equity requirement for continued listing on the Nasdaq Capital Market under the equity criteria under Nasdaq Listing Rule 5550(b)(1) (“Rule 5550(b)(1)”). The Company has 45 calendar days, or until September 5, 2023, to submit a plan to regain compliance. If the plan is accepted, Nasdaq can grant an extension of 180 calendar days from the date of the letter to evidence compliance.
Our common shares may be de-listed if we do not regain compliance with Rule 5550(a)(2) by June 27,December 26, 2023 or Rule 5550(b)(1) and our shareholders could face significant material adverse consequences, including:
● | Limited availability or market quotations for our common shares; |
● | Reduced liquidity of our common shares; |
● | Determination that our common shared are “penny stock”, which would require brokers trading in our common shares to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our common shares; |
● | Limited amount of news and analysts’ coverage of us; and |
● | Decreased ability for us to issue additional equity securities or obtain additional equity or debt financing in the future. |
Limited availability or market quotations for our common shares;
Reduced liquidity of our common shares;
Determination that our common shared are “penny stock”, which would require brokers trading in our common shares to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our common shares;
Limited amount of news an analysts’ coverage of us; and
Decreased ability for us to issue additional equity securities or obtain additional equity or debt financing in the future.
In the event of a de-listing, however, we would take actions to restore our compliance with Nasdaq Marketplace Rules, but we can provide no assurances that the listing of our Common Shares would be restored, that our Common Shares will remain above the Nasdaq minimum bid price requirement or that we otherwise will remain in compliance with the Nasdaq Marketplace Rules.
Our shareholders may be subject to dilution resulting from future offerings of Common Shares by us.
We may raise additional funds in the future by issuing Common Shares or equity-linked securities. Holders of our securities have no pre-emptivepreemptive rights in connection with such further issuances. Our board of directors has the discretion to determine if an issuance of our capital stock is warranted, the price at which such issuance is to be affected and the other terms of any future issuance of capital stock. In addition, additional common shares will be issued by us in connection with the exercise of warrants, options or grant of other equity awards granted by us.
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Additional common shares are also expected to be issued in settlement of a legal case. See the section entitled “Legal Proceedings” appearing elsewhere in this prospectus for more information. Such additional equity issuances could, depending on the price at which such securities are issued, substantially dilute the interests of the holders of our existing securities.
Our failure After giving effect to meet the continued listing requirementssale by us of Nasdaq could result in a de-listing of our Common Shares.
If we fail to continue to satisfy the continued listing requirements of Nasdaq, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq will take steps to de-list our Common Shares. Such a de-listing would likely have a negative effect on the price(i) [●] shares of our Common Shares and would impair your abilityaccompanying Common Warrants to sell or purchase our Common Shares when you wish to do so, as well as adversely affect our ability to issue additional securities and obtain additional financing in the future.
In the event of a de-listing, however, we would take actions to restore our compliance with Nasdaq Marketplace Rules, but we can provide no assurances that the listing[●] shares of our Common Shares would be restored, that ourat the assumed public offering price of $[●] per Common Share and accompanying Common Warrant, [and (ii) Pre-Funded Warrants to purchase Common Shares will remain aboveand accompanying Common Warrants at a the Nasdaq minimum bidassumed public offering price requirement or that we otherwise will remain in compliance with the Nasdaq Marketplace Rules.
On November 15, 2022, the Company filed a Notification of Late Filing on Form 12b-25 (the “Form 12b-25”) with the SEC, which stated that it was unable to file its Form 10-Q for the quarter ended September 30, 2022$[●] per Pre-Funded Warrant and accompanying Common Warrant], and after deducting [Placement Agent] fees and expenses and estimated offering expenses payable by the prescribed due date without unreasonable effort or expense because it required additional time to finalize its financial statements to be included in the Form 10-Q. The Company did not file its Form 10-Q by the fifth calendar day delay after the prescribed due date. On November 22, 2022, the Company received another deficiency notice (the “Second Deficiency Notice”) from Nasdaq indicating that, as a result of not having timely filed the Form 10-Q with the SEC, the Company is not in compliance with Nasdaq Listing Rule 5250(c)(1) (“Rule 5250(c)(1)”), which requires timely filing of all required periodic financial reports with the SEC. The Second Deficiency Notice had no immediate effect on the listing or tradingus [and assuming full exercise of the Company’s common shares on Nasdaq. The Second Deficiency Notice indicated thatPre-Funded Warrants], you will experience immediate dilution of $[●] per share, representing the Company could regain compliance with Rule 5250(c)(1) at any time priordifference between the public offering price per share and our as adjusted net tangible book value per share as of March 31, 2023 after giving effect to January 23, 2023 by filingthis offering. See the Form 10-Q. Ifsection entitled “Dilution” appearing elsewhere in this prospectus for a more detailed illustration of the Company failed to file the Form 10-Q by such date, the Company could have submitted a plan to regain compliance with Rule 5250(c)(1) prior to such date and, following receipt of such plan, Nasdaq could have determined to grant an extension of 180 calendar days from the Form 10-Q due date, or until May 15, 2023, for the Company to regain compliance. On December 19, 2022, the Company filed its Form 10-Q for the quarter ended September 30, 2022 and, thereby, regained compliance with Rule 5250(c)(1).dilution you would incur if you participate in this offering.
Our constating documents permit us to issue an unlimited amount of additional Common Shares or Preferred Shares, which may prevent a third-party takeover or cause our shareholders to experience dilution in the future.
Our constating documents authorize us to issue an unlimited number of Common Shares and an unlimited number of preferred shares (“Preferred Shares”Shares”). Our board of directors has the authority to cause us to issue additional Common Shares and Preferred Shares and to determine the special rights and restrictions of the shares of one or more series of our Preferred Shares, each without consent of our shareholders. The issuance of any such securities may result in a reduction of the book value or market price of our Common Shares.
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Given the fact that we operate in a capital-intensive industry with significant working capital requirements, we may be required to issue additional Common Shares or other securities that are dilutive to existing shareholders in the future in order to continue our operations, which may result in dilution to existing shareholders. Further, any such issuances could result in a change of control or a reduction in the market price for our Common Shares. Additionally, the rights of the holders of Common Shares will be subject to, and may be adversely affected by, the rights of holders of any Preferred Shares that may be issued in the future. For example, Preferred Shares typically rank senior to Common Shares as to dividend rights, liquidation preference or both and may be convertible into Common Shares. Lastly, our ability to issue Preferred Shares could make it more difficult for a third-party to
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acquire a majority of our outstanding voting shares, particularly in the event we issue Preferred Shares with special voting rights, the effect of which may be to deprive our shareholders of a control premium that might otherwise be realized in connection with an acquisition of us.
Because the Company is a “smaller reporting company,” we may take advantage of certain scaled disclosures available to us, resulting in holders of our securities receiving less Company information than they would receive from a public company that is not a smaller reporting companycompany.
We are a “smaller reporting company” as defined in the Exchange Act. As a smaller reporting company, we may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as (i) our common shares held by non-affiliates is less than $250 million measured on the last business day of our second fiscal quarter, or (ii) our annual revenue is less than $100 million during the most recently completed fiscal year and our common shares held by non-affiliates is less than $700 million measured on the last business day of our second fiscal quarter. To the extent we take advantage of any reduced disclosure obligations, it may make it harder for investors to analyze the Company’s results of operations and financial prospectusreports in comparison with other public companies.
As a smaller reporting company, we are permitted to comply with scaled-back disclosure obligations in our SEC filings compared to other issuers, including with respect to disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We have elected to adopt the accommodations available to smaller reporting companies. Until we cease to be a smaller reporting company, the scaled-back disclosure in our SEC filings will result in less information about our company being available than for other public companies.
If investors consider our common shares less attractive as a result of our election to use the scaled-back disclosure permitted for smaller reporting companies, there may be a less active trading market for our common shares and our share price may be more volatile.
Any acquisitions, strategic investments, divestures, mergers, or joint ventures we make may require the issuance of a significant amount of equity or debt securities and may not be successful.
As part of our business strategy, we expect to selectively pursue strategic acquisitions, as well as additional strategic and other investments such as joint ventures or partnerships, to obtain additional businesses, products and/or technologies, capabilities, and personnel. Acquisitions and other investments present challenges, including geographical coordination, personnel integration and retention of key management personnel, systems integration, the potential disruption of each company’s respective ongoing businesses, possible inconsistencies in standards, controls, procedures, and policies, unanticipated costs of terminating or relocating facilities and operations, unanticipated expenses relating to such integration, contingent obligations, and the reconciliation of corporate cultures. Those operations could divert management’s attention from the business, cause a temporary interruption of or loss of momentum in the business, and adversely affect our results of operations and financial condition. The inability to consummate and integrate new acquisitions on advantageous terms, or the failure to achieve a favorable return on our strategic and other investments, could adversely affect our ability to grow and compete effectively. Additionally, if we make one or more acquisitions in which the consideration includes the Company’s securities, we may be required to issue a substantial amount of equity, debt, warrants, convertible instruments, or other similar securities. Such an issuance could result in dilution to shareholders or increase our interest expense and other expenses.
We have reported negative cash flows from operating activities and may do so in future periods.
The Company reported negative cash flow from operating activities of $54.3 million, $56.6$28.6 million and $14.1$54.3 million for the fiscal years ended March 31, 20222023 and March 31, 2021 and the six-month period ended September 30, 2022, respectively.2022. The Company has historically and may also continue to have negative cash
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flow from operating activities until sufficient levels of sales are achieved. The Company cannot guarantee that future positive cash flow from operating activities will be obtained. In addition, negative cash flows may continue longer than the Company has planned for which could cause liquidity issues.
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We may also be unable to obtain borrowings in an amount sufficient to enable them to pay debt or to fund other liquidity needs. If sufficient liquidity is not obtained, the Companywe may need to refinance or restructure all or a portion of its debt on or before maturity, sell assets or borrow money or issue equity, which may not be possible on terms satisfactory to the Company, or at all. If the Company continues to report negative cash flows from operating activities, or any failure to obtain any required additional financing on favorable terms, or at all, such events could have a material adverse effect on the business, financial condition, and results of operation of the Company.
We maywill not be able to maintain our operations without additional funding.
As of January 22,March 31, 2023, Neptune had $6.3$2.0 million of cash and cash equivalents. We had negative cash flows from operating activities of $28.6 million during the twelve-month period ended March 31, 2023 and $54.3 million during the twelve-month period ended March 31, 20222022. As of July 25, 2023, we have approximately $0.7 million in cash and $14.1 million duringcash equivalents, which is expected to be sufficient to operate the six-month period ended September 30, 2022.business for less than 1 month 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. We may be unable to generate sufficient cash flow from operations or to obtain future borrowings in an amount sufficient to enable us to pay our debt or to fund our other liquidity needs. If we do not have sufficient liquidity, we may need to refinance or restructure all or a portion of our debt on or before maturity, sell assets or borrow more money or issue equity, which we may not be able to do on terms satisfactory to us or at all. In addition, any refinancing could be at higher interest rates and may require us to comply with more onerous covenants which could further restrict our business operations. We may also try to raise the necessary capital through securities offerings.offerings, however these may entail significant downsides, due to limitations on use of registration statements on Form S-3. For more information on our inability to use Form S-3, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial and Capital Management—Capital Resources.” Such offerings are subject to market conditions and are beyond our control.
We are subject to foreign currency fluctuations, which could adversely affect our financial results.
We are exposed to the financial risk related to the fluctuation of foreign exchange rates and the degrees of volatility of those rates. Currency risk relates to the portion of our business transactions denominated in currencies other than the Canadian dollar.
For the twelve-month period ended March 31, 2022,2023, approximately 70%82% of our revenues were in U.S. dollars, and most of our expenses, including the purchase of raw materials, were in U.S. dollars. If the value of the United States dollar fluctuates significantly more than expected in the foreign exchange markets, our operating results and financial condition may be adversely affected.
[This is a reasonable best-efforts offering, no minimum amount of securities is required to be sold, and we may not raise the amount of capital we believe is required for our business plans, including our near-term business plans.
The [Placement Agent] has agreed to use its [reasonable best efforts] to solicit offers to purchase the securities in this offering. The [Placement Agent] has no obligation to buy any of the securities from us or to arrange for the purchase or sale of any specific number or dollar amount of the securities. There is no required minimum number of securities that must be sold as a condition to completion of this offering. Because there is no minimum offering amount required as a condition to the closing of this offering, the actual offering amount, [Placement Agent] fees and proceeds to us are not presently determinable and may be substantially less than the maximum amounts set forth herein. We may sell fewer than all of the securities offered hereby, which may significantly reduce the amount of proceeds received by us, and investors in this offering will not receive a refund in the event that we do not sell an amount of securities sufficient to support our continued operations, including our near-term continued operations. Thus, we may not raise the amount of capital we believe is required for our operations in the short-term and may need to raise additional funds to complete such short-term operations. Such additional fundraises may not be available or available on terms acceptable to us.]
[Purchasers who purchase our securities in this offering pursuant to a securities purchase agreement may have rights not available to purchasers that purchase without the benefit of a securities purchase agreement.
In addition to rights and remedies available to all purchasers in this offering under federal securities and state law, the purchasers that enter into a securities purchase agreement will also be able to bring claims of breach of contract against us. The ability to pursue a claim for breach of contract provides those investors with the means to enforce the covenants uniquely available to them under the securities purchase agreement including: (i) timely delivery of shares; (ii) agreement to not enter into variable rate financings for one year from closing, subject to certain exceptions; (iii) agreement to not enter into any financings for 90 days from closing; and (iv) indemnification for breach of contract.]
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General Risk Factors
Catastrophic events outside of our control, including pandemics, may harm our results of operations or damage our facilities.
A catastrophic events, or the perception of such events, such as earthquakes, tsunamis, floods, typhoons, fires, power disruptions or other natural or manmade disasters, computer viruses, cyber-attacks, terrorist attacks, wars (such as the ongoing military conflict between Russia and Ukraine), riots, civil unrest or other conflicts, or an outbreak of a public health crisis including epidemics, pandemics (such as the COVID-19 pandemic), outbreaks of new infectious diseases or viruses, or related events that can result in volatility and disruption to global supply chains, operations, mobility of people, patterns of consumption and service, and the financial markets could disrupt the Company’s operations, or those of its material contractors. Such disruptions could impair production or distribution of the Company’s potential products, damage inventory or our facilities, interrupt critical functions or otherwise materially adversely affect its business, which could materially harm the Company’s financial condition or results of operations.
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The market price of the Company’s Common Shares may be highly volatile.
The stock market, from time-to-time, experiences significant price and volume fluctuations unrelated to the operating performance of particular companies. Future announcements concerning the Company, its competitors, including those pertaining to financing arrangements, government regulations, developments concerning regulatory actions affecting the Company, litigation, additions or departures of key personnel, cash flow, and economic conditions and political factors in Canada and the United States may have a significant impact on the market price of the Company’s Common Shares. In addition, there can be no assurance that the Company’s Common Shares will continue to be listed on Nasdaq.
The market price of the Company’s Common Shares could fluctuate significantly for many other reasons, including for reasons unrelated to the Company’s specific performance, such as reports by industry analysts, investor perceptions, or negative announcements by its subscribers, competitors or suppliers regarding their own performance, as well as general economic and industry conditions. For example, to the extent that other large companies within its industry experience declines in their stock price, the share price of the Company’s Common Shares may decline as well. In addition, when the market price of a company’s shares drops significantly, shareholders often institute securities class action lawsuits against the company.
Litigation resulting from these claims could be costly and time-consuming and could divert the attention of management and other key personnel from the Company’s business and operations. The complexity of any such claims and the inherent uncertainty of commercial or class action, litigation increases these risks. In recognition of these considerations, the Company could suffer significant litigation expenses in defending any of these claims and enter into settlement agreements. If the Company is unsuccessful in its defense of material litigation claims or is unable to settle the claims, the Company may be faced with significant monetary damage awards or other remedies against it including injunctive relief that could have a material adverse effect on the Company’s business, financial condition and results of operations. Administrative or regulatory actions against the Company or its employees could also have a material adverse effect on the Company’s business, financial condition and results of operations.
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USE OF PROCEEDS
We estimate the net proceeds to us in this offering will not receive anybe approximately $[●] million, after deducting the [Placement Agent] fees and expenses and estimated offering expenses payable by us. This assumes a public offering price of the proceeds from the$[●] per Common Share and Warrant (the last reported sale price of our Common Shares on Nasdaq on [●], 2023). [However, because this is a [reasonable best-efforts] offering and there is no minimum offering amount required as a condition to the closing of this offering, the actual offering amount, the [Placement Agent]’s fees and net proceeds to us are not presently determinable and may be substantially less than the maximum amounts set forth on the cover page of this prospectus.] The table below depicts how we plan to utilize the proceeds in the event that 50% and 100% of the securities in this offering. We will receiveoffering are sold, after deducting [Placement Agent] fees and expenses and estimated offering expenses payable by us.
Use of Proceeds |
| 100% |
| 50% | ||
Repayment of debt (1) | | $ | [●] | | $ | [●] |
General corporate purposes | | $ | [●] | | $ | [●] |
Total: | | $ | [●] | | $ | [●] |
(1) | Represents a mandatory prepayment of $1 million, together with an exit fee of $100,000 and payment of interest (the “Mandatory Repayment”), payable pursuant to a senior secured notes financing for gross proceeds of $4.0 million with CCUR Holdings, Inc. |
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and Symbolic Logic, Inc. that was entered into on January 12, 2023, as amended. The notes mature on January 12, 2024 and currently bear interest at a rate of 24% per annum, resetting to 16.5% per annum following payment of the Mandatory Repayment. The remainder of the Mandatory Repayment is required to be paid by August 30, 2023. Proceeds from the notes were used for general corporate purposes. |
These estimates exclude the proceeds, if any, from the exercise of theCommon Warrants but not on the saleissued in this offering. If all of the Common Shares underlying the Warrants. The Selling Shareholders willWarrants issued in this offering were to be exercised in cash at an assumed exercise price of $[●] per Common Share, we would receive all of the proceeds from this offering. We will, however, receive the netadditional proceeds of any Warrants exercised for cash. Proceeds,approximately $[●] million. We cannot predict when or if any, received from the exercise of suchthese Common Warrants will be usedexercised. It is possible that these Common Warrants may expire and may never be exercised. Additionally, the Common Warrants contain a cashless exercise provision that permit exercise of Common Warrants on a cashless basis at any time where there is no effective registration statement under the Securities Act of 1933, as amended, covering the issuance of the underlying shares.
We plan to use the proceeds of the offering, after repayment of debt, for general corporate purposes, including working capital. The principal reasons for this offering are to increase our working capital and to provide capital for general corporate purposes. No assurances can
Due to the uncertainties inherent in our business, we cannot estimate with certainty the exact amounts of the net proceeds from this offering that may be givenused for any purpose. As a result, our management will have broad discretion in applying the net proceeds from this offering.
The net proceeds from this offering will not significantly improve the Company’s working capital. The Company’s trade and other payables will continue to significantly exceed its cash balance. After receipt of the net proceeds from this offering the Company will still be required to actively manage its liquidity and expenses and payments of payables will continue to not be made as the amounts become due. Nor will the receipt of the net proceeds from this offering remove that anysubstantial doubt and as such, there will remain substantial doubt about our ability to continue as a going concern after this offering.
CAPITALIZATION
The following table sets forth our capitalization as of such WarrantsMarch 31, 2023 as follows:
● | on an actual basis; |
● | on a pro forma basis to give effect to the issuance of common shares and warrants on May 15, 2023; and |
● | on a pro forma as adjusted basis to reflect our receipt of the net proceeds our sale and issuance of [●] Common Shares (assuming [no sale of any Pre-Funded Warrants] and no exercise of the Common Warrants) in this offering based on the assumed public offering price of $[●] per common share (the last reported sale price of our Common Shares on Nasdaq on [●], 2023) after deducting estimated [Placement Agent] fees and expenses and estimated offering expenses payable by us. |
The as adjusted information set forth below is illustrative only and will be exercised. The Selling Shareholders will pay any underwriting discountsadjusted based on the actual public offering price and commissionsother terms of this offering determined at pricing. You should read this table in conjunction with “Management’s Discussion and Analysis of
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Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in, or incorporated by reference into, this prospectus.
|
| As of March 31, 2023 | |||||||
| | | | | | Pro forma as | |||
| | Actual |
| Pro forma(1) |
| Adjusted (2) | |||
| | (In thousands, except share and per share data) | |||||||
Liability related to warrants | | $ | 3,156 | | $ | 5,956 | | $ | [●] |
Operating lease liabilities (including current portion) | | $ | 2,018 | | $ | 2,018 | | $ | [●] |
Loans and borrowings (including current portion) | | $ | 22,951 | | $ | 22,951 | | $ | [●] |
Other liability | | $ | 24 | | $ | 24 | | $ | [●] |
Shareholders’ equity: | | | | | | | | | |
Share capital, without par value, 11,996,387 shares issued and outstanding as of March 31, 2023, actual; 24,117,599 shares issued and outstanding, proforma; [●] shares issued and [●] outstanding, proforma as adjusted | | | 321,946 | | | 323,546 | | | |
Preferred shares, no par value; no shares outstanding, actual; no shares outstanding, proforma; and no shares outstanding proforma as adjusted | | | | | | | | | |
Warrants | | $ | 6,155 | | $ | 6,155 | | $ | [●] |
Additional paid-in capital | | $ | 58,139 | | $ | 58,139 | | $ | [●] |
Accumulated other comprehensive loss | | $ | (14,539) | | $ | (14,539) | | $ | [●] |
Deficit | | $ | (383,641) | | $ | (384,799) | | $ | [●] |
Total equity (deficiency) attributable to equity holders of the Company | | $ | (11,940) | | $ | (11,498) | | $ | [●] |
Non-controlling interest | | $ | (15,621) | | $ | (15,621) | | $ | [●] |
Total shareholders’ equity (deficiency) | | $ | (27,561) | | $ | (27,119) | | $ | [●] |
Total capitalization | | $ | 589 | | $ | 3,830 | | $ | [●] |
(1) | The receipt of the net proceeds on May 15, 2023 of our sale and issuance of 4,415,162 common shares and pre-funded warrants to purchase 7,706,050 common shares (and assuming no exercise of the common warrants) based on the price of $0.33 per common share and accompanying common warrant and repricing and extension of life of existing warrants, after deducting estimated costs. As the accounting treatment of the warrants and the allocation between equity and liability components has not yet been finalized, it is assumed for the purposes of the pro forma capitalization that approximately half of the proceeds has been allocated to the derivative warrant liabilities and the remainder to share capital. Accordingly, approximately half of the estimated costs have been allocated to deficit and the remainder to share capital. The pro forma capitalization also reflects a repricing and extension of life of the pre-existing warrants with an offsetting debit to deficit, and assumes the exercise in full of all outstanding pre-funded warrants. |
(2) | As the accounting treatment of the Warrants and the allocation between equity and liability components has not yet been determined, it is assumed for the purposes of the Pro forma as Adjusted capitalization that all of the proceeds have been allocated to the derivative warrant liabilities and therefore, all of the estimate [Placement Agent] fees and expenses and estimated offering expenses have been allocated to deficit. In addition, if the fair value of the derivative warrant liabilities exceeds the total proceeds of this offering, a loss would be recorded upon initial recognition of this offering, which loss is not reflected in the deficit in the above table. |
A $0.25 increase or decrease in the assumed public offering price of $[●] per share, as set forth on the cover page of this prospectus, would increase or decrease the expected net proceeds to us from this offering by approximately $[●] million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated [Placement Agent] fees and expenses incurredand estimated offering expenses payable by them for brokerage, accounting, taxus.
Similarly, a 100,000 share increase or legal servicesdecrease in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase or any otherdecrease the net proceeds to us by approximately $[●], assuming the assumed public offering price of $[●] per share remains the same, and after deducting estimated [Placement Agent] fees and expenses incurredand estimated offering expenses payable by us.
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The number of our Common Shares to be outstanding immediately after this offering is based on 11,996,387 Common Shares outstanding as of March 31, 2023 and excludes:
● | 674,475 Common Shares issuable upon the exercise of stock options outstanding as of March 31, 2023, at a weighted average exercise price of $70.27 per Common Share; |
● | 12,197,670 Common Shares issuable upon the exercise of warrants outstanding as of March 31, 2023, at a weighted average exercise price of $10.64 per Common Share; |
● | 4,308 deferred share units; |
● | 2,789 restricted share units; |
● | any additional Common Shares that are available for future issuance under our equity compensation plans; and |
● | the issuance, on May 15, 2023, of 4,415,162 common shares, 7,706,050 pre-funded warrants, and accompanying warrants to purchase up to an aggregate of 12,121,212 common shares at a combined public offering price of $0.33 per share, and the repricing and extension the term of existing common warrants to purchase up to an aggregate of 8,423,733 common shares. |
DILUTION
If you purchase Common Shares and Warrants in this offering, you will experience dilution to the extent of the difference between the combined public offering price per Common Share and related Warrant in this offering and our net tangible book value (deficit) per Common Share. Net tangible book value (deficit) per Common Share is equal to the amount of our total tangible assets, less total liabilities, divided by the Selling Shareholdersnumber of outstanding Common Shares. As of March 31, 2023, our net tangible book value (deficit) was approximately $(31.6 million), or approximately $(2.63) per Common Share. Taking into account the Common Shares and warrants to purchase Common Shares issued on May 15, 2023, our pro forma net tangible book value (deficit) was approximately $(31.2 million) or $(1.29) per Common Share. The pro forma net tangible book value has been computed assuming exercise in disposingfull of the May 15, 2023 pre-funded warrants and no exercise of the common warrants.
After giving effect to the assumed sale by us of Common Shares and Warrants in this offering at an assumed combined public offering price of $[●] per Common Share and related Warrant (the last reported sale price of our Common Shares on Nasdaq on [●], 2023), after deducting the estimated [Placement Agent] fees and expenses and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value (deficit) as of March 31, 2023 would have been approximately $([●] million), or approximately $([●]) per Common Share. The pro forma as adjusted net tangible book value has been computed assuming [exercise in full of the Pre-Funded Warrants] and no exercise of the Common Shares. We will bear all other costs,Warrants. This represents an immediate increase in net tangible book value (deficit) of $[●] per Common Share to existing shareholders and an immediate dilution of $[●] per share to new investors purchasing Common Shares and related Warrants in this offering, attributing none of the assumed combined public offering price to the Common Warrants offered hereby. The following table illustrates this per Common Share dilution:
| | | ||||
|
| Per Common |
| | ||
| | Share and | | | ||
| | Warrant | | Total | ||
Assumed combined public offering price per Common Share and related Common Warrant | | $ | [●] | | $ | |
Net tangible book value (deficit) per Common Share as of March 31, 2023 | | $ | (2.63) | | | |
Increase in net tangible book value (deficit) per Common Share after the May 2023 offering | | $ | 1.34 | | | |
Pro forma net tangible book value (deficit) per Common Share as of March 31, 2023 | | $ | (1.29) | | | |
Increase in pro forma net tangible book value per Common Share after this offering | | $ | [●] | | | |
Pro forma as adjusted net tangible book value (deficit) per Common Share after this offering | | $ | [●] | | | |
Dilution per Common Share to new investors | | $ | [●] | | $ | ([●]) |
A $0.25 increase (decrease) in the assumed combined public offering price of $[●] per Common Share and Common Warrant would result in an increase (decrease) in our pro forma as adjusted net tangible book value (deficit) of approximately $[●] million or approximately $[●] per Common Share, and would result in an increase (decrease) in the dilution to new investors of approximately $[●] per Common Share, assuming that the number of Common Shares and Common Warrants sold by us remains the same, after deducting the estimated [Placement Agent] fees and expenses incurredand estimated offering expenses payable by us.
Similarly, a decrease of 100,000 in effecting the registration of the Common Shares covered by this prospectus, including all registration and filing fees, and fees and expenses for our counsel and our independent registered public accountants.
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DETERMINATION OF OFFERING PRICE
The offering price of the Common Shares underlying the Warrants offered hereby is determined by reference to their exercise price of $1.62 per share for the Series E Warrants and $0.53 per share for the January 2023 Warrants.
We cannot currently determine the price or prices at which sharesnumber of Common Shares may be soldoffered by us would decrease our pro forma as adjusted net tangible book value by approximately $[●] million or $[●] per share, and increase the Selling Shareholders underdilution per share to investors participating in this prospectus.offering by $[●] per share, assuming the assumed offering price per share remains the same and after deducting the estimated [Placement Agent]
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commissions and estimated offering expenses payable by us. The information discussed above is illustrative only and will adjust based on the actual offering price, the actual number of Common Shares we offer in this offering, and other terms of this offering determined at pricing.
The foregoing discussion and table do not take into account further dilution to new investors that could occur upon the exercise of outstanding options or warrants having a per share exercise price less than the per Common Share and related Common Warrant offering price to the public in this offering. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our shareholders.
The number of our Common Shares to be outstanding immediately after this offering is based on 11,996,387 Common Shares outstanding as of March 31, 2023 and excludes:
● | 674,475 Common Shares issuable upon the exercise of stock options outstanding as of March 31, 2023, at a weighted average exercise price of $70.27 per Common Share; |
● | 12,197,670 Common Shares issuable upon the exercise of warrants outstanding as of March 31, 2023, at a weighted average exercise price of $10.64 per Common Share; |
● | 4,308 deferred share units; |
● | 2,789 restricted share units; |
● | any additional Common Shares that are available for future issuance under our equity compensation plans; and |
● | the issuance, on May 15, 2023, of 4,415,162 common shares, 7,706,050 pre-funded warrants, and accompanying warrants to purchase up to an aggregate of 12,121,212 common shares at a combined public offering price of $0.33 per share, and the repricing and extension the term of existing common warrants to purchase up to an aggregate of 8,423,733 common shares. |
MARKET INFORMATION FOR SECURITIES AND DIVIDEND POLICY
Our common sharesCommon Shares trade under the symbol “NEPT” on Nasdaq.
The following table sets forth the high and low intraday sales prices per Common Share as reported on Nasdaq beginning on April 1, 2020 and taking into account the Share Consolidation that took effect on June 13, 2022:
| Low Trading Price |
| High Trading Price | |||||
Period |
| ($) | ($) | |||||
Year Ending March 31, 2024 |
|
|
|
|
|
| ||
Second Quarter |
| (to [●], 2023) | $ | [●] | $ | [●] | ||
First Quarter |
| (June 30, 2023) | $ | 0.13 | $ | 0.70 | ||
Year Ending March 31, 2023 |
|
|
|
|
|
| ||
Fourth Quarter |
| (March 31, 2023) | $ | 0.29 | $ | 1.04 | ||
Third Quarter |
| (December 31, 2022) | $ | 0.23 | $ | 1.92 | ||
Second Quarter |
| (September 30, 2022) | $ | 1.00 | $ | 3.74 | ||
First Quarter |
| (June 30, 2022) | $ | 1.34 | $ | 1.41 | ||
Year Ended March 31, 2022 |
|
|
|
|
|
| ||
Fourth Quarter |
| (March 31, 2022) | $ | 7.35 | $ | 19.60 | ||
Third Quarter |
| (December 31, 2021) | $ | 12.25 | $ | 22.40 | ||
Second Quarter |
| (September 30, 2021) | $ | 19.25 | $ | 41.30 | ||
First Quarter |
| (June 30, 2021) | $ | 37.10 | $ | 55.30 | ||
Year Ended March 31, 2021 |
|
|
|
|
|
| ||
Fourth Quarter |
| (March 31, 2021) | $ | 45.15 | $ | 110.25 | ||
Third Quarter |
| (December 31, 2020) | $ | 52.15 | $ | 86.80 | ||
Second Quarter |
| (September 30, 2020) | $ | 73.85 | $ | 113.05 | ||
First Quarter |
| (June 30, 2020) | $ | 35.70 | $ | 110.25 |
Period | Low Trading Price | High Trading Price | ||||||||
($) | ($) | |||||||||
Year Ending March 31, 2023 | ||||||||||
Fourth Quarter | (through January 27, 2022) | $ | 0.29 | $ | 0.89 | |||||
Third Quarter | (December 31, 2022) | $ | 0.23 | $ | 1.92 | |||||
Second Quarter | (September 30, 2022) | $ | 1.00 | $ | 3.74 | |||||
First Quarter | (June 30, 2022) | $ | 1.34 | $ | 1.41 | |||||
Year Ended March 31, 2022 | ||||||||||
Fourth Quarter | (March 31, 2022) | $ | 7.35 | $ | 19.60 | |||||
Third Quarter | (December 31, 2021) | $ | 12.25 | $ | 22.40 | |||||
Second Quarter | (September 30, 2021) | $ | 19.25 | $ | 41.30 | |||||
First Quarter | (June 30, 2021) | $ | 37.10 | $ | 55.30 | |||||
Year Ended March 31, 2021 | ||||||||||
Fourth Quarter | (March 31, 2021) | $ | 45.15 | $ | 110.25 | |||||
Third Quarter | (December 31, 2020) | $ | 52.15 | $ | 86.80 | |||||
Second Quarter | (September 30, 2020) | $ | 73.85 | $ | 113.05 | |||||
First Quarter | (June 30, 2020) | $ | 35.70 | $ | 110.25 |
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As of January 27,[●], 2023, we had 39[42] shareholders of record based on the records of our transfer agent, which does not include beneficial owners of our Common Shares whose shares are held in the names of various securities brokers, dealers and registered clearing agencies.
Dividends
We do not anticipate paying any dividend on our Common Shares in the foreseeable future. We presently intend to retain future earnings to finance the expansion and growth of our business. Any future determination to pay dividends will be at the discretion of our Boardboard of Directorsdirectors and will depend on our financial condition, results of operations, capital requirements and other factors the Boardboard of Directorsdirectors deems relevant. In addition, the terms of any future debt or credit facility may preclude us from paying dividends.
Securities Authorized for Issuance under Equity Compensation Plans
Information about our equity compensation plans, as set forth in this prospectus under the caption “Security“Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters”Matters”, is incorporated herein by reference.
Unregistered Organic Foods and Beverages
In February 2021, Neptune acquired a controlling interest in Sprout Foods, Inc., an organic plant-based baby food and toddler snack company. Sprout is an integral piece of Neptune’s health and wellness portfolio and represents a key brand within the Organic Foods and Beverages vertical. Since completing the Sprout acquisition, the Company has begun expansion efforts in Sprout’s distribution across substantially all of Target’s U.S. retail stores. The Company also announced, on July 27, 2021, the initial launch of Sprout products into Canada, in Metro grocery stores in the province of Ontario. Neptune further expects to launch Sprout products in North America throughout the remainder of the fiscal year. The Company expects the Neptune/Sprout combination to result in significant incremental revenue growth, with several near and long-term revenue synergy opportunities identified within Neptune’s existing relationships and current sales channels. As described above, Neptune also announced on June 9, 2021, an exclusive multi-year licensing agreement between Sprout and CoComelon, the #1 children’s entertainment and educational show in the world with more than 110 million subscribers worldwide. This co-branded product line is now available on Walmart.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 the U.S., accounting for approximately 90 percent of the overall market.
On May 2, 2023, Neptune announced that four of its most popular Sprout Organics x CoComelon co-branded, organic toddler pouches have been picked up by Target and are now available in select Target Stores across the United States, and Target.com. The Sprout Organics x CoComelon line includes 15 SKU’s that are made up of toddler pouches, Wafflez snacks, and plant-based snack bars, each leveraging CoComelon’s brand as the #1 Kids YouTube Channel in the world. In addition to the CoComelon partnership, Sprout Organics SKU’s consist of organic toddler pouches, toddler meals, toddler snacks and the newly launched Big Kid Mealz; Sprouts first product out of the baby aisle.
In the last year, Sprout has made the following major distribution gains and sales milestones:
Distribution: Now available in 90% of the organic baby food market, Sprout x CoComelon being a key driver of sales velocity.
Target SKU Count: 4 Sprout x CoComelon SKUs launched in select Target stores nationwide and Target.com.
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Added Distribution: In the last year, Sprout has established substantial distribution gains with leading retailers, and Target has contributed to that growth.
CoComelon Co-Brand: Yes Yes Veggie product is now Sprout’s #1 highest selling pouch in the latest 26 weeks in Total US xAOC*.
Geographic Presence: Now available in all 50 states, as well as in Canada.
*Sales velocity: Sales dollars per total point of Equity Securitiesdistribution; Nielsen AOD; Total US x AOC Latest 26 weeks W/E 3-25-23
Competition
The nutraceutical 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”.
Recent Developments
Liquidity and Going Concern—We are actively managing our liquidity and expenses, including by extending payables due and reducing investment in our businesses. There is substantial doubt about our ability to continue as a going concern. As of July 25, 2023, we had approximately $0.7 million in cash and cash equivalents. We believe our current cash position will be sufficient to operate our business for less than one month under our current business plan. In addition, we are pursuing several cash generating transactions as well as planning for further expense reductions. There can be no assurance that any cash generating transaction will be completed or that our expense reductions measures will be sufficient to allow as to continue operating our business. We need substantial additional funding to continue operating our business. If we are unable to continue as a going concern, we may have to liquidate our assets, and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements. We may have to liquidate our assets in the very near term if additional funding is not received in the upcoming months.
Our management has concluded that substantial doubt exists about our ability to continue as a going concern for one year from the issuance date of our latest financial statements, which substantial doubt continues to exist. The net proceeds from this offering are not expected to remove that substantial doubt and as such, there will remain substantial doubt about our ability to continue as a going concern after this offering. If we were to receive net proceeds of $[●] million from this offering, we believe that the net proceeds from this offering, together with our existing cash and cash equivalents, will meet our cash needs for approximately [●].
On April 17, 2023, the Company entered into an agreement that fixed the purchase price for the exercise of the Call Option to acquire the remaining 49.9% minority share of Sprout, pursuant to the Call Option agreement entered into with the minority stockholders of Sprout. If the Call Option had been exercised prior to June 15, 2023, the purchase price would have been $13.0 million, consisting of at least $10.5 million in cash with the remainder payable in Common Shares. No acquisition was completed by June 15, 2023. The original Call Option remains outstanding until December 31, 2023.
On April 27, 2023, the Company announced that Sprout extended the maturity of its existing $13 million secured promissory note with Morgan Stanley Expansion Capital (“MSEC”). The note maturity has been extended from February 1, 2024 to December 31, 2024, which will bear interest at the rate of 15.0% per annum through and including December 31, 2023, payable in kind, and 10.0% per annum, payable in kind, and 5.0% per annum payable in cash, from and after January 1, 2024.
On May 10, 2023, Neptune announced that Sprout has secured inventory financing through an Invoice Purchase and Security Agreement partnership with Alterna Capital Solutions LLC, effective April 21, 2023. The inventory line will provide Sprout with working capital. The maximum available has been amended to $7.5 million, from $5.0 million previously announced on January 25, 2023 (see note 13), adding a line of inventory to the accounts receivable factoring facility that is already in place.
Except as set forth below, since January 27, 2020, we12
On May 11, 2023, the Company announced its public offering of 12,121,212 of its common shares (or common share equivalents in lieu thereof) and accompanying warrants to purchase up to an aggregate of 12,121,212 common shares at a combined public offering price of $0.33 per share and accompanying warrant, resulting in gross proceeds of approximately $4.0 million. The warrants have not sold any securitiesan exercise price of $0.33 per share, are immediately exercisable upon issuance and will expire five years following the date of issuance. The closing of the offering occurred on May 15, 2023. On that day, the Company issued 4,415,162 common shares and 7,706,050 pre-funded warrants, along with 12,121,212 warrants (the “May 2023 Warrants”). As of the date of this prospectus, 5,410,600 common shares were issued upon exercise of pre-funded warrants, leaving 2,295,450 pre-funded warrants outstanding; none of the May 2023 Warrants have been exercised to date.
In connection with this offering, the Company has agreed that certain existing warrants to purchase up to an aggregate of 8,423,733 common shares that were not registeredpreviously issued in March 2022, June 2022, and October 2022, at exercise prices ranging from $1.62 to $11.20 per share and expiration dates ranging from September 14, 2023 to June 23, 2029, were amended to reduce the exercise prices of the applicable warrants to $0.33, with expiration dates five years following the closing of the offering, i.e. on May 15, 2028, with the exception of warrants to purchase up to 972,763 common shares which will expire on June 23, 2029 as currently contemplated.
On May 22, 2023, the Company entered into a Waiver and Second Amendment to Note Purchase Agreement (the “Waiver Agreement”), with CCUR Holdings, Inc. and the purchasers named therein, related to the Note Purchase Agreement dated as of January 12, 2023 (see note 13). The Waiver Agreement provides that the required prepayment of $2.0 million (the “Mandatory Prepayment”), due as of May 15, 2023, is waived, in part, until July 31, 2023, or for an additional thirty days thereafter if the Company has filed a Registration on Form S-1 with the Securities and Exchange Commission by July 31, 2023. Pursuant to the Waiver Agreement, the Company was required to pay, and has paid, $1.0 million of the Mandatory Prepayment. For the period beginning on March 31, 2023, through and including the date that the entire Mandatory Prepayment, including interest and fees is paid, interest on the sum of the outstanding principal amounts will accrue at the rate of twenty four percent (24%) per annum. Thereafter, interest will revert to the rate otherwise provided under the Securities Act.Note Purchase Agreement. The Company also agreed to pay an extension fee in an aggregate amount of $138,606, which was added to the principal amount due.
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RepurchasesOn July 21, 2023, the Company announced the receipt of Equity Securities
We did not repurchase anya letter from Nasdaq notifying the Company that, based on the reported stockholders' equity of our equity securities duringNeptune as reported in its Annual Report on Form 10-K for the yearsyear ended March 31, 2022 and 20212023, the Company does not meet the minimum stockholders' equity requirement for continued listing on the Nasdaq Capital Market under the equity criteria under Nasdaq Listing Rule 5550(b)(1) stating listed companies must maintain stockholders' equity of at least $2,500,000. The Nasdaq notification letter has no immediate effect on the Company's business operations or the interimlisting of the Company's common shares, and they will continue to trade on Nasdaq. Pursuant to the Nasdaq Listing Rule 5550(b)(1) the Company has 45 calendar days, or until September 5, 2023, to submit a plan to regain compliance. If the plan is accepted, Nasdaq can grant an extension of 180 calendar days from the date of the letter to evidence compliance. The Company intends to regain compliance within the applicable compliance period ended September 30, 2022.and is currently working on a plan to submit to Nasdaq.
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BUSINESS
OVERVIEW
GENERAL
Legal Proceedings—We and our subsidiaries are engaged in significant legal proceedings and claims that may result in payments, fines and penalties that could adversely affect our business, results of operations and financial condition. These legal proceedings include a purported class action, captioned Marvin Gong v. Neptune Wellness Solutions, Inc. (“Neptune”,et al. On October 21, 2022, the “Company”, “we”, “us” or “our”)Company announced that it had agreed to settle and resolve the lawsuit. As part of this settlement, Neptune intends to issue securities worth $2,750,000 within 31 days after the final order is entered, which is expected to occur in the coming days, which may result in a modern consumer packaged goods (“CPG”) company driven by a singular purpose:substantial number of shares being issued, and such an issuance may result in substantial dilution 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 portfolioexisting holders 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. Theour common shares.
History of the Company utilizes a highly flexible, cost efficient manufacturing and supply chain infrastructure that can be scaled up and down or into adjacent product categories to identify new innovation opportunities, quickly adapt to consumer preferences and demand, and bring new products to market through its mass retail partners and e-commerce channels. Leveraging decades of expertise in extraction and product formulation, Neptune is a provider of turnkey product development and supply chain solutions to business customers across several health and wellness verticals, including nutraceuticals and white label consumer packaged goods. Neptune has expanded its operations since June 2020 into several brand units in order to better address its markets. The main brand units are the following: Nutraceuticals, Beauty & Personal Care, and Organic Foods & Beverages. All amounts in this prospectus are in US dollars, unless otherwise noted.
HISTORY
Neptune was incorporated under Part IA of the Companies Act (Québec) on October 9, 1998 under the name Neptune Technologies & BioressourcesBioresources Inc. Since its incorporation, Neptune has amended its articles of incorporation on numerous occasions. The Company first amended its articles on May 30, 2000 to convert its then issued and outstanding shares into newly-created classes of shares. The Company’s articles were also amended on May 31, 2000 to create Series A Preferred Shares. On August 29, 2000, the Company converted all its issued and outstanding Class A shares into Class B subordinate shares. On September 25, 2000, the Company further amended its share capital to eliminate its Class A shares and converted its Class B subordinate shares into Common Shares. On November 1, 2013, the Company amended its articles of incorporation to reflect certain changes to items relating to board matters. The Company’s Common Shares are listed and posted for trading on the NASDAQ Stock Market LLC (“NASDAQ”) under the symbol, “NEPT”.
On June 9, 2022, we effected a one for thirty five thirty-five (1-for-35) reverse split of our common shares, which we refer to as the “Share“Share Consolidation,” as approved by our Boardboard of Directors.directors. Trading of our common shares on both the Toronto Stock Exchange (“TSX”) and NASDAQNasdaq on a post-consolidated basis commenced as of the open of markets on June 13, 2022. On August 15, 2022, the Company’s common shares wereCompany voluntarily delisted its Common Shares from the TSX butTSX.
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Corporate Information
Our principal executive offices are still traded on the NASDAQ.
OUR PROPERTIES AND OPERATIONS
Our headquarters is located in leased offices inat 545 Promenade du Centropolis, Suite 100, Laval, Québec, whereCanada, H7T 0A3 and the telephone number to our offices is (450) 687-2262.
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THE OFFERING
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Issuer: | Neptune Wellness Solutions Inc. | |
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Common Shares offered by us: | | Up to [●] Common Shares based on the sale of our Common Shares at an assumed combined public offering price of $[●] per Common Share and accompanying Common Warrants, which is the closing price of our common stock on [●], 2023. |
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[Pre-Funded Warrants offered by us: | | We are also offering each purchaser the opportunity to purchase, if the purchaser so chooses, Pre-Funded Warrants, in lieu of Common Shares, exercisable into up to an aggregate of [●] Common Shares. Each Pre-Funded Warrant will be exercisable for one Common Share. The purchase price of each Pre-Funded Warrant will equal the price per share at which the Common Shares are being sold to the public in this offering, minus [$0.0001], and the exercise price of each Pre-Funded Warrant will be [$0.0001] per Common Share. For additional information, see “Description of the Registrant’s Securities to be Registered — Pre-Funded Warrants” on page [●] of this prospectus. This prospectus also relates to the offering of the Common Shares issuable upon exercise of the Pre-Funded Warrants.] |
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Common Warrants offered by us: | | We are also offering Common Warrants exercisable into an aggregate of up to [●] common shares. Each Common Warrant will have an exercise price of $[●] per share, will be exercisable upon issuance and will expire on the [●]-year anniversary of the original issuance date. The Common Shares and Common Warrants can only be purchased together in this offering but will be issued separately and will be immediately separable upon issuance. For additional information, see “Description of the Registrant’s Securities to be Registered — Common Warrants” on page [●] of this prospectus. This prospectus also relates to the offering of the Common Shares issuable upon exercise of the Common Warrants. |
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Common Shares outstanding after this offering:(1) | | [●] Common Shares (assuming none of the Common Warrants issued in this offering are exercised [and the exercise in full of any Pre-Funded Warrants]) |
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Use of proceeds: | | We estimate that the net proceeds to us from the sale of our Common Shares in this offering will be approximately $[●] million, and after deducting estimated [Placement Agent] fees and expenses and estimated offering expenses payable by us. We plan to use the proceeds of the offering, after repayment of debt, for general corporate purposes and working capital. See “Use of Proceeds.” |
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Risk factors: | | See “Risk Factors” on page [●] and other information included in this prospectus for a discussion of factors you should consider before investing in our securities. |
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[Reasonable best efforts: | | We have agreed to issue and sell the securities offered hereby to the purchasers through the [Placement Agent]. The [Placement Agent] is not required to buy or sell any specific number or dollar amount of the securities offered hereby, but it will use its [reasonable best efforts] to solicit offers to purchase the securities offered by this prospectus. See “Plan of Distribution” on page [●] of this prospectus.] |
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Ticker symbol: | | Our Common Shares are listed on the Nasdaq under the symbol “NEPT”. There is no established trading market for the Warrants and we do not expect a market to develop. In addition, we do not intend to apply for the listing of the Warrants on any national securities exchange or other trading market. Without an active trading market, the liquidity of the Warrants will be limited. |
(1) | The number of Common Shares to be outstanding immediately after this offering as shown above is based on 21,822,149 Common Shares outstanding as of [●], 2023. Unless otherwise indicated, the number of Common Shares presented in this prospectus excludes: |
● | [●] Common Shares issuable upon the exercise of outstanding stock options having a weighted-average exercise price of $[●] per Common Share; |
● | [●] Common Shares issuable upon the exercise of outstanding warrants having a weighted-average exercise price of $[●] per Common Share; |
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● | [●] deferred share units; |
● | [●] restricted share units; and |
● | any additional Common Shares that are available for future issuance under our equity compensation plans. |
Unless otherwise indicated, this prospectus assumes no exercise of the Common Warrants [or Pre-Funded Warrants].
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RISK FACTORS
Investing in our securities involves a high degree of risk. Investors should carefully consider the risks described below and all of the other information set forth in this registration statement, including our financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding to invest in our Common Shares. If any of the events or developments described below occur, our business, financial condition, or results of operations could be materially or adversely affected. As a result, the market price of our Common Shares could decline, and investors could lose all or part of their investment. The risks and uncertainties described below are not the only risks and uncertainties that we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. See “Cautionary Notes Regarding Forward-Looking Statements.”
Risks Relating to our Business and Industry
We are exposed to risks associated with the divestiture of our cannabis business.
On October 16, 2022, we entered into an Asset Purchase Agreement with PurCann Pharma, Inc., pursuant to which PurCann Pharma, Inc. agreed to purchase substantially all of the assets relating to our Canadian cannabis business, including our processing plant and property located in Sherbrooke, Quebec. The sale of our cannabis business closed on November 9, 2022. We may not fully realize the anticipated benefits of this disposition. Further, we face continued liability for the pre-closing activities of the divested cannabis business, which we agreed to assume as part of the transaction. Additionally, we may be unable to collect any accounts receivable retained from our cannabis business.
The terms of our indebtedness restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.
The Note Purchase Agreement, as amended (the “Note Purchase Agreement”), governing the promissory notes (the “2023 Notes”) that we issued on January 12, 2023 contain a number of restrictive covenants, including covenants related to financial statement filing deadlines, that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on our ability to incur liens, make investments, loans, advances and acquisitions, incur additional indebtedness or guarantees, pay dividends on capital stock or redeem, repurchase or retire capital stock, engage in transactions with affiliates, sell assets, including capital stock of our subsidiaries, alter the business we conduct, alter their organizational documents, and consolidate or merge.
We defaulted on the conditions of the Note Purchase Agreement and entered into a Waiver and First Amendment to the Notes (the “First Waiver Agreement”) on March 9, 2023. The First Waiver Agreement waives certain administrative, departments primarily operate.regulatory and financial statement related covenants as required by the terms of the Notes. Furthermore, in connection with the First Waiver Agreement, the Notes were amended to provide that the Purchasers shall be paid an exit fee in the aggregate amount of $200,000, payable as follows: (i) on or prior to May 15, 2023, $100,000 and (ii) on the Maturity Date (as defined in the Note Purchase Agreement), $100,000 and the interest rate has increased to 24% for a period extending until the Company meets specified criteria in the First Waiver Agreement.
On May 22, 2023, the Company entered into a Waiver and Second Amendment to Note Purchase Agreement (the “Waiver Agreement”), with CCUR Holdings, Inc. and the purchasers named therein, related to the Note Purchase Agreement dated as of January 12, 2023 (see Note 13 to the consolidated financial statements as at and for the year ended March 31, 2023). The Waiver Agreement provides that the required prepayment of $2.0 million (the “Mandatory Prepayment”), due as of May 15, 2023, is waived, in part, until July 31, 2023, or for an additional thirty days thereafter if the Company has filed a Registration on Form S-1 with the Securities and Exchange Commission by July 31, 2023. Pursuant to the Waiver Agreement, the Company was required to pay, and has paid, $1.0 million of the Mandatory Prepayment. For the period beginning on March 31, 2023, through and including the date that the entire Mandatory Prepayment, including interest and fees is paid, interest on the sum of the outstanding principal amounts will accrue at the rate of twenty four percent (24%) per annum. Thereafter, interest will revert to the rate otherwise provided under the Note Purchase Agreement. The Company also agreed to pay an extension fee in an aggregate amount of $138,606, which was added to the principal amount due.
A breach of the covenants under the Note Purchase Agreement, or any replacement facility, could result in an event of default under the applicable indebtedness, unless we obtain a waiver to avoid such default. If we are unable to obtain a waiver, such an event of default may allow the creditors to accelerate the related debt and may result in the acceleration of or default under any other debt to which a
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cross-acceleration or cross-default provision applies. In the event that we breach one or more covenants, our lender may declare an event of default and require that we immediately repay all amounts outstanding, terminate any commitment to extend further credit and foreclose on the collateral granted to it to collateralize such indebtedness. The occurrence of any of these events could restrict our operations, which could have a material adverse effect on our business, financial condition and results of operations. In the event our lenders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness. If we are not able to pay our debts as they become due, we will be required to pursue one or more alternative strategies, such as refinancing or restructuring our indebtedness, selling assets or selling additional debt or equity securities. We may not be able to refinance our debt or sell additional debt or equity securities or our assets on favorable terms, if at all, and if we must sell our assets, it may negatively affect our ability to generate revenues.
While the Note Purchase Agreement was amended to provide for a waiver of certain defaults, there can be no guarantee that we will not breach covenants in the Note Purchase Agreement or the 2023 Notes in the future. In the event that we breach one or more covenants, our lender may declare an event of default, increase the interest rate to 24% and require that we immediately repay all amounts outstanding, terminate any commitment to extend further credit and foreclose on the collateral granted to it to collateralize such indebtedness. The occurrence of any of these events could restrict our operations, which could have a material adverse effect on our business, financial condition and results of operations.
If we do not manage our supply chain effectively or if there are disruptions in our supply chain, our business and results of operations may be adversely affected.
The success of our business depends, in part, on maintaining a strong sourcing and manufacturing platform and efficient distribution channels. The inability of any supplier of raw materials, independent contract manufacturer or third-party distributor to deliver or perform for us in a timely or cost-effective manner could cause our operating costs to increase and our profit margins to decrease, especially as it relates to our products that have a short shelf life. We must continuously monitor our inventory and product mix against forecasted demand or risk having inadequate supplies to meet consumer demand as well as having too much inventory on hand that may reach its expiration date and become unsaleable.
We must also lease laboratory space in Laval, Quebec where testingmanage our third-party distribution, warehouse and development of manytransportation providers to ensure they are able to support the efficient distribution of our products takes place. to retailers. A disruption in transportation services could result in an inability to supply materials to our or our co-manufacturers’ facilities or finished products to our distribution centers or customers. Activity at third-party distribution centers could be disrupted by a number of factors, including labor issues, failure to meet customer standards, natural disasters or financial issues affecting the third-party providers. In particular, the Russia-Ukraine war and recent labor market shortages impacting our industry have created operating challenges in making our products available to customers and consumers, and such challenges may persist.
Our future results of operations may be adversely affected by input cost inflation.
Many aspects of our business have been, and may continue to be, directly affected by volatile commodity costs and other inflationary pressures. Agricultural commodities and ingredients are subject to price volatility which can be caused by commodity market fluctuations, crop yields, seasonal cycles, weather conditions, temperature extremes and natural disasters (including due to the effects of climate change), pest and disease problems, changes in currency exchange rates, imbalances between supply and demand, and government programs and policies among other factors. Volatile fuel costs translate into unpredictable costs for the products and services we receive from our third-party providers including, but not limited to, distribution costs for our products and packaging costs.
Our future results of operations may be adversely affected by the availability of natural and organic ingredients.
Our ability to ensure a continuing supply of natural and organic ingredients at competitive prices depends on many factors beyond our control, such as the number and size of farms that grow natural and organic crops, climate conditions, increased demand for natural and organic ingredients by our competitors, changes in national and world economic conditions, currency fluctuations and forecasting adequate need of seasonal ingredients.
The natural and organic ingredients that we use in the production of our products (including, among others, vegetables, fruits, nuts and grains) are vulnerable to adverse weather conditions and natural disasters, such as floods, droughts, water scarcity, temperature extremes, wildfires, frosts, earthquakes and pestilences. Natural disasters and adverse weather conditions can lower crop yields and reduce crop size and crop quality, which in turn could reduce our supplies of natural and organic ingredients or increase the prices of those ingredients. Such natural disasters and adverse weather conditions can be caused or exacerbated by climate change, and the spate of recent extreme weather events, including historic droughts, heatwaves, extreme cold and flooding, presents an alarming trend. If our
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supplies of natural and organic ingredients are reduced, we may not be able to find enough supplemental supply sources on favorable terms, if at all, which could impact our ability to supply products to our customers and adversely affect our business, financial condition and results of operations.
We lease officesalso compete with other manufacturers in Jupiter, Floridathe procurement of natural and organic product ingredients, which may be less plentiful in the open market than conventional product ingredients. This competition may increase in the future if consumer demand for natural and organic products increases. This could cause our expenses to increase or could limit the amount of products that we can manufacture and sell.
We may not be successful in achieving savings and efficiencies from cost reduction initiatives and related strategic initiatives.
Our strategy includes identifying areas of cost savings and operating efficiencies to expand profit margins and cash flow. As part of our identification of operating efficiencies, we may continue to seek to dispose of businesses and brands that are less profitable or are otherwise less of a strategic fit within our core portfolio.
We may not be successful in fully implementing our productivity plans or realizing our anticipated savings and efficiencies, including potentially as a result of factors outside our control. Additionally, we may not be able to identify or negotiate divestiture opportunities on terms acceptable to us. If we are unable to fully realize the anticipated savings and efficiencies of our cost reduction initiatives and related strategic initiatives, our profitability may be materially and adversely impacted.
COVID-19 has and will continue to impact our operations and could have a material adverse effect on our business, results of operations and financial condition.
The global outbreak of the novel strain of the coronavirus known as COVID-19 has resulted in governments worldwide enacting emergency measures to combat the spread of the virus, including public health directives and orders in the United States, or the U.S., Canada and the European Union that, among other things and for various periods of time, directed individuals to shelter at their places of residence, directed businesses and governmental agencies to cease non-essential operations at physical locations, prohibited certain non-essential gatherings and events and ordered cessation of non-essential travel. The public health crisis caused by COVID-19 and the measures taken and continuing to be taken by governments, businesses and the public have, and we expect will continue to have, certain negative impacts on our business operations, and could have a material adverse effect on our business, results of operations and financial condition. The duration and impact of the COVID-19 outbreak is unknown at this time, as is the efficacy of the government and central bank interventions.
The full extent to which COVID-19 may impact our business, including our operations and the market for our securities and our financial condition, will depend on future developments, which are highly uncertain and cannot be predicted at this time. These include the duration, severity and scope of the outbreak, and further action taken by the government and other third parties in response to COVID-19 or new variants thereof. In particular, COVID-19 and government efforts to curtail COVID-19 could impede our production facilities, increase operating expenses, result in loss of sales, affect our supply chains, impact performance of contractual obligations or could require additional expenditures to be incurred. While most of these restrictions have since been lifted or eased, increases in new COVID-19 cases, including as a result of new COVID-19 variants, may lead to restrictions being reinstated, or new restrictions imposed.
Future remote work policies and similar government orders or other restrictions on the conduct of business operations related to the COVID-19 pandemic may negatively impact productivity and may disrupt our ongoing research and development activities, the magnitude of which will servedepend, in part, on the length and severity of the restrictions and other limitations on our ability to conduct our business in the ordinary course. We have and continue to update our operational procedures and safety protocols at our facilities to comply with mandates and guidance from governmental authorities. If such measures are not effective or governmental authorities implement further restrictions, we may be required to take more extreme action, which could include short or long-term closures of our facilities or reductions in workforce. These measures may impair our production levels or cause us to close or severely limit production at one or more facilities. Further, our operations could be adversely impacted if suppliers, contractors, customers and/or transportation carriers are restricted or prevented from conducting business activities.
Consumer demand for our products may also be impacted by COVID-19 as a result of reductions in consumers’ disposable income associated with layoffs, and work or pay limitations due to mandatory social distancing and lockdown measures implemented by government authorities. As demand for our products decreases, we may be required to record additional asset impairments, including an impairment of the carrying value of our goodwill, along with other accounting charges.
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Given the ongoing and dynamic nature and significance of COVID-19 and its impact globally, we are not able to enumerate all potential risks and uncertainties to our business or financial condition. Any of the negative impacts of COVID-19, including those described above, alone or in combination with others, may have a material adverse effect on our business, results of operations or financial condition. Further, any of these negative impacts, alone or in combination with others, could exacerbate many of the other risk factors outlined in this prospectus, our annual report on Form 10-K filed with the Commission on July 17, 2023 and in other reports that we file with the Commission from time to time.
Increasing awareness of health and wellness are driving changes in the consumer products industry, and if we are unable to react in a timely and cost-effective manner, our results of operations and future growth may be adversely affected.
We must continually anticipate and react, in a timely and cost-effective manner, to changes in consumer preferences and demands, including changes in demand driven by increasing awareness of health and wellness and demands for transparency or cleaner labels with respect to product ingredients by consumers and regulators. Consumers, especially in developed economies such as the U.S. headquarters once leasehold improvementsand Canada, are completed.rapidly shifting away from products containing artificial ingredients to all-natural, healthier alternatives. In addition, there has been a growing demand by consumers, non-governmental organizations and, to a lesser extent, governmental agencies to provide more transparency in product labeling and our customers have been taking steps to address this demand, including by voluntarily providing product-specific ingredients disclosure. These two trends could affect the types and volumes of our ingredients and compounds that our customers include in their consumer product offerings and, therefore, affect the demand for our products. If we are unable to react to or anticipate these trends in a timely and cost-effective manner, our results of operations and future growth may be materially adversely affected.
Markets for our products and services are highly competitive, and we may be unable to compete effectively.
Our products and services, including our consumer products, are offered in highly competitive markets that may be characterized by aggressive price competition and resulting downward pressure on gross margins, frequent introduction of new products and services, short product life cycles, evolving industry standards and government regulations, continual improvement in product price and performance characteristics, rapid adoption of technological advancements by competitors and price sensitivity on the part of consumers and businesses.
Additionally, our consumer products may compete on the basis of product performance, brand recognition and price. Advertising, promotion, merchandising and packaging also have significant impacts on consumer purchasing decisions. A newly introduced consumer product (whether improved or newly developed) usually encounters intense competition requiring substantial expenditures for advertising, sales promotion and trade merchandising. If a product gains consumer acceptance, it typically requires continued advertising, promotional support and product innovations to maintain its relative market position. If our advertising, marketing and promotional programs are not effective or adequate, our net sales may be negatively impacted.
Some of our competitors are larger than us and have greater financial resources. These competitors may be able to spend more aggressively on advertising and promotional activities, introduce competing products more quickly and respond more effectively to changing business and economic conditions than we can. Competitive activity may require the Company to increase its spending on advertising and promotions and/or reduce prices, which could lead to reduced sales, margins and net earnings.
We previously ownedmay be unable to manage our growth effectively.
Our future financial performance and our ability to commercialize our products and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to continue to improve our operational and financial systems, managerial controls and procedures and we will need to continue to expand, train and manage our technology and workforce. We must also maintain close coordination among our technology, compliance, accounting, finance, marketing and sales functions. We cannot assure you that we will manage our growth effectively. If we fail to do so, our business could be materially harmed.
To support our growth, we may have to further increase our investment in technology, facilities, personnel and financial and management systems and controls. We may also have to further expand our procedures for monitoring and assuring our compliance with applicable regulations, and may need to integrate, train and manage a growing employee base. The expansion of our existing businesses, and expansion into new businesses and the resulting growth of our employee base will increase our need for internal audit and monitoring processes that are more extensive and broader in scope than those we have historically required. We may not be successful in identifying or implementing all of the processes that are necessary. Further, unless our growth results in an increase in our revenues that is proportionate to the increase in our costs associated with this growth, our operating margins and profitability will be adversely affected.
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We depend on a few significant customers for a substantial portion of our revenue. If we fail to retain or expand our customer relationships or significant customers reduce their purchases, our revenue could decline significantly.
For the twelve-month period ended March 31, 2023, one customer accounted for 10.66% of revenue, and one customer accounted for 10.26% of revenue for the twelve-month period ended March 31, 2022.
We believe that our operating results for the foreseeable future will continue to depend on sales to a small number of customers. These customers have no purchase commitments and may cancel, change or delay purchases with little or no notice or penalty. As a result of this customer concentration, our revenue could fluctuate materially and could be materially and disproportionately impacted by purchasing decisions of these customers or any other significant customer. In the future, these customers may decide to purchase less product from us than they have in the past, may alter purchasing patterns at any time with limited notice, or may decide not to continue to purchase our products at all, any of which could cause our revenue to decline materially and materially harm our financial condition and results of operations. If we are unable to diversify our customer base, we will continue to be susceptible to risks associated with customer concentration.
In addition, the Company is subject to credit risk of its customers, and its profitability and cash flow are dependent on receipt of timely payments from clients. Any delay in payment by the Company’s customers may have an adverse effect on the Company’s profitability, working capital and cash flow. There is no assurance that the Company will be able to collect all or any of its trade receivables in a timely matter. If any of the Company’s clients face unexpected situations such as financial difficulties, the Company may not be able to receive full or any payment of the uncollected sums or enforce any judgment debts against such clients, and the Company’s business, results of operations and financial condition could be materially and adversely affected.
Significant interruptions in our access to certain supply chains, for key inputs such as raw materials, electricity, water, and other utilities may impair our operations.
Our business is dependent on a number of key inputs and their related costs (certain of which are sourced in other countries and on different continents), including raw materials, supplies and equipment related to our operations, as well as electricity, water and other utilities. Governments may regulate or restrict the flow of our labor or our products, and the Company’s operations, suppliers, customers, and distribution channels could be severely impacted. Any significant future government-mandated or market-related interruption, price increase or negative change in the availability or economics of the supply chain for key inputs and, in particular, rising or volatile energy costs could curtail or preclude our ability to continue production. In addition, our operations would be significantly affected by a prolonged power outage.
No assurances can be given that we will be successful in maintaining our required supply of materials, labor, equipment, parts, and components. See also “COVID-19 has and will continue to impact our operations and could have a material adverse effect on our business, results of operations and financial condition”.
Our future success depends on the sales of our consumer products and turnkey solutions products.
We derive a large portion of our revenues from the sale of our turnkey solutions products and expect to derive an increasing portion of our revenues from the sale of consumer products. Our investments in and strategies used for our brand marketing are critical to achieve brand awareness with current customers, educate potential new customers and convert potential new customers into customers. However, there can be no assurance that our principal products will continue to receive, maintain or increase market acceptance. The inability to successfully commercialize our turnkey solutions and specialty ingredient products, in the future, for any reason, would have a material adverse effect on our financial condition, prospects and ability to continue operations. The overall commercialization success of our products depends on several factors, including:
● | continued market acceptance of our products by the nutraceutical market; |
● | the amount of resources devoted by our distribution partners to continue the commercialization efforts of our products in our core geographic markets; |
● | maintaining supply of our products to meet the purchase orders of our distribution partners; |
● | receipt of regulatory approvals, as applicable, for our products from regulatory agencies in certain territories in which we wish to expand our commercialization efforts; |
● | continuing compliance with applicable regulations; |
● | the number of competitors in our market; and |
● | protecting and enforcing our intellectual property and avoiding patent infringement claims. |
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Our activities rely on certain third-party suppliers, contract manufacturers and distributors, and such reliance may adversely affect us if the third parties are unable or unwilling to fulfill their obligations.
For our consumer product and nutraceutical activities, we purchase certain important ingredients and raw materials from third-party suppliers and, in certain cases, we engage contract manufacturers to supply us with finished products. Part of our strategy is to enter into and maintain arrangements with third parties related to the development, testing, production, facilitypackaging, and commercialization of our products to our customers which are then responsible for the marketing and distribution of the products. Our revenues are dependent to a great extent on the successful efforts of these third parties. Entering into strategic relationships can be a complex process and our interests and the interests of our partners may not be or remain aligned with our interests.
Real or perceived quality control problems with raw materials outsourced from certain regions or finished products manufactured by contract manufacturers could negatively impact consumer confidence in Sherbrooke, Quebecour products or expose us to liability. In addition, disruption in the operations of any such supplier or manufacturer or material increases in the price of raw materials, for any reason, such as changes in economic and political conditions, tariffs, trade disputes, regulatory requirements, import restrictions, loss of certifications, power interruptions, fires, hurricanes, drought or other climate-related events, war, or other events, could have a material adverse effect on our business, results of operations, financial condition and cash flows. Also, currency fluctuations could result in higher costs for raw materials purchased abroad.
The Company and any third-party manufacturers engaged by the Company to perform manufacturing services are subject to laws and regulations, including current Good Manufacturing Practices regulations (“cGMP”), which are enforced by the U.S. Food and Drug Administration, or the FDA, and other regulatory authorities. The Company and its third-party manufacturers may be unable to comply with cGMP or other regulatory requirements. A failure to comply with these requirements may result in fines, product recalls or seizures and related publicity requirements, injunctions, total or partial suspension of production, civil penalties, warning or untitled letters, import or export bans or restrictions and criminal prosecution and penalties. Any of these penalties could delay or prevent the promotion, marketing, or sale of the Company’s products. If the safety of any products manufactured by or supplied to the Company is compromised due to the manufacturer’s failure to adhere to applicable laws or for other reasons, the Company may not be able to successfully sell its products and our business, financial condition and operations may be materially adversely affected.
Some of our current and future partners may decide to compete with us, refuse or be unable to fulfill or honor their contractual obligations to us, or change their plans to reduce their commitment to, or even abandon, their relationships with us. There can be no assurance that our partners will market our products successfully or that any such third-party collaboration will be on favorable terms. We may not be able to control the amount and timing of resources our partners devote to our potential products. In addition, we may incur liabilities relating to the distribution and commercialization of our products. While the agreements with such customers generally include customary indemnification provisions indemnifying us for liabilities relating to third-party manufacturing or packaging of our potential products, there can be no assurance that these indemnification rights will be sufficient in amount, scope or duration to fully offset the potential liabilities associated with our potential products. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business, financial condition or results of operations.
Our products may be subject to recalls for a variety of reasons, which could require us to expend significant management and capital resources.
Manufacturers and distributors of products are sometimes subject to the recall or return of their products for a variety of reasons, including product defects, such as contamination, adulteration, unintended harmful side effects, or interactions with other substances, packaging safety, and inadequate or inaccurate labeling disclosure. If any of the products produced by or for us are recalled due to an alleged product defect or for any other reason, we could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. As a result of any such recall, our sales may be significantly affected and may not be able to replace those sales at an acceptable margin or at all. In addition, a product recall may require significant management attention or damage our reputation and goodwill or that of our products or brands.
Additionally, product recalls may lead to increased scrutiny of our operations by regulatory agencies and authorities, requiring further management attention, increased compliance costs and potential legal fees, fines, penalties and other expenses.
We may not meet timelines for project development.
The Company’s business is dependent on a number of key inputs and their related costs including raw materials and supplies related to its operations, as well as electricity, water and other utilities. Any significant interruption or negative change in the availability or
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economics of the supply chain for key inputs could materially impact the business, financial condition operating results, and timelines for project development of the Company. Any inability to secure required supplies and services or to do so on appropriate terms could have a materially adverse impact on the business, financial condition, operating results, and timelines for project development of the Company.
Product contamination or tampering or issues or concerns with respect to product quality, safety and integrity could adversely affect our business, reputation, financial condition or results of operations.
Product contamination or tampering, or allegations of product contamination or tampering or product quality issues (whether or not valid) with respect to products in our portfolio may reduce demand for such products, and cause production and delivery disruptions or increase costs, which could adversely affect our business, reputation, financial condition or results of operations. Moreover, even if allegations of product contamination or tampering or suggestions that our products were not fit for consumption or use are meritless, the negative publicity surrounding assertions against us or products in our portfolio or processes could adversely affect our reputation or brands. Our business could also be adversely affected if consumers lose confidence in product quality, safety and integrity generally, even if such loss of confidence is unrelated to products in our portfolio.
Any of the foregoing could adversely affect our business, reputation, financial condition or results of operations. In addition, if we do not have adequate insurance, if we do not have enforceable indemnification from suppliers, manufacturers, distributors, joint venture partners or other third parties or if indemnification is not available, the liability relating to such product claims or disruption as a result of recall efforts could materially adversely affect our business, financial condition or results of operations.
We may have difficulty obtaining insurance to cover its operational risks and, even where available, may not be sufficient to cover losses we conductedmay incur.
We may have difficulty obtaining the various insurances that are desired to operate its business, which may expose the Company to additional risk and financial liability. Insurance that is otherwise readily available, such as general liability, and directors’ and officers’ insurance, may be more difficult to find, and more expensive, because of the regulatory regime applicable to our cannabisindustry. There are no guarantees that the Company will be able to find such insurance coverage in the future, or that the cost will be affordable. If the Company is unable to obtain insurance coverage on acceptable terms, it may prevent it from entering into certain business sectors, may inhibit growth, and may expose the Company to additional risks and financial liabilities.
Moreover, our current and expected business activities expose us to the risk of liabilities arising from our operations. For example, we may be liable for claims brought by users of our products or by employees, customers or other third parties for personal injury or property damage occurring in the course of our operations. We seek to minimize these risks through various insurance contracts from third-party insurance carriers. However, our insurance coverage is subject to large individual claim deductibles, individual claim and aggregate policy limits, and other terms and conditions. We retain an insurance risk for the deductible portion of each claim and for any gaps in insurance coverage. We do not view insurance, by itself, as a material mitigant to these business risks.
We cannot assure that our insurance will be sufficient to cover our losses. Any losses that insurance does not substantially cover could have a material adverse effect on our business, results of operations, including laboratory testing. On October 17, 2022,financial condition and cash flows. The insurance industry has become more selective in offering some types of insurance, such as product liability, product recall, property and directors’ and officers’ liability insurance. Our current insurance program is consistent with both our past level of coverage and our risk management policies. However, we cannot assure that we will be able to obtain comparable insurance coverage on favorable terms, or at all, in the future.
Risks Relating to Our Accounting and Financial Activities
Although our consolidated financial statements have been prepared on a going concern basis, our management believe that our recurring losses and negative cash flows from operations and other factors have raised substantial doubt about our ability to continue as a going concern as of March 31, 2023.
Our consolidated financial statements for the twelve-month period ended March 31, 2023 were 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. Thus, our consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. Our recurring losses, negative cash flow, need for additional financing and the uncertainties surrounding our ability to raise such financing, raise substantial doubt about our ability to continue as a going concern. For the twelve-month period ended March 31, 2023, the Company incurred a net loss of $88.8 million, negative cash flows from operations of $28.6 million, and had
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an accumulated deficit of $383.6 million as at March 31, 2023. Our lack of cash resources and our potential inability to continue as a going concern may materially adversely affect our share price and our ability to raise new capital, enter into critical contractual relations with third parties, meet our obligations as they become due and otherwise execute our business strategy. The Company currently has no committed sources of financing available. If we are unable to raise additional financing, increase sales and reduce expenses we will be unable to continue to fund our operations, develop our products, realize value from our assets, or discharge our liabilities in the normal course of business. If we become unable to continue as a going concern, we could have to liquidate our assets, and potentially realize significantly less than the values at which they are carried on our financial statements, and shareholders could lose all or part of their investment in our Common Shares.
This offering is being made on a [reasonable best-efforts] basis and we may sell fewer than all of the securities offered hereby and may receive significantly less in net proceeds from this offering. Assuming that we receive net proceeds of $[●] million from this offering (assuming an offering with gross proceeds of $[●] million), we believe that the net proceeds from this offering will meet our cash needs for approximately [●]. The net proceeds from this offering will not significantly improve the Company’s working capital. The Company’s trade and other payables will continue to significantly exceed its cash balance. After receipt of the net proceeds from this offering the Company will still be required to actively manage its liquidity and expenses and payments of payables will continue to not be made as the amounts become due. Nor will the receipt of the net proceeds from this offering remove that substantial doubt and as such, there will remain substantial doubt about our ability to continue as a going concern after this offering. If we have insufficient capital to operate our business under our current business plan, we have contingency plans for our business that include, among other things, the delay of the introduction of new products, a reduction in headcount, and a reduction of the expansion of our distribution networks, which is expected to substantially reduce revenue growth and delay our profitability. There can be no assurance that our implementation of these contingency plans will not have a material adverse effect on our business. We may need to liquidate our assets, and potentially realize significantly less than the values at which they are carried on our financial statements, and shareholders could lose all or part of their investment in our Common Shares.
We have recorded significant long-lived asset impairment charges and may be required to record additional charges to future earnings if our long-lived assets become impaired.
As of March 31, 2023, our goodwill balance was $2.4 million and our intangible asset balance was $1.6 million, which represented 7.8% and 5.2% respectively of total consolidated assets. The Company recorded an impairment loss of $19.5 million for goodwill and $18.0 million for intangibles in the twelve-month period ended March 31, 2023. We are required to review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our intangible assets and/or goodwill may not be recoverable include a decline in share price and market capitalization, slower growth rates in our industry or our own operations, and/or other materially adverse events that have implications on the profitability of our business or business verticals.
In addition, the Company announced that weit had entered into a binding agreement for the sale of ourits Canadian cannabis business, which would include the sale of our cannabis brands andincluding the Sherbrooke building, for C$5.15 million to be paid to the Company in one or more transactions. The disposition of our cannabis operations occurredcash, which transaction closed on November 9, 2022. We believe the divestmentThe Company recorded a loss on remeasurement of the cannabis assets will allowto fair value less cost of sale in the amount of $15.3 million in the twelve-month period ended March 31, 2023.
We may be required to record additional charges during the period in which any impairment of our goodwill, intangible assets or other long-lived assets is determined which could have a material adverse impact on our results of operations. Even though these charges may be non-cash items and may not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about us or our securities.
In some cases, we cannot determine with any certainty whether we have priority of invention in relation to any new product or new process covered by a patent application or if we were the first to file a patent application for any such new invention. Furthermore, in the event of patent litigation there can be no assurance that our patents would be held valid or enforceable by a court of competent jurisdiction or that a court would rule that the competitor’s products or technologies constitute patent infringement.
Moreover, part of our technological know-how constitutes trade secrets. We require that our employees, consultants, advisers and collaborators sign confidentiality agreements. However, these agreements may not provide adequate protection in the event of unauthorized use or disclosure of our trade secrets, know-how or other proprietary information.
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Claims that our technology or products infringe on intellectual property rights of others could be costly to defend or settle, could cause reputational injury and would divert the attention of our management and key personnel, which in turn could have a material adverse effect on our business, results of operations, financial condition and cash flows. Any adverse outcome of such litigation or settlement of such a dispute could subject us to realize significant cost savingsliabilities, could put one or more of our patents at risk of being invalidated or interpreted narrowly, could put one or more of our pending patent applications at risk of not issuing, or could facilitate the entry of generic products. Any such litigation could also divert our research, technical and operational streamliningmanagement personnel from redirected resources towardstheir normal responsibilities.
Risks Relating to Our Liquidity
We are actively managing our simplified corporate structure.
liquidity and expenses, including by extending payables due and reducing investment in our businesses, and it is not certain that we will be ultimately successful in developing our business and remaining a going concern.
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As of the date of this prospectus, we are actively managing our liquidity and expenses, and there is substantial doubt that our current cash position will be sufficient to continue as a going concern. The Company currently has minimal available cash balances, and we are also continuing to incur expenses that will cause us to expend cash in the short term. Payables are now in excess of available cash balances and payments of payables are not being made as the amounts become due. As of [July 14], 2023, we had approximately $1.3 million in cash and cash equivalents, which is expected to be sufficient to operate the business for less than one month 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. We also have leased offices in Vaudreuil, Provinceno arranged sources of Québec, Canada. The Vaudreuil offices were previously usedfinancing available to us. Our failure to obtain any required additional financing on favorable terms, or at all, would have a material adverse effect on our business, financial condition and results of operations. We are pursuing several cash generating transactions, including the strategic plan described herein, as well as further expense reduction measures, but there can be no assurance that any transaction will be completed or that our expense reduction measures will be sufficient to continue as a going concern.
As a result of our failure to timely file our Quarterly Report on Form 10-Q for the quarter ended December 31, 2022, we are currently ineligible to file new short form registration statements on Form S-3, which may impair our ability to raise capital on terms favorable to us, in a timely manner or at all.
Form S-3 permits eligible issuers to conduct registered offerings using a short form registration statement that allows the issuer to incorporate by reference its past and future filings and reports made under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In addition, Form S-3 enables eligible issuers to conduct primary offerings “off the shelf” under Rule 415 of the Securities Act. The shelf registration process, combined with the ability to forward incorporate information, allows issuers to avoid delays and interruptions in the offering process and to access the capital markets in a more expeditious and efficient manner than raising capital in a standard registered offering pursuant to a Registration Statement on Form S-1. The ability to register securities for resale may also be limited as a result of the loss of Form S-3 eligibility.
As a result of our failure to timely file our Quarterly Report on Form 10-Q for the quarter ended December 31, 2022, we are currently ineligible to file new short form registration statements on Form S-3 and, absent a waiver of the Form S-3 eligibility requirements, we will no longer be permitted to use our existing registration statement on Form S-3. As a consequence, we might not be permitted to sell all of the amount of securities we could otherwise sell prior to such time, subject to the limits of General Instruction I.B.6. of Form S-3, which could adversely affect our operations and financial results.
Our inability to use Form S-3 may significantly impair our ability to raise necessary capital to run our operations and execute on our strategy. If we seek to access the capital markets through a registered offering during the period of time that we are unable to use Form S-3, we may be required to publicly disclose the proposed offering and the material terms thereof before the offering commences, we may experience delays in the offering process due to SEC review of a Form S-1 registration statement and we may incur increased offering and transaction costs and other considerations. Disclosing a public offering prior to the formal commencement of an offering may result in downward pressure on our share price. If we are unable to raise capital through a registered offering, we would be required to conduct our equity financing transactions on a private placement basis, which may be subject to pricing, size and other limitations imposed under Nasdaq rules, or seek other sources of capital.
We may have difficulty accessing public and private capital and banking services, which could negatively impact its ability to finance its operations.
We anticipate that funding sources may be available pursuant to private and public offerings of equity and/or debt and bank lending. However, if equity and/or debt financing was not available in the public capital markets, then the Company expects that it would have
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access to raise equity and/or debt financing privately. There can be no assurance that additional financing, if raised privately or publicly, will be available to the Company when needed or on terms which are acceptable, or that the Company’s Biodrogaexisting indebtedness would not impact its ability to obtain such additional financing. The Company’s inability to raise financing to fund working capital, capital expenditures or acquisitions could limit its growth and may have a material adverse effect upon future profitability. If the Company cannot achieve profitability, it may be forced to cease operations and you may suffer a total loss of your investment.
The issuance and sale of common shares upon exercise of outstanding warrants may cause substantial dilution to existing shareholders and may also depress the market price of our common shares. Certain outstanding warrants to purchase shares of our common stock have cashless exercise rights.
As at March 31, 2023, the Company had a total of 12,197,665 warrants outstanding, representing 101.7% of the common shares issued at that date. If the holders of the warrants choose to exercise the warrants, it will cause substantial dilution to the holders of our common shares. If exercises of the warrants and sales of such shares issuable upon exercise thereof take place, the price of our common shares may decline. In addition, the common shares issuable upon exercise of the warrants may represent overhang that may also adversely affect the market price of our common shares. Overhang occurs when there is a greater supply of a company’s stock in the market than there is demand for that stock. When this happens the price of our common shares may decrease, and any additional shares which shareholders attempt to sell in the market will only further decrease the share price. If the share volume of our common shares cannot absorb shares sold by the warrant holders, then the value of our common shares will likely decrease.
Certain of the warrants discussed above allow for cashless exercise rights. In a ‘cashless exercise’, the holder reduces the number of shares of common shares issuable upon exercise of the warrants in amount equal to the aggregate value of the exercise price of the exercised warrants. For example, if our common shares were trading at $10 per share and a holder desires to exercise warrants to purchase 100 common shares with an exercise price of $1.00 per share on a cashless basis, the number of common shares issuable to the holder upon such exercise would be reduced by 10 shares, equal in value to $100 ($10 per share x 10 shares), and the holder would receive 90 common shares upon such exercise. We do not receive any cash upon a cashless exercise and as such, while a cashless exercise reduces the dilution which would otherwise exist upon a warrant exercise, it is also not as beneficial to us, as it does not bring in any new investment proceeds. Additionally, holders of warrants with cashless exercise provisions may be more likely to exercise their warrants as they do not have to come out of pocket with any cash exercise payments.
Legal and Regulatory Risks Relating to Our Business
We identified material weaknesses in our internal control over financial reporting. This may adversely affect the accuracy and reliability of our financial statements and, if we fail to maintain effective internal control over financial reporting, it could impact our reputation, business, and the price of our common shares, as well as lead to a loss of investor confidence in us.
The Company has and may continue to fail to maintain the adequacy of its internal controls over financial reporting as such standards are modified, supplemented or amended from time to time, and the Company cannot ensure that it will conclude on an ongoing basis that it has effective internal controls over financial reporting. The Company’s failure to satisfy the requirements of Canadian and United States legislation on an ongoing, timely basis could result in the loss of investor confidence in the reliability of its financial statements or in a cease trade order, which in turn could harm the Company’s business and negatively impact the trading price and market value of its shares or other securities. In addition, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm the Company’s operating results or cause it to fail to meet its reporting obligations.
The Company also has and may continue to fail to maintain the adequacy of its disclosure controls. Disclosure controls and procedures are designed to ensure that the information required to be disclosed by the Company in reports filed with securities regulatory agencies is recorded, processed, summarized and reported on a timely basis and is accumulated and communicated to the Company’s management, as appropriate, to allow timely decisions regarding required disclosure.
No evaluation can provide complete assurance that the Company’s financial and disclosure controls will detect or uncover all failures of persons within the Company to disclose material information otherwise required to be reported. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance with respect to the reliability of financial reporting and financial statement preparation. The effectiveness of the Company’s controls and procedures could also be limited by simple errors or faulty judgements.
Material weaknesses in the Company’s internal control over financial reporting were determined to exist at March 31, 2023 and these material weaknesses have not been remediated to date. The Company’s management, including the Chief Executive Officer and Chief
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Financial Officer, concluded that our internal control over financial reporting was not effective as of March 31, 2023 due to the presence of these material weaknesses. While we intend to adopt new and revised controls to remediate these weaknesses, if these and other controls fail to adequately remediate these material weaknesses, it could result loss of investor confidence, which could lead to a decline in our share price. In addition, if we do not maintain adequate financial and management personnel, processes, and controls, we may not be able to accurately report our financial performance on a timely basis, which could cause a decline in our share price and harm our ability to raise capital. Failure to accurately report our financial performance on a timely basis could also jeopardize our continued listing on Nasdaq or any other exchange on which our common shares may be listed.
As a non-accelerated filer, we are not required to comply with the auditor attestation requirements of the Sarbanes-Oxley Act.
We are a non-accelerated filer under the Exchange Act and we are not required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002. Therefore, our internal controls over financial reporting will not receive the level of review provided by the process relating to the auditor attestation included in annual reports of issuers that are subject to the auditor attestation requirements. In addition, we cannot predict if investors will find our common shares less attractive because we are not required to comply with the auditor attestation requirements. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and trading price for our common shares may be negatively affected.
The Company may be classified as a “passive foreign investment company” for U.S. federal income tax purposes, which would subject U.S. investors that hold the Company’s Common Shares to potentially significant adverse U.S. federal income tax consequences.
If the Company is classified as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes in any taxable year, U.S. investors holding the Company’s Common Shares generally will be subject, in that taxable year and all subsequent taxable years (whether or not the Company continued to be a PFIC), to certain adverse U.S. federal income tax consequences. The Company will be classified as a PFIC in respect of any taxable year in which, after taking into account its income and gross assets (including the income and assets of 25% or more owned subsidiaries), either (i) 75% or more of its gross income consists of certain types of “passive income” or (ii) 50% or more of the average quarterly value of its assets is attributable to “passive assets” (assets that produce or are held for the production of passive income). Based on our current operations, income, assets and certain estimates and projections, including as to the relative values of our assets, including goodwill, which is based on the expected price of our Common Shares, the Company believes that it was not a PFIC for the taxable year ended March 31, 2022. The determination of the Company’s status as a PFIC for the fiscal year ending March 31, 2023 cannot be made at this time. Because the Company’s PFIC status must be determined annually with respect to each taxable year and will depend on the composition and character of the Company’s assets and income, including the Company’s use of proceeds from offerings, and the value of the Company’s assets (which may be determined, in part, by reference to the market value of Common Shares, which may be volatile) over the course of such taxable year, the Company may be a PFIC in any taxable year. Because there are uncertainties in the application of the relevant rules and PFIC status is a factual determination made annually after the close of each taxable year, there can be no assurance that the Company will not be a PFIC for any future taxable year. In addition, it is possible that the U.S. Internal Revenue Service may challenge the Company’s classification of certain income and assets as non-passive, which may result in the Company being or becoming a PFIC in the current or subsequent years.
If the Company is a PFIC for any year during a U.S. Holder’s (as defined below in “Certain U.S. Federal Income Tax Considerations”) holding period, then such U.S. Holder generally will be required to treat any gain realized upon a disposition of Common Shares, or any “excess distribution” received on its Common Shares, as ordinary income, and to pay an interest charge on a portion of such gain or distribution, unless the U.S. Holder makes a timely and effective “qualified electing fund” election (“QEF Election”) or a “mark-to-market” election with respect to its Common Shares. A U.S. Holder who makes a QEF Election generally must report on a current basis its share of the Company’s net capital gain and ordinary earnings for any year in which the Company is a PFIC, whether or not the Company distributes any amounts to its shareholders. However, U.S. Holders should be aware that if the Company determines that it is a PFIC for this year or any future taxable year, the Company can make no assurances that it would provide the information necessary for U.S. Holders to make a QEF Election. Thus, U.S. Holders may not be able to make a QEF Election with respect to their Common Shares. A U.S. Holder who makes a mark-to-market election generally must include as ordinary income each year the excess of the fair market value of the Common Shares over the taxpayer’s basis therein. Each U.S. Holder should consult its own tax advisors regarding the PFIC rules and the U.S. federal income tax consequences of the acquisition, ownership, and disposition of Common Shares.
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We are subject to laws and regulations and guidelines, changes in which could increase our costs and individually or in the aggregate adversely affect our business.
We are subject to laws and regulations affecting our operations in a number of areas. These laws and regulations affect the Company’s activities in areas including, but not limited to, organic food and beverage products, dietary supplements, consumer protection, labor, intellectual property ownership and infringement, import and export requirements, and environmental, health and safety.
The successful execution of our business objectives is contingent upon compliance with all applicable laws and regulatory requirements and obtaining all other required regulatory approvals, which may be onerous and expensive. Any such costs, which may rise in the future as a result of changes in these laws and regulations or in their interpretation and the expansion of the Company’s business, could individually or in the aggregate make the Company’s products and services less attractive to our customers, delay the introduction of new products, or cause the Company to implement policies and procedures designed to ensure compliance with applicable laws and regulations. There can be no assurance that the Company’s officers, directors, employees, contractors, or agents will not violate such laws and regulations or our policies and procedures.
We are subject to risks inherent to the nutraceutical industry.
We are heavily dependent on the export of products to the United States. The FDA is able to block the import entry of any product that violates or appears to violate U.S. law. Future changes in U.S. requirements and interpretations of those requirements, coupled with FDA’s authority to block import entry based only on an apparent violation of the law, increases the possibility that our products may not have full access to the U.S. market and poses additional risks to our business.
We are subject to anti-money laundering laws and regulations in multiple jurisdictions.
The Company will be subject to a variety of laws and regulations in Canada and in the United States that involve money laundering, financial recordkeeping and proceeds of crime, including the U.S. Currency and Foreign Transactions Reporting Act of 1970 (commonly known as the Bank Secrecy Act), as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), the Criminal Code (Canada), as amended and the rules and regulations thereunder, and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the United States and Canada.
If any of the Company’s investments, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such investments in the United States or Canada were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize the ability of the Company to declare or pay dividends, effect other distributions or subsequently repatriate such funds back to Canada. Furthermore, while we have no current intention to declare or pay dividends on its Common Shares in the foreseeable future, we may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.
Our inability to maintain our regulatory approvals and permits or failure to comply with applicable regulations could adversely affect our business and financial results.
The Company is required to obtain and maintain certain federal and state permits, licenses and approvals in the jurisdictions where its products are manufactured and/or sold and to comply with extensive regulations governing its business, including FDA regulations. There can be no assurance that the Company will be able to obtain or maintain necessary licenses, permits or approvals or continue to comply with applicable regulations. Any material delay or inability to receive these items is likely to delay and/or inhibit the Company’s ability to conduct its business, and would have an adverse effect on its business, financial condition and results of operations.
We are currently, and may in the future be, subject to substantial litigation, investigations and proceedings that could cause us to incur significant legal expenses and result in harm to our business.
We and our subsidiaries are subject to federal, state, local, foreign and provincial health, safety, and labeling laws and regulations, including but not limited to the federal Food, Drug, and Cosmetic Act and regulations promulgated by the FDA; laws and regulations promulgated by the United States Department of Agriculture; the National Organic Program; and state, local, foreign, and provincial law equivalents. In addition, the California Safe Drinking Water and Toxic Enforcement Act of 1986 (Proposition 65) and implementing
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regulations impose testing and warning requirements for products containing any chemical known to the State of California to cause cancer and/or reproductive toxicity. Product recall laws and regulations also apply to our products.
The failure by us to comply with applicable health, safety, and labeling requirements could result in fines, penalties, injunctions, product recalls, enforcement actions, third-party claims for property damage and personal injury, regulatory or judicial orders requiring corrective measures, and attorneys’ fees associated with prosecuting such actions, which could have a material adverse effect on our business, financial condition, or results of operations.
We rely on contract manufacturers to produce products in compliance with applicable health, safety, and labeling requirements. Further, as with any consumer-facing company selling food or nutraceutical products, there is always a chance of microbial contamination even under the most stringent manufacturing practices; thus, the risk of fines, penalties, injunctions, product recalls, enforcement actions, third-party claims for property damage and personal injury, regulatory or judicial orders requiring corrective measures, and attorneys’ fees associated with prosecuting such actions is heightened where the company is not actively involved in the manufacturing practices.
On February 4, 2021, the United States House of Representatives Subcommittee on Economic and Consumer Policy, Committee on Oversight and Reform (“Subcommittee”), published a report, “Baby Foods Are Tainted with Dangerous Levels of Arsenic, Lead, Cadmium, and Mercury” (the “Report”), which stated that, with respect to Sprout, a company in which Neptune acquired a 50.1% stake, “Independent testing of Sprout Organic Foods has confirmed that their baby foods contain concerning levels of toxic heavy metals.” The Report further stated that after receiving reports alleging high levels of toxic metals in baby foods, the Subcommittee requested information from Sprout but did not receive a response. On February 11, 2021, the Subcommittee contacted Sprout, reiterating its requests for documents and information about toxic heavy metals in Sprout’s baby foods.
Sprout provided an initial response to the Subcommittee on February 25, 2021. The pending inquiries and potential findings could have a material adverse effect on our business, financial condition, or results of operations.
On March 16, 2021, a purported class action, captioned Marvin Gong v. Neptune Wellness Solutions, et al., was filed in the United States District Court for the Eastern District of New York against the Company and certain of its current and former officers. On October 21, 2022, the Company announced that it had agreed to settle and resolve the lawsuit for a gross payment to the class of between $4 and $4.25 million, with the exact amount being within the Company’s control and dependent on the type of consideration used. The settlement was subject to court approval and certification by the court of the class. On March 16, 2023, the settlement offer was accepted and the first two payments in the amount of $500,000 each were subsequently paid. The remainder is payable either in cash ($2,500,000) or in common shares ($2,750,000) at Neptune’s election, within 31 days after the Final Approval Order is entered. The Company intends to sub-leasepay the Vaudreuil offices.
BUSINESS STRATEGYremainder in common shares, which may result in a substantial number of shares being issued, and such an issuance may result in substantial dilution to the existing holders of our common shares.
Neptune’s vision isWe also are subject to change consumer habits throughfederal, state, local, foreign and provincial laws, rules and regulations concerning advertising and marketing, including but not limited to those prohibiting unfair, deceptive, and/or abusive trade practices. Violations of advertising and marketing requirements can result in fines, penalties, injunctions, disgorgement of profits, full restitution for injury suffered by consumers, rescission of contracts, enforcement actions, regulatory or judicial orders requiring corrective measures, and attorneys’ fees associated with prosecuting such actions.
Accordingly, we are exposed to potential liabilities and reputational risk associated with litigation, regulatory proceedings and government investigations and enforcement actions for the creationfailure of us to comply with applicable health, safety, and distributionlabeling requirements and advertising and marketing requirements. Any adverse judgment in or settlement of environmentally friendly, ethicalany pending or any future litigation or investigation could result in payments, fines and innovative consumer product goods. Our mission is to redefine healthpenalties that could adversely affect our business, results of operations and wellnessfinancial condition and help humanity thrivewhich may not be covered by providing sustainable consumer focused solutions. Despite the decline in global economic activity since the outbreakinsurance. Regardless of the merits of the claims and the outcome, legal proceedings have resulted in, and may continue to result in, significant legal fees and expenses as well as diversion of management’s and employee time and other resources, and adverse publicity. Such proceedings could also adversely affect our business, results of operations and financial condition. If the Company is unsuccessful in its defense of material litigation claims or is unable to settle the claims, the Company may be faced with significant monetary damage awards or other remedies against it including injunctive relief that could have a material adverse effect on the Company’s business, financial condition and results of operations. Administrative or regulatory actions against the Company or its employees could also have a material adverse effect on the Company’s business, financial condition and results of operations. For more information on our pending legal proceedings, see “Legal Proceedings.”
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Risks Relating to Our Human Resources
We may be unable to attract or retain key personnel, and we may be unable to attract, develop and retain additional employees required for our development and future success.
Our success is largely dependent on the performance of our management team and certain employees and our continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. Qualified individuals are in high demand, and we may incur significant costs to attract and retain them. The loss of the services of any key personnel, or an inability to attract other suitably qualified persons when needed, could prevent us from executing on our business plan and strategy, and we may be unable to find adequate replacements on a timely basis, or at all. We do not currently maintain key-person insurance on the lives of any of our key personnel.
We face exposure to fraudulent or illegal activity by officers, directors, employees, contractors, consultants and agents, which may subject us to investigations and actions.
We are exposed to the risk that any of our officers, directors, employees, independent contractors and consultants and our subsidiaries may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to us that violate (i) government regulations, (ii) manufacturing standards, (iii) federal, state, local, and foreign healthcare fraud and abuse laws and regulations, or (iv) laws that require the true, complete and accurate reporting of financial information or data. It may not always be possible for us to identify and deter misconduct by our officers, directors, employees and other third parties, and the precautions taken transformative,by us to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. We cannot provide assurance that our internal controls and compliance systems will protect us from acts committed by our officers, directors, employees, agents or business partners in violation of U.S. or Canadian federal, provincial or state or local laws. If any such actions are instituted against us, and we are not successful in defending or asserting our rights, those actions could have a material impact on our business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could have a material adverse effect on our business, financial condition, results of operations or prospects.
Risks Relating to increase its sales, distributionOur Information Technology
We must successfully maintain and/or upgrade our information technology systems, and reachour failure to do so could have a material adverse effect on our business, financial condition or results of operations.
We rely on various information technology systems to manage our operations. Over the last several years, we have implemented, and we continue to implement, modifications and upgrades to such systems, including changes to legacy systems, replacing legacy systems with successor systems with new functionality, and acquiring new systems with new functionality. These types of activities subject us to inherent costs and risks associated with replacing and changing these systems, including impairment of our ability to fulfill customer orders, potential disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, retention of sufficiently skilled personnel to implement and operate the new systems, demands on management time and other risks and costs of delays or difficulties in bothtransitioning to or integrating new systems into our current systems. These implementations, modifications, and upgrades may not result in productivity improvements at a level that outweighs the business-to-business (“B2B”)costs of implementation, or at all. In addition, the difficulties with implementing new technology systems may cause disruptions in our business operations and business-to-consumer (“B2C”) model in the consumer-packaged goods (“CPG”) market. Neptune hashave a dual material adverse effect on our business, financial condition, or results of operations.
go-to market B2BWe may be exposed to risks and B2C strategy focused on expanding its global distribution reach. The strategy sets Neptune apart from its competitioncosts associated with security breaches, data loss, credit card fraud and has startedidentity theft that could cause us to yield consistent, long-termincur unexpected expenses and loss of revenue opportunities for the Company.as well as other risks.
The Company’s long-term strategyoperations are increasingly dependent on IT systems and the management of information; thus, the protection of customers, employees, suppliers and other business data is focused oncritical. A portion of our sales require the healthcollection of certain customer data, such as credit card information. In order for our sales channel to function, we and wellness sectorother parties involved in processing customer transactions must be able to transmit confidential information, including credit card information, securely over public networks. The use of credit payment systems makes us more susceptible to a risk of loss, particularly with respect to an emphasis on select CPG verticals, including Nutraceuticals, Beauty & Personal Care, and Organic Foods & Beverages. Neptune’s current brand portfolio across these verticals include Sprout®, Neptune Wellness™, Forest Remedies®, and MaxSimil®.
On June 9, 2021, Neptune announced a multi-year licensing agreement between Sprout and CoComelon, the world’s leading children’s entertainment brand, owned and operatedexternal security breach of customer information controlled 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.
Neptune’s future will be focused on brand creation, accelerating organic growthus, or by third parties under arrangements with emphasis on increased efficiency and margin expansion. This will be complemented by accretive acquisitionsus (including those with a proven track record of operational excellence. On July 22, 2021,whom we have strategic alliances). Despite our efforts, the Company launched Forest Remedies’ plant-based Omega 3-6-9 gummiesexperienced a cyber-attack in July 2021 as a consequence of increased digital interactions with customers, suppliers and soft gels. Neptune is focused on expanding its exclusive Omega-3 delivery technology MaxSimil® while improving growthconsumers, and profitabilitychanges in its Nutraceuticals vertical. The MaxSimil® product lineup will be expanded with the launchways 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, and proteins within this important vertical.
PRODUCTS, PRINCIPAL MARKETS, METHODS OF DISTRIBUTION AND BRANDS
Products
Our Nutraceutical, Beauty and Personal care products and Organic Foods and Beverages are manufactured by third party manufacturers. In order to meet demand for our products, we have developed relationships with selected contract manufacturers. 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%working of our annual production requirements. For Sprout, 90%employees and these external stakeholders due to the
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COVID-19 outbreak. Also, we are not dependentparticularly reliant on any single contract manufacturerservice providers and that, if necessary, our current selected contract manufacturers could be replaced with minimal disruptionthus the impact of COVID-19 on their operations also imposed a risk for us. Cyber-attacks will continue to impose threats to our operations.
In addition, federal, state, provincial and international laws and regulations govern the collection, retention, sharing, and security of data that we manage. The regulatory environment surrounding information security and privacy has been increasingly demanding in recent years and may see the imposition of new and additional requirements by provincial, state, and federal governments as well as foreign jurisdictions in which we do business. Compliance with these requirements may result in cost increases due to necessary systems changes and the development of new processes to meet these requirements by us.
In the event of a security breach, theft, leakage, accidental release or other illegal activity with respect to employees, customers, suppliers or other company data, we could become subject to various claims, including those arising out of thefts and fraudulent transactions, and may also result in the suspension of credit card services. This could cause consumers to lose confidence in our security measures, harm our reputation as well as divert management attention, and expose us to potentially unreserved claims and litigation. Any loss in connection with these types of claims could be substantial. If our electronic payment systems are damaged or cease to function properly, we may have to make significant investments to fix or replace them, and we may suffer interruptions in our operations in the interim. In addition, we are reliant on these systems, not only to protect the security of the information stored, but also to appropriately track and record data. Any failures or inadequacies in these systems could expose us to significant unreserved losses, which could materially and adversely affect our earnings and the market price of securities. Our quality control staff requires full disclosurebrand reputation would likely be damaged as well.
Risks Relating to Our Intellectual Property
Our commercial success depends, in part, on our intellectual property rights and a failure by us to protect our intellectual property may have a material adverse effect on our ability to develop and commercialize our products.
Our success depends in part on our ability to develop products, obtain patents, protect our trade secrets and operate without infringing third-party exclusive rights or without others infringing our exclusive rights or those granted to us under license. The patent position of a corporation is generally uncertain and involves complex legal, factual and scientific issues, several of which remain unresolved. We do not know whether we will be able to develop other patentable proprietary technology and/or products. Furthermore, we cannot be completely certain that our future patents, if any, will provide a definitive and competitive advantage or afford protection against competitors with similar technology. Furthermore, we cannot give any assurance that such patents will not be challenged or circumvented by others using alternative technology or whether existing third-party patents will prevent us from marketing our products. In addition, competitors or potential competitors may independently develop, or have independently developed products as effective as ours or invent or have invented other products based on our patented products.
If third-party licenses are required, we may not be able to obtain them, or if obtainable, they may not be available on reasonable terms. Furthermore, we could develop or obtain alternative technologies related to third-party patents that may inadvertently cover their products. Inability to obtain such licenses or alternative technologies could delay the market launch of certain of our products, or even prevent us from developing, manufacturing or selling certain products. In addition, we could incur significant costs in defending ourselves in patent infringement proceedings initiated against us or in bringing infringement proceedings against others.
Risks Relating to This Offering and Ownership of Our Common Shares
We do not currently intend to pay any cash dividends on our Common Shares in the foreseeable future.
We have never paid any cash dividends on our Common Shares. We do not anticipate paying any cash dividends on our Common Shares in the foreseeable future because, among other reasons, we currently intend to retain any future earnings to finance our business. The future payment of cash dividends will be dependent on factors such as cash on hand and achieving profitability, the financial requirements to fund growth, our general financial condition and other factors our board of directors may consider appropriate in the circumstances. Until we pay cash dividends, which we may never do, our shareholders will not be able to receive a return on their Common Shares unless they sell them.
We have broad discretion in the use of proceeds from the offering.
Our management will have broad discretion with respect to the application of net proceeds received by us from the sale of the Common Shares and Warrants under this prospectus and may spend such proceeds in ways that do not improve our results of operations or enhance
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the value of the Common Shares and Warrants. Any failure by management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business or cause the price of our Common Shares to decline.
If there is insufficient liquidity in our Common Shares, it could adversely affect your ability to sell your shares.
Shareholders of the Company may be unable to sell significant quantities of Common Shares into the public trading markets without a significant reduction in the price of their Common Shares, or at all. There can be no assurance that there will be sufficient liquidity of the Common Shares on the trading market, and that the Company will continue to meet the listing requirements of the Nasdaq or achieve listing on any other public stock exchange. There can be no assurance that an active and liquid market for the Common Shares will be maintained and an investor may find it difficult to resell Common Shares.
There is currently no established public trading market for the Warrants.
There is no established public trading market for the Warrants, and we do not expect such a market to develop. In addition, we do not plan on making an application to list the Warrants on the Nasdaq, or any other securities exchange or other trading system. This may affect the pricing of the Warrants in the secondary market, the transparency and availability of trading prices, the liquidity of the Warrants, and the extent of issuer regulation. Except in limited circumstances specified in the Warrants, holders of the Warrants will not be entitled to any voting rights, dividends or other rights as shareholders of the Company, prior to the exercise of their Warrants. In addition, the Warrants have an exercise price of $[●] per Common Share, will be exercisable immediately, and will expire five years following the date of issuance. If the price of the Common Shares does not exceed the exercise price of the Warrants during the period when the Warrants are exercisable, the Warrants may not have any value.
U.S. investors may be unable to enforce certain judgments against us in Canada.
Neptune is a corporation existing under the Business Corporations Act (Québec). A number of our directors and officers are residents of Canada or other jurisdictions outside of the United States, and substantially all of our assets are located outside the United States. As a result, it may be difficult to effect service within the United States upon the Company or upon its directors and officers. Execution by United States courts of any judgment obtained against the Company or any of the Company’s directors or officers in United States courts may be limited to the assets of such companies or such persons, as the case may be, located in the United States. It may also be difficult for holders of securities who reside in the United States to realize in the United States upon judgments of courts of the United States predicated upon civil liability and the civil liability of the Company’s directors and executive officers under the U.S. federal securities laws. The Company has been advised that a judgment of a U.S. court predicated solely upon civil liability under United States federal securities laws or the securities or “blue sky” laws of any state within the United States, would likely be enforceable in Canada if the United States court in which the judgment was obtained has a basis for jurisdiction in the matter that would be recognized by a Canadian court for the same purposes. However, there may be doubt as to the enforceability in Canada against these non-U.S. entities or their controlling persons, directors and officers who are not residents of the United States, in original actions or in actions for enforcement of judgments of courts of the United States, of liabilities predicated solely upon U.S. federal or state securities laws.
Certain Canadian laws could delay or deter a change of control.
The Investment Canada Act (Canada) subjects an acquisition of control of a corporation by a non-Canadian to government review if the value of the assets as calculated pursuant to the legislation exceeds a threshold amount.
A reviewable acquisition may not proceed unless the relevant minister is satisfied that the investment is likely to be a net benefit to Canada. Any of the foregoing could prevent or delay a change of control and may deprive or limit strategic opportunities for our shareholders to sell their shares.
Our failure to meet the continued listing requirements of Nasdaq could result in a de-listing of our Common Shares.
If we fail to continue to satisfy the continued listing requirements of Nasdaq, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq will take steps to de-list our Common Shares. The per share price of our Common Shares has declined below the minimum bid price threshold required for continued listing. In addition, our shareholders’ equity has decreased below the minimum threshold under the equity standard for listing on Nasdaq. Amu such de-listing would likely have a negative effect on the price of our Common Shares and would impair your ability to sell or purchase our Common Shares when you wish to do so, as well as adversely affect our ability to issue additional securities and obtain additional financing in the future.
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On December 29, 2022, we received a deficiency notice from Nasdaq (the “Deficiency Notice”) informing us that our Common Shares have failed to comply with the $1.00 minimum bid price required for continued listing under Nasdaq Listing Rule 5550(a)(2) (“Rule 5550(a)(2)”) based upon the closing bid price of our Common Shares for the 30 consecutive business days prior to the date of the Deficiency Notice. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we were given 180 calendar days from December 29, 2022, or until June 27, 2023, to regain compliance with Rule 5550(a)(2). On June 27, 2023, the Company filed for an extension to this deadline and the Nasdaq has determined that the Company is eligible for an additional 180 calendar day period, or until December 26, 2023, to regain compliance. If at any time before December 26, 2023, the bid price of our Common Shares closes at $1.00 per share or more for a minimum of 10 consecutive business days, the Nasdaq will provide written confirmation that we have regained compliance.
On July 19, 2023, we received a deficiency notice from Nasdaq informing us that our reported stockholders’ equity as reported in our recent Annual Report on Form 10-K has decreased below the minimum stockholders’ equity requirement for continued listing on the Nasdaq Capital Market under the equity criteria under Nasdaq Listing Rule 5550(b)(1) (“Rule 5550(b)(1)”). The Company has 45 calendar days, or until September 5, 2023, to submit a plan to regain compliance. If the plan is accepted, Nasdaq can grant an extension of 180 calendar days from the date of the letter to evidence compliance.
Our common shares may be de-listed if we do not regain compliance with Rule 5550(a)(2) by December 26, 2023 or Rule 5550(b)(1) and our shareholders could face significant material adverse consequences, including:
● | Limited availability or market quotations for our common shares; |
● | Reduced liquidity of our common shares; |
● | Determination that our common shared are “penny stock”, which would require brokers trading in our common shares to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our common shares; |
● | Limited amount of news and analysts’ coverage of us; and |
● | Decreased ability for us to issue additional equity securities or obtain additional equity or debt financing in the future. |
In the event of a de-listing, however, we would take actions to restore our compliance with Nasdaq Marketplace Rules, but we can provide no assurances that the listing of our Common Shares would be restored, that our Common Shares will remain above the Nasdaq minimum bid price requirement or that we otherwise will remain in compliance with the Nasdaq Marketplace Rules.
Our shareholders may be subject to dilution resulting from future offerings of Common Shares by us.
We may raise additional funds in the future by issuing Common Shares or equity-linked securities. Holders of our securities have no preemptive rights in connection with such further issuances. Our board of directors has the discretion to determine if an issuance of our capital stock is warranted, the price at which such issuance is to be affected and the other terms of any future issuance of capital stock. In addition, additional common shares will be issued by us in connection with the exercise of warrants, options or grant of other equity awards granted by us. Additional common shares are also expected to be issued in settlement of a legal case. See the section entitled “Legal Proceedings” appearing elsewhere in this prospectus for more information. Such additional equity issuances could, depending on the price at which such securities are issued, substantially dilute the interests of the holders of our existing securities. After giving effect to the sale by us of (i) [●] shares of our Common Shares and accompanying Common Warrants to purchase [●] shares of our Common Shares at the assumed public offering price of $[●] per Common Share and accompanying Common Warrant, [and (ii) Pre-Funded Warrants to purchase Common Shares and accompanying Common Warrants at a the assumed public offering price of $[●] per Pre-Funded Warrant and accompanying Common Warrant], and after deducting [Placement Agent] fees and expenses and estimated offering expenses payable by us [and assuming full exercise of the Pre-Funded Warrants], you will experience immediate dilution of $[●] per share, representing the difference between the public offering price per share and our as adjusted net tangible book value per share as of March 31, 2023 after giving effect to this offering. See the section entitled “Dilution” appearing elsewhere in this prospectus for a more detailed illustration of the dilution you would incur if you participate in this offering.
Our constating documents permit us to issue an unlimited amount of additional Common Shares or Preferred Shares, which may prevent a third-party takeover or cause our shareholders to experience dilution in the future.
Our constating documents authorize us to issue an unlimited number of Common Shares and an unlimited number of preferred shares (“Preferred Shares”). Our board of directors has the authority to cause us to issue additional Common Shares and Preferred Shares and to determine the special rights and restrictions of the shares of one or more series of our Preferred Shares, each without consent of our shareholders. The issuance of any such securities may result in a reduction of the book value or market price of our Common Shares.
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Given the fact that we operate in a capital-intensive industry with significant working capital requirements, we may be required to issue additional Common Shares or other securities that are dilutive to existing shareholders in the future in order to continue our operations, which may result in dilution to existing shareholders. Further, any such issuances could result in a change of control or a reduction in the market price for our Common Shares. Additionally, the rights of the holders of Common Shares will be subject to, and may be adversely affected by, the rights of holders of any Preferred Shares that may be issued in the future. For example, Preferred Shares typically rank senior to Common Shares as to dividend rights, liquidation preference or both and may be convertible into Common Shares. Lastly, our ability to issue Preferred Shares could make it more difficult for a third-party to acquire a majority of our outstanding voting shares, particularly in the event we issue Preferred Shares with special voting rights, the effect of which may be to deprive our shareholders of a control premium that might otherwise be realized in connection with an acquisition of us.
Because the Company is a “smaller reporting company,” we may take advantage of certain scaled disclosures available to us, resulting in holders of our securities receiving less Company information than they would receive from a public company that is not a smaller reporting company.
We are a “smaller reporting company” as defined in the Exchange Act. As a smaller reporting company, we may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as (i) our common shares held by non-affiliates is less than $250 million measured on the last business day of our second fiscal quarter, or (ii) our annual revenue is less than $100 million during the most recently completed fiscal year and our common shares held by non-affiliates is less than $700 million measured on the last business day of our second fiscal quarter. To the extent we take advantage of any reduced disclosure obligations, it may make it harder for investors to analyze the Company’s results of operations and financial reports in comparison with other public companies.
As a smaller reporting company, we are permitted to comply with scaled-back disclosure obligations in our SEC filings compared to other issuers, including with respect to disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We have elected to adopt the accommodations available to smaller reporting companies. Until we cease to be a smaller reporting company, the scaled-back disclosure in our SEC filings will result in less information about our company being available than for other public companies.
If investors consider our common shares less attractive as a result of our election to use the scaled-back disclosure permitted for smaller reporting companies, there may be a less active trading market for our common shares and our share price may be more volatile.
Any acquisitions, strategic investments, divestures, mergers, or joint ventures we make may require the issuance of a significant amount of equity or debt securities and may not be successful.
As part of our suppliersbusiness strategy, we expect to selectively pursue strategic acquisitions, as well as additional strategic and other investments such as joint ventures or partnerships, to obtain additional businesses, products and/or technologies, capabilities, and personnel. Acquisitions and other investments present challenges, including geographical coordination, personnel integration and retention of key management personnel, systems integration, the potential disruption of each company’s respective ongoing businesses, possible inconsistencies in standards, controls, procedures, and policies, unanticipated costs of terminating or relocating facilities and operations, unanticipated expenses relating to such integration, contingent obligations, and the reconciliation of corporate cultures. Those operations could divert management’s attention from the business, cause a temporary interruption of or loss of momentum in the business, and adversely affect our results of operations and financial condition. The inability to consummate and integrate new acquisitions on advantageous terms, or the failure to achieve a favorable return on our strategic and other investments, could adversely affect our ability to grow and compete effectively. Additionally, if we make one or more acquisitions in which the consideration includes the Company’s securities, we may be required to issue a substantial amount of equity, debt, warrants, convertible instruments, or other similar securities. Such an issuance could result in dilution to shareholders or increase our interest expense and other expenses.
We have reported negative cash flows from operating activities and may do so in future periods.
The Company reported negative cash flow from operating activities of $28.6 million and $54.3 million for the fiscal years ended March 31, 2023 and March 31, 2022. The Company has historically and may also continue to have negative cash flow from operating activities until sufficient levels of sales are achieved. The Company cannot guarantee that future positive cash flow from operating activities will be obtained. In addition, negative cash flows may continue longer than the Company has planned for which could cause liquidity issues.
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We may also be unable to obtain borrowings in an amount sufficient to enable them to pay debt or to fund other liquidity needs. If sufficient liquidity is not obtained, we may need to refinance or restructure all or a portion of its debt on or before maturity, sell assets or borrow money or issue equity, which may not be possible on terms satisfactory to the Company, or at all. If the Company continues to report negative cash flows from operating activities, or any failure to obtain any required additional financing on favorable terms, or at all, such events could have a material adverse effect on the business, financial condition, and results of operation of the Company.
We will not be able to maintain our operations without additional funding.
As of March 31, 2023, Neptune had $2.0 million of cash and cash equivalents. We had negative cash flows from operating activities of $28.6 million during the twelve-month period ended March 31, 2023 and $54.3 million during the twelve-month period ended March 31, 2022. As of July 25, 2023, we have approximately $0.7 million in cash and cash equivalents, which is expected to be sufficient to operate the business for less than 1 month 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. We may be unable to generate sufficient cash flow from operations or to obtain future borrowings in an amount sufficient to enable us to pay our debt or to fund our other liquidity needs. If we do not have sufficient liquidity, we may need to refinance or restructure all or a portion of our debt on or before maturity, sell assets or borrow more money or issue equity, which we may not be able to do on terms satisfactory to us or at all. In addition, any refinancing could be at higher interest rates and may require us to comply with more onerous covenants which could further restrict our business operations. We may also try to raise the necessary capital through securities offerings, however these may entail significant downsides, due to limitations on use of registration statements on Form S-3. For more information on our inability to use Form S-3, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial and Capital Management—Capital Resources.” Such offerings are subject to market conditions and are beyond our control.
We are subject to foreign currency fluctuations, which could adversely affect our financial results.
We are exposed to the financial risk related to the fluctuation of foreign exchange rates and the degrees of volatility of those rates. Currency risk relates to the portion of our business transactions denominated in currencies other than the Canadian dollar.
For the twelve-month period ended March 31, 2023, approximately 82% of our revenues were in U.S. dollars, and most of our expenses, including the purchase of raw materials, were in U.S. dollars. If the value of the United States dollar fluctuates significantly more than expected in the foreign exchange markets, our operating results and financial condition may be adversely affected.
[This is a reasonable best-efforts offering, no minimum amount of securities is required to be sold, and we periodically conduct on-site auditsmay not raise the amount of their facilities. For strategic reasons, certaincapital we believe is required for our business plans, including our near-term business plans.
The [Placement Agent] has agreed to use its [reasonable best efforts] to solicit offers to purchase the securities in this offering. The [Placement Agent] has no obligation to buy any of our key raw materialsthe securities from us or to arrange for the purchase or sale of any specific number or dollar amount of the securities. There is no required minimum number of securities that must be sold as a condition to completion of this offering. Because there is no minimum offering amount required as a condition to the closing of this offering, the actual offering amount, [Placement Agent] fees and proceeds to us are sourced from single suppliers. However,not presently determinable and may be substantially less than the maximum amounts set forth herein. We may sell fewer than all of the securities offered hereby, which may significantly reduce the amount of proceeds received by us, and investors in this offering will not receive a refund in the event that we were unabledo not sell an amount of securities sufficient to source an ingredient from a current supplier,support our continued operations, including our near-term continued operations. Thus, we may not raise the amount of capital we believe is required for our operations in the short-term and may need to raise additional funds to complete such short-term operations. Such additional fundraises may not be available or available on terms acceptable to us.]
[Purchasers who purchase our securities in this offering pursuant to a securities purchase agreement may have rights not available to purchasers that we could generally obtainpurchase without the same ingredientbenefit of a securities purchase agreement.
In addition to rights and remedies available to all purchasers in this offering under federal securities and state law, the purchasers that enter into a securities purchase agreement will also be able to bring claims of breach of contract against us. The ability to pursue a claim for breach of contract provides those investors with the means to enforce the covenants uniquely available to them under the securities purchase agreement including: (i) timely delivery of shares; (ii) agreement to not enter into variable rate financings for one year from closing, subject to certain exceptions; (iii) agreement to not enter into any financings for 90 days from closing; and (iv) indemnification for breach of contract.]
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General Risk Factors
Catastrophic events outside of our control, including pandemics, may harm our results of operations or damage our facilities.
A catastrophic events, or the perception of such events, such as earthquakes, tsunamis, floods, typhoons, fires, power disruptions or other natural or manmade disasters, computer viruses, cyber-attacks, terrorist attacks, wars (such as the ongoing military conflict between Russia and Ukraine), riots, civil unrest or other conflicts, or an equivalent from an alternative supplier, with minimaloutbreak of a public health crisis including epidemics, pandemics (such as the COVID-19 pandemic), outbreaks of new infectious diseases or viruses, or related events that can result in volatility and disruption to global supply chains, operations, mobility of people, patterns of consumption and service, and the financial markets could disrupt the Company’s operations, or those of its material contractors. Such disruptions could impair production or distribution of the Company’s potential products, damage inventory or our facilities, interrupt critical functions or otherwise materially adversely affect its business, which could materially harm the Company’s financial condition or results of operations.
The market price of the Company’s Common Shares may be highly volatile.
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Canadian Cannabis Products—ExtractsThe stock market, from time-to-time, experiences significant price and Formulations
We retrofitted our existing production facility locatedvolume fluctuations unrelated to the operating performance of particular companies. Future announcements concerning the Company, its competitors, including those pertaining to financing arrangements, government regulations, developments concerning regulatory actions affecting the Company, litigation, additions or departures of key personnel, cash flow, and economic conditions and political factors in Sherbrooke, ProvinceCanada and the United States may have a significant impact on the market price of Québec, Canada to comply with Health Canada requirements under the Cannabis Act, in order to produce our cannabis extracts and formulations at our existing site. Our GMP (Good Manufacturing Practices, mandated byCompany’s Common Shares. In addition, there can be no assurance that the Natural Health Products Directorate of Health Canada) production facility features robust safety measures and equipment, which allows for enhanced manufacturing practices. We also operate a laboratory at our facility, which allows us to conduct research, new product development and quality control analysis in-house.
As a condition for obtaining our license to produce cannabis oil under the Cannabis Act, Health Canada required multiple compliance measuresCompany’s Common Shares will continue to be taken,listed on Nasdaq.
The market price of the Company’s Common Shares could fluctuate significantly for many other reasons, including for reasons unrelated to the addition of physical barriers, visual monitoring, recording devices, intrusion detection,Company’s specific performance, such as reports by industry analysts, investor perceptions, or negative announcements by its subscribers, competitors or suppliers regarding their own performance, as well as other important controls around accessgeneral economic and industry conditions. For example, to the extent that other large companies within its industry experience declines in their stock price, the share price of the Company’s Common Shares may decline as well. In addition, when the market price of a company’s shares drops significantly, shareholders often institute securities class action lawsuits against the company.
Litigation resulting from these claims could be costly and time-consuming and could divert the attention of management and other key personnel from the Company’s business and operations. The complexity of any such claims and the inherent uncertainty of commercial or class action, litigation increases these risks. In recognition of these considerations, the Company could suffer significant litigation expenses in defending any of these claims and enter into settlement agreements. If the Company is unsuccessful in its defense of material litigation claims or is unable to settle the claims, the Company may be faced with significant monetary damage awards or other remedies against it including injunctive relief that could have a material adverse effect on the Company’s business, financial condition and results of operations. Administrative or regulatory actions against the Company or its employees could also have a material adverse effect on the Company’s business, financial condition and results of operations.
USE OF PROCEEDS
We estimate the net proceeds to us in this offering will be approximately $[●] million, after deducting the [Placement Agent] fees and expenses and estimated offering expenses payable by us. This assumes a public offering price of $[●] per Common Share and Warrant (the last reported sale price of our Common Shares on Nasdaq on [●], 2023). [However, because this is a [reasonable best-efforts] offering and there is no minimum offering amount required as a condition to the closing of this offering, the actual offering amount, the [Placement Agent]’s fees and net proceeds to us are not presently determinable and may be substantially less than the maximum amounts set forth on the cover page of this prospectus.] The table below depicts how we plan to utilize the proceeds in the event that 50% and 100% of the securities in this offering are sold, after deducting [Placement Agent] fees and expenses and estimated offering expenses payable by us.
Use of Proceeds |
| 100% |
| 50% | ||
Repayment of debt (1) | | $ | [●] | | $ | [●] |
General corporate purposes | | $ | [●] | | $ | [●] |
Total: | | $ | [●] | | $ | [●] |
(1) | Represents a mandatory prepayment of $1 million, together with an exit fee of $100,000 and payment of interest (the “Mandatory Repayment”), payable pursuant to a senior secured notes financing for gross proceeds of $4.0 million with CCUR Holdings, Inc. |
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and Symbolic Logic, Inc. that was entered into on January 12, 2023, as amended. The notes mature on January 12, 2024 and currently bear interest at a rate of 24% per annum, resetting to 16.5% per annum following payment of the Mandatory Repayment. The remainder of the Mandatory Repayment is required to be paid by August 30, 2023. Proceeds from the notes were used for general corporate purposes. |
These estimates exclude the proceeds, if any, from the exercise of Common Warrants issued in this offering. If all of the Common Warrants issued in this offering were to be exercised in cash at an assumed exercise price of $[●] per Common Share, we would receive additional proceeds of approximately $[●] million. We cannot predict when or if these Common Warrants will be exercised. It is possible that these Common Warrants may expire and may never be exercised. Additionally, the Common Warrants contain a cashless exercise provision that permit exercise of Common Warrants on a cashless basis at any time where there is no effective registration statement under the Securities Act of 1933, as amended, covering the issuance of the underlying shares.
We plan to use the proceeds of the offering, after repayment of debt, for general corporate purposes, including working capital. The principal reasons for this offering are to increase our working capital and to provide capital for general corporate purposes.
Due to the uncertainties inherent in our business, we cannot estimate with certainty the exact amounts of the net proceeds from this offering that may be used for any purpose. As a result, our management will have broad discretion in applying the net proceeds from this offering.
The net proceeds from this offering will not significantly improve the Company’s working capital. The Company’s trade and other payables will continue to significantly exceed its cash balance. After receipt of the net proceeds from this offering the Company will still be required to actively manage its liquidity and expenses and payments of payables will continue to not be made as the amounts become due. Nor will the receipt of the net proceeds from this offering remove that substantial doubt and as such, there will remain substantial doubt about our ability to continue as a going concern after this offering.
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2023 as follows:
● | on an actual basis; |
● | on a pro forma basis to give effect to the issuance of common shares and warrants on May 15, 2023; and |
● | on a pro forma as adjusted basis to reflect our receipt of the net proceeds our sale and issuance of [●] Common Shares (assuming [no sale of any Pre-Funded Warrants] and no exercise of the Common Warrants) in this offering based on the assumed public offering price of $[●] per common share (the last reported sale price of our Common Shares on Nasdaq on [●], 2023) after deducting estimated [Placement Agent] fees and expenses and estimated offering expenses payable by us. |
The as adjusted information set forth below is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing. You should read this table in conjunction with “Management’s Discussion and Analysis of
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Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in, or incorporated by reference into, this prospectus.
|
| As of March 31, 2023 | |||||||
| | | | | | Pro forma as | |||
| | Actual |
| Pro forma(1) |
| Adjusted (2) | |||
| | (In thousands, except share and per share data) | |||||||
Liability related to warrants | | $ | 3,156 | | $ | 5,956 | | $ | [●] |
Operating lease liabilities (including current portion) | | $ | 2,018 | | $ | 2,018 | | $ | [●] |
Loans and borrowings (including current portion) | | $ | 22,951 | | $ | 22,951 | | $ | [●] |
Other liability | | $ | 24 | | $ | 24 | | $ | [●] |
Shareholders’ equity: | | | | | | | | | |
Share capital, without par value, 11,996,387 shares issued and outstanding as of March 31, 2023, actual; 24,117,599 shares issued and outstanding, proforma; [●] shares issued and [●] outstanding, proforma as adjusted | | | 321,946 | | | 323,546 | | | |
Preferred shares, no par value; no shares outstanding, actual; no shares outstanding, proforma; and no shares outstanding proforma as adjusted | | | | | | | | | |
Warrants | | $ | 6,155 | | $ | 6,155 | | $ | [●] |
Additional paid-in capital | | $ | 58,139 | | $ | 58,139 | | $ | [●] |
Accumulated other comprehensive loss | | $ | (14,539) | | $ | (14,539) | | $ | [●] |
Deficit | | $ | (383,641) | | $ | (384,799) | | $ | [●] |
Total equity (deficiency) attributable to equity holders of the Company | | $ | (11,940) | | $ | (11,498) | | $ | [●] |
Non-controlling interest | | $ | (15,621) | | $ | (15,621) | | $ | [●] |
Total shareholders’ equity (deficiency) | | $ | (27,561) | | $ | (27,119) | | $ | [●] |
Total capitalization | | $ | 589 | | $ | 3,830 | | $ | [●] |
(1) | The receipt of the net proceeds on May 15, 2023 of our sale and issuance of 4,415,162 common shares and pre-funded warrants to purchase 7,706,050 common shares (and assuming no exercise of the common warrants) based on the price of $0.33 per common share and accompanying common warrant and repricing and extension of life of existing warrants, after deducting estimated costs. As the accounting treatment of the warrants and the allocation between equity and liability components has not yet been finalized, it is assumed for the purposes of the pro forma capitalization that approximately half of the proceeds has been allocated to the derivative warrant liabilities and the remainder to share capital. Accordingly, approximately half of the estimated costs have been allocated to deficit and the remainder to share capital. The pro forma capitalization also reflects a repricing and extension of life of the pre-existing warrants with an offsetting debit to deficit, and assumes the exercise in full of all outstanding pre-funded warrants. |
(2) | As the accounting treatment of the Warrants and the allocation between equity and liability components has not yet been determined, it is assumed for the purposes of the Pro forma as Adjusted capitalization that all of the proceeds have been allocated to the derivative warrant liabilities and therefore, all of the estimate [Placement Agent] fees and expenses and estimated offering expenses have been allocated to deficit. In addition, if the fair value of the derivative warrant liabilities exceeds the total proceeds of this offering, a loss would be recorded upon initial recognition of this offering, which loss is not reflected in the deficit in the above table. |
A $0.25 increase or decrease in the assumed public offering price of $[●] per share, as set forth on the cover page of this prospectus, would increase or decrease the expected net proceeds to us from this offering by approximately $[●] million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated [Placement Agent] fees and expenses and estimated offering expenses payable by us.
Similarly, a 100,000 share increase or decrease in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase or decrease the net proceeds to us by approximately $[●], assuming the assumed public offering price of $[●] per share remains the same, and after deducting estimated [Placement Agent] fees and expenses and estimated offering expenses payable by us.
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The number of our Common Shares to be outstanding immediately after this offering is based on 11,996,387 Common Shares outstanding as of March 31, 2023 and excludes:
● | 674,475 Common Shares issuable upon the exercise of stock options outstanding as of March 31, 2023, at a weighted average exercise price of $70.27 per Common Share; |
● | 12,197,670 Common Shares issuable upon the exercise of warrants outstanding as of March 31, 2023, at a weighted average exercise price of $10.64 per Common Share; |
● | 4,308 deferred share units; |
● | 2,789 restricted share units; |
● | any additional Common Shares that are available for future issuance under our equity compensation plans; and |
● | the issuance, on May 15, 2023, of 4,415,162 common shares, 7,706,050 pre-funded warrants, and accompanying warrants to purchase up to an aggregate of 12,121,212 common shares at a combined public offering price of $0.33 per share, and the repricing and extension the term of existing common warrants to purchase up to an aggregate of 8,423,733 common shares. |
DILUTION
If you purchase Common Shares and Warrants in this offering, you will experience dilution to the extent of the difference between the combined public offering price per Common Share and related Warrant in this offering and our net tangible book value (deficit) per Common Share. Net tangible book value (deficit) per Common Share is equal to the amount of our total tangible assets, less total liabilities, divided by the number of outstanding Common Shares. As of March 31, 2023, our net tangible book value (deficit) was approximately $(31.6 million), or approximately $(2.63) per Common Share. Taking into account the Common Shares and warrants to purchase Common Shares issued on May 15, 2023, our pro forma net tangible book value (deficit) was approximately $(31.2 million) or $(1.29) per Common Share. The pro forma net tangible book value has been computed assuming exercise in full of the May 15, 2023 pre-funded warrants and no exercise of the common warrants.
After giving effect to the assumed sale by us of Common Shares and Warrants in this offering at an assumed combined public offering price of $[●] per Common Share and related Warrant (the last reported sale price of our Common Shares on Nasdaq on [●], 2023), after deducting the estimated [Placement Agent] fees and expenses and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value (deficit) as of March 31, 2023 would have been approximately $([●] million), or approximately $([●]) per Common Share. The pro forma as adjusted net tangible book value has been computed assuming [exercise in full of the Pre-Funded Warrants] and no exercise of the Common Warrants. This represents an immediate increase in net tangible book value (deficit) of $[●] per Common Share to existing Sherbrooke facility.shareholders and an immediate dilution of $[●] per share to new investors purchasing Common Shares and related Warrants in this offering, attributing none of the assumed combined public offering price to the Common Warrants offered hereby. The following table illustrates this per Common Share dilution:
| | | ||||
|
| Per Common |
| | ||
| | Share and | | | ||
| | Warrant | | Total | ||
Assumed combined public offering price per Common Share and related Common Warrant | | $ | [●] | | $ | |
Net tangible book value (deficit) per Common Share as of March 31, 2023 | | $ | (2.63) | | | |
Increase in net tangible book value (deficit) per Common Share after the May 2023 offering | | $ | 1.34 | | | |
Pro forma net tangible book value (deficit) per Common Share as of March 31, 2023 | | $ | (1.29) | | | |
Increase in pro forma net tangible book value per Common Share after this offering | | $ | [●] | | | |
Pro forma as adjusted net tangible book value (deficit) per Common Share after this offering | | $ | [●] | | | |
Dilution per Common Share to new investors | | $ | [●] | | $ | ([●]) |
A $0.25 increase (decrease) in the assumed combined public offering price of $[●] per Common Share and Common Warrant would result in an increase (decrease) in our pro forma as adjusted net tangible book value (deficit) of approximately $[●] million or approximately $[●] per Common Share, and would result in an increase (decrease) in the dilution to new investors of approximately $[●] per Common Share, assuming that the number of Common Shares and Common Warrants sold by us remains the same, after deducting the estimated [Placement Agent] fees and expenses and estimated offering expenses payable by us.
Similarly, a decrease of 100,000 in the number of Common Shares offered by us would decrease our pro forma as adjusted net tangible book value by approximately $[●] million or $[●] per share, and increase the dilution per share to investors participating in this offering by $[●] per share, assuming the assumed offering price per share remains the same and after deducting the estimated [Placement Agent]
On October 17, 2022,39
commissions and estimated offering expenses payable by us. The information discussed above is illustrative only and will adjust based on the actual offering price, the actual number of Common Shares we announcedoffer in this offering, and other terms of this offering determined at pricing.
The foregoing discussion and table do not take into account further dilution to new investors that could occur upon the exercise of outstanding options or warrants having a per share exercise price less than the per Common Share and related Common Warrant offering price to the public in this offering. In addition, we had entered into a binding agreementmay choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our cannabis business, includingshareholders.
The number of our Common Shares to be outstanding immediately after this offering is based on 11,996,387 Common Shares outstanding as of March 31, 2023 and excludes:
● | 674,475 Common Shares issuable upon the exercise of stock options outstanding as of March 31, 2023, at a weighted average exercise price of $70.27 per Common Share; |
● | 12,197,670 Common Shares issuable upon the exercise of warrants outstanding as of March 31, 2023, at a weighted average exercise price of $10.64 per Common Share; |
● | 4,308 deferred share units; |
● | 2,789 restricted share units; |
● | any additional Common Shares that are available for future issuance under our equity compensation plans; and |
● | the issuance, on May 15, 2023, of 4,415,162 common shares, 7,706,050 pre-funded warrants, and accompanying warrants to purchase up to an aggregate of 12,121,212 common shares at a combined public offering price of $0.33 per share, and the repricing and extension the term of existing common warrants to purchase up to an aggregate of 8,423,733 common shares. |
MARKET INFORMATION FOR SECURITIES AND DIVIDEND POLICY
Our Common Shares trade under the Sherbrooke facility,symbol “NEPT” on Nasdaq.
The following table sets forth the planned divestiture of this business announcedhigh and low intraday sales prices per Common Share as reported on Nasdaq beginning on April 1, 2020 and taking into account the Share Consolidation that took effect on June 8, 2022. Some assets were excluded from the sale and were written down accordingly. The disposition closed on November 9, 2022. We believe the divestment13, 2022:
| Low Trading Price |
| High Trading Price | |||||
Period |
| ($) | ($) | |||||
Year Ending March 31, 2024 |
|
|
|
|
|
| ||
Second Quarter |
| (to [●], 2023) | $ | [●] | $ | [●] | ||
First Quarter |
| (June 30, 2023) | $ | 0.13 | $ | 0.70 | ||
Year Ending March 31, 2023 |
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|
|
|
|
| ||
Fourth Quarter |
| (March 31, 2023) | $ | 0.29 | $ | 1.04 | ||
Third Quarter |
| (December 31, 2022) | $ | 0.23 | $ | 1.92 | ||
Second Quarter |
| (September 30, 2022) | $ | 1.00 | $ | 3.74 | ||
First Quarter |
| (June 30, 2022) | $ | 1.34 | $ | 1.41 | ||
Year Ended March 31, 2022 |
|
|
|
|
|
| ||
Fourth Quarter |
| (March 31, 2022) | $ | 7.35 | $ | 19.60 | ||
Third Quarter |
| (December 31, 2021) | $ | 12.25 | $ | 22.40 | ||
Second Quarter |
| (September 30, 2021) | $ | 19.25 | $ | 41.30 | ||
First Quarter |
| (June 30, 2021) | $ | 37.10 | $ | 55.30 | ||
Year Ended March 31, 2021 |
|
|
|
|
|
| ||
Fourth Quarter |
| (March 31, 2021) | $ | 45.15 | $ | 110.25 | ||
Third Quarter |
| (December 31, 2020) | $ | 52.15 | $ | 86.80 | ||
Second Quarter |
| (September 30, 2020) | $ | 73.85 | $ | 113.05 | ||
First Quarter |
| (June 30, 2020) | $ | 35.70 | $ | 110.25 |
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As of November 11, 2022, all cannabis was removed from[●], 2023, we had [42] shareholders of record based on the Sherbrooke facility and the Company no longer possesses or conducts any activities with cannabis, other than certain products produced for third party customers containing CBD inrecords of our nutraceutical business.
MARKETS
Nutraceuticals
Neptune offers a varietytransfer agent, which does not include beneficial owners 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 thatCommon Shares whose shares are available for sale as raw material or transformed into finished products. The Company has recently launched a new line of Vitamin Sprays and Pumps for both children and adults. Neptune is focused on expanding its exclusive Omega-3 delivery technology MaxSimil® while improving growth and profitability in its Nutraceuticals vertical through its brand Biodroga.
Neptune’s core strength is product innovation with a focus on specialty ingredients offered in bulk soft gels and liquid delivery systems. The Company continues to expand its delivery system capabilities with projects for pumps, sprays, roll-ons and CBD enhancements. All of Neptune’s Nutraceutical products are available under distributors’ private labels, primarily soldheld in the Canadiannames of various securities brokers, dealers and U.S. nutraceutical markets. Neptune, through its nutraceuticals products business, also formulates, developsregistered clearing agencies.
Dividends
We do not anticipate paying any dividend on our Common Shares in the foreseeable future. We presently intend to retain future earnings to finance the expansion and provides customers with turnkey nutrition solutions.growth of our business. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors the board of directors deems relevant. In addition, the terms of any future debt or credit facility may preclude us from paying dividends.
Beauty & Personal CareSecurities Authorized for Issuance under Equity Compensation Plans
The Company sells wellness products toInformation about our equity compensation plans, as set forth in this prospectus under the Beauty & Personal Care market through its Forest Remedies brand. Forest Remedies offers plant-based supplements, including first-of-its kind multi-omega gummiescaption “Security Ownership of Certain Beneficial Owners and soft gels with packaging thatManagement and Related Shareholder Matters”, is 100% plastic-free. Neptune announced, on March 10, 2022, the launch of its Forest Remedies Multi Omega 3-6-9 line of supplements into more than 340 Sprouts Farmers Market stores across the U.S. This distribution agreement marks another important milestone in our efforts to transform Neptune into a high-growth branded CPG company.incorporated herein by reference.
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Organic Foods and Beverages
In February 2021, Neptune acquired a controlling interest in Sprout Foods, Inc., an organic plant-based baby food and toddler snack company. Sprout is an integral piece of Neptune’s health and wellness portfolio and represents a key brand within the Organic Foods and Beverages vertical. Since completing the Sprout acquisition, the Company has begun expansion efforts in Sprout’s distribution across substantially all of Target’s U.S. retail stores. The Company also announced, on July 27, 2021, the initial launch of Sprout products into Canada, in Metro grocery stores in the province of Ontario. Neptune further expects to launch Sprout products in North America throughout the remainder of the fiscal year. The Company expects the Neptune/Sprout combination to result in significant incremental revenue growth, with several near and long-term revenue synergy opportunities identified within Neptune’s existing relationships and current sales channels. As described above, Neptune also announced on June 9, 2021, an exclusive multi-year licensing agreement between Sprout and CoComelon, the #1 children’s entertainment and educational show in the world with more than 110 million subscribers worldwide. This co-branded product line is now available on Walmart.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 the U.S., accounting for approximately 90 percent of the overall market.
SALES AND DISTRIBUTION
Nutraceutical Products
On May 2, 2023, Neptune announced that four of its most popular Sprout Organics x CoComelon co-branded, organic toddler pouches have been picked up by Target and are now available in select Target Stores across the United States, and Target.com. The Company sells its nutraceutical products mainlySprout Organics x CoComelon line includes 15 SKU’s that are made up of toddler pouches, Wafflez snacks, and plant-based snack bars, each leveraging CoComelon’s brand as the #1 Kids YouTube Channel in bulk softgels or liquidsthe world. In addition to multiple distributorsthe CoComelon partnership, Sprout Organics SKU’s consist of organic toddler pouches, toddler meals, toddler snacks 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 majoritynewly launched Big Kid Mealz; Sprouts first product out of the Company’sbaby aisle.
In the last year, Sprout has made the following major distribution gains and sales are concentratedmilestones:
Distribution: Now available in 90% of the organic baby food market, Sprout x CoComelon being a key driver of sales velocity.
Target SKU Count: 4 Sprout x CoComelon SKUs launched in select Target stores nationwide and Target.com.
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Added Distribution: In the last year, Sprout has established substantial distribution gains with a small group of distributorsleading retailers, and customers. Agreements with these distribution partners may be terminated or altered by them unilaterally in certain circumstances.Target has contributed to that growth.
Beauty & Personal Care
The Company sells its Beauty and Personal Care products through distributors and directly to retail outletsCoComelon Co-Brand: Yes Yes Veggie product is now Sprout’s #1 highest selling pouch in the United States. It also sells its products online through its own website forestremedies.comlatest 26 weeks in Total US xAOC*.
Geographic Presence: Now available in all 50 states, as well as e-commerce sites.in Canada.
Organic Foods and Beverages*Sales velocity: Sales dollars per total point of distribution; Nielsen AOD; Total US x AOC Latest 26 weeks W/E 3-25-23
The Company, though its Sprout subsidiary, sells its products to mass retailers, grocery stores and other retail outlets, as well as online through e-commerce sites and its own website sproutorganics.com.
OUR B2C BRAND PORTFOLIO STRATEGY
We are currently working on accelerating brand equity for our brand portfolio:
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COMPETITIONCompetition
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“Risks Related to Our Business”Business” under the heading “Risk Factors”“Risk Factors”.
Recent Developments
Liquidity and Going Concern—We are actively managing our liquidity and expenses, including by extending payables due and reducing investment in our businesses. There is substantial doubt about our ability to continue as a going concern. As of July 25, 2023, we had approximately $0.7 million in cash and cash equivalents. We believe our current cash position will be sufficient to operate our business for less than one month under our current business plan. In addition, we are pursuing several cash generating transactions as well as planning for further expense reductions. There can be no assurance that any cash generating transaction will be completed or that our expense reductions measures will be sufficient to allow as to continue operating our business. We need substantial additional funding to continue operating our business. If we are unable to continue as a going concern, we may have to liquidate our assets, and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements. We may have to liquidate our assets in the very near term if additional funding is not received in the upcoming months.
Our management has concluded that substantial doubt exists about our ability to continue as a going concern for one year from the issuance date of our latest financial statements, which substantial doubt continues to exist. The net proceeds from this offering are not expected to remove that substantial doubt and as such, there will remain substantial doubt about our ability to continue as a going concern after this offering. If we were to receive net proceeds of $[●] million from this offering, we believe that the net proceeds from this offering, together with our existing cash and cash equivalents, will meet our cash needs for approximately [●].
On April 17, 2023, the Company entered into an agreement that fixed the purchase price for the exercise of the Call Option to acquire the remaining 49.9% minority share of Sprout, pursuant to the Call Option agreement entered into with the minority stockholders of Sprout. If the Call Option had been exercised prior to June 15, 2023, the purchase price would have been $13.0 million, consisting of at least $10.5 million in cash with the remainder payable in Common Shares. No acquisition was completed by June 15, 2023. The original Call Option remains outstanding until December 31, 2023.
On April 27, 2023, the Company announced that Sprout extended the maturity of its existing $13 million secured promissory note with Morgan Stanley Expansion Capital (“MSEC”). The note maturity has been extended from February 1, 2024 to December 31, 2024, which will bear interest at the rate of 15.0% per annum through and including December 31, 2023, payable in kind, and 10.0% per annum, payable in kind, and 5.0% per annum payable in cash, from and after January 1, 2024.
On May 10, 2023, Neptune announced that Sprout has secured inventory financing through an Invoice Purchase and Security Agreement partnership with Alterna Capital Solutions LLC, effective April 21, 2023. The inventory line will provide Sprout with working capital. The maximum available has been amended to $7.5 million, from $5.0 million previously announced on January 25, 2023 (see note 13), adding a line of inventory to the accounts receivable factoring facility that is already in place.
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On May 11, 2023, the Company announced its public offering of 12,121,212 of its common shares (or common share equivalents in lieu thereof) and accompanying warrants to purchase up to an aggregate of 12,121,212 common shares at a combined public offering price of $0.33 per share and accompanying warrant, resulting in gross proceeds of approximately $4.0 million. The warrants have an exercise price of $0.33 per share, are immediately exercisable upon issuance and will expire five years following the date of issuance. The closing of the offering occurred on May 15, 2023. On that day, the Company issued 4,415,162 common shares and 7,706,050 pre-funded warrants, along with 12,121,212 warrants (the “May 2023 Warrants”). As of the date of this prospectus, 5,410,600 common shares were issued upon exercise of pre-funded warrants, leaving 2,295,450 pre-funded warrants outstanding; none of the May 2023 Warrants have been exercised to date.
In connection with this offering, the Company has agreed that certain existing warrants to purchase up to an aggregate of 8,423,733 common shares that were previously issued in March 2022, June 2022, and October 2022, at exercise prices ranging from $1.62 to $11.20 per share and expiration dates ranging from September 14, 2023 to June 23, 2029, were amended to reduce the exercise prices of the applicable warrants to $0.33, with expiration dates five years following the closing of the offering, i.e. on May 15, 2028, with the exception of warrants to purchase up to 972,763 common shares which will expire on June 23, 2029 as currently contemplated.
On May 22, 2023, the Company entered into a Waiver and Second Amendment to Note Purchase Agreement (the “Waiver Agreement”), with CCUR Holdings, Inc. and the purchasers named therein, related to the Note Purchase Agreement dated as of January 12, 2023 (see note 13). The Waiver Agreement provides that the required prepayment of $2.0 million (the “Mandatory Prepayment”), due as of May 15, 2023, is waived, in part, until July 31, 2023, or for an additional thirty days thereafter if the Company has filed a Registration on Form S-1 with the Securities and Exchange Commission by July 31, 2023. Pursuant to the Waiver Agreement, the Company was required to pay, and has paid, $1.0 million of the Mandatory Prepayment. For the period beginning on March 31, 2023, through and including the date that the entire Mandatory Prepayment, including interest and fees is paid, interest on the sum of the outstanding principal amounts will accrue at the rate of twenty four percent (24%) per annum. Thereafter, interest will revert to the rate otherwise provided under the Note Purchase Agreement. The Company also agreed to pay an extension fee in an aggregate amount of $138,606, which was added to the principal amount due.
On July 21, 2023, the Company announced the receipt of a letter from Nasdaq notifying the Company that, based on the reported stockholders' equity of Neptune as reported in its Annual Report on Form 10-K for the year ended March 31, 2023, the Company does not meet the minimum stockholders' equity requirement for continued listing on the Nasdaq Capital Market under the equity criteria under Nasdaq Listing Rule 5550(b)(1) stating listed companies must maintain stockholders' equity of at least $2,500,000. The Nasdaq notification letter has no immediate effect on the Company's business operations or the listing of the Company's common shares, and they will continue to trade on Nasdaq. Pursuant to the Nasdaq Listing Rule 5550(b)(1) the Company has 45 calendar days, or until September 5, 2023, to submit a plan to regain compliance. If the plan is accepted, Nasdaq can grant an extension of 180 calendar days from the date of the letter to evidence compliance. The Company intends to regain compliance within the applicable compliance period and is currently working on a plan to submit to Nasdaq.
Legal Proceedings—We and our subsidiaries are engaged in significant legal proceedings and claims that may result in payments, fines and penalties that could adversely affect our business, results of operations and financial condition. These legal proceedings include a purported class action, captioned Marvin Gong v. Neptune Wellness Solutions, et al. On October 21, 2022, the Company announced that it had agreed to settle and resolve the lawsuit. As part of this settlement, Neptune intends to issue securities worth $2,750,000 within 31 days after the final order is entered, which is expected to occur in the coming days, which may result in a substantial number of shares being issued, and such an issuance may result in substantial dilution to the existing holders of our common shares.
History of the Company
Neptune was incorporated under Part IA of the Companies Act (Québec) on October 9, 1998 under the name Neptune Technologies & Bioresources Inc. Since its incorporation, Neptune has amended its articles of incorporation on numerous occasions. The Company first amended its articles on May 30, 2000 to convert its then issued and outstanding shares into newly-created classes of shares. The Company’s articles were also amended on May 31, 2000 to create Series A Preferred Shares. On August 29, 2000, the Company converted all its issued and outstanding Class A shares into Class B subordinate shares. On September 25, 2000, the Company further amended its share capital to eliminate its Class A shares and converted its Class B subordinate shares into Common Shares. On November 1, 2013, the Company amended its articles of incorporation to reflect certain changes to items relating to board matters. On June 9, 2022, we effected a one for thirty-five (1-for-35) reverse split of our common shares, which we refer to as the “Share Consolidation,” as approved by our board of directors. Trading of our common shares on both the Toronto Stock Exchange (“TSX”) and Nasdaq on a post-consolidated basis commenced as of the open of markets on June 13, 2022. On August 15, 2022, the Company voluntarily delisted its Common Shares from the TSX.
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Corporate Information
Our principal executive offices are located at 545 Promenade du Centropolis, Suite 100, Laval, Québec, Canada, H7T 0A3 and the telephone number to our offices is (450) 687-2262.
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THE OFFERING
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Issuer: | Neptune Wellness Solutions Inc. | |
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Common Shares offered by us: | | Up to [●] Common Shares based on the sale of our Common Shares at an assumed combined public offering price of $[●] per Common Share and accompanying Common Warrants, which is the closing price of our common stock on [●], 2023. |
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[Pre-Funded Warrants offered by us: | | We are also offering each purchaser the opportunity to purchase, if the purchaser so chooses, Pre-Funded Warrants, in lieu of Common Shares, exercisable into up to an aggregate of [●] Common Shares. Each Pre-Funded Warrant will be exercisable for one Common Share. The purchase price of each Pre-Funded Warrant will equal the price per share at which the Common Shares are being sold to the public in this offering, minus [$0.0001], and the exercise price of each Pre-Funded Warrant will be [$0.0001] per Common Share. For additional information, see “Description of the Registrant’s Securities to be Registered — Pre-Funded Warrants” on page [●] of this prospectus. This prospectus also relates to the offering of the Common Shares issuable upon exercise of the Pre-Funded Warrants.] |
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Common Warrants offered by us: | | We are also offering Common Warrants exercisable into an aggregate of up to [●] common shares. Each Common Warrant will have an exercise price of $[●] per share, will be exercisable upon issuance and will expire on the [●]-year anniversary of the original issuance date. The Common Shares and Common Warrants can only be purchased together in this offering but will be issued separately and will be immediately separable upon issuance. For additional information, see “Description of the Registrant’s Securities to be Registered — Common Warrants” on page [●] of this prospectus. This prospectus also relates to the offering of the Common Shares issuable upon exercise of the Common Warrants. |
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Common Shares outstanding after this offering:(1) | | [●] Common Shares (assuming none of the Common Warrants issued in this offering are exercised [and the exercise in full of any Pre-Funded Warrants]) |
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Use of proceeds: | | We estimate that the net proceeds to us from the sale of our Common Shares in this offering will be approximately $[●] million, and after deducting estimated [Placement Agent] fees and expenses and estimated offering expenses payable by us. We plan to use the proceeds of the offering, after repayment of debt, for general corporate purposes and working capital. See “Use of Proceeds.” |
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Risk factors: | | See “Risk Factors” on page [●] and other information included in this prospectus for a discussion of factors you should consider before investing in our securities. |
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[Reasonable best efforts: | | We have agreed to issue and sell the securities offered hereby to the purchasers through the [Placement Agent]. The [Placement Agent] is not required to buy or sell any specific number or dollar amount of the securities offered hereby, but it will use its [reasonable best efforts] to solicit offers to purchase the securities offered by this prospectus. See “Plan of Distribution” on page [●] of this prospectus.] |
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Ticker symbol: | | Our Common Shares are listed on the Nasdaq under the symbol “NEPT”. There is no established trading market for the Warrants and we do not expect a market to develop. In addition, we do not intend to apply for the listing of the Warrants on any national securities exchange or other trading market. Without an active trading market, the liquidity of the Warrants will be limited. |
(1) | The number of Common Shares to be outstanding immediately after this offering as shown above is based on 21,822,149 Common Shares outstanding as of [●], 2023. Unless otherwise indicated, the number of Common Shares presented in this prospectus excludes: |
● | [●] Common Shares issuable upon the exercise of outstanding stock options having a weighted-average exercise price of $[●] per Common Share; |
● | [●] Common Shares issuable upon the exercise of outstanding warrants having a weighted-average exercise price of $[●] per Common Share; |
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● | [●] deferred share units; |
● | [●] restricted share units; and |
● | any additional Common Shares that are available for future issuance under our equity compensation plans. |
Unless otherwise indicated, this prospectus assumes no exercise of the Common Warrants [or Pre-Funded Warrants].
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RISK FACTORS
Investing in our securities involves a high degree of risk. Investors should carefully consider the risks described below and all of the other information set forth in this registration statement, including our financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding to invest in our Common Shares. If any of the events or developments described below occur, our business, financial condition, or results of operations could be materially or adversely affected. As a result, the market price of our Common Shares could decline, and investors could lose all or part of their investment. The risks and uncertainties described below are not the only risks and uncertainties that we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. See “Cautionary Notes Regarding Forward-Looking Statements.”
Risks Relating to our Business and Industry
We are exposed to risks associated with the divestiture of our cannabis business.
On October 16, 2022, we entered into an Asset Purchase Agreement with PurCann Pharma, Inc., pursuant to which PurCann Pharma, Inc. agreed to purchase substantially all of the assets relating to our Canadian cannabis business, including our processing plant and property located in Sherbrooke, Quebec. The sale of our cannabis business closed on November 9, 2022. We may not fully realize the anticipated benefits of this disposition. Further, we face continued liability for the pre-closing activities of the divested cannabis business, which we agreed to assume as part of the transaction. Additionally, we may be unable to collect any accounts receivable retained from our cannabis business.
The terms of our indebtedness restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.
The Note Purchase Agreement, as amended (the “Note Purchase Agreement”), governing the promissory notes (the “2023 Notes”) that we issued on January 12, 2023 contain a number of restrictive covenants, including covenants related to financial statement filing deadlines, that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on our ability to incur liens, make investments, loans, advances and acquisitions, incur additional indebtedness or guarantees, pay dividends on capital stock or redeem, repurchase or retire capital stock, engage in transactions with affiliates, sell assets, including capital stock of our subsidiaries, alter the business we conduct, alter their organizational documents, and consolidate or merge.
We defaulted on the conditions of the Note Purchase Agreement and entered into a Waiver and First Amendment to the Notes (the “First Waiver Agreement”) on March 9, 2023. The First Waiver Agreement waives certain administrative, regulatory and financial statement related covenants as required by the terms of the Notes. Furthermore, in connection with the First Waiver Agreement, the Notes were amended to provide that the Purchasers shall be paid an exit fee in the aggregate amount of $200,000, payable as follows: (i) on or prior to May 15, 2023, $100,000 and (ii) on the Maturity Date (as defined in the Note Purchase Agreement), $100,000 and the interest rate has increased to 24% for a period extending until the Company meets specified criteria in the First Waiver Agreement.
On May 22, 2023, the Company entered into a Waiver and Second Amendment to Note Purchase Agreement (the “Waiver Agreement”), with CCUR Holdings, Inc. and the purchasers named therein, related to the Note Purchase Agreement dated as of January 12, 2023 (see Note 13 to the consolidated financial statements as at and for the year ended March 31, 2023). The Waiver Agreement provides that the required prepayment of $2.0 million (the “Mandatory Prepayment”), due as of May 15, 2023, is waived, in part, until July 31, 2023, or for an additional thirty days thereafter if the Company has filed a Registration on Form S-1 with the Securities and Exchange Commission by July 31, 2023. Pursuant to the Waiver Agreement, the Company was required to pay, and has paid, $1.0 million of the Mandatory Prepayment. For the period beginning on March 31, 2023, through and including the date that the entire Mandatory Prepayment, including interest and fees is paid, interest on the sum of the outstanding principal amounts will accrue at the rate of twenty four percent (24%) per annum. Thereafter, interest will revert to the rate otherwise provided under the Note Purchase Agreement. The Company also agreed to pay an extension fee in an aggregate amount of $138,606, which was added to the principal amount due.
A breach of the covenants under the Note Purchase Agreement, or any replacement facility, could result in an event of default under the applicable indebtedness, unless we obtain a waiver to avoid such default. If we are unable to obtain a waiver, such an event of default may allow the creditors to accelerate the related debt and may result in the acceleration of or default under any other debt to which a
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cross-acceleration or cross-default provision applies. In the event that we breach one or more covenants, our lender may declare an event of default and require that we immediately repay all amounts outstanding, terminate any commitment to extend further credit and foreclose on the collateral granted to it to collateralize such indebtedness. The occurrence of any of these events could restrict our operations, which could have a material adverse effect on our business, financial condition and results of operations. In the event our lenders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness. If we are not able to pay our debts as they become due, we will be required to pursue one or more alternative strategies, such as refinancing or restructuring our indebtedness, selling assets or selling additional debt or equity securities. We may not be able to refinance our debt or sell additional debt or equity securities or our assets on favorable terms, if at all, and if we must sell our assets, it may negatively affect our ability to generate revenues.
While the Note Purchase Agreement was amended to provide for a waiver of certain defaults, there can be no guarantee that we will not breach covenants in the Note Purchase Agreement or the 2023 Notes in the future. In the event that we breach one or more covenants, our lender may declare an event of default, increase the interest rate to 24% and require that we immediately repay all amounts outstanding, terminate any commitment to extend further credit and foreclose on the collateral granted to it to collateralize such indebtedness. The occurrence of any of these events could restrict our operations, which could have a material adverse effect on our business, financial condition and results of operations.
If we do not manage our supply chain effectively or if there are disruptions in our supply chain, our business and results of operations may be adversely affected.
The success of our business depends, in part, on maintaining a strong sourcing and manufacturing platform and efficient distribution channels. The inability of any supplier of raw materials, independent contract manufacturer or third-party distributor to deliver or perform for us in a timely or cost-effective manner could cause our operating costs to increase and our profit margins to decrease, especially as it relates to our products that have a short shelf life. We must continuously monitor our inventory and product mix against forecasted demand or risk having inadequate supplies to meet consumer demand as well as having too much inventory on hand that may reach its expiration date and become unsaleable.
We must also manage our third-party distribution, warehouse and transportation providers to ensure they are able to support the efficient distribution of our products to retailers. A disruption in transportation services could result in an inability to supply materials to our or our co-manufacturers’ facilities or finished products to our distribution centers or customers. Activity at third-party distribution centers could be disrupted by a number of factors, including labor issues, failure to meet customer standards, natural disasters or financial issues affecting the third-party providers. In particular, the Russia-Ukraine war and recent labor market shortages impacting our industry have created operating challenges in making our products available to customers and consumers, and such challenges may persist.
Our future results of operations may be adversely affected by input cost inflation.
Many aspects of our business have been, and may continue to be, directly affected by volatile commodity costs and other inflationary pressures. Agricultural commodities and ingredients are subject to price volatility which can be caused by commodity market fluctuations, crop yields, seasonal cycles, weather conditions, temperature extremes and natural disasters (including due to the effects of climate change), pest and disease problems, changes in currency exchange rates, imbalances between supply and demand, and government programs and policies among other factors. Volatile fuel costs translate into unpredictable costs for the products and services we receive from our third-party providers including, but not limited to, distribution costs for our products and packaging costs.
Our future results of operations may be adversely affected by the availability of natural and organic ingredients.
Our ability to ensure a continuing supply of natural and organic ingredients at competitive prices depends on many factors beyond our control, such as the number and size of farms that grow natural and organic crops, climate conditions, increased demand for natural and organic ingredients by our competitors, changes in national and world economic conditions, currency fluctuations and forecasting adequate need of seasonal ingredients.
The natural and organic ingredients that we use in the production of our products (including, among others, vegetables, fruits, nuts and grains) are vulnerable to adverse weather conditions and natural disasters, such as floods, droughts, water scarcity, temperature extremes, wildfires, frosts, earthquakes and pestilences. Natural disasters and adverse weather conditions can lower crop yields and reduce crop size and crop quality, which in turn could reduce our supplies of natural and organic ingredients or increase the prices of those ingredients. Such natural disasters and adverse weather conditions can be caused or exacerbated by climate change, and the spate of recent extreme weather events, including historic droughts, heatwaves, extreme cold and flooding, presents an alarming trend. If our
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supplies of natural and organic ingredients are reduced, we may not be able to find enough supplemental supply sources on favorable terms, if at all, which could impact our ability to supply products to our customers and adversely affect our business, financial condition and results of operations.
We also compete with other manufacturers in the procurement of natural and organic product ingredients, which may be less plentiful in the open market than conventional product ingredients. This competition may increase in the future if consumer demand for natural and organic products increases. This could cause our expenses to increase or could limit the amount of products that we can manufacture and sell.
We may not be successful in achieving savings and efficiencies from cost reduction initiatives and related strategic initiatives.
Our strategy includes identifying areas of cost savings and operating efficiencies to expand profit margins and cash flow. As part of our identification of operating efficiencies, we may continue to seek to dispose of businesses and brands that are less profitable or are otherwise less of a strategic fit within our core portfolio.
We may not be successful in fully implementing our productivity plans or realizing our anticipated savings and efficiencies, including potentially as a result of factors outside our control. Additionally, we may not be able to identify or negotiate divestiture opportunities on terms acceptable to us. If we are unable to fully realize the anticipated savings and efficiencies of our cost reduction initiatives and related strategic initiatives, our profitability may be materially and adversely impacted.
COVID-19 has and will continue to impact our operations and could have a material adverse effect on our business, results of operations and financial condition.
The global outbreak of the novel strain of the coronavirus known as COVID-19 has resulted in governments worldwide enacting emergency measures to combat the spread of the virus, including public health directives and orders in the United States, or the U.S., Canada and the European Union that, among other things and for various periods of time, directed individuals to shelter at their places of residence, directed businesses and governmental agencies to cease non-essential operations at physical locations, prohibited certain non-essential gatherings and events and ordered cessation of non-essential travel. The public health crisis caused by COVID-19 and the measures taken and continuing to be taken by governments, businesses and the public have, and we expect will continue to have, certain negative impacts on our business operations, and could have a material adverse effect on our business, results of operations and financial condition. The duration and impact of the COVID-19 outbreak is unknown at this time, as is the efficacy of the government and central bank interventions.
The full extent to which COVID-19 may impact our business, including our operations and the market for our securities and our financial condition, will depend on future developments, which are highly uncertain and cannot be predicted at this time. These include the duration, severity and scope of the outbreak, and further action taken by the government and other third parties in response to COVID-19 or new variants thereof. In particular, COVID-19 and government efforts to curtail COVID-19 could impede our production facilities, increase operating expenses, result in loss of sales, affect our supply chains, impact performance of contractual obligations or could require additional expenditures to be incurred. While most of these restrictions have since been lifted or eased, increases in new COVID-19 cases, including as a result of new COVID-19 variants, may lead to restrictions being reinstated, or new restrictions imposed.
Future remote work policies and similar government orders or other restrictions on the conduct of business operations related to the COVID-19 pandemic may negatively impact productivity and may disrupt our ongoing research and development activities, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on our ability to conduct our business in the ordinary course. We have and continue to update our operational procedures and safety protocols at our facilities to comply with mandates and guidance from governmental authorities. If such measures are not effective or governmental authorities implement further restrictions, we may be required to take more extreme action, which could include short or long-term closures of our facilities or reductions in workforce. These measures may impair our production levels or cause us to close or severely limit production at one or more facilities. Further, our operations could be adversely impacted if suppliers, contractors, customers and/or transportation carriers are restricted or prevented from conducting business activities.
Consumer demand for our products may also be impacted by COVID-19 as a result of reductions in consumers’ disposable income associated with layoffs, and work or pay limitations due to mandatory social distancing and lockdown measures implemented by government authorities. As demand for our products decreases, we may be required to record additional asset impairments, including an impairment of the carrying value of our goodwill, along with other accounting charges.
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Given the ongoing and dynamic nature and significance of COVID-19 and its impact globally, we are not able to enumerate all potential risks and uncertainties to our business or financial condition. Any of the negative impacts of COVID-19, including those described above, alone or in combination with others, may have a material adverse effect on our business, results of operations or financial condition. Further, any of these negative impacts, alone or in combination with others, could exacerbate many of the other risk factors outlined in this prospectus, our annual report on Form 10-K filed with the Commission on July 17, 2023 and in other reports that we file with the Commission from time to time.
Increasing awareness of health and wellness are driving changes in the consumer products industry, and if we are unable to react in a timely and cost-effective manner, our results of operations and future growth may be adversely affected.
We must continually anticipate and react, in a timely and cost-effective manner, to changes in consumer preferences and demands, including changes in demand driven by increasing awareness of health and wellness and demands for transparency or cleaner labels with respect to product ingredients by consumers and regulators. Consumers, especially in developed economies such as the U.S. and Canada, are rapidly shifting away from products containing artificial ingredients to all-natural, healthier alternatives. In addition, there has been a growing demand by consumers, non-governmental organizations and, to a lesser extent, governmental agencies to provide more transparency in product labeling and our customers have been taking steps to address this demand, including by voluntarily providing product-specific ingredients disclosure. These two trends could affect the types and volumes of our ingredients and compounds that our customers include in their consumer product offerings and, therefore, affect the demand for our products. If we are unable to react to or anticipate these trends in a timely and cost-effective manner, our results of operations and future growth may be materially adversely affected.
Markets for our products and services are highly competitive, and we may be unable to compete effectively.
Our products and services, including our consumer products, are offered in highly competitive markets that may be characterized by aggressive price competition and resulting downward pressure on gross margins, frequent introduction of new products and services, short product life cycles, evolving industry standards and government regulations, continual improvement in product price and performance characteristics, rapid adoption of technological advancements by competitors and price sensitivity on the part of consumers and businesses.
Additionally, our consumer products may compete on the basis of product performance, brand recognition and price. Advertising, promotion, merchandising and packaging also have significant impacts on consumer purchasing decisions. A newly introduced consumer product (whether improved or newly developed) usually encounters intense competition requiring substantial expenditures for advertising, sales promotion and trade merchandising. If a product gains consumer acceptance, it typically requires continued advertising, promotional support and product innovations to maintain its relative market position. If our advertising, marketing and promotional programs are not effective or adequate, our net sales may be negatively impacted.
Some of our competitors are larger than us and have greater financial resources. These competitors may be able to spend more aggressively on advertising and promotional activities, introduce competing products more quickly and respond more effectively to changing business and economic conditions than we can. Competitive activity may require the Company to increase its spending on advertising and promotions and/or reduce prices, which could lead to reduced sales, margins and net earnings.
We may be unable to manage our growth effectively.
Our future financial performance and our ability to commercialize our products and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to continue to improve our operational and financial systems, managerial controls and procedures and we will need to continue to expand, train and manage our technology and workforce. We must also maintain close coordination among our technology, compliance, accounting, finance, marketing and sales functions. We cannot assure you that we will manage our growth effectively. If we fail to do so, our business could be materially harmed.
To support our growth, we may have to further increase our investment in technology, facilities, personnel and financial and management systems and controls. We may also have to further expand our procedures for monitoring and assuring our compliance with applicable regulations, and may need to integrate, train and manage a growing employee base. The expansion of our existing businesses, and expansion into new businesses and the resulting growth of our employee base will increase our need for internal audit and monitoring processes that are more extensive and broader in scope than those we have historically required. We may not be successful in identifying or implementing all of the processes that are necessary. Further, unless our growth results in an increase in our revenues that is proportionate to the increase in our costs associated with this growth, our operating margins and profitability will be adversely affected.
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We depend on a few significant customers for a substantial portion of our revenue. If we fail to retain or expand our customer relationships or significant customers reduce their purchases, our revenue could decline significantly.
For the twelve-month period ended March 31, 2023, one customer accounted for 10.66% of revenue, and one customer accounted for 10.26% of revenue for the twelve-month period ended March 31, 2022.
We believe that our operating results for the foreseeable future will continue to depend on sales to a small number of customers. These customers have no purchase commitments and may cancel, change or delay purchases with little or no notice or penalty. As a result of this customer concentration, our revenue could fluctuate materially and could be materially and disproportionately impacted by purchasing decisions of these customers or any other significant customer. In the future, these customers may decide to purchase less product from us than they have in the past, may alter purchasing patterns at any time with limited notice, or may decide not to continue to purchase our products at all, any of which could cause our revenue to decline materially and materially harm our financial condition and results of operations. If we are unable to diversify our customer base, we will continue to be susceptible to risks associated with customer concentration.
In addition, the Company is subject to credit risk of its customers, and its profitability and cash flow are dependent on receipt of timely payments from clients. Any delay in payment by the Company’s customers may have an adverse effect on the Company’s profitability, working capital and cash flow. There is no assurance that the Company will be able to collect all or any of its trade receivables in a timely matter. If any of the Company’s clients face unexpected situations such as financial difficulties, the Company may not be able to receive full or any payment of the uncollected sums or enforce any judgment debts against such clients, and the Company’s business, results of operations and financial condition could be materially and adversely affected.
Significant interruptions in our access to certain supply chains, for key inputs such as raw materials, electricity, water, and other utilities may impair our operations.
Our business is dependent on a number of key inputs and their related costs (certain of which are sourced in other countries and on different continents), including raw materials, supplies and equipment related to our operations, as well as electricity, water and other utilities. Governments may regulate or restrict the flow of our labor or our products, and the Company’s operations, suppliers, customers, and distribution channels could be severely impacted. Any significant future government-mandated or market-related interruption, price increase or negative change in the availability or economics of the supply chain for key inputs and, in particular, rising or volatile energy costs could curtail or preclude our ability to continue production. In addition, our operations would be significantly affected by a prolonged power outage.
No assurances can be given that we will be successful in maintaining our required supply of materials, labor, equipment, parts, and components. See also “COVID-19 has and will continue to impact our operations and could have a material adverse effect on our business, results of operations and financial condition”.
Our future success depends on the sales of our consumer products and turnkey solutions products.
We derive a large portion of our revenues from the sale of our turnkey solutions products and expect to derive an increasing portion of our revenues from the sale of consumer products. Our investments in and strategies used for our brand marketing are critical to achieve brand awareness with current customers, educate potential new customers and convert potential new customers into customers. However, there can be no assurance that our principal products will continue to receive, maintain or increase market acceptance. The inability to successfully commercialize our turnkey solutions and specialty ingredient products, in the future, for any reason, would have a material adverse effect on our financial condition, prospects and ability to continue operations. The overall commercialization success of our products depends on several factors, including:
● | continued market acceptance of our products by the nutraceutical market; |
● | the amount of resources devoted by our distribution partners to continue the commercialization efforts of our products in our core geographic markets; |
● | maintaining supply of our products to meet the purchase orders of our distribution partners; |
● | receipt of regulatory approvals, as applicable, for our products from regulatory agencies in certain territories in which we wish to expand our commercialization efforts; |
● | continuing compliance with applicable regulations; |
● | the number of competitors in our market; and |
● | protecting and enforcing our intellectual property and avoiding patent infringement claims. |
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Our activities rely on certain third-party suppliers, contract manufacturers and distributors, and such reliance may adversely affect us if the third parties are unable or unwilling to fulfill their obligations.
For our consumer product and nutraceutical activities, we purchase certain important ingredients and raw materials from third-party suppliers and, in certain cases, we engage contract manufacturers to supply us with finished products. Part of our strategy is to enter into and maintain arrangements with third parties related to the development, testing, production, packaging, and commercialization of our products to our customers which are then responsible for the marketing and distribution of the products. Our revenues are dependent to a great extent on the successful efforts of these third parties. Entering into strategic relationships can be a complex process and our interests and the interests of our partners may not be or remain aligned with our interests.
Real or perceived quality control problems with raw materials outsourced from certain regions or finished products manufactured by contract manufacturers could negatively impact consumer confidence in our products or expose us to liability. In addition, disruption in the operations of any such supplier or manufacturer or material increases in the price of raw materials, for any reason, such as changes in economic and political conditions, tariffs, trade disputes, regulatory requirements, import restrictions, loss of certifications, power interruptions, fires, hurricanes, drought or other climate-related events, war, or other events, could have a material adverse effect on our business, results of operations, financial condition and cash flows. Also, currency fluctuations could result in higher costs for raw materials purchased abroad.
The Company and any third-party manufacturers engaged by the Company to perform manufacturing services are subject to laws and regulations, including current Good Manufacturing Practices regulations (“cGMP”), which are enforced by the U.S. Food and Drug Administration, or the FDA, and other regulatory authorities. The Company and its third-party manufacturers may be unable to comply with cGMP or other regulatory requirements. A failure to comply with these requirements may result in fines, product recalls or seizures and related publicity requirements, injunctions, total or partial suspension of production, civil penalties, warning or untitled letters, import or export bans or restrictions and criminal prosecution and penalties. Any of these penalties could delay or prevent the promotion, marketing, or sale of the Company’s products. If the safety of any products manufactured by or supplied to the Company is compromised due to the manufacturer’s failure to adhere to applicable laws or for other reasons, the Company may not be able to successfully sell its products and our business, financial condition and operations may be materially adversely affected.
Some of our current and future partners may decide to compete with us, refuse or be unable to fulfill or honor their contractual obligations to us, or change their plans to reduce their commitment to, or even abandon, their relationships with us. There can be no assurance that our partners will market our products successfully or that any such third-party collaboration will be on favorable terms. We may not be able to control the amount and timing of resources our partners devote to our potential products. In addition, we may incur liabilities relating to the distribution and commercialization of our products. While the agreements with such customers generally include customary indemnification provisions indemnifying us for liabilities relating to third-party manufacturing or packaging of our potential products, there can be no assurance that these indemnification rights will be sufficient in amount, scope or duration to fully offset the potential liabilities associated with our potential products. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business, financial condition or results of operations.
Our products may be subject to recalls for a variety of reasons, which could require us to expend significant management and capital resources.
Manufacturers and distributors of products are sometimes subject to the recall or return of their products for a variety of reasons, including product defects, such as contamination, adulteration, unintended harmful side effects, or interactions with other substances, packaging safety, and inadequate or inaccurate labeling disclosure. If any of the products produced by or for us are recalled due to an alleged product defect or for any other reason, we could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. As a result of any such recall, our sales may be significantly affected and may not be able to replace those sales at an acceptable margin or at all. In addition, a product recall may require significant management attention or damage our reputation and goodwill or that of our products or brands.
Additionally, product recalls may lead to increased scrutiny of our operations by regulatory agencies and authorities, requiring further management attention, increased compliance costs and potential legal fees, fines, penalties and other expenses.
We may not meet timelines for project development.
The Company’s business is dependent on a number of key inputs and their related costs including raw materials and supplies related to its operations, as well as electricity, water and other utilities. Any significant interruption or negative change in the availability or
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economics of the supply chain for key inputs could materially impact the business, financial condition operating results, and timelines for project development of the Company. Any inability to secure required supplies and services or to do so on appropriate terms could have a materially adverse impact on the business, financial condition, operating results, and timelines for project development of the Company.
Product contamination or tampering or issues or concerns with respect to product quality, safety and integrity could adversely affect our business, reputation, financial condition or results of operations.
Product contamination or tampering, or allegations of product contamination or tampering or product quality issues (whether or not valid) with respect to products in our portfolio may reduce demand for such products, and cause production and delivery disruptions or increase costs, which could adversely affect our business, reputation, financial condition or results of operations. Moreover, even if allegations of product contamination or tampering or suggestions that our products were not fit for consumption or use are meritless, the negative publicity surrounding assertions against us or products in our portfolio or processes could adversely affect our reputation or brands. Our business could also be adversely affected if consumers lose confidence in product quality, safety and integrity generally, even if such loss of confidence is unrelated to products in our portfolio.
Any of the foregoing could adversely affect our business, reputation, financial condition or results of operations. In addition, if we do not have adequate insurance, if we do not have enforceable indemnification from suppliers, manufacturers, distributors, joint venture partners or other third parties or if indemnification is not available, the liability relating to such product claims or disruption as a result of recall efforts could materially adversely affect our business, financial condition or results of operations.
We may have difficulty obtaining insurance to cover its operational risks and, even where available, may not be sufficient to cover losses we may incur.
We may have difficulty obtaining the various insurances that are desired to operate its business, which may expose the Company to additional risk and financial liability. Insurance that is otherwise readily available, such as general liability, and directors’ and officers’ insurance, may be more difficult to find, and more expensive, because of the regulatory regime applicable to our industry. There are no guarantees that the Company will be able to find such insurance coverage in the future, or that the cost will be affordable. If the Company is unable to obtain insurance coverage on acceptable terms, it may prevent it from entering into certain business sectors, may inhibit growth, and may expose the Company to additional risks and financial liabilities.
Moreover, our current and expected business activities expose us to the risk of liabilities arising from our operations. For example, we may be liable for claims brought by users of our products or by employees, customers or other third parties for personal injury or property damage occurring in the course of our operations. We seek to minimize these risks through various insurance contracts from third-party insurance carriers. However, our insurance coverage is subject to large individual claim deductibles, individual claim and aggregate policy limits, and other terms and conditions. We retain an insurance risk for the deductible portion of each claim and for any gaps in insurance coverage. We do not view insurance, by itself, as a material mitigant to these business risks.
We cannot assure that our insurance will be sufficient to cover our losses. Any losses that insurance does not substantially cover could have a material adverse effect on our business, results of operations, financial condition and cash flows. The insurance industry has become more selective in offering some types of insurance, such as product liability, product recall, property and directors’ and officers’ liability insurance. Our current insurance program is consistent with both our past level of coverage and our risk management policies. However, we cannot assure that we will be able to obtain comparable insurance coverage on favorable terms, or at all, in the future.
Risks Relating to Our Accounting and Financial Activities
Although our consolidated financial statements have been prepared on a going concern basis, our management believe that our recurring losses and negative cash flows from operations and other factors have raised substantial doubt about our ability to continue as a going concern as of March 31, 2023.
Our consolidated financial statements for the twelve-month period ended March 31, 2023 were 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. Thus, our consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. Our recurring losses, negative cash flow, need for additional financing and the uncertainties surrounding our ability to raise such financing, raise substantial doubt about our ability to continue as a going concern. For the twelve-month period ended March 31, 2023, the Company incurred a net loss of $88.8 million, negative cash flows from operations of $28.6 million, and had
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an accumulated deficit of $383.6 million as at March 31, 2023. Our lack of cash resources and our potential inability to continue as a going concern may materially adversely affect our share price and our ability to raise new capital, enter into critical contractual relations with third parties, meet our obligations as they become due and otherwise execute our business strategy. The Company currently has no committed sources of financing available. If we are unable to raise additional financing, increase sales and reduce expenses we will be unable to continue to fund our operations, develop our products, realize value from our assets, or discharge our liabilities in the normal course of business. If we become unable to continue as a going concern, we could have to liquidate our assets, and potentially realize significantly less than the values at which they are carried on our financial statements, and shareholders could lose all or part of their investment in our Common Shares.
This offering is being made on a [reasonable best-efforts] basis and we may sell fewer than all of the securities offered hereby and may receive significantly less in net proceeds from this offering. Assuming that we receive net proceeds of $[●] million from this offering (assuming an offering with gross proceeds of $[●] million), we believe that the net proceeds from this offering will meet our cash needs for approximately [●]. The net proceeds from this offering will not significantly improve the Company’s working capital. The Company’s trade and other payables will continue to significantly exceed its cash balance. After receipt of the net proceeds from this offering the Company will still be required to actively manage its liquidity and expenses and payments of payables will continue to not be made as the amounts become due. Nor will the receipt of the net proceeds from this offering remove that substantial doubt and as such, there will remain substantial doubt about our ability to continue as a going concern after this offering. If we have insufficient capital to operate our business under our current business plan, we have contingency plans for our business that include, among other things, the delay of the introduction of new products, a reduction in headcount, and a reduction of the expansion of our distribution networks, which is expected to substantially reduce revenue growth and delay our profitability. There can be no assurance that our implementation of these contingency plans will not have a material adverse effect on our business. We may need to liquidate our assets, and potentially realize significantly less than the values at which they are carried on our financial statements, and shareholders could lose all or part of their investment in our Common Shares.
We have recorded significant long-lived asset impairment charges and may be required to record additional charges to future earnings if our long-lived assets become impaired.
As of March 31, 2023, our goodwill balance was $2.4 million and our intangible asset balance was $1.6 million, which represented 7.8% and 5.2% respectively of total consolidated assets. The Company recorded an impairment loss of $19.5 million for goodwill and $18.0 million for intangibles in the twelve-month period ended March 31, 2023. We are required to review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our intangible assets and/or goodwill may not be recoverable include a decline in share price and market capitalization, slower growth rates in our industry or our own operations, and/or other materially adverse events that have implications on the profitability of our business or business verticals.
In addition, the Company announced that it had entered into a binding agreement for the sale of its Canadian cannabis business, including the Sherbrooke building, for C$5.15 million to be paid to the Company in cash, which transaction closed on November 9, 2022. The Company recorded a loss on remeasurement of the assets to fair value less cost of sale in the amount of $15.3 million in the twelve-month period ended March 31, 2023.
We may be required to record additional charges during the period in which any impairment of our goodwill, intangible assets or other long-lived assets is determined which could have a material adverse impact on our results of operations. Even though these charges may be non-cash items and may not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about us or our securities.
In some cases, we cannot determine with any certainty whether we have priority of invention in relation to any new product or new process covered by a patent application or if we were the first to file a patent application for any such new invention. Furthermore, in the event of patent litigation there can be no assurance that our patents would be held valid or enforceable by a court of competent jurisdiction or that a court would rule that the competitor’s products or technologies constitute patent infringement.
Moreover, part of our technological know-how constitutes trade secrets. We require that our employees, consultants, advisers and collaborators sign confidentiality agreements. However, these agreements may not provide adequate protection in the event of unauthorized use or disclosure of our trade secrets, know-how or other proprietary information.
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Claims that our technology or products infringe on intellectual property rights of others could be costly to defend or settle, could cause reputational injury and would divert the attention of our management and key personnel, which in turn could have a material adverse effect on our business, results of operations, financial condition and cash flows. Any adverse outcome of such litigation or settlement of such a dispute could subject us to significant liabilities, could put one or more of our patents at risk of being invalidated or interpreted narrowly, could put one or more of our pending patent applications at risk of not issuing, or could facilitate the entry of generic products. Any such litigation could also divert our research, technical and management personnel from their normal responsibilities.
Risks Relating to Our Liquidity
We are actively managing our liquidity and expenses, including by extending payables due and reducing investment in our businesses, and it is not certain that we will be ultimately successful in developing our business and remaining a going concern.
As of the date of this prospectus, we are actively managing our liquidity and expenses, and there is substantial doubt that our current cash position will be sufficient to continue as a going concern. The Company currently has minimal available cash balances, and we are also continuing to incur expenses that will cause us to expend cash in the short term. Payables are now in excess of available cash balances and payments of payables are not being made as the amounts become due. As of [July 14], 2023, we had approximately $1.3 million in cash and cash equivalents, which is expected to be sufficient to operate the business for less than one month 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. We have no arranged sources of financing available to us. Our failure to obtain any required additional financing on favorable terms, or at all, would have a material adverse effect on our business, financial condition and results of operations. We are pursuing several cash generating transactions, including the strategic plan described herein, as well as further expense reduction measures, but there can be no assurance that any transaction will be completed or that our expense reduction measures will be sufficient to continue as a going concern.
As a result of our failure to timely file our Quarterly Report on Form 10-Q for the quarter ended December 31, 2022, we are currently ineligible to file new short form registration statements on Form S-3, which may impair our ability to raise capital on terms favorable to us, in a timely manner or at all.
Form S-3 permits eligible issuers to conduct registered offerings using a short form registration statement that allows the issuer to incorporate by reference its past and future filings and reports made under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In addition, Form S-3 enables eligible issuers to conduct primary offerings “off the shelf” under Rule 415 of the Securities Act. The shelf registration process, combined with the ability to forward incorporate information, allows issuers to avoid delays and interruptions in the offering process and to access the capital markets in a more expeditious and efficient manner than raising capital in a standard registered offering pursuant to a Registration Statement on Form S-1. The ability to register securities for resale may also be limited as a result of the loss of Form S-3 eligibility.
As a result of our failure to timely file our Quarterly Report on Form 10-Q for the quarter ended December 31, 2022, we are currently ineligible to file new short form registration statements on Form S-3 and, absent a waiver of the Form S-3 eligibility requirements, we will no longer be permitted to use our existing registration statement on Form S-3. As a consequence, we might not be permitted to sell all of the amount of securities we could otherwise sell prior to such time, subject to the limits of General Instruction I.B.6. of Form S-3, which could adversely affect our operations and financial results.
Our inability to use Form S-3 may significantly impair our ability to raise necessary capital to run our operations and execute on our strategy. If we seek to access the capital markets through a registered offering during the period of time that we are unable to use Form S-3, we may be required to publicly disclose the proposed offering and the material terms thereof before the offering commences, we may experience delays in the offering process due to SEC review of a Form S-1 registration statement and we may incur increased offering and transaction costs and other considerations. Disclosing a public offering prior to the formal commencement of an offering may result in downward pressure on our share price. If we are unable to raise capital through a registered offering, we would be required to conduct our equity financing transactions on a private placement basis, which may be subject to pricing, size and other limitations imposed under Nasdaq rules, or seek other sources of capital.
We may have difficulty accessing public and private capital and banking services, which could negatively impact its ability to finance its operations.
We anticipate that funding sources may be available pursuant to private and public offerings of equity and/or debt and bank lending. However, if equity and/or debt financing was not available in the public capital markets, then the Company expects that it would have
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access to raise equity and/or debt financing privately. There can be no assurance that additional financing, if raised privately or publicly, will be available to the Company when needed or on terms which are acceptable, or that the Company’s existing indebtedness would not impact its ability to obtain such additional financing. The Company’s inability to raise financing to fund working capital, capital expenditures or acquisitions could limit its growth and may have a material adverse effect upon future profitability. If the Company cannot achieve profitability, it may be forced to cease operations and you may suffer a total loss of your investment.
The issuance and sale of common shares upon exercise of outstanding warrants may cause substantial dilution to existing shareholders and may also depress the market price of our common shares. Certain outstanding warrants to purchase shares of our common stock have cashless exercise rights.
As at March 31, 2023, the Company had a total of 12,197,665 warrants outstanding, representing 101.7% of the common shares issued at that date. If the holders of the warrants choose to exercise the warrants, it will cause substantial dilution to the holders of our common shares. If exercises of the warrants and sales of such shares issuable upon exercise thereof take place, the price of our common shares may decline. In addition, the common shares issuable upon exercise of the warrants may represent overhang that may also adversely affect the market price of our common shares. Overhang occurs when there is a greater supply of a company’s stock in the market than there is demand for that stock. When this happens the price of our common shares may decrease, and any additional shares which shareholders attempt to sell in the market will only further decrease the share price. If the share volume of our common shares cannot absorb shares sold by the warrant holders, then the value of our common shares will likely decrease.
Certain of the warrants discussed above allow for cashless exercise rights. In a ‘cashless exercise’, the holder reduces the number of shares of common shares issuable upon exercise of the warrants in amount equal to the aggregate value of the exercise price of the exercised warrants. For example, if our common shares were trading at $10 per share and a holder desires to exercise warrants to purchase 100 common shares with an exercise price of $1.00 per share on a cashless basis, the number of common shares issuable to the holder upon such exercise would be reduced by 10 shares, equal in value to $100 ($10 per share x 10 shares), and the holder would receive 90 common shares upon such exercise. We do not receive any cash upon a cashless exercise and as such, while a cashless exercise reduces the dilution which would otherwise exist upon a warrant exercise, it is also not as beneficial to us, as it does not bring in any new investment proceeds. Additionally, holders of warrants with cashless exercise provisions may be more likely to exercise their warrants as they do not have to come out of pocket with any cash exercise payments.
Legal and Regulatory Risks Relating to Our Business
We identified material weaknesses in our internal control over financial reporting. This may adversely affect the accuracy and reliability of our financial statements and, if we fail to maintain effective internal control over financial reporting, it could impact our reputation, business, and the price of our common shares, as well as lead to a loss of investor confidence in us.
The Company has and may continue to fail to maintain the adequacy of its internal controls over financial reporting as such standards are modified, supplemented or amended from time to time, and the Company cannot ensure that it will conclude on an ongoing basis that it has effective internal controls over financial reporting. The Company’s failure to satisfy the requirements of Canadian and United States legislation on an ongoing, timely basis could result in the loss of investor confidence in the reliability of its financial statements or in a cease trade order, which in turn could harm the Company’s business and negatively impact the trading price and market value of its shares or other securities. In addition, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm the Company’s operating results or cause it to fail to meet its reporting obligations.
The Company also has and may continue to fail to maintain the adequacy of its disclosure controls. Disclosure controls and procedures are designed to ensure that the information required to be disclosed by the Company in reports filed with securities regulatory agencies is recorded, processed, summarized and reported on a timely basis and is accumulated and communicated to the Company’s management, as appropriate, to allow timely decisions regarding required disclosure.
No evaluation can provide complete assurance that the Company’s financial and disclosure controls will detect or uncover all failures of persons within the Company to disclose material information otherwise required to be reported. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance with respect to the reliability of financial reporting and financial statement preparation. The effectiveness of the Company’s controls and procedures could also be limited by simple errors or faulty judgements.
Material weaknesses in the Company’s internal control over financial reporting were determined to exist at March 31, 2023 and these material weaknesses have not been remediated to date. The Company’s management, including the Chief Executive Officer and Chief
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Financial Officer, concluded that our internal control over financial reporting was not effective as of March 31, 2023 due to the presence of these material weaknesses. While we intend to adopt new and revised controls to remediate these weaknesses, if these and other controls fail to adequately remediate these material weaknesses, it could result loss of investor confidence, which could lead to a decline in our share price. In addition, if we do not maintain adequate financial and management personnel, processes, and controls, we may not be able to accurately report our financial performance on a timely basis, which could cause a decline in our share price and harm our ability to raise capital. Failure to accurately report our financial performance on a timely basis could also jeopardize our continued listing on Nasdaq or any other exchange on which our common shares may be listed.
As a non-accelerated filer, we are not required to comply with the auditor attestation requirements of the Sarbanes-Oxley Act.
We are a non-accelerated filer under the Exchange Act and we are not required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002. Therefore, our internal controls over financial reporting will not receive the level of review provided by the process relating to the auditor attestation included in annual reports of issuers that are subject to the auditor attestation requirements. In addition, we cannot predict if investors will find our common shares less attractive because we are not required to comply with the auditor attestation requirements. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and trading price for our common shares may be negatively affected.
The Company may be classified as a “passive foreign investment company” for U.S. federal income tax purposes, which would subject U.S. investors that hold the Company’s Common Shares to potentially significant adverse U.S. federal income tax consequences.
If the Company is classified as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes in any taxable year, U.S. investors holding the Company’s Common Shares generally will be subject, in that taxable year and all subsequent taxable years (whether or not the Company continued to be a PFIC), to certain adverse U.S. federal income tax consequences. The Company will be classified as a PFIC in respect of any taxable year in which, after taking into account its income and gross assets (including the income and assets of 25% or more owned subsidiaries), either (i) 75% or more of its gross income consists of certain types of “passive income” or (ii) 50% or more of the average quarterly value of its assets is attributable to “passive assets” (assets that produce or are held for the production of passive income). Based on our current operations, income, assets and certain estimates and projections, including as to the relative values of our assets, including goodwill, which is based on the expected price of our Common Shares, the Company believes that it was not a PFIC for the taxable year ended March 31, 2022. The determination of the Company’s status as a PFIC for the fiscal year ending March 31, 2023 cannot be made at this time. Because the Company’s PFIC status must be determined annually with respect to each taxable year and will depend on the composition and character of the Company’s assets and income, including the Company’s use of proceeds from offerings, and the value of the Company’s assets (which may be determined, in part, by reference to the market value of Common Shares, which may be volatile) over the course of such taxable year, the Company may be a PFIC in any taxable year. Because there are uncertainties in the application of the relevant rules and PFIC status is a factual determination made annually after the close of each taxable year, there can be no assurance that the Company will not be a PFIC for any future taxable year. In addition, it is possible that the U.S. Internal Revenue Service may challenge the Company’s classification of certain income and assets as non-passive, which may result in the Company being or becoming a PFIC in the current or subsequent years.
If the Company is a PFIC for any year during a U.S. Holder’s (as defined below in “Certain U.S. Federal Income Tax Considerations”) holding period, then such U.S. Holder generally will be required to treat any gain realized upon a disposition of Common Shares, or any “excess distribution” received on its Common Shares, as ordinary income, and to pay an interest charge on a portion of such gain or distribution, unless the U.S. Holder makes a timely and effective “qualified electing fund” election (“QEF Election”) or a “mark-to-market” election with respect to its Common Shares. A U.S. Holder who makes a QEF Election generally must report on a current basis its share of the Company’s net capital gain and ordinary earnings for any year in which the Company is a PFIC, whether or not the Company distributes any amounts to its shareholders. However, U.S. Holders should be aware that if the Company determines that it is a PFIC for this year or any future taxable year, the Company can make no assurances that it would provide the information necessary for U.S. Holders to make a QEF Election. Thus, U.S. Holders may not be able to make a QEF Election with respect to their Common Shares. A U.S. Holder who makes a mark-to-market election generally must include as ordinary income each year the excess of the fair market value of the Common Shares over the taxpayer’s basis therein. Each U.S. Holder should consult its own tax advisors regarding the PFIC rules and the U.S. federal income tax consequences of the acquisition, ownership, and disposition of Common Shares.
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We are subject to laws and regulations and guidelines, changes in which could increase our costs and individually or in the aggregate adversely affect our business.
We are subject to laws and regulations affecting our operations in a number of areas. These laws and regulations affect the Company’s activities in areas including, but not limited to, organic food and beverage products, dietary supplements, consumer protection, labor, intellectual property ownership and infringement, import and export requirements, and environmental, health and safety.
The successful execution of our business objectives is contingent upon compliance with all applicable laws and regulatory requirements and obtaining all other required regulatory approvals, which may be onerous and expensive. Any such costs, which may rise in the future as a result of changes in these laws and regulations or in their interpretation and the expansion of the Company’s business, could individually or in the aggregate make the Company’s products and services less attractive to our customers, delay the introduction of new products, or cause the Company to implement policies and procedures designed to ensure compliance with applicable laws and regulations. There can be no assurance that the Company’s officers, directors, employees, contractors, or agents will not violate such laws and regulations or our policies and procedures.
We are subject to risks inherent to the nutraceutical industry.
We are heavily dependent on the export of products to the United States. The FDA is able to block the import entry of any product that violates or appears to violate U.S. law. Future changes in U.S. requirements and interpretations of those requirements, coupled with FDA’s authority to block import entry based only on an apparent violation of the law, increases the possibility that our products may not have full access to the U.S. market and poses additional risks to our business.
We are subject to anti-money laundering laws and regulations in multiple jurisdictions.
The Company will be subject to a variety of laws and regulations in Canada and in the United States that involve money laundering, financial recordkeeping and proceeds of crime, including the U.S. Currency and Foreign Transactions Reporting Act of 1970 (commonly known as the Bank Secrecy Act), as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), the Criminal Code (Canada), as amended and the rules and regulations thereunder, and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the United States and Canada.
If any of the Company’s investments, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such investments in the United States or Canada were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize the ability of the Company to declare or pay dividends, effect other distributions or subsequently repatriate such funds back to Canada. Furthermore, while we have no current intention to declare or pay dividends on its Common Shares in the foreseeable future, we may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.
Our inability to maintain our regulatory approvals and permits or failure to comply with applicable regulations could adversely affect our business and financial results.
The Company is required to obtain and maintain certain federal and state permits, licenses and approvals in the jurisdictions where its products are manufactured and/or sold and to comply with extensive regulations governing its business, including FDA regulations. There can be no assurance that the Company will be able to obtain or maintain necessary licenses, permits or approvals or continue to comply with applicable regulations. Any material delay or inability to receive these items is likely to delay and/or inhibit the Company’s ability to conduct its business, and would have an adverse effect on its business, financial condition and results of operations.
We are currently, and may in the future be, subject to substantial litigation, investigations and proceedings that could cause us to incur significant legal expenses and result in harm to our business.
We and our subsidiaries are subject to federal, state, local, foreign and provincial health, safety, and labeling laws and regulations, including but not limited to the federal Food, Drug, and Cosmetic Act and regulations promulgated by the FDA; laws and regulations promulgated by the United States Department of Agriculture; the National Organic Program; and state, local, foreign, and provincial law equivalents. In addition, the California Safe Drinking Water and Toxic Enforcement Act of 1986 (Proposition 65) and implementing
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regulations impose testing and warning requirements for products containing any chemical known to the State of California to cause cancer and/or reproductive toxicity. Product recall laws and regulations also apply to our products.
The failure by us to comply with applicable health, safety, and labeling requirements could result in fines, penalties, injunctions, product recalls, enforcement actions, third-party claims for property damage and personal injury, regulatory or judicial orders requiring corrective measures, and attorneys’ fees associated with prosecuting such actions, which could have a material adverse effect on our business, financial condition, or results of operations.
We rely on contract manufacturers to produce products in compliance with applicable health, safety, and labeling requirements. Further, as with any consumer-facing company selling food or nutraceutical products, there is always a chance of microbial contamination even under the most stringent manufacturing practices; thus, the risk of fines, penalties, injunctions, product recalls, enforcement actions, third-party claims for property damage and personal injury, regulatory or judicial orders requiring corrective measures, and attorneys’ fees associated with prosecuting such actions is heightened where the company is not actively involved in the manufacturing practices.
On February 4, 2021, the United States House of Representatives Subcommittee on Economic and Consumer Policy, Committee on Oversight and Reform (“Subcommittee”), published a report, “Baby Foods Are Tainted with Dangerous Levels of Arsenic, Lead, Cadmium, and Mercury” (the “Report”), which stated that, with respect to Sprout, a company in which Neptune acquired a 50.1% stake, “Independent testing of Sprout Organic Foods has confirmed that their baby foods contain concerning levels of toxic heavy metals.” The Report further stated that after receiving reports alleging high levels of toxic metals in baby foods, the Subcommittee requested information from Sprout but did not receive a response. On February 11, 2021, the Subcommittee contacted Sprout, reiterating its requests for documents and information about toxic heavy metals in Sprout’s baby foods.
Sprout provided an initial response to the Subcommittee on February 25, 2021. The pending inquiries and potential findings could have a material adverse effect on our business, financial condition, or results of operations.
On March 16, 2021, a purported class action, captioned Marvin Gong v. Neptune Wellness Solutions, et al., was filed in the United States District Court for the Eastern District of New York against the Company and certain of its current and former officers. On October 21, 2022, the Company announced that it had agreed to settle and resolve the lawsuit for a gross payment to the class of between $4 and $4.25 million, with the exact amount being within the Company’s control and dependent on the type of consideration used. The settlement was subject to court approval and certification by the court of the class. On March 16, 2023, the settlement offer was accepted and the first two payments in the amount of $500,000 each were subsequently paid. The remainder is payable either in cash ($2,500,000) or in common shares ($2,750,000) at Neptune’s election, within 31 days after the Final Approval Order is entered. The Company intends to pay the remainder in common shares, which may result in a substantial number of shares being issued, and such an issuance may result in substantial dilution to the existing holders of our common shares.
We also are subject to federal, state, local, foreign and provincial laws, rules and regulations concerning advertising and marketing, including but not limited to those prohibiting unfair, deceptive, and/or abusive trade practices. Violations of advertising and marketing requirements can result in fines, penalties, injunctions, disgorgement of profits, full restitution for injury suffered by consumers, rescission of contracts, enforcement actions, regulatory or judicial orders requiring corrective measures, and attorneys’ fees associated with prosecuting such actions.
Accordingly, we are exposed to potential liabilities and reputational risk associated with litigation, regulatory proceedings and government investigations and enforcement actions for the failure of us to comply with applicable health, safety, and labeling requirements and advertising and marketing requirements. Any adverse judgment in or settlement of any pending or any future litigation or investigation could result in payments, fines and penalties that could adversely affect our business, results of operations and financial condition and which may not be covered by insurance. Regardless of the merits of the claims and the outcome, legal proceedings have resulted in, and may continue to result in, significant legal fees and expenses as well as diversion of management’s and employee time and other resources, and adverse publicity. Such proceedings could also adversely affect our business, results of operations and financial condition. If the Company is unsuccessful in its defense of material litigation claims or is unable to settle the claims, the Company may be faced with significant monetary damage awards or other remedies against it including injunctive relief that could have a material adverse effect on the Company’s business, financial condition and results of operations. Administrative or regulatory actions against the Company or its employees could also have a material adverse effect on the Company’s business, financial condition and results of operations. For more information on our pending legal proceedings, see “Legal Proceedings.”
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Risks Relating to Our Human Resources
We may be unable to attract or retain key personnel, and we may be unable to attract, develop and retain additional employees required for our development and future success.
Our success is largely dependent on the performance of our management team and certain employees and our continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. Qualified individuals are in high demand, and we may incur significant costs to attract and retain them. The loss of the services of any key personnel, or an inability to attract other suitably qualified persons when needed, could prevent us from executing on our business plan and strategy, and we may be unable to find adequate replacements on a timely basis, or at all. We do not currently maintain key-person insurance on the lives of any of our key personnel.
We face exposure to fraudulent or illegal activity by officers, directors, employees, contractors, consultants and agents, which may subject us to investigations and actions.
We are exposed to the risk that any of our officers, directors, employees, independent contractors and consultants and our subsidiaries may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to us that violate (i) government regulations, (ii) manufacturing standards, (iii) federal, state, local, and foreign healthcare fraud and abuse laws and regulations, or (iv) laws that require the true, complete and accurate reporting of financial information or data. It may not always be possible for us to identify and deter misconduct by our officers, directors, employees and other third parties, and the precautions taken by us to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. We cannot provide assurance that our internal controls and compliance systems will protect us from acts committed by our officers, directors, employees, agents or business partners in violation of U.S. or Canadian federal, provincial or state or local laws. If any such actions are instituted against us, and we are not successful in defending or asserting our rights, those actions could have a material impact on our business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could have a material adverse effect on our business, financial condition, results of operations or prospects.
Risks Relating to Our Information Technology
We must successfully maintain and/or upgrade our information technology systems, and our failure to do so could have a material adverse effect on our business, financial condition or results of operations.
We rely on various information technology systems to manage our operations. Over the last several years, we have implemented, and we continue to implement, modifications and upgrades to such systems, including changes to legacy systems, replacing legacy systems with successor systems with new functionality, and acquiring new systems with new functionality. These types of activities subject us to inherent costs and risks associated with replacing and changing these systems, including impairment of our ability to fulfill customer orders, potential disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, retention of sufficiently skilled personnel to implement and operate the new systems, demands on management time and other risks and costs of delays or difficulties in transitioning to or integrating new systems into our current systems. These implementations, modifications, and upgrades may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. In addition, the difficulties with implementing new technology systems may cause disruptions in our business operations and have a material adverse effect on our business, financial condition, or results of operations.
We may be exposed to risks and costs associated with security breaches, data loss, credit card fraud and identity theft that could cause us to incur unexpected expenses and loss of revenue as well as other risks.
The Company’s operations are increasingly dependent on IT systems and the management of information; thus, the protection of customers, employees, suppliers and other business data is critical. A portion of our sales require the collection of certain customer data, such as credit card information. In order for our sales channel to function, we and other parties involved in processing customer transactions must be able to transmit confidential information, including credit card information, securely over public networks. The use of credit payment systems makes us more susceptible to a risk of loss, particularly with respect to an external security breach of customer information controlled by us, or by third parties under arrangements with us (including those with whom we have strategic alliances). Despite our efforts, the Company experienced a cyber-attack in July 2021 as a consequence of increased digital interactions with customers, suppliers and consumers, and changes in ways of working of our employees and these external stakeholders due to the
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COVID-19 outbreak. Also, we are particularly reliant on service providers and thus the impact of COVID-19 on their operations also imposed a risk for us. Cyber-attacks will continue to impose threats to our operations.
In addition, federal, state, provincial and international laws and regulations govern the collection, retention, sharing, and security of data that we manage. The regulatory environment surrounding information security and privacy has been increasingly demanding in recent years and may see the imposition of new and additional requirements by provincial, state, and federal governments as well as foreign jurisdictions in which we do business. Compliance with these requirements may result in cost increases due to necessary systems changes and the development of new processes to meet these requirements by us.
In the event of a security breach, theft, leakage, accidental release or other illegal activity with respect to employees, customers, suppliers or other company data, we could become subject to various claims, including those arising out of thefts and fraudulent transactions, and may also result in the suspension of credit card services. This could cause consumers to lose confidence in our security measures, harm our reputation as well as divert management attention, and expose us to potentially unreserved claims and litigation. Any loss in connection with these types of claims could be substantial. If our electronic payment systems are damaged or cease to function properly, we may have to make significant investments to fix or replace them, and we may suffer interruptions in our operations in the interim. In addition, we are reliant on these systems, not only to protect the security of the information stored, but also to appropriately track and record data. Any failures or inadequacies in these systems could expose us to significant unreserved losses, which could materially and adversely affect our earnings and the market price of securities. Our brand reputation would likely be damaged as well.
Risks Relating to Our Intellectual Property
Our commercial success depends, in part, on our intellectual property rights and a failure by us to protect our intellectual property may have a material adverse effect on our ability to develop and commercialize our products.
Our success depends in part on our ability to develop products, obtain patents, protect our trade secrets and operate without infringing third-party exclusive rights or without others infringing our exclusive rights or those granted to us under license. The patent position of a corporation is generally uncertain and involves complex legal, factual and scientific issues, several of which remain unresolved. We do not know whether we will be able to develop other patentable proprietary technology and/or products. Furthermore, we cannot be completely certain that our future patents, if any, will provide a definitive and competitive advantage or afford protection against competitors with similar technology. Furthermore, we cannot give any assurance that such patents will not be challenged or circumvented by others using alternative technology or whether existing third-party patents will prevent us from marketing our products. In addition, competitors or potential competitors may independently develop, or have independently developed products as effective as ours or invent or have invented other products based on our patented products.
If third-party licenses are required, we may not be able to obtain them, or if obtainable, they may not be available on reasonable terms. Furthermore, we could develop or obtain alternative technologies related to third-party patents that may inadvertently cover their products. Inability to obtain such licenses or alternative technologies could delay the market launch of certain of our products, or even prevent us from developing, manufacturing or selling certain products. In addition, we could incur significant costs in defending ourselves in patent infringement proceedings initiated against us or in bringing infringement proceedings against others.
Risks Relating to This Offering and Ownership of Our Common Shares
We do not currently intend to pay any cash dividends on our Common Shares in the foreseeable future.
We have never paid any cash dividends on our Common Shares. We do not anticipate paying any cash dividends on our Common Shares in the foreseeable future because, among other reasons, we currently intend to retain any future earnings to finance our business. The future payment of cash dividends will be dependent on factors such as cash on hand and achieving profitability, the financial requirements to fund growth, our general financial condition and other factors our board of directors may consider appropriate in the circumstances. Until we pay cash dividends, which we may never do, our shareholders will not be able to receive a return on their Common Shares unless they sell them.
We have broad discretion in the use of proceeds from the offering.
Our management will have broad discretion with respect to the application of net proceeds received by us from the sale of the Common Shares and Warrants under this prospectus and may spend such proceeds in ways that do not improve our results of operations or enhance
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the value of the Common Shares and Warrants. Any failure by management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business or cause the price of our Common Shares to decline.
If there is insufficient liquidity in our Common Shares, it could adversely affect your ability to sell your shares.
Shareholders of the Company may be unable to sell significant quantities of Common Shares into the public trading markets without a significant reduction in the price of their Common Shares, or at all. There can be no assurance that there will be sufficient liquidity of the Common Shares on the trading market, and that the Company will continue to meet the listing requirements of the Nasdaq or achieve listing on any other public stock exchange. There can be no assurance that an active and liquid market for the Common Shares will be maintained and an investor may find it difficult to resell Common Shares.
There is currently no established public trading market for the Warrants.
There is no established public trading market for the Warrants, and we do not expect such a market to develop. In addition, we do not plan on making an application to list the Warrants on the Nasdaq, or any other securities exchange or other trading system. This may affect the pricing of the Warrants in the secondary market, the transparency and availability of trading prices, the liquidity of the Warrants, and the extent of issuer regulation. Except in limited circumstances specified in the Warrants, holders of the Warrants will not be entitled to any voting rights, dividends or other rights as shareholders of the Company, prior to the exercise of their Warrants. In addition, the Warrants have an exercise price of $[●] per Common Share, will be exercisable immediately, and will expire five years following the date of issuance. If the price of the Common Shares does not exceed the exercise price of the Warrants during the period when the Warrants are exercisable, the Warrants may not have any value.
U.S. investors may be unable to enforce certain judgments against us in Canada.
Neptune is a corporation existing under the Business Corporations Act (Québec). A number of our directors and officers are residents of Canada or other jurisdictions outside of the United States, and substantially all of our assets are located outside the United States. As a result, it may be difficult to effect service within the United States upon the Company or upon its directors and officers. Execution by United States courts of any judgment obtained against the Company or any of the Company’s directors or officers in United States courts may be limited to the assets of such companies or such persons, as the case may be, located in the United States. It may also be difficult for holders of securities who reside in the United States to realize in the United States upon judgments of courts of the United States predicated upon civil liability and the civil liability of the Company’s directors and executive officers under the U.S. federal securities laws. The Company has been advised that a judgment of a U.S. court predicated solely upon civil liability under United States federal securities laws or the securities or “blue sky” laws of any state within the United States, would likely be enforceable in Canada if the United States court in which the judgment was obtained has a basis for jurisdiction in the matter that would be recognized by a Canadian court for the same purposes. However, there may be doubt as to the enforceability in Canada against these non-U.S. entities or their controlling persons, directors and officers who are not residents of the United States, in original actions or in actions for enforcement of judgments of courts of the United States, of liabilities predicated solely upon U.S. federal or state securities laws.
Certain Canadian laws could delay or deter a change of control.
The Investment Canada Act (Canada) subjects an acquisition of control of a corporation by a non-Canadian to government review if the value of the assets as calculated pursuant to the legislation exceeds a threshold amount.
A reviewable acquisition may not proceed unless the relevant minister is satisfied that the investment is likely to be a net benefit to Canada. Any of the foregoing could prevent or delay a change of control and may deprive or limit strategic opportunities for our shareholders to sell their shares.
Our failure to meet the continued listing requirements of Nasdaq could result in a de-listing of our Common Shares.
If we fail to continue to satisfy the continued listing requirements of Nasdaq, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq will take steps to de-list our Common Shares. The per share price of our Common Shares has declined below the minimum bid price threshold required for continued listing. In addition, our shareholders’ equity has decreased below the minimum threshold under the equity standard for listing on Nasdaq. Amu such de-listing would likely have a negative effect on the price of our Common Shares and would impair your ability to sell or purchase our Common Shares when you wish to do so, as well as adversely affect our ability to issue additional securities and obtain additional financing in the future.
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On December 29, 2022, we received a deficiency notice from Nasdaq (the “Deficiency Notice”) informing us that our Common Shares have failed to comply with the $1.00 minimum bid price required for continued listing under Nasdaq Listing Rule 5550(a)(2) (“Rule 5550(a)(2)”) based upon the closing bid price of our Common Shares for the 30 consecutive business days prior to the date of the Deficiency Notice. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we were given 180 calendar days from December 29, 2022, or until June 27, 2023, to regain compliance with Rule 5550(a)(2). On June 27, 2023, the Company filed for an extension to this deadline and the Nasdaq has determined that the Company is eligible for an additional 180 calendar day period, or until December 26, 2023, to regain compliance. If at any time before December 26, 2023, the bid price of our Common Shares closes at $1.00 per share or more for a minimum of 10 consecutive business days, the Nasdaq will provide written confirmation that we have regained compliance.
On July 19, 2023, we received a deficiency notice from Nasdaq informing us that our reported stockholders’ equity as reported in our recent Annual Report on Form 10-K has decreased below the minimum stockholders’ equity requirement for continued listing on the Nasdaq Capital Market under the equity criteria under Nasdaq Listing Rule 5550(b)(1) (“Rule 5550(b)(1)”). The Company has 45 calendar days, or until September 5, 2023, to submit a plan to regain compliance. If the plan is accepted, Nasdaq can grant an extension of 180 calendar days from the date of the letter to evidence compliance.
Our common shares may be de-listed if we do not regain compliance with Rule 5550(a)(2) by December 26, 2023 or Rule 5550(b)(1) and our shareholders could face significant material adverse consequences, including:
● | Limited availability or market quotations for our common shares; |
● | Reduced liquidity of our common shares; |
● | Determination that our common shared are “penny stock”, which would require brokers trading in our common shares to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our common shares; |
● | Limited amount of news and analysts’ coverage of us; and |
● | Decreased ability for us to issue additional equity securities or obtain additional equity or debt financing in the future. |
In the event of a de-listing, however, we would take actions to restore our compliance with Nasdaq Marketplace Rules, but we can provide no assurances that the listing of our Common Shares would be restored, that our Common Shares will remain above the Nasdaq minimum bid price requirement or that we otherwise will remain in compliance with the Nasdaq Marketplace Rules.
Our shareholders may be subject to dilution resulting from future offerings of Common Shares by us.
We may raise additional funds in the future by issuing Common Shares or equity-linked securities. Holders of our securities have no preemptive rights in connection with such further issuances. Our board of directors has the discretion to determine if an issuance of our capital stock is warranted, the price at which such issuance is to be affected and the other terms of any future issuance of capital stock. In addition, additional common shares will be issued by us in connection with the exercise of warrants, options or grant of other equity awards granted by us. Additional common shares are also expected to be issued in settlement of a legal case. See the section entitled “Legal Proceedings” appearing elsewhere in this prospectus for more information. Such additional equity issuances could, depending on the price at which such securities are issued, substantially dilute the interests of the holders of our existing securities. After giving effect to the sale by us of (i) [●] shares of our Common Shares and accompanying Common Warrants to purchase [●] shares of our Common Shares at the assumed public offering price of $[●] per Common Share and accompanying Common Warrant, [and (ii) Pre-Funded Warrants to purchase Common Shares and accompanying Common Warrants at a the assumed public offering price of $[●] per Pre-Funded Warrant and accompanying Common Warrant], and after deducting [Placement Agent] fees and expenses and estimated offering expenses payable by us [and assuming full exercise of the Pre-Funded Warrants], you will experience immediate dilution of $[●] per share, representing the difference between the public offering price per share and our as adjusted net tangible book value per share as of March 31, 2023 after giving effect to this offering. See the section entitled “Dilution” appearing elsewhere in this prospectus for a more detailed illustration of the dilution you would incur if you participate in this offering.
Our constating documents permit us to issue an unlimited amount of additional Common Shares or Preferred Shares, which may prevent a third-party takeover or cause our shareholders to experience dilution in the future.
Our constating documents authorize us to issue an unlimited number of Common Shares and an unlimited number of preferred shares (“Preferred Shares”). Our board of directors has the authority to cause us to issue additional Common Shares and Preferred Shares and to determine the special rights and restrictions of the shares of one or more series of our Preferred Shares, each without consent of our shareholders. The issuance of any such securities may result in a reduction of the book value or market price of our Common Shares.
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Given the fact that we operate in a capital-intensive industry with significant working capital requirements, we may be required to issue additional Common Shares or other securities that are dilutive to existing shareholders in the future in order to continue our operations, which may result in dilution to existing shareholders. Further, any such issuances could result in a change of control or a reduction in the market price for our Common Shares. Additionally, the rights of the holders of Common Shares will be subject to, and may be adversely affected by, the rights of holders of any Preferred Shares that may be issued in the future. For example, Preferred Shares typically rank senior to Common Shares as to dividend rights, liquidation preference or both and may be convertible into Common Shares. Lastly, our ability to issue Preferred Shares could make it more difficult for a third-party to acquire a majority of our outstanding voting shares, particularly in the event we issue Preferred Shares with special voting rights, the effect of which may be to deprive our shareholders of a control premium that might otherwise be realized in connection with an acquisition of us.
Because the Company is a “smaller reporting company,” we may take advantage of certain scaled disclosures available to us, resulting in holders of our securities receiving less Company information than they would receive from a public company that is not a smaller reporting company.
We are a “smaller reporting company” as defined in the Exchange Act. As a smaller reporting company, we may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as (i) our common shares held by non-affiliates is less than $250 million measured on the last business day of our second fiscal quarter, or (ii) our annual revenue is less than $100 million during the most recently completed fiscal year and our common shares held by non-affiliates is less than $700 million measured on the last business day of our second fiscal quarter. To the extent we take advantage of any reduced disclosure obligations, it may make it harder for investors to analyze the Company’s results of operations and financial reports in comparison with other public companies.
As a smaller reporting company, we are permitted to comply with scaled-back disclosure obligations in our SEC filings compared to other issuers, including with respect to disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We have elected to adopt the accommodations available to smaller reporting companies. Until we cease to be a smaller reporting company, the scaled-back disclosure in our SEC filings will result in less information about our company being available than for other public companies.
If investors consider our common shares less attractive as a result of our election to use the scaled-back disclosure permitted for smaller reporting companies, there may be a less active trading market for our common shares and our share price may be more volatile.
Any acquisitions, strategic investments, divestures, mergers, or joint ventures we make may require the issuance of a significant amount of equity or debt securities and may not be successful.
As part of our business strategy, we expect to selectively pursue strategic acquisitions, as well as additional strategic and other investments such as joint ventures or partnerships, to obtain additional businesses, products and/or technologies, capabilities, and personnel. Acquisitions and other investments present challenges, including geographical coordination, personnel integration and retention of key management personnel, systems integration, the potential disruption of each company’s respective ongoing businesses, possible inconsistencies in standards, controls, procedures, and policies, unanticipated costs of terminating or relocating facilities and operations, unanticipated expenses relating to such integration, contingent obligations, and the reconciliation of corporate cultures. Those operations could divert management’s attention from the business, cause a temporary interruption of or loss of momentum in the business, and adversely affect our results of operations and financial condition. The inability to consummate and integrate new acquisitions on advantageous terms, or the failure to achieve a favorable return on our strategic and other investments, could adversely affect our ability to grow and compete effectively. Additionally, if we make one or more acquisitions in which the consideration includes the Company’s securities, we may be required to issue a substantial amount of equity, debt, warrants, convertible instruments, or other similar securities. Such an issuance could result in dilution to shareholders or increase our interest expense and other expenses.
We have reported negative cash flows from operating activities and may do so in future periods.
The Company reported negative cash flow from operating activities of $28.6 million and $54.3 million for the fiscal years ended March 31, 2023 and March 31, 2022. The Company has historically and may also continue to have negative cash flow from operating activities until sufficient levels of sales are achieved. The Company cannot guarantee that future positive cash flow from operating activities will be obtained. In addition, negative cash flows may continue longer than the Company has planned for which could cause liquidity issues.
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We may also be unable to obtain borrowings in an amount sufficient to enable them to pay debt or to fund other liquidity needs. If sufficient liquidity is not obtained, we may need to refinance or restructure all or a portion of its debt on or before maturity, sell assets or borrow money or issue equity, which may not be possible on terms satisfactory to the Company, or at all. If the Company continues to report negative cash flows from operating activities, or any failure to obtain any required additional financing on favorable terms, or at all, such events could have a material adverse effect on the business, financial condition, and results of operation of the Company.
We will not be able to maintain our operations without additional funding.
As of March 31, 2023, Neptune had $2.0 million of cash and cash equivalents. We had negative cash flows from operating activities of $28.6 million during the twelve-month period ended March 31, 2023 and $54.3 million during the twelve-month period ended March 31, 2022. As of July 25, 2023, we have approximately $0.7 million in cash and cash equivalents, which is expected to be sufficient to operate the business for less than 1 month 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. We may be unable to generate sufficient cash flow from operations or to obtain future borrowings in an amount sufficient to enable us to pay our debt or to fund our other liquidity needs. If we do not have sufficient liquidity, we may need to refinance or restructure all or a portion of our debt on or before maturity, sell assets or borrow more money or issue equity, which we may not be able to do on terms satisfactory to us or at all. In addition, any refinancing could be at higher interest rates and may require us to comply with more onerous covenants which could further restrict our business operations. We may also try to raise the necessary capital through securities offerings, however these may entail significant downsides, due to limitations on use of registration statements on Form S-3. For more information on our inability to use Form S-3, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial and Capital Management—Capital Resources.” Such offerings are subject to market conditions and are beyond our control.
We are subject to foreign currency fluctuations, which could adversely affect our financial results.
We are exposed to the financial risk related to the fluctuation of foreign exchange rates and the degrees of volatility of those rates. Currency risk relates to the portion of our business transactions denominated in currencies other than the Canadian dollar.
For the twelve-month period ended March 31, 2023, approximately 82% of our revenues were in U.S. dollars, and most of our expenses, including the purchase of raw materials, were in U.S. dollars. If the value of the United States dollar fluctuates significantly more than expected in the foreign exchange markets, our operating results and financial condition may be adversely affected.
[This is a reasonable best-efforts offering, no minimum amount of securities is required to be sold, and we may not raise the amount of capital we believe is required for our business plans, including our near-term business plans.
The [Placement Agent] has agreed to use its [reasonable best efforts] to solicit offers to purchase the securities in this offering. The [Placement Agent] has no obligation to buy any of the securities from us or to arrange for the purchase or sale of any specific number or dollar amount of the securities. There is no required minimum number of securities that must be sold as a condition to completion of this offering. Because there is no minimum offering amount required as a condition to the closing of this offering, the actual offering amount, [Placement Agent] fees and proceeds to us are not presently determinable and may be substantially less than the maximum amounts set forth herein. We may sell fewer than all of the securities offered hereby, which may significantly reduce the amount of proceeds received by us, and investors in this offering will not receive a refund in the event that we do not sell an amount of securities sufficient to support our continued operations, including our near-term continued operations. Thus, we may not raise the amount of capital we believe is required for our operations in the short-term and may need to raise additional funds to complete such short-term operations. Such additional fundraises may not be available or available on terms acceptable to us.]
[Purchasers who purchase our securities in this offering pursuant to a securities purchase agreement may have rights not available to purchasers that purchase without the benefit of a securities purchase agreement.
In addition to rights and remedies available to all purchasers in this offering under federal securities and state law, the purchasers that enter into a securities purchase agreement will also be able to bring claims of breach of contract against us. The ability to pursue a claim for breach of contract provides those investors with the means to enforce the covenants uniquely available to them under the securities purchase agreement including: (i) timely delivery of shares; (ii) agreement to not enter into variable rate financings for one year from closing, subject to certain exceptions; (iii) agreement to not enter into any financings for 90 days from closing; and (iv) indemnification for breach of contract.]
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General Risk Factors
Catastrophic events outside of our control, including pandemics, may harm our results of operations or damage our facilities.
A catastrophic events, or the perception of such events, such as earthquakes, tsunamis, floods, typhoons, fires, power disruptions or other natural or manmade disasters, computer viruses, cyber-attacks, terrorist attacks, wars (such as the ongoing military conflict between Russia and Ukraine), riots, civil unrest or other conflicts, or an outbreak of a public health crisis including epidemics, pandemics (such as the COVID-19 pandemic), outbreaks of new infectious diseases or viruses, or related events that can result in volatility and disruption to global supply chains, operations, mobility of people, patterns of consumption and service, and the financial markets could disrupt the Company’s operations, or those of its material contractors. Such disruptions could impair production or distribution of the Company’s potential products, damage inventory or our facilities, interrupt critical functions or otherwise materially adversely affect its business, which could materially harm the Company’s financial condition or results of operations.
The market price of the Company’s Common Shares may be highly volatile.
The stock market, from time-to-time, experiences significant price and volume fluctuations unrelated to the operating performance of particular companies. Future announcements concerning the Company, its competitors, including those pertaining to financing arrangements, government regulations, developments concerning regulatory actions affecting the Company, litigation, additions or departures of key personnel, cash flow, and economic conditions and political factors in Canada and the United States may have a significant impact on the market price of the Company’s Common Shares. In addition, there can be no assurance that the Company’s Common Shares will continue to be listed on Nasdaq.
The market price of the Company’s Common Shares could fluctuate significantly for many other reasons, including for reasons unrelated to the Company’s specific performance, such as reports by industry analysts, investor perceptions, or negative announcements by its subscribers, competitors or suppliers regarding their own performance, as well as general economic and industry conditions. For example, to the extent that other large companies within its industry experience declines in their stock price, the share price of the Company’s Common Shares may decline as well. In addition, when the market price of a company’s shares drops significantly, shareholders often institute securities class action lawsuits against the company.
Litigation resulting from these claims could be costly and time-consuming and could divert the attention of management and other key personnel from the Company’s business and operations. The complexity of any such claims and the inherent uncertainty of commercial or class action, litigation increases these risks. In recognition of these considerations, the Company could suffer significant litigation expenses in defending any of these claims and enter into settlement agreements. If the Company is unsuccessful in its defense of material litigation claims or is unable to settle the claims, the Company may be faced with significant monetary damage awards or other remedies against it including injunctive relief that could have a material adverse effect on the Company’s business, financial condition and results of operations. Administrative or regulatory actions against the Company or its employees could also have a material adverse effect on the Company’s business, financial condition and results of operations.
USE OF PROCEEDS
We estimate the net proceeds to us in this offering will be approximately $[●] million, after deducting the [Placement Agent] fees and expenses and estimated offering expenses payable by us. This assumes a public offering price of $[●] per Common Share and Warrant (the last reported sale price of our Common Shares on Nasdaq on [●], 2023). [However, because this is a [reasonable best-efforts] offering and there is no minimum offering amount required as a condition to the closing of this offering, the actual offering amount, the [Placement Agent]’s fees and net proceeds to us are not presently determinable and may be substantially less than the maximum amounts set forth on the cover page of this prospectus.] The table below depicts how we plan to utilize the proceeds in the event that 50% and 100% of the securities in this offering are sold, after deducting [Placement Agent] fees and expenses and estimated offering expenses payable by us.
Use of Proceeds |
| 100% |
| 50% | ||
Repayment of debt (1) | | $ | [●] | | $ | [●] |
General corporate purposes | | $ | [●] | | $ | [●] |
Total: | | $ | [●] | | $ | [●] |
(1) | Represents a mandatory prepayment of $1 million, together with an exit fee of $100,000 and payment of interest (the “Mandatory Repayment”), payable pursuant to a senior secured notes financing for gross proceeds of $4.0 million with CCUR Holdings, Inc. |
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and Symbolic Logic, Inc. that was entered into on January 12, 2023, as amended. The notes mature on January 12, 2024 and currently bear interest at a rate of 24% per annum, resetting to 16.5% per annum following payment of the Mandatory Repayment. The remainder of the Mandatory Repayment is required to be paid by August 30, 2023. Proceeds from the notes were used for general corporate purposes. |
These estimates exclude the proceeds, if any, from the exercise of Common Warrants issued in this offering. If all of the Common Warrants issued in this offering were to be exercised in cash at an assumed exercise price of $[●] per Common Share, we would receive additional proceeds of approximately $[●] million. We cannot predict when or if these Common Warrants will be exercised. It is possible that these Common Warrants may expire and may never be exercised. Additionally, the Common Warrants contain a cashless exercise provision that permit exercise of Common Warrants on a cashless basis at any time where there is no effective registration statement under the Securities Act of 1933, as amended, covering the issuance of the underlying shares.
We plan to use the proceeds of the offering, after repayment of debt, for general corporate purposes, including working capital. The principal reasons for this offering are to increase our working capital and to provide capital for general corporate purposes.
Due to the uncertainties inherent in our business, we cannot estimate with certainty the exact amounts of the net proceeds from this offering that may be used for any purpose. As a result, our management will have broad discretion in applying the net proceeds from this offering.
The net proceeds from this offering will not significantly improve the Company’s working capital. The Company’s trade and other payables will continue to significantly exceed its cash balance. After receipt of the net proceeds from this offering the Company will still be required to actively manage its liquidity and expenses and payments of payables will continue to not be made as the amounts become due. Nor will the receipt of the net proceeds from this offering remove that substantial doubt and as such, there will remain substantial doubt about our ability to continue as a going concern after this offering.
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2023 as follows:
● | on an actual basis; |
● | on a pro forma basis to give effect to the issuance of common shares and warrants on May 15, 2023; and |
● | on a pro forma as adjusted basis to reflect our receipt of the net proceeds our sale and issuance of [●] Common Shares (assuming [no sale of any Pre-Funded Warrants] and no exercise of the Common Warrants) in this offering based on the assumed public offering price of $[●] per common share (the last reported sale price of our Common Shares on Nasdaq on [●], 2023) after deducting estimated [Placement Agent] fees and expenses and estimated offering expenses payable by us. |
The as adjusted information set forth below is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing. You should read this table in conjunction with “Management’s Discussion and Analysis of
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Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in, or incorporated by reference into, this prospectus.
|
| As of March 31, 2023 | |||||||
| | | | | | Pro forma as | |||
| | Actual |
| Pro forma(1) |
| Adjusted (2) | |||
| | (In thousands, except share and per share data) | |||||||
Liability related to warrants | | $ | 3,156 | | $ | 5,956 | | $ | [●] |
Operating lease liabilities (including current portion) | | $ | 2,018 | | $ | 2,018 | | $ | [●] |
Loans and borrowings (including current portion) | | $ | 22,951 | | $ | 22,951 | | $ | [●] |
Other liability | | $ | 24 | | $ | 24 | | $ | [●] |
Shareholders’ equity: | | | | | | | | | |
Share capital, without par value, 11,996,387 shares issued and outstanding as of March 31, 2023, actual; 24,117,599 shares issued and outstanding, proforma; [●] shares issued and [●] outstanding, proforma as adjusted | | | 321,946 | | | 323,546 | | | |
Preferred shares, no par value; no shares outstanding, actual; no shares outstanding, proforma; and no shares outstanding proforma as adjusted | | | | | | | | | |
Warrants | | $ | 6,155 | | $ | 6,155 | | $ | [●] |
Additional paid-in capital | | $ | 58,139 | | $ | 58,139 | | $ | [●] |
Accumulated other comprehensive loss | | $ | (14,539) | | $ | (14,539) | | $ | [●] |
Deficit | | $ | (383,641) | | $ | (384,799) | | $ | [●] |
Total equity (deficiency) attributable to equity holders of the Company | | $ | (11,940) | | $ | (11,498) | | $ | [●] |
Non-controlling interest | | $ | (15,621) | | $ | (15,621) | | $ | [●] |
Total shareholders’ equity (deficiency) | | $ | (27,561) | | $ | (27,119) | | $ | [●] |
Total capitalization | | $ | 589 | | $ | 3,830 | | $ | [●] |
(1) | The receipt of the net proceeds on May 15, 2023 of our sale and issuance of 4,415,162 common shares and pre-funded warrants to purchase 7,706,050 common shares (and assuming no exercise of the common warrants) based on the price of $0.33 per common share and accompanying common warrant and repricing and extension of life of existing warrants, after deducting estimated costs. As the accounting treatment of the warrants and the allocation between equity and liability components has not yet been finalized, it is assumed for the purposes of the pro forma capitalization that approximately half of the proceeds has been allocated to the derivative warrant liabilities and the remainder to share capital. Accordingly, approximately half of the estimated costs have been allocated to deficit and the remainder to share capital. The pro forma capitalization also reflects a repricing and extension of life of the pre-existing warrants with an offsetting debit to deficit, and assumes the exercise in full of all outstanding pre-funded warrants. |
(2) | As the accounting treatment of the Warrants and the allocation between equity and liability components has not yet been determined, it is assumed for the purposes of the Pro forma as Adjusted capitalization that all of the proceeds have been allocated to the derivative warrant liabilities and therefore, all of the estimate [Placement Agent] fees and expenses and estimated offering expenses have been allocated to deficit. In addition, if the fair value of the derivative warrant liabilities exceeds the total proceeds of this offering, a loss would be recorded upon initial recognition of this offering, which loss is not reflected in the deficit in the above table. |
A $0.25 increase or decrease in the assumed public offering price of $[●] per share, as set forth on the cover page of this prospectus, would increase or decrease the expected net proceeds to us from this offering by approximately $[●] million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated [Placement Agent] fees and expenses and estimated offering expenses payable by us.
Similarly, a 100,000 share increase or decrease in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase or decrease the net proceeds to us by approximately $[●], assuming the assumed public offering price of $[●] per share remains the same, and after deducting estimated [Placement Agent] fees and expenses and estimated offering expenses payable by us.
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The number of our Common Shares to be outstanding immediately after this offering is based on 11,996,387 Common Shares outstanding as of March 31, 2023 and excludes:
● | 674,475 Common Shares issuable upon the exercise of stock options outstanding as of March 31, 2023, at a weighted average exercise price of $70.27 per Common Share; |
● | 12,197,670 Common Shares issuable upon the exercise of warrants outstanding as of March 31, 2023, at a weighted average exercise price of $10.64 per Common Share; |
● | 4,308 deferred share units; |
● | 2,789 restricted share units; |
● | any additional Common Shares that are available for future issuance under our equity compensation plans; and |
● | the issuance, on May 15, 2023, of 4,415,162 common shares, 7,706,050 pre-funded warrants, and accompanying warrants to purchase up to an aggregate of 12,121,212 common shares at a combined public offering price of $0.33 per share, and the repricing and extension the term of existing common warrants to purchase up to an aggregate of 8,423,733 common shares. |
DILUTION
If you purchase Common Shares and Warrants in this offering, you will experience dilution to the extent of the difference between the combined public offering price per Common Share and related Warrant in this offering and our net tangible book value (deficit) per Common Share. Net tangible book value (deficit) per Common Share is equal to the amount of our total tangible assets, less total liabilities, divided by the number of outstanding Common Shares. As of March 31, 2023, our net tangible book value (deficit) was approximately $(31.6 million), or approximately $(2.63) per Common Share. Taking into account the Common Shares and warrants to purchase Common Shares issued on May 15, 2023, our pro forma net tangible book value (deficit) was approximately $(31.2 million) or $(1.29) per Common Share. The pro forma net tangible book value has been computed assuming exercise in full of the May 15, 2023 pre-funded warrants and no exercise of the common warrants.
After giving effect to the assumed sale by us of Common Shares and Warrants in this offering at an assumed combined public offering price of $[●] per Common Share and related Warrant (the last reported sale price of our Common Shares on Nasdaq on [●], 2023), after deducting the estimated [Placement Agent] fees and expenses and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value (deficit) as of March 31, 2023 would have been approximately $([●] million), or approximately $([●]) per Common Share. The pro forma as adjusted net tangible book value has been computed assuming [exercise in full of the Pre-Funded Warrants] and no exercise of the Common Warrants. This represents an immediate increase in net tangible book value (deficit) of $[●] per Common Share to existing shareholders and an immediate dilution of $[●] per share to new investors purchasing Common Shares and related Warrants in this offering, attributing none of the assumed combined public offering price to the Common Warrants offered hereby. The following table illustrates this per Common Share dilution:
| | | ||||
|
| Per Common |
| | ||
| | Share and | | | ||
| | Warrant | | Total | ||
Assumed combined public offering price per Common Share and related Common Warrant | | $ | [●] | | $ | |
Net tangible book value (deficit) per Common Share as of March 31, 2023 | | $ | (2.63) | | | |
Increase in net tangible book value (deficit) per Common Share after the May 2023 offering | | $ | 1.34 | | | |
Pro forma net tangible book value (deficit) per Common Share as of March 31, 2023 | | $ | (1.29) | | | |
Increase in pro forma net tangible book value per Common Share after this offering | | $ | [●] | | | |
Pro forma as adjusted net tangible book value (deficit) per Common Share after this offering | | $ | [●] | | | |
Dilution per Common Share to new investors | | $ | [●] | | $ | ([●]) |
A $0.25 increase (decrease) in the assumed combined public offering price of $[●] per Common Share and Common Warrant would result in an increase (decrease) in our pro forma as adjusted net tangible book value (deficit) of approximately $[●] million or approximately $[●] per Common Share, and would result in an increase (decrease) in the dilution to new investors of approximately $[●] per Common Share, assuming that the number of Common Shares and Common Warrants sold by us remains the same, after deducting the estimated [Placement Agent] fees and expenses and estimated offering expenses payable by us.
Similarly, a decrease of 100,000 in the number of Common Shares offered by us would decrease our pro forma as adjusted net tangible book value by approximately $[●] million or $[●] per share, and increase the dilution per share to investors participating in this offering by $[●] per share, assuming the assumed offering price per share remains the same and after deducting the estimated [Placement Agent]
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commissions and estimated offering expenses payable by us. The information discussed above is illustrative only and will adjust based on the actual offering price, the actual number of Common Shares we offer in this offering, and other terms of this offering determined at pricing.
The foregoing discussion and table do not take into account further dilution to new investors that could occur upon the exercise of outstanding options or warrants having a per share exercise price less than the per Common Share and related Common Warrant offering price to the public in this offering. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our shareholders.
The number of our Common Shares to be outstanding immediately after this offering is based on 11,996,387 Common Shares outstanding as of March 31, 2023 and excludes:
● | 674,475 Common Shares issuable upon the exercise of stock options outstanding as of March 31, 2023, at a weighted average exercise price of $70.27 per Common Share; |
● | 12,197,670 Common Shares issuable upon the exercise of warrants outstanding as of March 31, 2023, at a weighted average exercise price of $10.64 per Common Share; |
● | 4,308 deferred share units; |
● | 2,789 restricted share units; |
● | any additional Common Shares that are available for future issuance under our equity compensation plans; and |
● | the issuance, on May 15, 2023, of 4,415,162 common shares, 7,706,050 pre-funded warrants, and accompanying warrants to purchase up to an aggregate of 12,121,212 common shares at a combined public offering price of $0.33 per share, and the repricing and extension the term of existing common warrants to purchase up to an aggregate of 8,423,733 common shares. |
MARKET INFORMATION FOR SECURITIES AND DIVIDEND POLICY
Our Common Shares trade under the symbol “NEPT” on Nasdaq.
The following table sets forth the high and low intraday sales prices per Common Share as reported on Nasdaq beginning on April 1, 2020 and taking into account the Share Consolidation that took effect on June 13, 2022:
| Low Trading Price |
| High Trading Price | |||||
Period |
| ($) | ($) | |||||
Year Ending March 31, 2024 |
|
|
|
|
|
| ||
Second Quarter |
| (to [●], 2023) | $ | [●] | $ | [●] | ||
First Quarter |
| (June 30, 2023) | $ | 0.13 | $ | 0.70 | ||
Year Ending March 31, 2023 |
|
|
|
|
|
| ||
Fourth Quarter |
| (March 31, 2023) | $ | 0.29 | $ | 1.04 | ||
Third Quarter |
| (December 31, 2022) | $ | 0.23 | $ | 1.92 | ||
Second Quarter |
| (September 30, 2022) | $ | 1.00 | $ | 3.74 | ||
First Quarter |
| (June 30, 2022) | $ | 1.34 | $ | 1.41 | ||
Year Ended March 31, 2022 |
|
|
|
|
|
| ||
Fourth Quarter |
| (March 31, 2022) | $ | 7.35 | $ | 19.60 | ||
Third Quarter |
| (December 31, 2021) | $ | 12.25 | $ | 22.40 | ||
Second Quarter |
| (September 30, 2021) | $ | 19.25 | $ | 41.30 | ||
First Quarter |
| (June 30, 2021) | $ | 37.10 | $ | 55.30 | ||
Year Ended March 31, 2021 |
|
|
|
|
|
| ||
Fourth Quarter |
| (March 31, 2021) | $ | 45.15 | $ | 110.25 | ||
Third Quarter |
| (December 31, 2020) | $ | 52.15 | $ | 86.80 | ||
Second Quarter |
| (September 30, 2020) | $ | 73.85 | $ | 113.05 | ||
First Quarter |
| (June 30, 2020) | $ | 35.70 | $ | 110.25 |
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As of [●], 2023, we had [42] shareholders of record based on the records of our transfer agent, which does not include beneficial owners of our Common Shares whose shares are held in the names of various securities brokers, dealers and registered clearing agencies.
Dividends
We do not anticipate paying any dividend on our Common Shares in the foreseeable future. We presently intend to retain future earnings to finance the expansion and growth of our business. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors the board of directors deems relevant. In addition, the terms of any future debt or credit facility may preclude us from paying dividends.
Securities Authorized for Issuance under Equity Compensation Plans
Information about our equity compensation plans, as set forth in this prospectus under the caption “Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters”, is incorporated herein by reference.
Unregistered Sales of Equity Securities
Except as set forth below, since [●], 2020, we have not sold any securities that were not registered under the Securities Act.
(1) | In March 2023, we issued warrants to purchase common shares of the Company to one accredited investor which permits the investor to purchase an aggregate of 111,111 of our common shares at an exercise price of $0.54. |
(2) | In February 2023, we issued to three accredited investors an aggregate of 146,330 of our common shares in connection with loans to Sprout Foods, Inc. |
(3) | In January 2023, we issued (i) 71,665 common shares to our financial advisor in connection with our strategic review and (ii) to two accredited investors the January 2023 Warrants, which permits the investors to purchase an aggregate of 850,000 of our common shares at an exercise price of $0.53 per common share. |
(4) | In October 2022, we issued to accredited investors the Series E Warrants in the Private Placement, which permits the investors to purchase an aggregate of 6,417,114 of our common shares at an exercise price of $1.62 per common share. |
(5) | In July and September 2022, we issued to two accredited investors an aggregate of 409,435 common shares in connection with loans to Sprout Foods, Inc. |
(6) | In June 2022 we issued 7,104 common shares to our financial advisor in connection with our proposed divestiture of our Canadian cannabis business. |
(7) | In October 2020, we issued 462,963 common shares and 300,926 warrants to purchase common shares at an offering of $75.60 per share to institutional investors. |
Repurchases of Equity Securities
We did not repurchase any of our equity securities during the years ended March 31, 2023 and 2022.
BUSINESS
Overview
General
Neptune Wellness Solutions Inc. (“Neptune”, the “Company”, “we”, “us” or “our”) is a modern consumer packaged goods (“CPG”) company driven by a singular purpose: to transform the everyday for a healthier tomorrow. Neptune is a diversified health and wellness company with multiple brand units. With a mission to redefine health and wellness, Neptune is focused on building a broad portfolio of high quality, affordable consumer products in response to long-term secular trends and market demand for natural, plant-based, sustainable and purpose-driven lifestyle brands. The Company utilizes a highly flexible, cost-efficient manufacturing and supply chain infrastructure that can be scaled up and down or into adjacent product categories to identify new innovation opportunities, quickly adapt to consumer preferences and demand, and bring new products to market through its mass retail partners and e-commerce channels. Leveraging decades of expertise in extraction and product formulation, Neptune is a provider of turnkey product development and supply chain solutions to business customers across several health and wellness verticals, including nutraceuticals and white label consumer packaged goods. Neptune has expanded its operations since June 2020 into brand units in order to better address its markets.
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The main brand units are Nutraceuticals and Organic Foods & Beverages. All amounts in this prospectus are in US dollars, unless otherwise noted.
History
Neptune was incorporated under Part IA of the Companies Act (Québec) on October 9, 1998 under the name Neptune Technologies & Bioresources Inc. Since its incorporation, Neptune has amended its articles of incorporation on numerous occasions. The Company first amended its articles on May 30, 2000 to convert its then issued and outstanding shares into newly-created classes of shares. The Company’s articles were also amended on May 31, 2000 to create Series A Preferred Shares. On August 29, 2000, the Company converted all its issued and outstanding Class A shares into Class B subordinate shares. On September 25, 2000, the Company further amended its share capital to eliminate its Class A shares and converted its Class B subordinate shares into Common Shares. On November 1, 2013, the Company amended its articles of incorporation to reflect certain changes to items relating to board matters. The Company’s Common Shares are listed and posted for trading on the Nasdaq under the symbol, “NEPT”.
On June 9, 2022, we effected a one for thirty-five (1-for-35) reverse split of our common shares, which we refer to as the “Share Consolidation,” as approved by our board of directors. Trading of our common shares on both the TSX and Nasdaq on a post-consolidated basis commenced as of the open of markets on June 13, 2022. On August 15, 2022, the Company voluntarily delisted its Common Shares from the TSX.
Our Properties and Operations
The following table sets forth the Company’s principal physical properties:
Type | Material Properties Location | Leased / Owned | ||
Office | Laval, Québec | Leased | ||
Office | Vaudreuil, Québec | Leased | ||
Office / Laboratory | Laval, Québec | Leased | ||
Office | Jupiter, Florida | Leased |
Our headquarters is located in leased offices in Laval, Québec, where our general and administrative departments primarily operate. We also lease laboratory space in Laval, Quebec where testing and development of many of our products takes place. On December 5, 2022, our U.S. operations opened an office in Jupiter, Florida which serves as the U.S. headquarters.
We previously owned a production facility in Sherbrooke, Quebec where we conducted our cannabis operations including laboratory testing. On October 17, 2022, we announced that we had entered into a binding agreement for the sale of our cannabis business, which would include the sale of our cannabis brands and the Sherbrooke building in one or more transactions. The disposition of our cannabis operations occurred on November 9, 2022. We believe the divestment of the cannabis assets will allow us to realize significant cost savings and operational streamlining from redirected resources towards our simplified corporate structure.
We also have leased offices in Vaudreuil, Province of Québec, Canada, which have been sub-leased to a third-party tenant.
Business Strategy
Neptune’s vision is to change consumer habits through the creation and distribution of environmentally friendly, ethical and innovative consumer product goods. Our mission is to redefine health and wellness and help humanity thrive by providing sustainable consumer focused solutions. Despite the decline in global economic activity since the outbreak of the COVID-19 virus, Neptune has taken transformative, and successful, actions to increase its sales, distribution and reach in both the business-to-business (“B2B”) and business-to-consumer (“B2C”) models in the 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 and Organic Foods & Beverages. Neptune’s current brand portfolio across these verticals include Sprout®, Neptune Wellness™, Forest Remedies®, and MaxSimil®.
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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.
Neptune’s future will be focused on brand creation, accelerating organic growth with emphasis on increased efficiency and margin expansion. This will be complemented by accretive acquisitions with a proven track record of operational excellence. On July 22, 2021, the Company launched Forest Remedies’ plant-based Omega 3-6-9 gummies and soft gels. Neptune is focused on expanding its exclusive Omega-3 delivery technology MaxSimil® while improving growth and profitability in its Nutraceuticals vertical. The MaxSimil® product lineup will be expanded with the launch of two new consumer products: MaxSimil® with CoQ10 and MaxSimil® with Curcumin. Additionally, the Company launched a new consumer line of Vitamin Sprays and Pumps for both children and adults with selected retail partners. To support anticipated accelerated growth, the Nutraceuticals U.S. sales force has been expanded to maximize awareness and distribution of the capabilities and expertise in nutraceuticals, including prebiotics and probiotics, and proteins within this important vertical.
Products, Principal Markets, Methods of Distribution and Brands
Products
Our Nutraceutical products and Organic Foods and Beverages are manufactured by third party manufacturers. In order to meet demand for our products, we have developed relationships with selected contract manufacturers. 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 of quality procedures and certifications 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
On October 16, 2022, Neptune entered into an asset sale and purchase agreement (the “ASPA”) with a third-party, for its Canadian cannabis business including the Sherbrooke facility, following the planned divestiture of this business announced on June 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 on November 9, 2022. Some assets were excluded from the ASPA and were written down accordingly. On November 10, 2022, the Company filed a notice of cessation of cannabis activities with Health Canada and requested that its cannabis processing and research licenses be revoked. As of November 11, 2022, all cannabis was removed from the Sherbrooke facility and the Company no longer possesses or conducts any activities with cannabis.
Markets
Nutraceuticals
Neptune offers a variety of specialty ingredients, including our licensed specialty ingredient MaxSimil®, a technology that helps increase digestion and absorption of fat-soluble and nutritional ingredients. Additionally, the Company sources a variety of other marine oils, seed oils and specialty ingredients that are available for sale as raw material or transformed into finished products. The Company has recently launched a new line of Vitamin Sprays and Pumps for both children and adults. Neptune is focused on expanding its exclusive Omega-3 delivery technology MaxSimil® while improving growth and profitability in its Nutraceuticals vertical through its brand Biodroga.
Neptune’s core strength is product innovation with a focus on specialty ingredients offered in bulk soft gels and liquid delivery systems. The Company continues to expand its delivery system capabilities with projects for pumps, sprays and roll-ons. All of Neptune’s
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Nutraceutical products are available under distributors’ private labels, primarily sold in the Canadian and U.S. nutraceutical markets. Neptune, through its nutraceuticals products business, also formulates, develops and provides customers with turnkey nutrition solutions.
The Company sells wellness products to the Nutraceutical market through its Forest Remedies brand. Forest Remedies offers plant-based supplements, including first-of-its kind multi-omega gummies and soft gels with packaging that is 100% plastic-free. Neptune announced, on March 10, 2022, the launch of its Forest Remedies Multi Omega 3-6-9 line of supplements. This distribution agreement marks another important milestone in our efforts to transform Neptune into a high-growth branded CPG company.
Organic Foods and Beverages
In February 2021, Neptune acquired a controlling interest in Sprout Foods, Inc., an organic plant-based baby food and toddler snack company. Sprout is an integral piece of Neptune’s health and wellness portfolio and represents a key brand within the Organic Foods and Beverages vertical. Since completing the Sprout acquisition, the Company has begun expansion efforts in Sprout’s distribution across substantially all of Target’s U.S. retail stores. The Company also announced, on July 27, 2021, the initial launch of Sprout products into Canada, in Metro grocery stores in the province of Ontario. Neptune further expects to launch Sprout products in North America throughout the remainder of the fiscal year. The Company expects the Neptune/Sprout combination to result in significant incremental revenue growth, with several near and long-term revenue synergy opportunities identified within Neptune’s existing relationships and current sales channels. As described above, Neptune also announced on June 9, 2021, an exclusive multi-year licensing agreement between Sprout and CoComelon, the #1 children’s entertainment and educational show in the world with more than 110 million subscribers worldwide. This co-branded product line is now available on Walmart.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 the U.S., accounting for approximately 90 percent of the overall market.
On May 2, 2023, Neptune announced that four of its most popular Sprout Organics x CoComelon co-branded, organic toddler pouches have been picked up by Target and are now available in select Target Stores across the United States, and Target.com. The Sprout Organics x CoComelon line includes 15 SKU’s that are made up of toddler pouches, Wafflez snacks, and plant-based snack bars, each leveraging CoComelon’s brand as the #1 Kids YouTube Channel in the world. In addition to the CoComelon partnership, Sprout Organics SKU’s consist of organic toddler pouches, toddler meals, toddler snacks and the newly launched Big Kid Mealz; Sprouts first product out of the baby aisle.
In the last year, Sprout has made the following major distribution gains and sales milestones:
Distribution: Now available in 90% of the organic baby food market, Sprout x CoComelon being a key driver of sales velocity.
Target SKU Count: 4 Sprout x CoComelon SKUs launched in select Target stores nationwide and Target.com.
Added Distribution: In the last year, Sprout has established substantial distribution gains with leading retailers, and Target has contributed to that growth.
CoComelon Co-Brand: Yes Yes Veggie product is now Sprout’s #1 highest selling pouch in the latest 26 weeks in Total US xAOC*.
Geographic Presence: Now available in all 50 states, as well as in Canada.
*Sales velocity: Sales dollars per total point of distribution; Nielsen AOD; Total US x AOC Latest 26 weeks W/E 3-25-23
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.
The Company sells its Neutraceutical products through distributors and directly to retail outlets in the United States. It also sells its products online through its own website forestremedies.com as well as e-commerce sites.
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Organic Foods and Beverages
The Company, though its Sprout subsidiary, sells its products to mass retailers, grocery stores and other retail outlets, as well as online through e-commerce sites and its own website sproutorganics.com.
Our B2C Brand Portfolio Strategy
We are currently working on accelerating brand equity for our brand portfolio:
| Biodroga™. Neptune, through its Biodroga subsidiary, provides product development and turnkey solutions (4PL) to its customers throughout North America. Biodroga offers a full range of services, whether it is leveraging our global network of suppliers to find the best ingredients or developing unique formulations that set our 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. | |
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| | MaxSimil. Neptune 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 predigest omega-3 fatty acids. The Journal of Nutrition, by the Oxford University Press, recently released the results of a clinical study that evidences MaxSimil’s superior absorption as compared with standard fish oil supplements. MaxSimil was first introduced to the market in 2018, and is sold as a straight omega-3 supplement with standard and unique concentration of EPA/DHA. MaxSimil is also starting to be presented in combination with specialty ingredients such as Curcumin and Vitamin K2. |
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| | Forest Remedies®. Under our Forest Remedies® brand, we offer first-of-their kind vegan multi-omega gummies and soft gels with packaging that is 100% plastic-free. Launched on March 10, 2022, our Forest Remedies Multi Omega 3-6-9 line of supplements is available into more than 340 Sprouts Farmers Market stores across the U.S. This distribution agreement marks another important milestone in our efforts to transform Neptune into a high-growth branded CPG company. |
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| | Sprout®. Neptune entered a new market with the Neptune/Sprout combination. Sprout has created a trusted organic baby food brand with a comprehensive range of products that are always USDA certified organic, non-GMO and contain nothing artificial. Sprout’s products target four segments: Stage 2 (children 6 months and up), Stage 3 (children 8 months and up), Toddler (children aged 12 months and up) and Snacks (children 8 months and up). Since our acquisition of a controlling interest in Sprout, the Company has begun expansion efforts in Sprouts’ distribution substantially in all of Target’s U.S. retail stores. The Company also announced on July 27, 2021, its initial launch into the Canadian market through its partnership with food retailer Metro Inc. Certain toddler snacks under this brand label are now available in Metro grocery stores in the province of Ontario. |
Competition
The nutraceutical 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 prospectus.
REGULATORYRegulatory
Our Nutraceutical Beauty, Personal Care and Organic Food and Beverage businesses are subject to varying degrees of regulation by a number of government authorities in Canada and the U.S., including Health Canada, the FDA, the Federal Trade Commission (FTC), the Consumer Product
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Safety Commission, the U.S. Department of Agriculture, and the Environmental Protection Agency. Various provincial, state and local agencies in areas where we operate and in which our products are sold also regulate our business. The areas of our business regulated by both these and other authorities include, among others:
● | 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. |
product claims and advertising;
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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 in Canada and the U.S., while other agencies regulate marketing and advertising claims. Under Health Canada and FDA rules, companies that manufacture, package, label, distribute or hold nutritional supplements are required to meet certain GMP’s to ensure such products are of the quality specified and are properly packaged and labeled. We are committed to meeting or exceeding the standards set by Health Canada and the FDA and believe we are currently operating within the mandated GMP.
Health Canada and he FDA also regulate the labeling and marketing of dietary supplements and nutritional products, including the following:
● | 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. |
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 in Canada and the U.S., including those relating to health, safety, bioterrorism, taxes, labor, employment, import and export, the environment and intellectual property. All of these regulations require significant financial and operational resources to ensure compliance, and we cannot assure you we will always be in compliance despite our best efforts to do so or that being in compliancecomplying will not become prohibitively costly to our business.
INTELLECTUAL PROPERTYIntellectual 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. On June 8, 2022 we announced the planned accelerated divestiture of our cannabis business including the sale of our cannabis brands, Mood Ring™ and PanHash™, as well as the Sherbrooke building in one or more transactions, and on October 17, 2022 we announced that we had entered into a binding agreement for the sale of our cannabis business. The sale closed on November 9, 2022.
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Patent Applications
On August 9, 2018, Neptune filed two applications with the United States Patent and Trademark Office (USPTO) for patents related to the extraction of cannabis material. The extraction processes provide highly-efficient methods to obtain cannabinoids and other desired compounds from the cannabis plant at a greater purity than conventional methods. Both processes are applicable to marijuana and hemp and have been incorporated into the Company’s GMP-certified extraction facility in Sherbrooke. The first patent application outlines a method of extracting and isolating compounds from plants of the Cannabis genus at low temperature by using a cold organic solvent. The second patent application similarly provides for a method for extracting compounds from cannabis at low temperature, but without the use of organic solvents. Specifically, this patent relates to a process for high recovery of cannabinoids and terpenes by using natural solvents. The patent applications were sold in connection with the sale of the Company’s cannabis business, which closed on November 9, 2022.
Licenses
On November 27, 2017,January 31, 2020, Neptune entered into an exclusive, worldwide, and royalty-bearing licensing agreement with SCF Pharma Inc. for the usedevelopment, manufacturing, formulation, distribution, sub-licensing and sale of the MaxSimil® technology in combination with cannabis-derivednutraceutical products. This new agreement allows Neptune to research, manufacture, formulate, distribute, and sell monoglyceride omega-3-rich ingredients in combination with cannabis and/or cannabinoid-rich or hemp derived ingredients for medical and adult use applications. The Company believes the MaxSimil® technology has the ability to enhance absorption of lipidbased and lipid soluble ingredients such as cannabinoids, essential fatty acids including EPA and DHA omega-3s, vitamins A, D, K and E, CoQ10 and others. This could be especially beneficial in increasing the absorption of ingredients which are not easily absorbed, such as CBD.
On June 9,May 28, 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. The licensing agreement, which expires December 31, 2023, will automatically extend until December 31, 2026 provided there has not been a material breach of the agreement, the Company does not provide notice of an intent
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to not extend by October 1, 2023, and the Company has accrued royalties of $195,000 or more under the agreement before October 1, 2023. The Company expects to meet the minimum royalty threshold later this year, on time.
EMPLOYEESEmployees
As of September 30, 2022,March 31, 2023, we had 7150 employees working at our business offices in Jupiter and Laval, at our facility in Sherbrooke or remotely, down from 155161 employees at June 30,March 31, 2022. Our employees possess specialized skills and knowledge, which we believe are valuable assets of the Company. As of September 30, 2022, 37March 31, 2023, 21 of our employees were in Canada while 3429 were in the United States. We also had 821 temporary personnel. OneNone of our employees waswere 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.
SEASONALITYSeasonality
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.
BUSINESS UPDATEBusiness 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
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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 in October 2022, June 2022 and March 2022. We also issued promissory notes in July 2022, November 2022 and March 2023, issued senior secured notes in January 2023 and entered into an accounts receivable factoring facility in January 2023; an inventory factoring facility was also added in May 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 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Going Concern.Concern. Unless otherwise specified, all dollar amounts are in US dollars (“USD”USD”).
Growth Drivers
We remain enthusiastic about the growth prospects of our business, with opportunity across all three of our core verticals. We have successfully made the transition to a fully-integrated consumer packaged goods company with a diverse suite of better-for-you brands, available in some of the country’s largest retail chains. At the same time, we are driving consumer relevance by pursuing the right strategic partnerships for co-branded product lines and expanding our product offerings in key wellness categories.
Major Distribution Gains
Since acquiring a majority stake in Sprout Organics in February 2021, we have expanded Sprout baby foods and toddler snacks substantially, both online and in store at major retailers like Target and Wal-Mart.Walmart. Earlier in March 2022, we announced the launch of our Forest Remedies Multi Omega 3-6-9 line of supplements into more than 340 Sprouts Farmers Market stores across the U.S. This distribution agreement marks another important milestone in our efforts to transform Neptune into a high-growth branded CPG company.
Strategic Partnerships
In February 2022, we brought Walmart a first-of-its-kind collaboration between Sprout Organics and popular kids’ entertainment platform CoComelon. This co-branded product line is now available on Walmart.com and in 900 Walmart stores and has been very well-received. With this launch, Sprout Organics now sells into the top organic baby food retailers in the U.S., accounting for approximately 90 percent of the overall market.
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Investing in Our Prospects
On November 15, 2021 we initiated a strategic review and made some big changes to get on track to becoming a profitable diversified CPG company. These actions have taken effect, and we are starting to see the results. The third quarter of fiscal year 2022 was the first quarter where we posted a positive gross marginsmargin since transitioning to a CPG-focused model. We also hadThe third quarter of fiscal year 2022 was the first quarter where we posted a positive gross margin insince transitioning to a CPG-focused model. For the second quarter of fiscal 2023. We also delivered four consecutive quarters of sequential revenue growth before a decrease in the fourth quarter of the yearthree-month period ended March 31, 2022 as well as a decrease in2023, consolidated gross profit margin was (21.14)% of net sales, up from (49.39)% for the second quartersame period last year. For the twelve-month period ended March 31, 2023 the gross profit margin was (4.70)% up from (15.44)% for the same period of 2023.the prior year. However, there can be no assurances that revenue or gross profit growth will continue.
While the global market can be unstable during turbulent times, we are taking steps to ensure we remain well-positionedwell- positioned to execute against our stated plan: controlling our costs while pursuing high-growth opportunities. To that effect, Neptune announced on June 8, 2022 the launch of a new Consumer Packaged Goods (“CPG”)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) the 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 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.
On October 16, 2022, Neptune entered into an asset sale and purchase agreement (the “ASPA”“ASPA”) with a third-party,third- party, for its Canadian cannabis business including the Sherbrooke facility, following the divestiture of this
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business announced on June 8, 2022. The aggregate purchase price of the assets sold, net of liabilities assumed, amounted to approximately $3.7$3.8 million ($5.15 million CAD). The ASPA closed on November 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.
RECENT CORPORATE DEVELOPMENTSRecent Corporate Developments
Neptune’s Presence in Canada’s Cannabis Market
During the year ended on March 31, 2022, Neptune supplied the market with premium cannabis extracts and dried flower, under its Mood Ring™Ring™ and PanHash™PanHash™ brands, and completed its launch of all significant regulated product categories. All cannabis products were manufactured and packaged at the Company’s purpose-built facility in Sherbrooke, Quebec. On June 8, 2022, the Company announced a planned accelerated 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 six-monthnine-month period ended September 30,December 31, 2022. On October 16, 2022, Neptune entered into an asset sale and purchase agreement (the “ASPA”“ASPA”) with a third-party, for its Canadian cannabis business including the Sherbrooke facility, following the planned divestiture of this business announced on June 8, 2022. The aggregate purchase price of the assets sold, net of liabilities assumed, amounted to approximately $3.7$3.8 million ($5.15 million CAD). The ASPA closed on November 9, 2022. Some assets were excluded from the ASPA and were written-down accordingly, on October 17, 2022 we announced that we had entered into a binding agreement for the sale of our cannabis business and the sale closed on November 9, 2022.
Launch of a New CPG Focused Strategic Plan
On June 8, 2022, Neptune announced the launch of a new Consumer Packaged Goods (“CPG”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) 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– 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%.
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Neptune Announces New Line of CoComelon® Co-Branded Products
Neptune announced on May 26, 2022 a new line up of CoComelon co-branded organic snack bars for toddlers. The snack bars are the latest innovation in the Sprout Organics x CoComelon product line launched earlier this year,in 2022, 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.
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Changes to Management
As part of the Company’s renewed focus on its CPG brands and Sprout Organics in particular, Neptune announced on June 8, 2022 that Sarah Tynan, Sprout’s Chief Customer Officer, was promoted to CEO of Sprout. Ms. Tynan has been instrumental in garnering big distribution gains forresigned from her position at 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.as of July 7, 2023.
On June 14, 2022, Neptune announced the appointment of Raymond Silcock as Chief Financial Officer, effective July 25, 2022. Mr. Silcock, who is based out of Neptune’s Jupiter, Florida office, previously served as Executive Vice President and Chief Financial Officer at Perrigo Plc, as well as CFO at Diamond Foods, The Great Atlantic and Pacific Tea Company, UST Inc., and Cott Corporation. In addition, he has previously served as Chair of both Audit and Strategy Committees on several Boards including Pinnacle Foods Inc,Inc., American Italian Pasta Company, Prestige Brands and Bacardi Limited. Mr. Silcock replaces Randy Weaver who was Interim CFO up to July 22, 20222022.
Receipt of Nasdaq NotificationNotifications
On November 15, 2022, the Company filed a Notification of Late Filing on Form 12b-25 (the “Form 12b-25”“Form 12b-25”) with the SEC, which stated that it was unable to file its Form 10-Q for the quarter ended September 30, 2022 by the prescribed due date without unreasonable effort or expense because it required additional time to finalize its financial statements to be included in the Form 10-Q. The Company did not file its Form 10-Q by the fifth calendar day delay after the prescribed due date. On November 22, 2022, the Company received a notice (the “Deficiency Notice”)Deficiency Notice from Nasdaq indicating that, as a result of not having timely filed the Form 10-Q with the SEC, the Company is not in compliance with Nasdaq Listing Rule 5250(c)(1) (the “Listing Rule”“Listing Rule”), which requires timely filing of all required periodic financial reports with the SEC. The Deficiency Notice had no immediate effect on the listing or trading of the Company’s common shares on the Nasdaq Capital Market.Nasdaq. The Deficiency Notice indicated that the Company could regain compliance with the Listing Rule at any time prior to January 23, 2023 by filing the Form 10-Q. If the Company failed to file the Form 10-Q by such date, the Company maycould submit a plan to regain compliance with the Listing Rule prior to such date and, following receipt of such plan, Nasdaq may grant an extension of 180 calendar days from the Form 10-Q due date, or until May 15, 2023, for the Company to regain compliance. On December 20, 2022, the Company filed its Form 10-Q for the quarter ended September 30,December 31, 2022 and, thereby, regained compliance with the Listing Rule.
Previously, on August 31, 2021, Neptune announced that thatOn February 15, 2023, the Company hadfiled a Form 12b-25 with the SEC, which stated that it was unable to file its Form 10-Q for the quarter ended December 31, 2022 by the prescribed due date without unreasonable effort or expense because it required additional time to finalize its financial statements to be included in the Form 10-Q. The Company did not file its Form 10-Q by the fifth calendar day delay after the prescribed due date. On February 23, 2023, the Company received a written notification (the “Notification Letter”)Deficiency Notice from Nasdaq on August 30, 2021, notifyingindicating that, as a result of not having timely filed the Form 10-Q with the SEC, 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 thattimely filing of all required periodic financial reports with the closing bid price for the Company’s common shares listed on Nasdaq be maintained at a minimum of US$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 from July 16, 2021, to August 27, 2021, the Company no longer met the minimum bid price requirement.
SEC. The Notification LetterDeficiency Notice had no immediate effect on the listing or trading of the Company’s common shares on the Nasdaq. The Deficiency Notice indicated that the Company could regain compliance with the Listing Rule at any time prior to April 24, 2023 by filing the Form 10-Q. If the Company failed to file the Form 10-Q by such date, the Company may submit a plan to regain compliance with the Listing Rule prior to such date and, following receipt of such plan, Nasdaq may grant an extension of 180 calendar days from the Form 10-Q due date, or until August 21, 2023, for the Company to regain compliance. On March 30, 2023, the Company filed its Form 10-Q for the quarter ended December 31, 2022 and, thereby, regained compliance with the Listing Rule.
On December 29, 2022, we received a Deficiency Notice from Nasdaq informing us that our Common Shares have failed to comply with the $1.00 minimum bid price required for continued listing under Nasdaq Listing Rule 5550(a)(2) based upon the closing bid price of our Common Shares for the 30 consecutive business days prior to the date of the Deficiency Notice. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company was providedwe were given 180 calendar days from December 29, 2022, or until February 28, 2022,June 27, 2023, to regain compliance with Rule 5550(a)(2). On June 27, 2023, the minimum bid price requirement, during which time the Company’s common shares continuedCompany filed for an extension to trade onthis deadline and the Nasdaq Capital Market. Tohas determined that the Company is eligible for an additional 180 calendar day period, or until December 26, 2023, to regain compliance,compliance. If at any time before
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December 26 2023, the Company’s common shares must have had a closing bid price of our Common Shares closes at least US$1.00$1.00 per share or more for a minimum of 10 consecutive trading days.business days, the Nasdaq will provide written confirmation that we have regained compliance.
On July 19, 2023, we received a deficiency notice from Nasdaq informing us that our reported stockholders’ equity as reported in our recent Annual Report on Form 10-K has decreased below the minimum stockholders’ equity requirement for continued listing on the Nasdaq Capital Market under the equity criteria under Nasdaq Listing Rule 5550(b)(1) (“Rule 5550(b)(1)”). The Company requested and received an additional 180-day periodhas 45 calendar days, or until September 5, 2023, to submit a plan to regain compliance, and had until August 27, 2022 to comply.
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On June 9, 2022, Neptune announcedcompliance. If the completionplan is accepted, Nasdaq can grant an extension of the Company’s proposed consolidation of its common shares (the “Common Shares”) on the basis of one (1) post-consolidation Common Share for every thirty-five (35) pre-consolidation Common Shares (the “Share Consolidation”). The post-Share Consolidation Common Shares commenced trading on the NASDAQ and the TSX at the market open on June 13, 2022. The Share Consolidation reduced the number of Common Shares issued and outstanding180 calendar days from approximately 198 million Common Shares to approximately 5.7 million Common Shares as at June 13, 2022.
As of the date of this prospectus, the Company has regained compliance with the Nasdaq minimum bid price requirement.letter to evidence compliance.
Change in Auditor
On November 4, 2021,May 30, 2023, the Company announced the appointment of KPMG LLPBerkowitz Pollack Brant Advisors + CPAs (“KPMG”BPB”) as its independent registered public accounting firm, effective October 22, 2021, followingto audit our consolidated financial statements for the resignationyear ending March 31, 2024. Accordingly, KPMG LLP (“KPMG”), which previously served as the Company’s independent auditors, was dismissed upon completion of Ernst & Young LLP (“EY”)their audit on September 23, 2021.July 14, 2023 of the Company’s consolidated financial statements as of and for the year ended March 31, 2023 and the issuance of their report thereon. The appointment of KPMGBPB was made after a thorough evaluation process and has been approved by Neptune’s Boardour board of Directorsdirectors and itsour Audit Committee. KPMG replaces EY as Neptune’s independent registered public accounting firm for the fiscal year ending March 31, 2022. Previously, on July 10, 2020, the Company dismissed KPMG and proposed EY as its independent registered public accounting firm, which was effective following the Company’s annual and special meeting of shareholders held on August 12, 2020.
Loss of Foreign Private Issuer Status
As of September 30, 2021, the Company was no longer considered a foreign private issuer and accordingly, such change in status required the Company to file as a U.S. domestic filer, effective April 1, 2022, and comply with all periodic disclosures and reporting requirements of the Exchange Act applicable to U.S. domestic issuers including the requirement to transition from IFRS to US GAAP for the year ended March 31, 2022. The Company was also required to modify certain of its policies to comply with governance practices associated with U.S. domestic issuers. As a result, the loss of foreign private issuer status increases the Company’s legal and financial compliance costs and make some activities more time consuming and costly.
Closing of a $5,000,000 Registered Direct Offering Priced At-The-Market Under Nasdaq Rules
On June 22, 2022, Neptune announced that it entered into definitive agreements with several institutional investors for the purchase and sale of an aggregate of 1,945,526 common shares (including common share equivalents) of the Company,1,300,000 Common Shares and accompanying two series of645,526 pre-funded warrants to purchase up to an aggregate of 3,891,052 common shares per645,526 Common Shares (the “June 2022 Pre-Funded Warrants”) of the Company, and two series of warrants each to purchase up to 1,945,526 Common Shares (for an aggregate of 3,891,052 Common Shares) (the “Series C Warrants “ and “Series D Warrants ,” and together, the “June 2022 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 warrantsrules (the “June 2022 Offering”). The June 2022 Warrants each have an exercise price of $2.32 per share and arewere immediately exercisable upon issuance. One series of warrantsThe Series D Warrants will expire two years following the date of issuance and one series of warrantsthe Series C Warrants will expire five years following the date of issuance. The gross proceeds from the offering areJune 2022 Offering were $5 million, prior to deducting placement agent’sagent fees and other offering expenses payable by Neptune and assuming none of the warrants issued in the offeringJune 2022 Warrants are exercised for cash. Neptune intends to use the net proceeds from the offering for working capital and other general corporate purposes. The offering closed on June 23, 2022. The pre-funded warrantsJune 2022 Pre-Funded Warrants issued in the offering were fully exercised on June 24, 2022 for $64.55. Additionally, on October 6, 2022, 972,763 Series C common share purchase warrants were amended to provide for an extended expiration date of June 23, 2029.
ExpansionUSE OF PROCEEDS
We estimate the net proceeds to us in this offering will be approximately $[●] million, after deducting the [Placement Agent] fees and expenses and estimated offering expenses payable by us. This assumes a public offering price of $[●] per Common Share and Warrant (the last reported sale price of our Common Shares on Nasdaq on [●], 2023). [However, because this is a [reasonable best-efforts] offering and there is no minimum offering amount required as a condition to the closing of this offering, the actual offering amount, the [Placement Agent]’s fees and net proceeds to us are not presently determinable and may be substantially less than the maximum amounts set forth on the cover page of this prospectus.] The table below depicts how we plan to utilize the proceeds in the event that 50% and 100% of the Existing Secured Promissory Notessecurities in this offering are sold, after deducting [Placement Agent] fees and expenses and estimated offering expenses payable by us.
Use of Proceeds |
| 100% |
| 50% | ||
Repayment of debt (1) | | $ | [●] | | $ | [●] |
General corporate purposes | | $ | [●] | | $ | [●] |
Total: | | $ | [●] | | $ | [●] |
(1) | Represents a mandatory prepayment of $1 million, together with an exit fee of $100,000 and payment of interest (the “Mandatory Repayment”), payable pursuant to a senior secured notes financing for gross proceeds of $4.0 million with CCUR Holdings, Inc. |
On July 13, 2022, Neptune announced36
and Symbolic Logic, Inc. that was entered into on January 12, 2023, as amended. The notes mature on January 12, 2024 and currently bear interest at a rate of 24% per annum, resetting to 16.5% per annum following payment of the Mandatory Repayment. The remainder of the Mandatory Repayment is required to be paid by August 30, 2023. Proceeds from the notes were used for general corporate purposes. |
These estimates exclude the proceeds, if any, from the exercise of Common Warrants issued in this offering. If all of the Common Warrants issued in this offering were to be exercised in cash at an assumed exercise price of $[●] per Common Share, we would receive additional proceeds of approximately $[●] million. We cannot predict when or if these Common Warrants will be exercised. It is possible that Sprout Foods Inc. (“Sprout”),these Common Warrants may expire and may never be exercised. Additionally, the Company’s organic plant-based baby food and toddler snack company, has entered into an amendmentCommon Warrants contain a cashless exercise provision that permit exercise of each of its existing Secured Promissory Notes to expand from $22.5 million toCommon Warrants on a maximum of $37.5 million, allowing for up to $13 million of future
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lending. In connection with this amendment, investment funds managed by Morgan Stanley Expansion Capital (“Morgan Stanley” or “MSEC”) have agreed to immediately commit an additional $3 millioncashless basis at any time where there is no effective registration statement under the expanded Secured Promissory Notes to Sprout. This amount was received July 13, 2022. The maturity dateSecurities Act of 1933, as amended, covering the issuance of the note facility of February 1, 2024, is consistent withunderlying shares.
We plan to use the maturity dateproceeds of the existing Secured Promissory Notesoffering, after repayment of debt, for general corporate purposes, including working capital. The principal reasons for this offering are to increase our working capital and to provide capital for general corporate purposes.
Due to the uncertainties inherent in our business, we cannot estimate with MSEC and Neptune. The fundscertainty the exact amounts of the net proceeds from the expanded facility are intended tothis offering that may be used for any purpose. As a result, our management will have broad discretion in applying the generalnet proceeds from this offering.
The net proceeds from this offering will not significantly improve the Company’s working capital needs of Sproutcapital. The Company’s trade and the repayment of certain existing Sprout debt payableother payables will continue to Neptune. The existing and new Notes will bear interest at 10% per annum, increasing by 1.00% every three months during the termsignificantly exceed its cash balance. After receipt of the Secured Promissory Notes. MSEC was issued 372,670 common sharesnet proceeds from this offering the Company will still be required to actively manage its liquidity and expenses and payments of Neptune,payables will continue to not be made as the amounts become due. Nor will the receipt of an approximate valuethe net proceeds from this offering remove that substantial doubt and as such, there will remain substantial doubt about our ability to continue as a going concern after this offering.
CAPITALIZATION
The following table sets forth our capitalization as of $0.6 million in connection with this expansion. On November 8, 2022, Sprout entered into an agreement to issue an additional $525,000 of Secured Promissory Notes,March 31, 2023 as follows:
● | on an actual basis; |
● | on a pro forma basis to give effect to the issuance of common shares and warrants on May 15, 2023; and |
● | on a pro forma as adjusted basis to reflect our receipt of the net proceeds our sale and issuance of [●] Common Shares (assuming [no sale of any Pre-Funded Warrants] and no exercise of the Common Warrants) in this offering based on the assumed public offering price of $[●] per common share (the last reported sale price of our Common Shares on Nasdaq on [●], 2023) after deducting estimated [Placement Agent] fees and expenses and estimated offering expenses payable by us. |
The as adjusted information set forth below is illustrative only and will be adjusted based on the same terms as the Secured Promissory Note discussed. In connection with this financing, Neptune will issue common shares to the holders of these Secured Promissory Notes for a value of $105,000.
Closing of a $6,000,000 Registered Direct Offering Priced At-The-Market Under Nasdaq Rules and Concurrent Private Placement
On October 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 directactual public 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 on October 11, 2022
ADDITIONAL INFORMATION
The Company’s head office and registered office is located at 545 Promenade du Centropolis, Suite 100, Laval, Québec, Canada, H7T 0A3. The Company’s website address is www.neptunecorp.com. The information provided on the Neptune website is not partterms of this or any other report we fileoffering determined at pricing. You should read this table in conjunction with or furnish to the SEC. The Exchange Act requires us to file reports, proxy“Management’s Discussion and Analysis of
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Financial Condition and Results of Operations” and our financial statements and other information with the SEC. These materials may be obtained electronically by accessing the SEC’s home page at www.sec.gov.
Our Code of Conduct is available on our website, www.neptunewellness.com. We will post on our website amendments to the Code of Conductrelated notes included elsewhere in, or waivers from its provisions, if any, which are applicable to any of our directors or executive officers in accordance with the requirements of the SEC or Nasdaq.
The information on our website is not a part of, nor is it incorporated by reference into, this prospectus. Further,
|
| As of March 31, 2023 | |||||||
| | | | | | Pro forma as | |||
| | Actual |
| Pro forma(1) |
| Adjusted (2) | |||
| | (In thousands, except share and per share data) | |||||||
Liability related to warrants | | $ | 3,156 | | $ | 5,956 | | $ | [●] |
Operating lease liabilities (including current portion) | | $ | 2,018 | | $ | 2,018 | | $ | [●] |
Loans and borrowings (including current portion) | | $ | 22,951 | | $ | 22,951 | | $ | [●] |
Other liability | | $ | 24 | | $ | 24 | | $ | [●] |
Shareholders’ equity: | | | | | | | | | |
Share capital, without par value, 11,996,387 shares issued and outstanding as of March 31, 2023, actual; 24,117,599 shares issued and outstanding, proforma; [●] shares issued and [●] outstanding, proforma as adjusted | | | 321,946 | | | 323,546 | | | |
Preferred shares, no par value; no shares outstanding, actual; no shares outstanding, proforma; and no shares outstanding proforma as adjusted | | | | | | | | | |
Warrants | | $ | 6,155 | | $ | 6,155 | | $ | [●] |
Additional paid-in capital | | $ | 58,139 | | $ | 58,139 | | $ | [●] |
Accumulated other comprehensive loss | | $ | (14,539) | | $ | (14,539) | | $ | [●] |
Deficit | | $ | (383,641) | | $ | (384,799) | | $ | [●] |
Total equity (deficiency) attributable to equity holders of the Company | | $ | (11,940) | | $ | (11,498) | | $ | [●] |
Non-controlling interest | | $ | (15,621) | | $ | (15,621) | | $ | [●] |
Total shareholders’ equity (deficiency) | | $ | (27,561) | | $ | (27,119) | | $ | [●] |
Total capitalization | | $ | 589 | | $ | 3,830 | | $ | [●] |
(1) | The receipt of the net proceeds on May 15, 2023 of our sale and issuance of 4,415,162 common shares and pre-funded warrants to purchase 7,706,050 common shares (and assuming no exercise of the common warrants) based on the price of $0.33 per common share and accompanying common warrant and repricing and extension of life of existing warrants, after deducting estimated costs. As the accounting treatment of the warrants and the allocation between equity and liability components has not yet been finalized, it is assumed for the purposes of the pro forma capitalization that approximately half of the proceeds has been allocated to the derivative warrant liabilities and the remainder to share capital. Accordingly, approximately half of the estimated costs have been allocated to deficit and the remainder to share capital. The pro forma capitalization also reflects a repricing and extension of life of the pre-existing warrants with an offsetting debit to deficit, and assumes the exercise in full of all outstanding pre-funded warrants. |
(2) | As the accounting treatment of the Warrants and the allocation between equity and liability components has not yet been determined, it is assumed for the purposes of the Pro forma as Adjusted capitalization that all of the proceeds have been allocated to the derivative warrant liabilities and therefore, all of the estimate [Placement Agent] fees and expenses and estimated offering expenses have been allocated to deficit. In addition, if the fair value of the derivative warrant liabilities exceeds the total proceeds of this offering, a loss would be recorded upon initial recognition of this offering, which loss is not reflected in the deficit in the above table. |
A $0.25 increase or decrease in the assumed public offering price of $[●] per share, as set forth on the cover page of this prospectus, would increase or decrease the expected net proceeds to us from this offering by approximately $[●] million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated [Placement Agent] fees and expenses and estimated offering expenses payable by us.
Similarly, a 100,000 share increase or decrease in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase or decrease the net proceeds to us by approximately $[●], assuming the assumed public offering price of $[●] per share remains the same, and after deducting estimated [Placement Agent] fees and expenses and estimated offering expenses payable by us.
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The number of our referencesCommon Shares to be outstanding immediately after this offering is based on 11,996,387 Common Shares outstanding as of March 31, 2023 and excludes:
● | 674,475 Common Shares issuable upon the exercise of stock options outstanding as of March 31, 2023, at a weighted average exercise price of $70.27 per Common Share; |
● | 12,197,670 Common Shares issuable upon the exercise of warrants outstanding as of March 31, 2023, at a weighted average exercise price of $10.64 per Common Share; |
● | 4,308 deferred share units; |
● | 2,789 restricted share units; |
● | any additional Common Shares that are available for future issuance under our equity compensation plans; and |
● | the issuance, on May 15, 2023, of 4,415,162 common shares, 7,706,050 pre-funded warrants, and accompanying warrants to purchase up to an aggregate of 12,121,212 common shares at a combined public offering price of $0.33 per share, and the repricing and extension the term of existing common warrants to purchase up to an aggregate of 8,423,733 common shares. |
DILUTION
If you purchase Common Shares and Warrants in this offering, you will experience dilution to the URLsextent of the difference between the combined public offering price per Common Share and related Warrant in this offering and our net tangible book value (deficit) per Common Share. Net tangible book value (deficit) per Common Share is equal to the amount of our total tangible assets, less total liabilities, divided by the number of outstanding Common Shares. As of March 31, 2023, our net tangible book value (deficit) was approximately $(31.6 million), or approximately $(2.63) per Common Share. Taking into account the Common Shares and warrants to purchase Common Shares issued on May 15, 2023, our pro forma net tangible book value (deficit) was approximately $(31.2 million) or $(1.29) per Common Share. The pro forma net tangible book value has been computed assuming exercise in full of the May 15, 2023 pre-funded warrants and no exercise of the common warrants.
After giving effect to the assumed sale by us of Common Shares and Warrants in this offering at an assumed combined public offering price of $[●] per Common Share and related Warrant (the last reported sale price of our Common Shares on Nasdaq on [●], 2023), after deducting the estimated [Placement Agent] fees and expenses and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value (deficit) as of March 31, 2023 would have been approximately $([●] million), or approximately $([●]) per Common Share. The pro forma as adjusted net tangible book value has been computed assuming [exercise in full of the Pre-Funded Warrants] and no exercise of the Common Warrants. This represents an immediate increase in net tangible book value (deficit) of $[●] per Common Share to existing shareholders and an immediate dilution of $[●] per share to new investors purchasing Common Shares and related Warrants in this offering, attributing none of the assumed combined public offering price to the Common Warrants offered hereby. The following table illustrates this per Common Share dilution:
| | | ||||
|
| Per Common |
| | ||
| | Share and | | | ||
| | Warrant | | Total | ||
Assumed combined public offering price per Common Share and related Common Warrant | | $ | [●] | | $ | |
Net tangible book value (deficit) per Common Share as of March 31, 2023 | | $ | (2.63) | | | |
Increase in net tangible book value (deficit) per Common Share after the May 2023 offering | | $ | 1.34 | | | |
Pro forma net tangible book value (deficit) per Common Share as of March 31, 2023 | | $ | (1.29) | | | |
Increase in pro forma net tangible book value per Common Share after this offering | | $ | [●] | | | |
Pro forma as adjusted net tangible book value (deficit) per Common Share after this offering | | $ | [●] | | | |
Dilution per Common Share to new investors | | $ | [●] | | $ | ([●]) |
A $0.25 increase (decrease) in the assumed combined public offering price of $[●] per Common Share and Common Warrant would result in an increase (decrease) in our pro forma as adjusted net tangible book value (deficit) of approximately $[●] million or approximately $[●] per Common Share, and would result in an increase (decrease) in the dilution to new investors of approximately $[●] per Common Share, assuming that the number of Common Shares and Common Warrants sold by us remains the same, after deducting the estimated [Placement Agent] fees and expenses and estimated offering expenses payable by us.
Similarly, a decrease of 100,000 in the number of Common Shares offered by us would decrease our pro forma as adjusted net tangible book value by approximately $[●] million or $[●] per share, and increase the dilution per share to investors participating in this offering by $[●] per share, assuming the assumed offering price per share remains the same and after deducting the estimated [Placement Agent]
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commissions and estimated offering expenses payable by us. The information discussed above is illustrative only and will adjust based on the actual offering price, the actual number of Common Shares we offer in this offering, and other terms of this offering determined at pricing.
The foregoing discussion and table do not take into account further dilution to new investors that could occur upon the exercise of outstanding options or warrants having a per share exercise price less than the per Common Share and related Common Warrant offering price to the public in this offering. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these websites are intendedsecurities could result in further dilution to our shareholders.
The number of our Common Shares to be inactive textual references only.outstanding immediately after this offering is based on 11,996,387 Common Shares outstanding as of March 31, 2023 and excludes:
● | 674,475 Common Shares issuable upon the exercise of stock options outstanding as of March 31, 2023, at a weighted average exercise price of $70.27 per Common Share; |
● | 12,197,670 Common Shares issuable upon the exercise of warrants outstanding as of March 31, 2023, at a weighted average exercise price of $10.64 per Common Share; |
● | 4,308 deferred share units; |
● | 2,789 restricted share units; |
● | any additional Common Shares that are available for future issuance under our equity compensation plans; and |
● | the issuance, on May 15, 2023, of 4,415,162 common shares, 7,706,050 pre-funded warrants, and accompanying warrants to purchase up to an aggregate of 12,121,212 common shares at a combined public offering price of $0.33 per share, and the repricing and extension the term of existing common warrants to purchase up to an aggregate of 8,423,733 common shares. |
MARKET INFORMATION FOR SECURITIES AND DIVIDEND POLICY
Our Common Shares trade under the symbol “NEPT” on Nasdaq.
The following table sets forth the high and low intraday sales prices per Common Share as reported on Nasdaq beginning on April 1, 2020 and taking into account the Share Consolidation that took effect on June 13, 2022:
| Low Trading Price |
| High Trading Price | |||||
Period |
| ($) | ($) | |||||
Year Ending March 31, 2024 |
|
|
|
|
|
| ||
Second Quarter |
| (to [●], 2023) | $ | [●] | $ | [●] | ||
First Quarter |
| (June 30, 2023) | $ | 0.13 | $ | 0.70 | ||
Year Ending March 31, 2023 |
|
|
|
|
|
| ||
Fourth Quarter |
| (March 31, 2023) | $ | 0.29 | $ | 1.04 | ||
Third Quarter |
| (December 31, 2022) | $ | 0.23 | $ | 1.92 | ||
Second Quarter |
| (September 30, 2022) | $ | 1.00 | $ | 3.74 | ||
First Quarter |
| (June 30, 2022) | $ | 1.34 | $ | 1.41 | ||
Year Ended March 31, 2022 |
|
|
|
|
|
| ||
Fourth Quarter |
| (March 31, 2022) | $ | 7.35 | $ | 19.60 | ||
Third Quarter |
| (December 31, 2021) | $ | 12.25 | $ | 22.40 | ||
Second Quarter |
| (September 30, 2021) | $ | 19.25 | $ | 41.30 | ||
First Quarter |
| (June 30, 2021) | $ | 37.10 | $ | 55.30 | ||
Year Ended March 31, 2021 |
|
|
|
|
|
| ||
Fourth Quarter |
| (March 31, 2021) | $ | 45.15 | $ | 110.25 | ||
Third Quarter |
| (December 31, 2020) | $ | 52.15 | $ | 86.80 | ||
Second Quarter |
| (September 30, 2020) | $ | 73.85 | $ | 113.05 | ||
First Quarter |
| (June 30, 2020) | $ | 35.70 | $ | 110.25 |
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As of [●], 2023, we had [42] shareholders of record based on the records of our transfer agent, which does not include beneficial owners of our Common Shares whose shares are held in the names of various securities brokers, dealers and registered clearing agencies.
Dividends
We do not anticipate paying any dividend on our Common Shares in the foreseeable future. We presently intend to retain future earnings to finance the expansion and growth of our business. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors the board of directors deems relevant. In addition, the terms of any future debt or credit facility may preclude us from paying dividends.
Securities Authorized for Issuance under Equity Compensation Plans
Information about our equity compensation plans, as set forth in this prospectus under the caption “Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters”, is incorporated herein by reference.
Unregistered Sales of Equity Securities
Except as set forth below, since [●], 2020, we have not sold any securities that were not registered under the Securities Act.
(1) | In March 2023, we issued warrants to purchase common shares of the Company to one accredited investor which permits the investor to purchase an aggregate of 111,111 of our common shares at an exercise price of $0.54. |
(2) | In February 2023, we issued to three accredited investors an aggregate of 146,330 of our common shares in connection with loans to Sprout Foods, Inc. |
(3) | In January 2023, we issued (i) 71,665 common shares to our financial advisor in connection with our strategic review and (ii) to two accredited investors the January 2023 Warrants, which permits the investors to purchase an aggregate of 850,000 of our common shares at an exercise price of $0.53 per common share. |
(4) | In October 2022, we issued to accredited investors the Series E Warrants in the Private Placement, which permits the investors to purchase an aggregate of 6,417,114 of our common shares at an exercise price of $1.62 per common share. |
(5) | In July and September 2022, we issued to two accredited investors an aggregate of 409,435 common shares in connection with loans to Sprout Foods, Inc. |
(6) | In June 2022 we issued 7,104 common shares to our financial advisor in connection with our proposed divestiture of our Canadian cannabis business. |
(7) | In October 2020, we issued 462,963 common shares and 300,926 warrants to purchase common shares at an offering of $75.60 per share to institutional investors. |
Repurchases of Equity Securities
We did not repurchase any of our equity securities during the years ended March 31, 2023 and 2022.
BUSINESS
Overview
General
Neptune Wellness Solutions Inc. (“Neptune”, the “Company”, “we”, “us” or “our”) is a modern consumer packaged goods (“CPG”) company driven by a singular purpose: to transform the everyday for a healthier tomorrow. Neptune is a diversified health and wellness company with multiple brand units. With a mission to redefine health and wellness, Neptune is focused on building a broad portfolio of high quality, affordable consumer products in response to long-term secular trends and market demand for natural, plant-based, sustainable and purpose-driven lifestyle brands. The Company utilizes a highly flexible, cost-efficient manufacturing and supply chain infrastructure that can be scaled up and down or into adjacent product categories to identify new innovation opportunities, quickly adapt to consumer preferences and demand, and bring new products to market through its mass retail partners and e-commerce channels. Leveraging decades of expertise in extraction and product formulation, Neptune is a provider of turnkey product development and supply chain solutions to business customers across several health and wellness verticals, including nutraceuticals and white label consumer packaged goods. Neptune has expanded its operations since June 2020 into brand units in order to better address its markets.
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The main brand units are Nutraceuticals and Organic Foods & Beverages. All amounts in this prospectus are in US dollars, unless otherwise noted.
History
Neptune was incorporated under Part IA of the Companies Act (Québec) on October 9, 1998 under the name Neptune Technologies & Bioresources Inc. Since its incorporation, Neptune has amended its articles of incorporation on numerous occasions. The Company first amended its articles on May 30, 2000 to convert its then issued and outstanding shares into newly-created classes of shares. The Company’s articles were also amended on May 31, 2000 to create Series A Preferred Shares. On August 29, 2000, the Company converted all its issued and outstanding Class A shares into Class B subordinate shares. On September 25, 2000, the Company further amended its share capital to eliminate its Class A shares and converted its Class B subordinate shares into Common Shares. On November 1, 2013, the Company amended its articles of incorporation to reflect certain changes to items relating to board matters. The Company’s Common Shares are listed and posted for trading on the Nasdaq under the symbol, “NEPT”.
On June 9, 2022, we effected a one for thirty-five (1-for-35) reverse split of our common shares, which we refer to as the “Share Consolidation,” as approved by our board of directors. Trading of our common shares on both the TSX and Nasdaq on a post-consolidated basis commenced as of the open of markets on June 13, 2022. On August 15, 2022, the Company voluntarily delisted its Common Shares from the TSX.
Our Properties and Operations
The following table sets forth the Company’s principal physical properties:
Type | Material Properties Location | Leased / Owned | ||
Office | Laval, Québec | Leased | ||
Office | Vaudreuil, Québec | Leased | ||
Office / Laboratory | Laval, Québec | Leased | ||
Office | Jupiter, Florida | Leased |
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Our headquarters is located in leased offices in Laval, Québec, where our general and administrative departments primarily operate. We also ownlease laboratory space in Laval, Quebec where testing and development of many of our products takes place. On December 5, 2022, our U.S. operations opened an office in Jupiter, Florida which serves as the U.S. headquarters.
We previously owned a production facility in Sherbrooke, Québec,Quebec where we also conductconducted our cannabis operations including laboratory activities, and lease laboratory offices in Laval, Québec. We also have leased offices in Vaudreuil, Province of Québec, Canada, which was previously used for the Company’s Biodroga business. The Company intends to sub-lease the Vaudreuil offices. In addition, Neptune has leased office space in Jupiter, Florida.testing. On June 8,October 17, 2022, we announced that we had entered into a binding agreement for the planned accelerated divestituresale of our cannabis business, which would include the sale of our cannabis brands and the Sherbrooke building in one or more transactions. The disposition of our cannabis operations occurred on November 9, 2022. We believe the divestment of the cannabis assets will allow us to realize significant cost savings and operational streamlining from redirected resources towards our simplified corporate structure.
Legal ProceedingsWe also have leased offices in Vaudreuil, Province of Québec, Canada, which have been sub-leased to a third-party tenant.
Business Strategy
Neptune’s vision is to change consumer habits through the creation and distribution of environmentally friendly, ethical and innovative consumer product goods. Our mission is to redefine health and wellness and help humanity thrive by providing sustainable consumer focused solutions. Despite the decline in global economic activity since the outbreak of the COVID-19 virus, Neptune has taken transformative, and successful, actions to increase its sales, distribution and reach in both the business-to-business (“B2B”) and business-to-consumer (“B2C”) models in the 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 CompanyCompany’s long-term strategy is engaged from time-to-time in various legal proceedings and claims that have arisen in the ordinary course of business. The outcome of such proceedings and claims against the Company is subject to future resolution, including the uncertainties of litigation. Basedfocused on information currently known to the Company, the most significant outstanding proceedings and claims are as follows:
(i) In September 2020, Neptune submitted a claim and demand for arbitration against Peter M. Galloway and PMGSL Holdings, LLC (collectively “PMGSL”) in accordance with the SugarLeaf Asset Purchase Agreement (“APA”) dated May 9, 2019 between Neptune, PMGSL, Peter M. Galloway and Neptune Holding USA, Inc. Separately, PMGSL submitted a claim and demand for arbitration against Neptune. The Neptune claims and PMGSL claims have been consolidated into a single arbitration and each are related to the purchase by Neptune of substantially all of the assets of the predecessor entities of PMGSL Holdings, LLC. Neptune is claiming, among other things, breach of contract and negligent misrepresentation by PMGSL in connection with the APA and is seeking, among other things, equitable restitution and any and all damages recoverable under law. PMGSL is claiming, among other things, breach of contract by Neptune and is seeking, among other things, payment of certain compensation contemplated by the APA. A merit hearing in the arbitration took place in April 2022 and August 1, 2022. While Neptune believes there is no merit to the claims brought by PMGSL, a judgment in favor of PMGSL may have a material adverse effect on our business and Neptune intends to continue vigorously defending itself. Based on currently available information, a provision of $0.6 million has been recognized for this case as at March 31, 2022 ($ 0.6 million as at March 31, 2021).
(ii) On February 4, 2021, the United States House of Representatives Subcommittee on Economic and Consumer Policy, Committee on Oversight and Reform (the “Subcommittee”), published a report, “Baby Foods Are Tainted with Dangerous Levels of Arsenic, Lead, Cadmium, and Mercury” (the “Report”), which stated that, with respect to Sprout, “Independent testing of Sprout Organic Foods” has confirmed that their baby foods contain concerning levels of toxic heavy metals.” The Report further stated that after receiving reports alleging high levels of toxic metals in baby foods, the Subcommittee requested information from Sprout but did not receive a response.
On February 11, 2021, following the acquisition of a 50.1% stake in Sprout by Neptune, the Subcommittee contacted Sprout, reiterating its requests for documents and information about toxic heavy metals in Sprout’s baby foods. Sprout provided an initial response to the Subcommittee on February 25, 2021 and is cooperating with the Subcommittee requests. Further, on February 24, 2021, the Office of the Attorney General of the State of New Mexico (“NMAG”) delivered to Sprout a civil investigative demand requesting similar documents and information with regards to the Report and the NMAG’s investigation into possible violations of the False Advertising Act of New Mexico. Sprout has responded to the requests of the NMAG.
Since February 2021, several putative consumer class action lawsuits have been brought against Sprout alleging that its products (the “Products”) contain unsafe and undisclosed levels of various naturally-occurring heavy metals, namely lead, arsenic, cadmium and mercury. Sprout has denied the allegations in these lawsuits and contends that its baby foods are safe and properly labeled. The claims raised in these lawsuits were brought in the wake of the highly publicized Report. All such putative class actions have since been dismissed.
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In addition to the consumer class actions discussed above, Sprout is currently named in other cases, including one lawsuit filed on June 16, 2021 in California state court alleging some form of personal injury from the ingestion of Sprout’s Products, purportedly due to unsafe and undisclosed levels of various naturally occurring heavy metals. This lawsuit generally alleges injuries related to neurological development disorders such as autism spectrum disorder and attention deficit hyperactivity disorder. Sprout denies that its Products contributed to any of these injuries and will defend the cases vigorously. In addition, the Office of the Attorney General for the District of Columbia (“OAG”) recently sent a letter to Sprout, similar to letters sent to other baby food manufacturers, alleging potential labeling and marketing misrepresentations and omissions regarding the health and safetywellness sector with an emphasis on select CPG verticals, including Nutraceuticals and Organic Foods & Beverages. Neptune’s current brand portfolio across these verticals include Sprout®, Neptune Wellness™, Forest Remedies®, and MaxSimil®.
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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 baby foodup-age meal products.
Neptune’s future will be focused on brand creation, accelerating organic growth with emphasis on increased efficiency and margin expansion. This will be complemented by accretive acquisitions with a proven track record of operational excellence. On July 22, 2021, the Company launched Forest Remedies’ plant-based Omega 3-6-9 gummies and soft gels. Neptune is focused on expanding its exclusive Omega-3 delivery technology MaxSimil® while improving growth and profitability in its Nutraceuticals vertical. The MaxSimil® product lineup will be expanded with the launch of two new consumer products: MaxSimil® with CoQ10 and MaxSimil® with Curcumin. Additionally, the Company launched a new consumer line of Vitamin Sprays and Pumps for both children and adults with selected retail partners. To support anticipated accelerated growth, the Nutraceuticals U.S. sales force has been expanded to maximize awareness and distribution of the capabilities and expertise in nutraceuticals, including prebiotics and probiotics, and proteins within this important vertical.
Products, Principal Markets, Methods of Distribution and Brands
Products
Our Nutraceutical products constituting an unlawful trade practice. Sprout has agreedand Organic Foods and Beverages are manufactured by third party manufacturers. In order to meet demand for our products, we have developed relationships with selected contract manufacturers. For Biodroga we mainly buy all the OAGraw 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 will vigorously defend againstthat, if necessary, our current selected contract manufacturers could be replaced with minimal disruption to our operations.
Our quality control staff requires full disclosure of quality procedures and certifications on the allegations. No provision has been recordedpart 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 financial statements for this matter. This matter may have a material adverse effect on our business, financial results or results of operations.
(iii) On March 16, 2021, a purported shareholder class action was filed in United States District Court for the Eastern District of New York against the Company and certain of its current and former officers alleging violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934, with respect to the Company’s acquisition of SugarLeaf Labs, Inc. On October 21, 2022, the Company announcedevent that it had agreed to settle and resolve the lawsuit for a gross payment to the class of between $4 and $4.25 million, with the exact amount being within the Company’s control and dependent on the type of consideration used. The settlement is subject to court approval and certification by the court of the class.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All references in this management’s discussion and analysis of financial condition and results of operations, or MD&A, to the “Company”, “Neptune”, “we”, “us”, or “our” refer to Neptune Wellness Solutions Inc., unless otherwise indicated or the context requires otherwise. The following MD&A is for the year ended March 31, 2022 and for the three and six months ended September 30, 2022 and should be read in conjunction with the audited consolidated financial statements for the year ended March 31, 2022 and 2021 and the unaudited condensed consolidated interim financial statements for the three and six months ended September 30, 2022 and 2021 included in this Registration Statement/prospectus (collectively, the “Financial Statements”), which have been prepared by management in accordance with GAAP as issued by the FASB. All dollar amounts refer to U.S. dollars, except as stated otherwise. Unless otherwise stated herein, all share and per share numbers relating to the Company’s Common Shares prior to the effectiveness of the Reverse Share Split have been adjusted to give effect to the Reverse Share Split.
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.
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 six-month period ended September 30, 2022, the Company incurred a net loss of $43.8 million and negative cash flows from operations of $14.1 million, and had an accumulated deficit of $358.4 million as of September 30, 2022. For the year ended March 31, 2022, the Company incurred a net loss of $84.4 million and negative cash flows from operations of $54.3 million. Furthermore, as at September 30, 2022, the Company’s current liabilities and expected level of expenses for the next twelve months exceed cash on hand of $1.4 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 transactions completed after period-end from the sale of its Canadian cannabis business (see note 2(d)) and the registered direct offering (see note 18 to the financial statements for the three and six-months ended September 30, 2022).
As of the date the financial statements for the three and six-months ended September 30, 2022we were authorized for issuance, the cash balance is expected to be sufficient to operate the business for only the next two to three months under the current business plan. The Company requires funding in the very near term in order to continue its operations. If the Company is unable to source an ingredient from a current supplier, we believe that we could generally obtain funding in the near-term, it may havesame ingredient or an equivalent from an alternative supplier, with minimal disruption to cease operationsour operations.
Canadian Cannabis Products - Extracts 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. Other than the secured promissory notes issued by Sprout, the Company has limited debt and assets available for financing include 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, among
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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.
While the Company has been successful in obtaining financing from public issuances and private placements, there is no certainty as to future financings.
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.
SUBSEQUENT EVENTS
On July 13, 2022, Sprout Foods, Inc., a Delaware corporation (“Sprout”), a subsidiary of the Company, issued an amended and restated secured promissory note (the “Amended Note”) in favor of NH Expansion Credit Fund Holdings LP, an investment fund managed by Morgan Stanley Expansion Capital (“MSEC”), in the principal amount of $13,000,000. The Amended Note amended and restated the prior promissory note in the principal amount of $10,000,00 in connection with a loan of an additional $3,000,000 to Sprout from MSEC. The $13,000,000 Notes will bear interest at 10% per annum, increasing by 1.00% every three months during the term of the Notes.Formulations
On October 16, 2022, Neptune entered into an asset sale and purchase agreement (the “ASPA”“ASPA”) with a third-party, for its Canadian cannabis business including the Sherbrooke facility, following the planned divestiture of this business announced on June 8, 2022. The aggregate purchase price of the assets sold, net of liabilities assumed, amounted to $3.7$3.8 million ($5,155.15 million CAD). The ASPA closed on November 9, 2022. Some assets were excluded from the ASPA and were written down accordingly. The Company recorded an impairment loss on assets held for sale of $14.5 million in the second quarter interim financial statements for the three and six-months ended September 30, 2022. On November 10, 2022, the Company filed a notice of cessation of cannabis activities with Health Canada and requested that its cannabis processing and research licenses be revoked. As of November 11, 2022, all cannabis was removed from the Sherbrooke facility and the Company no longer possesses or conducts any activities with cannabis,cannabis.
Markets
Nutraceuticals
Neptune offers a variety of specialty ingredients, including our licensed specialty ingredient MaxSimil®, a technology that helps increase digestion and absorption of fat-soluble and nutritional ingredients. Additionally, the Company sources a variety of other than certainmarine oils, seed oils and specialty ingredients that are available for sale as raw material or transformed into finished products. The Company has recently launched a new line of Vitamin Sprays and Pumps for both children and adults. Neptune is focused on expanding its exclusive Omega-3 delivery technology MaxSimil® while improving growth and profitability in its Nutraceuticals vertical through its brand Biodroga.
Neptune’s core strength is product innovation with a focus on specialty ingredients offered in bulk soft gels and liquid delivery systems. The Company continues to expand its delivery system capabilities with projects for pumps, sprays and roll-ons. All of Neptune’s
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Nutraceutical products produced for third partyare available under distributors’ private labels, primarily sold in the Canadian and U.S. nutraceutical markets. Neptune, through its nutraceuticals products business, also formulates, develops and provides customers containing CBDwith turnkey nutrition solutions.
The Company sells wellness products to the Nutraceutical market through its Forest Remedies brand. Forest Remedies offers plant-based supplements, including first-of-its kind multi-omega gummies and soft gels with packaging that is 100% plastic-free. Neptune announced, on March 10, 2022, the launch of its Forest Remedies Multi Omega 3-6-9 line of supplements. This distribution agreement marks another important milestone in our nutraceutical business.efforts to transform Neptune into a high-growth branded CPG company.
Organic Foods and Beverages
In February 2021, Neptune acquired a controlling interest in Sprout Foods, Inc., an organic plant-based baby food and toddler snack company. Sprout is an integral piece of Neptune’s health and wellness portfolio and represents a key brand within the Organic Foods and Beverages vertical. Since completing the Sprout acquisition, the Company has begun expansion efforts in Sprout’s distribution across substantially all of Target’s U.S. retail stores. The Company remains liable foralso announced, on July 27, 2021, the pre-closing activitiesinitial launch of Sprout products into Canada, in Metro grocery stores in the province of Ontario. Neptune further expects to launch Sprout products in North America throughout the remainder of the divested cannabis business.fiscal year. The Company expects the Neptune/Sprout combination to result in significant incremental revenue growth, with several near and long-term revenue synergy opportunities identified within Neptune’s existing relationships and current sales channels. As described above, Neptune also announced on June 9, 2021, an exclusive multi-year licensing agreement between Sprout and CoComelon, the #1 children’s entertainment and educational show in the world with more than 110 million subscribers worldwide. This co-branded product line is now available on Walmart.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 the U.S., accounting for approximately 90 percent of the overall market.
On October 11, 2022,May 2, 2023, Neptune announced that four of its most popular Sprout Organics x CoComelon co-branded, organic toddler pouches have been picked up by Target and are now available in select Target Stores across the United States, and Target.com. The Sprout Organics x CoComelon line includes 15 SKU’s that are made up of toddler pouches, Wafflez snacks, and plant-based snack bars, each leveraging CoComelon’s brand as the #1 Kids YouTube Channel in the world. In addition to the CoComelon partnership, Sprout Organics SKU’s consist of organic toddler pouches, toddler meals, toddler snacks and the newly launched Big Kid Mealz; Sprouts first product out of the baby aisle.
In the last year, Sprout has made the following major distribution gains and sales milestones:
Distribution: Now available in 90% of the organic baby food market, Sprout x CoComelon being a key driver of sales velocity.
Target SKU Count: 4 Sprout x CoComelon SKUs launched in select Target stores nationwide and Target.com.
Added Distribution: In the last year, Sprout has established substantial distribution gains with leading retailers, and Target has contributed to that growth.
CoComelon Co-Brand: Yes Yes Veggie product is now Sprout’s #1 highest selling pouch in the latest 26 weeks in Total US xAOC*.
Geographic Presence: Now available in all 50 states, as well as in Canada.
*Sales velocity: Sales dollars per total point of distribution; Nielsen AOD; Total US x AOC Latest 26 weeks W/E 3-25-23
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 announcedmay have orders in place with approximately 100 different distributors and customers at any one time, the closingmajority of the Company’s sales are concentrated with a registered direct offeringsmall group of 3,208,557 of its Common Sharesdistributors and the Warrantscustomers. Agreements with these distribution partners may be terminated or altered by them unilaterally in the concurrent Private Placement. certain circumstances.
The Company received gross proceeds of approximately $6.0 million in connection with the offering, before deducting placement agent feessells its Neutraceutical products through distributors and related offering expenses. The net proceedsdirectly to the Company from the offering, after deducting the placement agent fees and expenses, and the Company’s estimated offering expenses, were approximately $5.15 million.
On October 21, 2022, the Company announced that it had agreed to settle and resolve a putative shareholder class action lawsuit filed against Neptune and certain of its current and former officers and directors, captioned Gong v. Neptune Wellness Solutions, Inc. (Case No. 2:21-cv-01386-ENV-ARL) pendingretail outlets in the United States District CourtStates. It also sells its products online through its own website forestremedies.com as well as e-commerce sites.
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Organic Foods and Beverages
The Company, though its Sprout subsidiary, sells its products to mass retailers, grocery stores and other retail outlets, as well as online through e-commerce sites and its own website sproutorganics.com.
Our B2C Brand Portfolio Strategy
We are currently working on accelerating brand equity for our brand portfolio:
| Biodroga™. Neptune, through its Biodroga subsidiary, provides product development and turnkey solutions (4PL) to its customers throughout North America. Biodroga offers a full range of services, whether it is leveraging our global network of suppliers to find the best ingredients or developing unique formulations that set our 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. | |
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| | MaxSimil. Neptune 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 predigest omega-3 fatty acids. The Journal of Nutrition, by the Oxford University Press, recently released the results of a clinical study that evidences MaxSimil’s superior absorption as compared with standard fish oil supplements. MaxSimil was first introduced to the market in 2018, and is sold as a straight omega-3 supplement with standard and unique concentration of EPA/DHA. MaxSimil is also starting to be presented in combination with specialty ingredients such as Curcumin and Vitamin K2. |
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| | Forest Remedies®. Under our Forest Remedies® brand, we offer first-of-their kind vegan multi-omega gummies and soft gels with packaging that is 100% plastic-free. Launched on March 10, 2022, our Forest Remedies Multi Omega 3-6-9 line of supplements is available into more than 340 Sprouts Farmers Market stores across the U.S. This distribution agreement marks another important milestone in our efforts to transform Neptune into a high-growth branded CPG company. |
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| | Sprout®. Neptune entered a new market with the Neptune/Sprout combination. Sprout has created a trusted organic baby food brand with a comprehensive range of products that are always USDA certified organic, non-GMO and contain nothing artificial. Sprout’s products target four segments: Stage 2 (children 6 months and up), Stage 3 (children 8 months and up), Toddler (children aged 12 months and up) and Snacks (children 8 months and up). Since our acquisition of a controlling interest in Sprout, the Company has begun expansion efforts in Sprouts’ distribution substantially in all of Target’s U.S. retail stores. The Company also announced on July 27, 2021, its initial launch into the Canadian market through its partnership with food retailer Metro Inc. Certain toddler snacks under this brand label are now available in Metro grocery stores in the province of Ontario. |
Competition
The nutraceutical 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 prospectus.
Regulatory
Our Nutraceutical and Organic Food and Beverage businesses are subject to varying degrees of regulation by a number of government authorities in Canada and the U.S., including Health Canada, the FDA, the Federal Trade Commission (FTC), the Consumer Product
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Safety Commission, the U.S. Department of Agriculture, and the Environmental Protection Agency. Various provincial, state and local agencies in areas where we operate and in which our products are sold also regulate our business. The areas of our business regulated by both these and other authorities include, among others:
● | 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 in Canada and the U.S., while other agencies regulate marketing and advertising claims. Under Health Canada and FDA rules, companies that manufacture, package, label, distribute or hold nutritional supplements are required to meet certain GMP’s to ensure such products are of the quality specified and are properly packaged and labeled. We are committed to meeting or exceeding the standards set by Health Canada and the FDA and believe we are currently operating within the mandated GMP.
Health Canada and he FDA also regulate the labeling and marketing of dietary supplements and nutritional products, including the following:
● | 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 in Canada and the U.S., including those relating to health, safety, bioterrorism, taxes, labor, employment, import and export, the environment and intellectual property. All of these regulations require significant financial and operational resources to ensure compliance, and we cannot assure you we will always be in compliance despite our best efforts to do so or that complying will not become prohibitively costly to our business.
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.
Licenses
On January 31, 2020, Neptune entered into an exclusive, worldwide, and royalty-bearing licensing agreement with SCF Pharma Inc. for the Eastern District of New York, for a gross payment to the class of between $4development, manufacturing, formulation, distribution, sub-licensing and $4.25 million, with the exact amount being within the Company’s control and dependent on the type of consideration used. The settlement is subject to court approval and certification by the courtsale of the class. The Company recorded a litigation settlement expense of $4,000,000MaxSimil® technology in the second quarter interim financial statements for the three and six-monthsnutraceutical products. ended September 30, 2022.
On January 12, 2023, the CompanyMay 28, 2021, Sprout Foods entered into a Note Purchase Agreement amongmulti-year licensing agreement with Moonbug, providing Sprout with an exclusive license to utilize certain properties relating to CoComelon®, the purchasers named thereinworld’s leading children’s entertainment brand, owned and operated by Moonbug, with Sprout products. The licensing agreement, which expires December 31, 2023, will automatically extend until December 31, 2026 provided there has not been a material breach of the agreement, the Company does not provide notice of an intent
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to not extend by October 1, 2023, and the Company pursuanthas accrued royalties of $195,000 or more under the agreement before October 1, 2023. The Company expects to meet the minimum royalty threshold later this year, on time.
Employees
As of March 31, 2023, we had 50 employees working at our business offices in Jupiter and Laval, or remotely, down from 161 employees at March 31, 2022. Our employees possess specialized skills and knowledge, which we believe are valuable assets of the CompanyCompany. As of March 31, 2023, 21 of our employees were in Canada while 29 were in the United States. We also had 21 temporary personnel. None 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.
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 in October 2022, June 2022 and March 2022. We also issued promissory notes in July 2022, November 2022 and sold $4 million in aggregate principal amount ofMarch 2023, issued senior secured promissory notes. The Company may also issue and sell, and the purchasers have agreed to purchase, up to an additional $1 millionnotes in aggregate principal amount of senior secured promissory notes to occur not later than February 28, 2023. The second closing will occur only in the event that the Company completes an incremental equity issuance by February 28,January 2023 and the aggregate principal amount of the second closing will not exceed the lesser of $1 million or 25% of the proceeds actually received from any
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such incremental equity issuance. The notes may be prepaid or redeemed in whole or in part by the Company, subject to the payment of a premium in an amount equal to ten percent (10%) of the principal amount of notes being repaid (other than principal in respect of PIK interest), less the aggregate amount of cash interest paid on the Notes being repaid on or before the date of such prepayment.
The notes are due and payable no later than January 12, 2024, unless earlier accelerated in accordance with the terms of the Note Purchase Agreement, with interest accruing at a rate of 16.5% per annum from the date of issuance and payable on the last business day of each calendar month in which the notes are outstanding. For the first six interest payment dates following the initial closing, interest will be paid in kind and thereafter payments shall be made in cash on the interest payment date in arrears. Under the terms of the Note Purchase Agreement, the Company issued to the purchasers of the initial notes warrants to purchase a total of 850,000 common shares of the Company exercisable at an exercise price of $0.53 per share at any time until January 12, 2028.
On January 23, 2023, Sprout entered into an accounts receivable factoring facility with Alterna Capital Solutions, LLC (“Alterna”), pursuant to which Sprout agreed to sell certain of its accounts receivable to Alterna. The maximum amount available to Sprout underin January 2023; an inventory factoring facility was also added in May 2023. Taking into account all considerations, we believe these actions are in the facility is $5 million, and funds deployed to Sprout incur a usage feebest interest of the primate rate plus 1%,company and will benefit shareholders in the long-term. See 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”).
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 minimum interest ratediverse suite of 8% per annum. The facilitybetter-for-you brands, available in some of the country’s largest retail chains. At the same time, we are driving consumer relevance by pursuing the right strategic partnerships for co-branded product lines and expanding our product offerings in key wellness categories.
Major Distribution Gains
Since acquiring a majority stake in Sprout Organics in February 2021, we have expanded Sprout baby foods and toddler snacks substantially, both online and in store at major retailers like Target and Walmart. Earlier in March 2022, we announced the launch of our Forest Remedies Multi Omega 3-6-9 line of supplements into more than 340 Sprouts Farmers Market stores across the U.S. This distribution agreement marks another important milestone in our efforts to transform Neptune into a high-growth branded CPG company.
Strategic Partnerships
In February 2022, we brought Walmart a first-of-its-kind collaboration between Sprout Organics and popular kids’ entertainment platform CoComelon. This co-branded product line is now available on Walmart.com and in 900 Walmart stores and has a one-year term and renews automatically. The Company provided a commercial guarantybeen very well-received. With this launch, Sprout Organics now sells into the top organic baby food retailers in connection with this agreement.the U.S., accounting for approximately 90 percent of the overall market.
SELECTED CONSOLIDATED ANNUAL AND QUARTERLY INFORMATION
SELECTED CONSOLIDATED FINANCIAL INFORMATION (in thousands)
The following tables set out selected consolidated financial information and are prepared in accordance with US GAAP.
Three-month periods ended | Twelve-month periods ended | |||||||||||||||
March 31, 2022 $ | March 31, 2021 $ | March 31, 2022 $ | March 31, 2021 $ | |||||||||||||
Total revenues | 11.532 | 4.669 | 48.797 | 35.400 | ||||||||||||
Adjusted EBITDA (recasted)1 | (17.302 | ) | (32.523 | ) | (42.162 | ) | (59.542 | ) | ||||||||
Net loss | (36.237 | ) | (43.540 | ) | (84.425 | ) | (124.264 | ) | ||||||||
Net loss attributable to equity holders of the Corporation | (31.536 | ) | (42.445 | ) | (74.972 | ) | (123.170 | ) | ||||||||
Net loss attributable to non-controlling interest | (4.701 | ) | (1.094 | ) | (9.453 | ) | (1.094 | ) | ||||||||
Basic and diluted loss per share | (7.25 | ) | (0.29 | ) | (17.50 | ) | (35.86 | ) | ||||||||
Basic and diluted loss per share attributable to equity holders of the Corporation | (6.31 | ) | (0.29 | ) | (15.54 | ) | (35.55 | ) | ||||||||
Basic and diluted loss per share attributable to non-controlling interest | (0.94 | ) | (0.01 | ) | (1.96 | ) | (0.32 | ) |
As at March 31, 2022 $ | As at March 31, 2021 $ | As at March 31, 2020 $ | ||||||||||
Total assets | 104.955 | 186.948 | 120.060 | |||||||||
Working capital2 | 7.071 | 54.718 | 15.346 | |||||||||
Non-current financial liabilities | 13.800 | 14.593 | 4.854 | |||||||||
Equity attributable to equity holders of the Corporation | 48.116 | 115.368 | 102.962 | |||||||||
Equity attributable to non-controlling interest | 12.722 | 22.178 | — |
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The following table sets out selected consolidated financial information.
Three-month periods ended | Six-month periods ended | |||||||||||||||
September 30, 2022 $ | September 30, 2021 $ | September 30, 2022 $ | September 30, 2021 $ | |||||||||||||
Total revenues | 11.987 | 12.519 | 28.259 | 22.597 | ||||||||||||
Adjusted EBITDA (recasted)1 | (13.677 | ) | (12.215 | ) | (25.029 | ) | (26.296 | ) | ||||||||
Net loss | (37.288 | ) | (12.102 | ) | (43.792 | ) | (30.958 | ) | ||||||||
Net loss attributable to equity holders of the Company | (30.897 | ) | (11.113 | ) | (35.182 | ) | (28.020 | ) | ||||||||
Net loss attributable to non-controlling interest | (6.390 | ) | (0.989 | ) | (8.610 | ) | (2.937 | ) | ||||||||
Basic and diluted loss per share | (4.75 | ) | (2.54 | ) | (6.26 | ) | (6.51 | ) | ||||||||
Basic and diluted loss per share attributable to equity holders of the Company | (3.94 | ) | (2.33 | ) | (5.03 | ) | (5.89 | ) | ||||||||
Basic and diluted loss per share attributable to non-controlling interest | (0.81 | ) | (0.21 | ) | (1.23 | ) | (0.62 | ) |
As at September 30, 2022 $ | As at March 31, 2022 $ | As at March 31, 2021 $ | ||||||||||
Total assets | 65.013 | 104.955 | 186.948 | |||||||||
Working capital2 | (4.110 | ) | 7.071 | 54.718 | ||||||||
Non-current financial liabilities | 17.059 | 13.800 | 14.593 | |||||||||
Equity attributable to equity holders of the Company | 11.485 | 48.116 | 115.368 | |||||||||
Equity attributable to non-controlling interest | 4.112 | 12.722 | 22.178 |
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CONSOLIDATED FINANCIAL ANALYSISTable of Contents
Investing in Our Prospects
NON-GAAP FINANCIAL PERFORMANCE MEASURES
The Company uses one adjusted financial measure, Adjusted Earnings Before Interest, Taxes, DepreciationOn November 15, 2021 we initiated a strategic review and Amortization (“Adjusted EBITDA”)made some big changes to assess its operating performance. This non-GAAP financial measure is presented inget on track to becoming a consistent manner, unless otherwise disclosed. The Company uses this measure for the purposes of evaluating its historicalprofitable diversified CPG company. These actions have taken effect, 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 themwe are starting to see the Company’s results throughresults. The third quarter of fiscal year 2022 was the eyesfirst quarter where we posted a positive gross margin since transitioning to a CPG-focused model. The third quarter of Management, andfiscal year 2022 was the first quarter where we posted a positive gross margin since transitioning 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.CPG-focused model. 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.
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In the quarter ended September 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 | Twelve-month periods ended | |||||||||||||||
Recast - March 31, 2022 | Recast - March 31, 2021 | Recast - March 31, 2022 | Recast - March 31, 2021 | |||||||||||||
Net loss for the period | $ | (36.237 | ) | $ | (43.540 | ) | $ | (84.425 | ) | $ | (124.264 | ) | ||||
Add (deduct): | ||||||||||||||||
Depreciation and amortization | 1.656 | 2.425 | 6.791 | 8.830 | ||||||||||||
Acceleration of amortization of long-lived non-financial assets | — | (0.156 | ) | — | 10.552 | |||||||||||
Revaluation of derivatives | 1.247 | (3.856 | ) | (7.035 | ) | (7.975 | ) | |||||||||
Net finance costs | 1.266 | 1.119 | 2.823 | 5.012 | ||||||||||||
Equity classified stock-based compensation | 1.565 | 2.505 | 7.817 | 9.885 | ||||||||||||
Non-employee compensation related to warrants | — | 0.244 | 0.179 | 1.904 | ||||||||||||
System migration, conversion, implementation | (0.001 | ) | — | 0.327 | — | |||||||||||
Costs related to cybersecurity incident | — | (0.022 | ) | — | 1.500 | |||||||||||
Impairment loss on long-lived assets | 17.177 | 8.814 | 19.581 | 37.753 | ||||||||||||
Costs related to conversion from IFRS to US GAAP | 0.577 | — | 0.577 | — | ||||||||||||
Change in revaluation of marketable securities | — | (0.178 | ) | 0.107 | (0.169 | ) | ||||||||||
Income tax expense (recovery) | (0.012 | ) | 0.122 | — | (3.478 | ) | ||||||||||
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Adjusted EBITDA1 | $ | (12.762 | ) | $ | (32.523 | ) | $ | (53.258 | ) | $ | (60.450 | ) | ||||
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Adjusted EBITDA1 reconciliation, in millions of dollars
Three-month periods ended | Six-month periods ended | |||||||||||||||
September 30, 2022 | Recast - September 30, 2021 | September 30, 2022 | Recast - September 30, 2021 | |||||||||||||
Net loss for the period | $ | (37.288 | ) | $ | (12.102 | ) | $ | (43.792 | ) | $ | (30.958 | ) | ||||
Add (deduct): | ||||||||||||||||
Depreciation and amortization | 0.691 | 2.277 | 1.729 | 3.620 | ||||||||||||
Revaluation of derivatives | 1.808 | (5.529 | ) | (7.716 | ) | (7.462 | ) | |||||||||
Net finance costs (income) | (4.235 | ) | (1.043 | ) | (2.600 | ) | 0.595 | |||||||||
Equity classified stock-based compensation | 0.640 | 2.158 | 1.827 | 5.238 | ||||||||||||
Non-employee compensation related to warrants | — | 0.061 | — | 0.154 | ||||||||||||
Impairment loss on long-lived assets | 24.694 | 1.885 | 25.510 | 2.415 | ||||||||||||
Change in revaluation of marketable securities | — | 0.078 | — | 0.090 | ||||||||||||
Income tax expense | 0.013 | — | 0.013 | 0.012 | ||||||||||||
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Adjusted EBITDA1 | $ | (13.677 | ) | $ | (12.215 | ) | $ | (25.029 | ) | $ | (26.296 | ) | ||||
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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 for the year ended March 31, 2022
Revenue is attributed to geographical locations based on the origin of customers’ location.
Three-month periods ended | Twelve-month periods ended | |||||||||||||||
March 31, 2022 | March 31, 2021 | March 31, 2022 | March 31, 2021 | |||||||||||||
Total Revenues | Total Revenues | Total Revenues | Total Revenues | |||||||||||||
Canada | $ | 3.527 | $ | 0.512 | $ | 12.447 | $ | 13.434 | ||||||||
United States | 7.686 | 3.982 | 35.330 | 20.856 | ||||||||||||
Other countries | 0.319 | 0.175 | 1.020 | 1.110 | ||||||||||||
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$11.532 | $4.669 | $48.797 | $35.400 | |||||||||||||
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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 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 | |||||||||
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Total | $ | 21.448 | $ | 22.168 | $ | 21.655 | ||||||
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As at March 31, 2021 | ||||||||||||
Property, plant and equipment | Goodwill | Intangible assets | ||||||||||
Canada | $ | 35.645 | $ | 2.614 | $ | 3.793 | ||||||
United States | 1.701 | 22.839 | 22.164 | |||||||||
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Total | $ | 37.346 | $ | 25.453 | $ | 25.957 | ||||||
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Geographical information for the quarter ended September 30, 2022
Revenue is attributed to geographical locations based on the origin of customers’ location.
Three-month periods ended | Six-month periods ended | |||||||||||||||
September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
Total Revenues | Total Revenues | Total Revenues | Total Revenues | |||||||||||||
Canada | $ | 0.671 | $ | 2.077 | $ | 5.727 | $ | 4.360 | ||||||||
United States | 11.097 | 10.253 | 22.029 | 17.812 | ||||||||||||
Other countries | 0.219 | 0.189 | 0.503 | 0.425 | ||||||||||||
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$ | 11.987 | $ | 12.519 | $ | 28.259 | $ | 22.597 | |||||||||
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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 September 30, 2022 | ||||||||||||||||
Property, plant and equipment | Goodwill | Intangible assets | Assets held for sale | |||||||||||||
Canada | $ | 1.056 | $ | 2.382 | $ | 1.793 | $ | 3.204 | ||||||||
United States | 1.089 | 11.972 | 16.000 | — | ||||||||||||
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Total | $ | 2.145 | $ | 14.354 | $ | 17.793 | $ | 3.204 | ||||||||
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Property, plant and equipment | Goodwill | Intangible assets | Assets held for sale | |||||||||||||
Canada | $ | 20.725 | $ | 2.626 | $ | 2.353 | $ | — | ||||||||
United States | 0.723 | 19.542 | 19.302 | — | ||||||||||||
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Total | $ | 21.448 | $ | 22.168 | $ | 21.655 | $ | — | ||||||||
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RESULTS ANALYSIS FOR THE YEAR ENDED MARCH 31, 2022
Adoption of US GAAP—Comparative Period Amounts
The consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). Comparative figures, which were previously presented in accordance with International Financial Reporting Standards (”IFRS”) as issued by the International Accounting Standards Board, have been adjusted as required to be compliant with the Company’s accounting policies under US GAAP.
Revenues
Consolidated revenue summary, in millions of dollars:
March 31, | Changes | |||||||||||||||
2022 | 2021 | Changes in $ | Changes in % | |||||||||||||
Three-month periods ended | 11.5 | 4.7 | 6.9 | 147 | % | |||||||||||
Twelve-month periods ended | 48.8 | 35.4 | 13.4 | 38 | % |
Total consolidated revenues for the three-month period ended March 31, 2022 amounted to $11.5 million representing an increase2023, consolidated gross profit margin was (21.14)% of $6.9 million or 147% compared to $4.7 millionnet sales, up from (49.39)% for the three-monthsame period ended March 31, 2021.
last year. For the twelve-month period ended March 31, 2022, consolidated revenues totaled $48.8 million representing an increase of $13.4 million or 38% compared to $35.4 million for2023 the twelve-month period ended March 31, 2021.
When compared to the previous quarter, the consolidated revenues decreased by $3.1 million or 21%, which was mainly attributable to timing of shipping of nutraceuticals products (decrease of $1.3 million) as well as decrease of cannabis products sales ($1.5 million) due to the Company’s cash restrictions preventing prepayment to its suppliers.
Three-month period ended March 31, 2022 compared to March 31, 2021
Food and beverages revenues represented a $3.8 million increase in comparison to the three-month period ended March 31, 2021, resulting from the sales growth efforts as well as the Cocomelon partnership. Revenues for the
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cannabis market increased by $1.9 million as Neptune has expanded its product portfolio in its existing markets with new cannabis products in comparison to last year.
Twelve-month period ended March 31, 2022 compared to March 31, 2021
For the twelve-month period ended March 31, 2022, the $13.4 million increase was mainly attributable to decreases of revenues from Health and Wellness products offset by an increase in the Food and Beverages revenues. Health and Wellness revenues decreased by $10.9 million due to a reduction in sales in hand sanitizers and other COVID-19 related products by the Company. This was offset by the addition of $23.2 million of Food and Beverages revenues, representing average quarterly sales for the first three quarters of fiscal 2022 of over $8 million, which were due to the acquisition of Sprout in the last quarter of fiscal 2021 that were not present in full in the comparative fiscal year.
Geographic Revenues
From a geographic point of view, revenues for the current quarter increased by $3.0 million or 589% in Canada, increased by $3.7 million or 93% in the United States and increased by $0.1 million or 82% for other countries (all royalty revenues) compared to the quarter ended March 31, 2021.
Revenues for the year decreased by $1.0 million or 7% in Canada, increased by $14.5 million or 69% in the United States and decreased by $0.1 million or 8% for other countries (all royalty revenues) compared to the twelve-month period ended March 31, 2021.
The increase of revenue in Canada for the quarter variance is mainly due to the repositioning of the Cannabis business from the B2B Cannabis market to the B2C Cannabis market, which is in a growth state. However, the Company announced its planned divestiture of Cannabis business in June 2022. The decrease in revenue in Canada for the year to date variance is mainly due to timing of shipment to customers for nutraceutical products. The increase in revenues for the twelve month period ended March 31, 2022 in the United States is due to an increase in sales in Sprout (acquired on February 10, 2021).
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
March 31, | Changes | |||||||||||||||
2022 | 2021 | Changes in $ | Changes in % | |||||||||||||
Three-month periods ended | (5.7 | ) | (18.6 | ) | 12.9 | 69 | % | |||||||||
Twelve-month periods ended | (7.5 | ) | (27.4 | ) | 19.8 | 72 | % |
The consolidated gross profit (loss) for the three-month period ended March 31, 2022 amounted to $(5.7) million compared to $(18.6) million for the three-month period ended March 31, 2021, an improvement of $12.9 million or 69%.
As for the twelve-month period ended March 31, 2022, the consolidated gross profit (loss) amounted to $(7.5) million compared to $(27.4) million for the twelve-month period ended March 31, 2021, an improvement of $19.8 million or 72%.
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Three-month period ended March 31, 2022 compared to March 31, 2021
The change for the quarter is mainly attributable to reduction in sales and related cost of salesmargin was (4.70)% up from the Health and Wellness products, increases in volumes of sales from cannabis products, and an increase in sales from food and beverages resulting from the acquisition of Sprout on February 10, 2021. For Health and Wellness products, there was a $15.0 million reduction in the gross loss of Health and Wellness products in the December 31, 2021 period, resulting from a reduction in sales in hand sanitizers and other COVID-19 related products by the Company as part of its strategic review plan. The gross margin for cannabis products declined by $1.9 million for the March 31, 2022 period which was driven by the repositioning of the business.
Twelve-month period ended March 31, 2022 compared to March 31, 2021
As for the twelve-month period ended March 31, 2022, the improvement is mainly attributable to reduction in sales and related cost of sales from the Health and Wellness products and partially offset by inventory write-downs as well as government wage subsidies. For the March 31, 2022 period, the gross loss improved by $20.2 million for the Health and Wellness products resulting from the reduction in sales in hand sanitizers and other COVID-19 related products, a gross margin improvement of $25.6 million. The gross loss improvement was partially offset by an increased gross loss from cannabis sales of $3.6 million. During the last six months of fiscal 2021, the Company was also ceasing placing order in its SugarLeaf facility in North Carolina for the B2B market in the USA, due to a continuous decline in pricing and demand. This resulted in a decrease of gross margin loss of $1.0 million for the period ended March 31, 2022 in comparison to 2021.
Gross Margin Percentage
For the three-month periods ended March 31, 2022 and 2021, the consolidated gross margin went from (398.8)(15.44)% in 2021 to (49.4)% in 2022, an increase of 349.4%. As for the twelve-month periods ended March 31, 2022 and 2021, the consolidated gross margin went from (28.5)% in 2021 to (15.4%) in 2022, an increase of 61.9%.
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 March 31, 2022 compared to March 31, 2021
For the quarter ended March 31, 2022, the consolidated R&D expenses net of tax credits and grants amounted to $0.2 million, compared to $0.6 million for the quarter ended March 31, 2021, a decrease of $0.4 million or 61% mainly due to the recognition of the warrants issued to non-employees for co-development recognized over the services rendered.
Twelve-month period ended March 31, 2022 compared to March 31, 2021
Consolidated R&D expenses net of tax credits and grants amounted to $0.9 million in the twelve-month period ended March 31, 2022 compared to $1.9 million for the same period of the prior year,year. However, there can be no assurances that revenue or gross profit 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 on June 8, 2022 the launch of a decrease of $1 million or 54% mainly duenew CPG focused strategic plan to reduce costs, improve the recognitionCompany’s path to profitability and enhance current shareholder value. This plan focuses on two primary actions: (1) the divestiture of the warrants issuedCanadian 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 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.
On October 16, 2022, Neptune entered into an asset sale and purchase agreement (the “ASPA”) with a third- party, for its Canadian cannabis business including the Sherbrooke facility, following the divestiture of this business announced on June 8, 2022. The aggregate purchase price of the assets sold, net of liabilities assumed, amounted to non-employeesapproximately $3.8 million ($5.15 million CAD). The ASPA closed on November 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 co-development recognized overNeptune going forward.
Recent Corporate Developments
Neptune’s Presence in Canada’s Cannabis Market
During the services rendered.
Selling, General and Administrative (“SG&A”) Expenses
Three-month periodyear ended on March 31, 2022, compared to March 31, 2021
Consolidated SG&A expenses netNeptune supplied the market with premium cannabis extracts and dried flower, under its Mood Ring™ and PanHash™ brands, and completed its launch of subsidies forall significant regulated product categories. All cannabis products were manufactured and packaged at the quarter ended March 31,Company’s purpose-built facility in Sherbrooke, Quebec. On June 8, 2022, amounted to $10.6 million compared to $18.3 million for the same period the prior year,Company announced a decrease of $7.7 million or 42% primarily due to the benefitsplanned accelerated divestiture of the strategic reviewCanadian cannabis business and continued cost controls.
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Twelve-month period ended March 31, 2022 compared to March 31, 2021
Regardingthat the twelve-month period ended March 31, 2022 compared to the same period in 2021, consolidated SG&A expenses net of subsidies amounted to $60.5 million compared to $63.8 million, a decrease of $3.3 millionCompany would focus on winding up its cannabis operations pending one or 5% primarily from cost reduction measuresmore sales transactions. Following this announcement, all assets and liabilities related to the previouslyCanadian 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 ended December 31, 2022. On October 16, 2022, Neptune entered into an asset sale and purchase agreement (the “ASPA”) with a third-party, for its Canadian cannabis business including the Sherbrooke facility, following the planned divestiture of this business announced on June 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 on November 9, 2022. Some assets were excluded from the ASPA and were written-down accordingly, on October 17, 2022 we announced that we had entered into a binding agreement for the sale of our cannabis business and the sale closed on November 9, 2022.
Launch of a New CPG Focused Strategic Plan
On June 8, 2022, Neptune announced the launch of a new Consumer Packaged Goods (“CPG”) focused strategic plan to reduce costs, improve the Company’s path to profitability and enhance current shareholder value. This plan builds on the Company’s initial strategic review partially offset by higher legalthat took place in fall of 2021 and other costs.focuses on two primary actions: (1) 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.
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Neptune Announces New Line of CoComelon® Co-Branded Products
Finance costsNeptune announced on May 26, 2022 a new line up of CoComelon co-branded organic snack bars for toddlers. The snack bars are the latest innovation in the Sprout Organics x CoComelon product line launched in 2022, 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.
Three-month period ended March 31,Changes to Management
Neptune announced on June 8, 2022 comparedthat Sarah Tynan, Sprout’s Chief Customer Officer, was promoted to March 31, 2021CEO of Sprout. Ms. Tynan resigned from her position at Sprout as of July 7, 2023.
Net finance costs, foreign exchangeOn June 14, 2022, Neptune announced the appointment of Raymond Silcock as Chief Financial Officer, effective July 25, 2022. Mr. Silcock, who is based out of Neptune’s Jupiter, Florida office, previously served as Executive Vice President and derivatives revaluations amounted to a loss of $2.5 million for the quarter ended March 31, 2022, compared to a gain of $2.9 million for the three-month period ended March 31, 2021, a change of $5.4 million or 186% for the quarter ended March 31, 2022. The variation for this period is mainly attributable to the revaluation of warrant liabilitiesChief Financial Officer at Perrigo Plc, as well as foreign exchange impact.CFO at Diamond Foods, The gainGreat 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 revaluationseveral Boards including Pinnacle Foods Inc., American Italian Pasta Company, Prestige Brands and Bacardi Limited. Mr. Silcock replaces Randy Weaver who was Interim CFO up to July 22, 2022.
Receipt of the warrants was primarily driven by the decrease in the Company’s stock price.Nasdaq Notifications
Twelve-month period ended March 31, 2022 compared to March 31, 2021
As for the twelve-month period ended March 31,On November 15, 2022, the net finance costs, foreign exchange and derivatives revaluations amounted toCompany filed a gainNotification of $4.1 million, compared to a gain of $3.1 million for the twelve-month period ended March 31, 2021, a change of $1 million or 31% for the twelve-month period ended March 31, 2022. The variation for this period is mainly attributable to an improvement in foreign currency losses partially offset by lower gainsLate Filing on the revaluation of warrants.
Income taxes
For the three-month periods ended March 31, 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 twelve-month period ended March 31, 2022.
Adjusted EBITDA
Three-month period ended March 31, 2022 compared to March 31, 2021
Recasted Consolidated Adjusted EBITDA loss decreased by $19.8 million or 60.8% for the quarter ended March 31, 2022 to a recasted Adjusted EBITDA loss of $12.8 million compared to $32.5 million for the quarter ended March 31, 2021. The decrease in recasted Adjusted EBITDA loss for the quarter ended March 31, 2022 compared to the quarter ended March 31, 2021 was driven by the quarter’s improved performance over the comparative quarter as explained in the net loss section.
Twelve-month period ended March 31, 2022 compared to March 31, 2021
Recasted Consolidated Adjusted EBITDA loss decreased by $7.2 million or 11.9% for the twelve-month period ended March 31, 2022 to a recasted Adjusted EBITDA loss of $53.3 million compared to $59.5 million for the twelve-month period ended March 31, 2021. The decrease in recasted Adjusted EBITDA loss for the twelve-month period ended March 31, 2022 compared to the twelve-month period ended March 31, 2021 was driven by the quarter’s improved performance over the comparative quarter as explained in the net loss section.
Net loss
Three-month period ended March 31, 2022 compared to March 31, 2021
For the quarter ended March 31, 2022, the net loss amounted to $36.2 million compared to $43.5 million for the quarter ended March 31, 2021, a decrease of $7.3 million or 17%. The Company’s execution of its strategic review plan by refocusing on its core businesses is primarily responsible for the lower loss.
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Twelve-month period ended March 31, 2022 compared to March 31, 2021
The net loss for the twelve-month period ended March 31, 2022 totaled $84.4 million compared to $124.3 million for the twelve-month period ended March 31, 2021, a decrease of $39.8 million or 32%. The Company’s execution of its strategic review plan of refocusing over its core products and businesses and lower impairments and asset write-downs have decreased the loss.
RESULTS ANALYSIS FOR THE QUARTER ENDED SEPTEMBER 30, 2022
Adoption of US GAAP—Comparative Period Amounts
The consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”Form 12b-25 (the “Form 12b-25”). Comparative figures, which were previously presented in accordance with International Financial Reporting Standards (”IFRS”) as issued by the International Accounting Standards Board, have been adjusted as required to be compliant with the Company’s accounting policies under US GAAP.
Revenues
Consolidated revenue summary, in millions of dollars:
September 30, | Changes | |||||||||||||||
2022 | 2021 | Changes in $ | Changes in % | |||||||||||||
Three-month periods ended | 12.0 | 12.5 | (0.5 | ) | -4 | % | ||||||||||
Six-month periods ended | 28.3 | 22.6 | 5.7 | 25 | % |
Three-month period ended September 30, 2022 comparedSEC, which stated that it was unable to September 30, 2021
Total consolidated revenues for the three-month period ended September 30, 2022 amounted to $12.0 million, a decrease of $0.5 million or 4% as compared to $12.5 million for the three-month period ended September 30, 2021. This decrease was primarily due to the Corporation having mostly exited the cannabis business ahead of selling all cannabis assets on November 9, 2022 and a decline in Nutraceutical Products. Cannabis sales were down $1.1 million versus prior year to $0.1 million. In addition, Nutraceutical Products sales in the quarter were $3.2 million, a decline of 22%, mainly due to shipment timing. Partially offsetting this decline, Organic Foods and Beverages revenues in Q2 FY 2023 were $8.4 million, a $1.4 million increase in comparison to the quarter ended September 30, 2021. The principal driver of this improvement was displays in 2,500 Walmart stores during the quarter.
Six-month period ended September 30, 2022 compared to September 30, 2021
For the six-month period ended September 30, 2022, consolidated revenues totaled $28.3 million, an increase of $5.7 million or 25% compared to $22.6 million for the six-month period ended September 30, 2021. Cannabis sales of $3.2 million were up $0.8 million or 33%, Nutraceutical Products sales increased $1 million to $8.3 million while Organic Foods and Beverages sales were up $3.9 million to $16.5 million an increase of 30%. This latter increase was mainly attributable to the launch of Organic Foods and Beverages Sprout product at Walmart with displays in 2,500 stores as well as to the CoComelon introduction and distribution gains in all markets.
Geographic Revenues
Revenues for the current quarter decreased by $1.4 million or 68% in Canada, increased by $0.8 million or 8% in the United States and increased by $0.03 million or 16% for other countries (royalty revenues) as compared to the quarter ended September 30, 2021.
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For the six-month period ended September 30, 2022, revenues increased by $1.4 million or 31% in Canada, increased by $4.2 million or 24% in the United States and increased by $0.08 million or 18% for other countries (royalty revenues) as compared to the six-month period ended September 30, 2021.
The decrease of revenue in Canada for the current quarter is mainly due to exiting our cannabis business as previously discussed although cannabis sales for the year-to-date were up. Increased first half year revenue in the United States is from sales growth of both Nutraceutical 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.
Consolidated gross profit (loss) summary, in millions of dollars
September 30, | Changes | |||||||||||||||
2022 | 2021 | Changes in $ | Changes in % | |||||||||||||
Three-month periods ended | 1.1 | (1.2 | ) | 2.3 | 194 | % | ||||||||||
Six-month periods ended | (1.8 | ) | (3.5 | ) | 1.7 | 49 | % |
Three-month period ended September 30, 2022 compared to September 30, 2021
The gross profit improvement, up from a loss in the same quarter last year, was mainly attributable to an improved product mix as well as continued cost control measures, which were partially offset by an inventory write down.
Six-month period ended September 30, 2022 compared to September 30, 2021
For the six-month period ended September 30, 2022, the consolidated gross profit (loss) amounted to $(1.8) million compared to $(3.5) million for the six-month period ended September 30, 2021, an improvement of $1.7 million or 49%mainly attributable to increased sales and lower costs.
Gross Margin Percentage
For the three-month periods ended September 30, 2022 and 2021, the consolidated gross margin went from (9.4)% in 2021 to 9.2% in 2022. As for the six-month periods ended September 30, 2022 and 2021, the consolidated gross margin went from (15.5)% in 2021 to (6.3%) in 2022.
Changes in gross margins resulted from increased sales volumes in the first half of the fiscal year and price increases together with cost reductions.
Research and Development (“R&D”) Expenses
Three-month period ended September 30, 2022 compared to September 30, 2021
For the quarter ended September 30, 2022, the consolidated R&D expenses amounted to $0.2 million, compared to $0.1 million for the quarter ended September 30, 2021.
Six-month period ended September 30, 2022 compared to September 30, 2021
Consolidated R&D expenses amounted to $0.4 million in the six-month period ended September 30, 2022, compared to $0.4 million for the same period last year.
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Selling, General and Administrative (“SG&A”) Expenses
Three-month period ended September 30, 2022 compared to September 30, 2021
Consolidated SG&A expensesfile its Form 10-Q for the quarter ended September 30, 2022 amountedby the prescribed due date without unreasonable effort or expense because it required additional time to $15.9 million comparedfinalize its financial statements to $15.4 millionbe included in the Form 10-Q. The Company did not file its Form 10-Q by the fifth calendar day delay after the prescribed due date. On November 22, 2022, the Company received a Deficiency Notice from Nasdaq indicating that, as a result of not having timely filed the Form 10-Q with the SEC, the Company is not in compliance with Nasdaq Listing Rule 5250(c)(1) (the “Listing Rule”), which requires timely filing of all required periodic financial reports with the SEC. The Deficiency Notice had no immediate effect on the listing or trading of the Company’s common shares on the Nasdaq. The Deficiency Notice indicated that the Company could regain compliance with the Listing Rule at any time prior to January 23, 2023 by filing the Form 10-Q. If the Company failed to file the Form 10-Q by such date, the Company could submit a plan to regain compliance with the Listing Rule prior to such date and, following receipt of such plan, Nasdaq may grant an extension of 180 calendar days from the Form 10-Q due date, or until May 15, 2023, for the same periodCompany to regain compliance. On December 20, 2022, the prior year, an increase of $0.5 million or 3%, primarily from severance and other expenses relating to restructuring offset by a reduction in stock-based compensation
Six-month period ended September 30, 2022, compared to September 30, 2021,
Regarding the six-month period ended September 30, 2022, compared to the same period in 2021, consolidated SG&A expenses amounted to $26.4 million compared to $31.5 million, a decrease of $5.1 million or 16%, primarily due to cost reductions from the restructuring and continued cost controls, partly offset by severance and other expenses relating to executing the restructuring.
Finance costs
Three-month period ended September 30, 2022 compared to September 30, 2021
Net finance costs, foreign exchange and derivatives revaluations amounted to a gain of $4.2 millionCompany filed its Form 10-Q for the quarter ended September 30,December 31, 2022 comparedand, thereby, regained compliance with the Listing Rule.
On February 15, 2023, the Company filed a Form 12b-25 with the SEC, which stated that it was unable to a gain of $1.0 million for the three-month period ended September 30, 2021, a reduction of $3.2 million. The variation for this period is mainly attributable to foreign exchange impact.
Six-month period ended September 30, 2022 compared to September 30, 2021
For the six-month period ended September 30, 2022, the net finance costs, foreign exchange and derivatives revaluations amounted to a gain of $2.6 million, compared to a loss of $0.60 million for the six-month period ended September 30, 2021, an increase of $3.2 million for the six-month period ended September 30, 2022. The variation for this period is mainly attributable to foreign exchange impact.
Income taxes
For the three-month period ended September 30, 2022, income tax expense (recovery) was nominal. As entities are in carry forward loss positions, there is no impact to income taxes for the six-month period ended September 30, 2022.
Net loss
Three-month period ended September 30, 2022 compared to September 30, 2021
For the quarter ended September 30, 2022, the net loss amounted to $37.3 million compared to a $12.1 million loss for the same quarter last year. This $25.2 million increase in net loss is primarily due to asset impairments of $24.7 million (intangible asset impairment $10.2 million and impairment of assets held for sale of $14.5 million) and a reduction in the fair value of derivatives of $7.3 million, partially offset by $3.0 million of inventory impairment and $3.1 million in unrealized foreign currency gains.
Six-month period ended September 30, 2022 compared to September 30, 2021
The net loss for the six-month period ended September 30, 2022 totaled $43.8 million compared to $31.0 million for the six-month period ended September 30, 2021, an increase of $12.8 million or 29%. The increase is primarily due to asset impairments of $25.5 million (including intangible assets and assets held for sale), a loss on issuance of warrants of $2.1 million, partially offset by $6.2 million in favorable foreign currency adjustment, a reduction in SG&A of $5.0 million and a prior year impairment impact of $2.4 million.
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Adjusted EBITDA
Three-month period ended September 30, 2022 compared to September 30, 2021
Consolidated Adjusted EBITDA loss worsened by $1.5 millionfile its Form 10-Q for the quarter ended September 30,December 31, 2022 by the prescribed due date without unreasonable effort or expense because it required additional time to finalize its financial statements to be included in the Form 10-Q. The Company did not file its Form 10-Q by the fifth calendar day delay after the prescribed due date. On February 23, 2023, the Company received a Deficiency Notice from Nasdaq indicating that, as a result of not having timely filed the Form 10-Q with the SEC, the Company is not in compliance with the Listing Rule, which requires timely filing of all required periodic financial reports with the SEC. The Deficiency Notice had no immediate effect on the listing or trading of the Company’s common shares on the Nasdaq. The Deficiency Notice indicated that the Company could regain compliance with the Listing Rule at any time prior to April 24, 2023 by filing the Form 10-Q. If the Company failed to file the Form 10-Q by such date, the Company may submit a plan to regain compliance with the Listing Rule prior to such date and, following receipt of such plan, Nasdaq may grant an Adjusted EBITDA lossextension of $13.7 million compared to $12.2 million loss180 calendar days from the Form 10-Q due date, or until August 21, 2023, for the same quarter last year. The increase in Adjusted EBITDA lossCompany to regain compliance. On March 30, 2023, the Company filed its Form 10-Q for the quarter is dueended December 31, 2022 and, thereby, regained compliance with the Listing Rule.
On December 29, 2022, we received a Deficiency Notice from Nasdaq informing us that our Common Shares have failed to $4.0 million legal provision partially offset by an increase in margins.
Six-month period ended September 30, 2022 compared to September 30, 2021
Consolidated Adjusted EBITDA loss improved by $1.3 millioncomply with the $1.00 minimum bid price required for continued listing under Nasdaq Listing Rule 5550(a)(2) based upon the closing bid price of our Common Shares for the six-month30 consecutive business days prior to the date of the Deficiency Notice. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we were given 180 calendar days from December 29, 2022, or until June 27, 2023, to regain compliance with Rule 5550(a)(2). On June 27, 2023, the Company filed for an extension to this deadline and the Nasdaq has determined that the Company is eligible for an additional 180 calendar day period, or until December 26, 2023, to regain compliance. If at any time before
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December 26 2023, the bid price of our Common Shares closes at $1.00 per share or more for a minimum of 10 consecutive business days, the Nasdaq will provide written confirmation that we have regained compliance.
On July 19, 2023, we received a deficiency notice from Nasdaq informing us that our reported stockholders’ equity as reported in our recent Annual Report on Form 10-K has decreased below the minimum stockholders’ equity requirement for continued listing on the Nasdaq Capital Market under the equity criteria under Nasdaq Listing Rule 5550(b)(1) (“Rule 5550(b)(1)”). The Company has 45 calendar days, or until September 5, 2023, to submit a plan to regain compliance. If the plan is accepted, Nasdaq can grant an extension of 180 calendar days from the date of the letter to evidence compliance.
Change in Auditor
On May 30, 2023, the Company announced the appointment of Berkowitz Pollack Brant Advisors + CPAs (“BPB”) as its independent registered public accounting firm, to audit our consolidated financial statements for the year ending March 31, 2024. Accordingly, KPMG LLP (“KPMG”), which previously served as the Company’s independent auditors, was dismissed upon completion of their audit on July 14, 2023 of the Company’s consolidated financial statements as of and for the year ended September 30,March 31, 2023 and the issuance of their report thereon. The appointment of BPB was made after a thorough evaluation process and has been approved by our board of directors and our Audit Committee.
Closing of a $5,000,000 Registered Direct Offering Priced At-The-Market Under Nasdaq Rules
On June 22, 2022, Neptune announced that it entered into definitive agreements with several institutional investors for the purchase and sale of an aggregate of 1,300,000 Common Shares and 645,526 pre-funded warrants to purchase up to an Adjusted EBITDA lossaggregate of $25.0645,526 Common Shares (the “June 2022 Pre-Funded Warrants”) of the Company, and two series of warrants each to purchase up to 1,945,526 Common Shares (for an aggregate of 3,891,052 Common Shares) (the “Series C Warrants “ and “Series D Warrants ,” and together, the “June 2022 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 (the “June 2022 Offering”). The June 2022 Warrants each have an exercise price of $2.32 per share and were immediately exercisable upon issuance. The Series D Warrants will expire two years following the date of issuance and the Series C Warrants will expire five years following the date of issuance. The gross proceeds from the June 2022 Offering were $5 million, comparedprior to a $26.3 million lossdeducting placement agent fees and other offering expenses payable by Neptune and assuming none of the June 2022 Warrants are exercised for cash. The offering closed on June 23, 2022. The June 2022 Pre-Funded Warrants issued in the same period last year. The decrease in Adjusted EBITDA lossoffering were fully exercised on June 24, 2022 for the six-month period is due$64.55. Additionally, on October 6, 2022, 972,763 Series C common share purchase warrants were amended to a reduction in gross loss and a reduction in costs, partially offset by $4.0 million legal provision.provide for an extended expiration date of June 23, 2029.
FINANCIAL AND CAPITAL MANAGEMENT FOR THE YEAR ENDED MARCH 31, 2022
USE OF PROCEEDS
The use of proceeds for the three and twelve-month periods ended March 31, 2022 and 2021, in millions of dollars, was as follows:
Three-month periods ended | Twelve-month periods ended | |||||||||||||||
March 31, 2022 | March 31, 2021 | March 31, 2022 | March 31, 2021 | |||||||||||||
Sources: | ||||||||||||||||
Proceeds from the issuance of shares through an At-The-Market Offering | $ | — | $ | — | $ | — | $ | 13.737 | ||||||||
Proceeds from the issuance of shares through a Direct Offering | 8.000 | — | 8.000 | 12.834 | ||||||||||||
Proceeds from the issuance of shares and warrants through a Private Placement | — | — | — | 35.301 | ||||||||||||
Proceeds from the issuance of shares and warrants through a Direct Offering Priced At-The-Market and Concurrent Private Placement | — | 55.000 | — | 55.000 | ||||||||||||
Proceeds from exercise of options | 0.001 | 2.653 | 0.001 | 7.479 | ||||||||||||
Proceeds from sale of property, plant and equipment | — | 0.015 | — | 0.015 | ||||||||||||
Proceeds from sale of Acasti shares1 | — | (0.236 | ) | 0.044 | — | |||||||||||
Maturity of short-term investment1 | — | — | — | 0.009 | ||||||||||||
Foreign exchange gain on cash and cash equivalents held in foreign currencies | 0.072 | — | 0.001 | (0.001 | ) | |||||||||||
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8.073 | 57.432 | 8.046 | 124.374 | |||||||||||||
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Acquisition of a subsidiary, net of cash acquired | — | 3.137 | — | 3.137 | ||||||||||||
Acquisition of property, plant and equipment | 0.904 | 1.937 | 1.939 | 6.618 | ||||||||||||
Acquisition of intangible assets | (0.001 | ) | 0.156 | 0.433 | 0.390 | |||||||||||
Repayment of loans and borrowings | — | 2.458 | — | 2.458 | ||||||||||||
Costs of issuance of shares | 0.637 | 2.705 | 0.637 | 6.174 |
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Withholding taxes paid pursuant to the settlement of non-treasury RSUs | 0.440 | 0.092 | 1.412 | 0.717 | ||||||||||||
Foreign exchange loss on cash and cash equivalents held in foreign currencies | (0.001 | ) | 6.232 | 0.390 | 0.187 | |||||||||||
Cash flows used in operating activities | 10.526 | 6.187 | 54.346 | 56.645 | ||||||||||||
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12.505 | 22.904 | 59.157 | 76.326 | |||||||||||||
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Net cash (outflows) | $ | (4.432 | ) | $ | 34.528 | $ | (51.111 | ) | $ | 48.048 |
Sources of Funds
For the three-month period ended March 31, 2022, gross proceeds from a direct offering totaling $8.0 million were raised, and the proceeds were used for operating activities resulting in cash outflows of $4.4 million. For the three-month period ended March 31, 2021, gross proceeds from a direct offering of $55.0 million were raised. In the same period, funds were used for the acquisition of a subsidiary, acquisition of equipment, loan repayments and operating activities. During the quarter, there were net cash proceeds of $34.7 million.
For the twelve-month period ended March 31, 2022, gross proceeds of $8.0 million were raised with $53.3 million of cash being used for operating activities and an additional $5.9 million for other purposes bringing net cash outflows in the year to $51.1 million. During the twelve month period ending March 31, 2021, proceeds from financings and other sources totaled $124.4 million with $55.9 million being used to fund operating expenses and an additional $20.4 million for other purposes. Net cash proceeds for the twelve months ended March 31, 2021 were $48.0 million.
At-The-Market Offering
During the three-month period ended June 30, 2020, the Company sold a total of 154,619 shares (5,411,649 pre-consolidation shares) through the At-The-Market offering (the “ATM Offering”) over the NASDAQ stock market, for gross proceeds of $19.0 million and net proceeds of $18.2 million. The shares were sold at the prevailing market prices which resulted in an average of approximately $88.55 per share (or $2.53 per pre-consolidation share). Effective February 16, 2021, the ATM Offering was terminated and Neptune will make no further sales under the ATM Offering. As of that date, Neptune had sold 273,450 of its common shares (9,570,735 pre-consolidation shares) under the ATM Offering, raising approximately $18.6 million in gross proceeds.
Direct Offerings
On March 14, 2022, Neptune issued a total of 528,572 (18,500,000 pre-consolidation) common shares of the Company (“Common Shares”), along with 185,715 (6,500,000 pre-consolidation) pre-funded warrants (“Pre-Funded Warrants”), as part of a registered direct offering (“Direct Offering”), with each Pre-Funded Warrant exercisable for one Common Share. The Common Shares and the Pre-Funded Warrants were sold together with 714,286 (25,000,000 pre-consolidation) Series A Warrants (the “Series A Warrants”) and 714,286 (25,000,000 pre-consolidation) Series B Warrants (the “Series B Warrants” and collectively with the Series A Warrants, the “Common Warrants”) to purchase up to an aggregate of 1,428,572 (50,000,000 pre-consolidation) Common Shares. Each Common Share and Pre-Funded Warrants and the accompanying Common Warrants were sold together at a combined offering price of $11.20 (or $0.32 pre-consolidation), for aggregate gross proceeds of $5.0 million before deducting fees and other estimated offering expenses. The Pre-Funded Warrants a funded in full at closing except for a nominal exercise price of $0.0035 (or $0.0001 pre-consolidation) and are exercisable commencing on the closing date, and will terminate when such Pre-Funded Warrants are exercised in full. 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 date of issuance. The net proceeds of the transaction amounted to $3.6 million.
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On July 13, 2020, Neptune entered into definitive agreements with certain healthcare-focused institutional investors for the sale of 136,389 common shares (4,733,584 pre-consolidation shares) at an offering price of $92.75 per share ($2.65 per pre-consolidation share) for gross proceeds of approximately $12.65 million before deducting fees and other estimated offering expenses, pursuant to a registered direct offering (the “Offering”). The Offering closed on July 15, 2020 with one of its existing institutional investors and two new U.S. institutional investors. The net proceeds of the direct offering were of $12.0 million.
Private Placement
On October 20, 2020, Neptune entered into definitive agreements with certain US healthcare focused institutional investors for a private placement of 462,963 (16,203,700 pre-consolidation) common shares and 300,926 (10,532,401 pre-consolidation) warrants to purchase 300,926 (10,532,401 pre-consolidation) common shares for gross proceeds of approximately $35 million before deducting fees and other estimated offering expenses (the “Private Placement”). Each warrant will entitle the holder thereof to acquire one common share at an exercise price of $78.75 (or $2.25 pre-consolidation) per share for a period beginning on April 22, 2021 through October 22, 2025. The Company used the net proceeds from the Private Placement, which closed on October 22, 2020, for purchase order fulfilment, working capital and other general corporate purposes. The net proceeds of the Private Placement amounted to $32.9 million.
Registered Direct Offering Priced At-The-Market Under Nasdaq Rules and Concurrent Private Placement
On February 17, 2021, Neptune announced it had entered into definitive agreements with institutional investors for the purchase of 785,715 common shares (27,500,000 pre-consolidation shares). The Company also agreed to issue to the investors, in a concurrent private placement, unregistered common share purchase warrants (the “Warrants”) to purchase an aggregate of 196,429 common shares (6,875,000 pre-consolidation shares). Each common share and accompanying quarter of a Warrant were sold together at a combined offering price of $70.00 (or $2.00 pre-consolidation), pursuant to a registered direct offering, priced at-the-market under Nasdaq rules, for aggregate gross proceeds of approximately $55.0 million before deducting fees and other estimated offering expenses (the “Offering”). The Warrants will have an exercise price of $78.75 per share (or $2.25 per pre-consolidation share), will be exercisable commencing on the six-month anniversary of the date of issuance, and will expire 5.5 years from the date of issuance. Proceeds were allocated first to the warrants based on their fair value and then the residual to the common shares, resulting in an initial warrant liability of $6.3 million and $48.7 million recorded in the equity of the Corporation. Purchase warrants are recognized as liabilities, as the exercise price of the warrants is in USD, whereas the Corporation’s functional currency is the Canadian dollar. The net proceeds of the registered direct offering were of $52.9 million. The Offering closed on February 19, 2021, following the satisfaction of customary closing conditions and the receipt of regulatory approvals, including the approval of the Toronto Stock Exchange.
Offerings subsequent to the year end
On June 23, 2022, Neptune closed agreements with several institutional investors for the purchase and sale of an aggregate of 1,300,000 common shares of the Corporation, 645,526 pre-funded warrants and accompanying series of warrants to purchase up to an aggregate of 2,591,052 common shares warrants, at an offering price of $2.57 per share and accompanying warrants in a registered direct offering priced at-the-market under Nasdaq rules. Each series of warrants have an exercise price of $2.32 per share and are immediately exercisable upon issuance. One series of warrants will expire two years following the date of issuance and one series of warrants will expire five years following the date of issuance. The gross proceeds from the offering are $5 million, prior to deducting placement agent’s fees and other offering expenses payable by Neptune. The Prefunded warrants were fully exercised on June 24, 2022 for $64.55.
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FINANCIAL AND CAPITAL MANAGEMENT FOR THE QUARTER ENDED SEPTEMBER 30, 2022
USE OF PROCEEDS
We estimate the net proceeds to us in this offering will be approximately $[●] million, after deducting the [Placement Agent] fees and expenses and estimated offering expenses payable by us. This assumes a public offering price of $[●] per Common Share and Warrant (the last reported sale price of our Common Shares on Nasdaq on [●], 2023). [However, because this is a [reasonable best-efforts] offering and there is no minimum offering amount required as a condition to the closing of this offering, the actual offering amount, the [Placement Agent]’s fees and net proceeds to us are not presently determinable and may be substantially less than the maximum amounts set forth on the cover page of this prospectus.] The table below depicts how we plan to utilize the proceeds in the event that 50% and 100% of the securities in this offering are sold, after deducting [Placement Agent] fees and expenses and estimated offering expenses payable by us.
Use of Proceeds |
| 100% |
| 50% | ||
Repayment of debt (1) | | $ | [●] | | $ | [●] |
General corporate purposes | | $ | [●] | | $ | [●] |
Total: | | $ | [●] | | $ | [●] |
(1) | Represents a mandatory prepayment of $1 million, together with an exit fee of $100,000 and payment of interest (the “Mandatory Repayment”), payable pursuant to a senior secured notes financing for gross proceeds of $4.0 million with CCUR Holdings, Inc. |
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and Symbolic Logic, Inc. that was entered into on January 12, 2023, as amended. The notes mature on January 12, 2024 and currently bear interest at a rate of 24% per annum, resetting to 16.5% per annum following payment of the Mandatory Repayment. The remainder of the Mandatory Repayment is required to be paid by August 30, 2023. Proceeds from the notes were used for general corporate purposes. |
These estimates exclude the proceeds, if any, from the exercise of Common Warrants issued in this offering. If all of the Common Warrants issued in this offering were to be exercised in cash at an assumed exercise price of $[●] per Common Share, we would receive additional proceeds of approximately $[●] million. We cannot predict when or if these Common Warrants will be exercised. It is possible that these Common Warrants may expire and may never be exercised. Additionally, the Common Warrants contain a cashless exercise provision that permit exercise of Common Warrants on a cashless basis at any time where there is no effective registration statement under the Securities Act of 1933, as amended, covering the issuance of the underlying shares.
We plan to use the proceeds of the offering, after repayment of debt, for general corporate purposes, including working capital. The principal reasons for this offering are to increase our working capital and to provide capital for general corporate purposes.
Due to the uncertainties inherent in our business, we cannot estimate with certainty the exact amounts of the net proceeds from this offering that may be used for any purpose. As a result, our management will have broad discretion in applying the net proceeds from this offering.
The net proceeds from this offering will not significantly improve the Company’s working capital. The Company’s trade and other payables will continue to significantly exceed its cash balance. After receipt of the net proceeds from this offering the Company will still be required to actively manage its liquidity and expenses and payments of payables will continue to not be made as the amounts become due. Nor will the receipt of the net proceeds from this offering remove that substantial doubt and as such, there will remain substantial doubt about our ability to continue as a going concern after this offering.
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2023 as follows:
● | on an actual basis; |
● | on a pro forma basis to give effect to the issuance of common shares and warrants on May 15, 2023; and |
● | on a pro forma as adjusted basis to reflect our receipt of the net proceeds our sale and issuance of [●] Common Shares (assuming [no sale of any Pre-Funded Warrants] and no exercise of the Common Warrants) in this offering based on the assumed public offering price of $[●] per common share (the last reported sale price of our Common Shares on Nasdaq on [●], 2023) after deducting estimated [Placement Agent] fees and expenses and estimated offering expenses payable by us. |
The as adjusted information set forth below is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing. You should read this table in conjunction with “Management’s Discussion and Analysis of
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Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in, or incorporated by reference into, this prospectus.
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| | Actual |
| Pro forma(1) |
| Adjusted (2) | |||
| | (In thousands, except share and per share data) | |||||||
Liability related to warrants | | $ | 3,156 | | $ | 5,956 | | $ | [●] |
Operating lease liabilities (including current portion) | | $ | 2,018 | | $ | 2,018 | | $ | [●] |
Loans and borrowings (including current portion) | | $ | 22,951 | | $ | 22,951 | | $ | [●] |
Other liability | | $ | 24 | | $ | 24 | | $ | [●] |
Shareholders’ equity: | | | | | | | | | |
Share capital, without par value, 11,996,387 shares issued and outstanding as of March 31, 2023, actual; 24,117,599 shares issued and outstanding, proforma; [●] shares issued and [●] outstanding, proforma as adjusted | | | 321,946 | | | 323,546 | | | |
Preferred shares, no par value; no shares outstanding, actual; no shares outstanding, proforma; and no shares outstanding proforma as adjusted | | | | | | | | | |
Warrants | | $ | 6,155 | | $ | 6,155 | | $ | [●] |
Additional paid-in capital | | $ | 58,139 | | $ | 58,139 | | $ | [●] |
Accumulated other comprehensive loss | | $ | (14,539) | | $ | (14,539) | | $ | [●] |
Deficit | | $ | (383,641) | | $ | (384,799) | | $ | [●] |
Total equity (deficiency) attributable to equity holders of the Company | | $ | (11,940) | | $ | (11,498) | | $ | [●] |
Non-controlling interest | | $ | (15,621) | | $ | (15,621) | | $ | [●] |
Total shareholders’ equity (deficiency) | | $ | (27,561) | | $ | (27,119) | | $ | [●] |
Total capitalization | | $ | 589 | | $ | 3,830 | | $ | [●] |
(1) | The receipt of the net proceeds on May 15, 2023 of our sale and issuance of 4,415,162 common shares and pre-funded warrants to purchase 7,706,050 common shares (and assuming no exercise of the common warrants) based on the price of $0.33 per common share and accompanying common warrant and repricing and extension of life of existing warrants, after deducting estimated costs. As the accounting treatment of the warrants and the allocation between equity and liability components has not yet been finalized, it is assumed for the purposes of the pro forma capitalization that approximately half of the proceeds has been allocated to the derivative warrant liabilities and the remainder to share capital. Accordingly, approximately half of the estimated costs have been allocated to deficit and the remainder to share capital. The pro forma capitalization also reflects a repricing and extension of life of the pre-existing warrants with an offsetting debit to deficit, and assumes the exercise in full of all outstanding pre-funded warrants. |
(2) | As the accounting treatment of the Warrants and the allocation between equity and liability components has not yet been determined, it is assumed for the purposes of the Pro forma as Adjusted capitalization that all of the proceeds have been allocated to the derivative warrant liabilities and therefore, all of the estimate [Placement Agent] fees and expenses and estimated offering expenses have been allocated to deficit. In addition, if the fair value of the derivative warrant liabilities exceeds the total proceeds of this offering, a loss would be recorded upon initial recognition of this offering, which loss is not reflected in the deficit in the above table. |
A $0.25 increase or decrease in the assumed public offering price of $[●] per share, as set forth on the cover page of this prospectus, would increase or decrease the expected net proceeds to us from this offering by approximately $[●] million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated [Placement Agent] fees and expenses and estimated offering expenses payable by us.
Similarly, a 100,000 share increase or decrease in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase or decrease the net proceeds to us by approximately $[●], assuming the assumed public offering price of $[●] per share remains the same, and after deducting estimated [Placement Agent] fees and expenses and estimated offering expenses payable by us.
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The number of our Common Shares to be outstanding immediately after this offering is based on 11,996,387 Common Shares outstanding as of March 31, 2023 and excludes:
● | 674,475 Common Shares issuable upon the exercise of stock options outstanding as of March 31, 2023, at a weighted average exercise price of $70.27 per Common Share; |
● | 12,197,670 Common Shares issuable upon the exercise of warrants outstanding as of March 31, 2023, at a weighted average exercise price of $10.64 per Common Share; |
● | 4,308 deferred share units; |
● | 2,789 restricted share units; |
● | any additional Common Shares that are available for future issuance under our equity compensation plans; and |
● | the issuance, on May 15, 2023, of 4,415,162 common shares, 7,706,050 pre-funded warrants, and accompanying warrants to purchase up to an aggregate of 12,121,212 common shares at a combined public offering price of $0.33 per share, and the repricing and extension the term of existing common warrants to purchase up to an aggregate of 8,423,733 common shares. |
DILUTION
If you purchase Common Shares and Warrants in this offering, you will experience dilution to the extent of the difference between the combined public offering price per Common Share and related Warrant in this offering and our net tangible book value (deficit) per Common Share. Net tangible book value (deficit) per Common Share is equal to the amount of our total tangible assets, less total liabilities, divided by the number of outstanding Common Shares. As of March 31, 2023, our net tangible book value (deficit) was approximately $(31.6 million), or approximately $(2.63) per Common Share. Taking into account the Common Shares and warrants to purchase Common Shares issued on May 15, 2023, our pro forma net tangible book value (deficit) was approximately $(31.2 million) or $(1.29) per Common Share. The pro forma net tangible book value has been computed assuming exercise in full of the May 15, 2023 pre-funded warrants and no exercise of the common warrants.
After giving effect to the assumed sale by us of Common Shares and Warrants in this offering at an assumed combined public offering price of $[●] per Common Share and related Warrant (the last reported sale price of our Common Shares on Nasdaq on [●], 2023), after deducting the estimated [Placement Agent] fees and expenses and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value (deficit) as of March 31, 2023 would have been approximately $([●] million), or approximately $([●]) per Common Share. The pro forma as adjusted net tangible book value has been computed assuming [exercise in full of the Pre-Funded Warrants] and no exercise of the Common Warrants. This represents an immediate increase in net tangible book value (deficit) of $[●] per Common Share to existing shareholders and an immediate dilution of $[●] per share to new investors purchasing Common Shares and related Warrants in this offering, attributing none of the assumed combined public offering price to the Common Warrants offered hereby. The following table illustrates this per Common Share dilution:
| | | ||||
|
| Per Common |
| | ||
| | Share and | | | ||
| | Warrant | | Total | ||
Assumed combined public offering price per Common Share and related Common Warrant | | $ | [●] | | $ | |
Net tangible book value (deficit) per Common Share as of March 31, 2023 | | $ | (2.63) | | | |
Increase in net tangible book value (deficit) per Common Share after the May 2023 offering | | $ | 1.34 | | | |
Pro forma net tangible book value (deficit) per Common Share as of March 31, 2023 | | $ | (1.29) | | | |
Increase in pro forma net tangible book value per Common Share after this offering | | $ | [●] | | | |
Pro forma as adjusted net tangible book value (deficit) per Common Share after this offering | | $ | [●] | | | |
Dilution per Common Share to new investors | | $ | [●] | | $ | ([●]) |
A $0.25 increase (decrease) in the assumed combined public offering price of $[●] per Common Share and Common Warrant would result in an increase (decrease) in our pro forma as adjusted net tangible book value (deficit) of approximately $[●] million or approximately $[●] per Common Share, and would result in an increase (decrease) in the dilution to new investors of approximately $[●] per Common Share, assuming that the number of Common Shares and Common Warrants sold by us remains the same, after deducting the estimated [Placement Agent] fees and expenses and estimated offering expenses payable by us.
Similarly, a decrease of 100,000 in the number of Common Shares offered by us would decrease our pro forma as adjusted net tangible book value by approximately $[●] million or $[●] per share, and increase the dilution per share to investors participating in this offering by $[●] per share, assuming the assumed offering price per share remains the same and after deducting the estimated [Placement Agent]
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commissions and estimated offering expenses payable by us. The information discussed above is illustrative only and will adjust based on the actual offering price, the actual number of Common Shares we offer in this offering, and other terms of this offering determined at pricing.
The foregoing discussion and table do not take into account further dilution to new investors that could occur upon the exercise of outstanding options or warrants having a per share exercise price less than the per Common Share and related Common Warrant offering price to the public in this offering. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our shareholders.
The number of our Common Shares to be outstanding immediately after this offering is based on 11,996,387 Common Shares outstanding as of March 31, 2023 and excludes:
● | 674,475 Common Shares issuable upon the exercise of stock options outstanding as of March 31, 2023, at a weighted average exercise price of $70.27 per Common Share; |
● | 12,197,670 Common Shares issuable upon the exercise of warrants outstanding as of March 31, 2023, at a weighted average exercise price of $10.64 per Common Share; |
● | 4,308 deferred share units; |
● | 2,789 restricted share units; |
● | any additional Common Shares that are available for future issuance under our equity compensation plans; and |
● | the issuance, on May 15, 2023, of 4,415,162 common shares, 7,706,050 pre-funded warrants, and accompanying warrants to purchase up to an aggregate of 12,121,212 common shares at a combined public offering price of $0.33 per share, and the repricing and extension the term of existing common warrants to purchase up to an aggregate of 8,423,733 common shares. |
MARKET INFORMATION FOR SECURITIES AND DIVIDEND POLICY
Our Common Shares trade under the symbol “NEPT” on Nasdaq.
The following table sets forth the high and low intraday sales prices per Common Share as reported on Nasdaq beginning on April 1, 2020 and taking into account the Share Consolidation that took effect on June 13, 2022:
| Low Trading Price |
| High Trading Price | |||||
Period |
| ($) | ($) | |||||
Year Ending March 31, 2024 |
|
|
|
|
|
| ||
Second Quarter |
| (to [●], 2023) | $ | [●] | $ | [●] | ||
First Quarter |
| (June 30, 2023) | $ | 0.13 | $ | 0.70 | ||
Year Ending March 31, 2023 |
|
|
|
|
|
| ||
Fourth Quarter |
| (March 31, 2023) | $ | 0.29 | $ | 1.04 | ||
Third Quarter |
| (December 31, 2022) | $ | 0.23 | $ | 1.92 | ||
Second Quarter |
| (September 30, 2022) | $ | 1.00 | $ | 3.74 | ||
First Quarter |
| (June 30, 2022) | $ | 1.34 | $ | 1.41 | ||
Year Ended March 31, 2022 |
|
|
|
|
|
| ||
Fourth Quarter |
| (March 31, 2022) | $ | 7.35 | $ | 19.60 | ||
Third Quarter |
| (December 31, 2021) | $ | 12.25 | $ | 22.40 | ||
Second Quarter |
| (September 30, 2021) | $ | 19.25 | $ | 41.30 | ||
First Quarter |
| (June 30, 2021) | $ | 37.10 | $ | 55.30 | ||
Year Ended March 31, 2021 |
|
|
|
|
|
| ||
Fourth Quarter |
| (March 31, 2021) | $ | 45.15 | $ | 110.25 | ||
Third Quarter |
| (December 31, 2020) | $ | 52.15 | $ | 86.80 | ||
Second Quarter |
| (September 30, 2020) | $ | 73.85 | $ | 113.05 | ||
First Quarter |
| (June 30, 2020) | $ | 35.70 | $ | 110.25 |
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As of [●], 2023, we had [42] shareholders of record based on the records of our transfer agent, which does not include beneficial owners of our Common Shares whose shares are held in the names of various securities brokers, dealers and registered clearing agencies.
Dividends
We do not anticipate paying any dividend on our Common Shares in the foreseeable future. We presently intend to retain future earnings to finance the expansion and growth of our business. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors the board of directors deems relevant. In addition, the terms of any future debt or credit facility may preclude us from paying dividends.
Securities Authorized for Issuance under Equity Compensation Plans
Information about our equity compensation plans, as set forth in this prospectus under the caption “Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters”, is incorporated herein by reference.
Unregistered Sales of Equity Securities
Except as set forth below, since [●], 2020, we have not sold any securities that were not registered under the Securities Act.
(1) | In March 2023, we issued warrants to purchase common shares of the Company to one accredited investor which permits the investor to purchase an aggregate of 111,111 of our common shares at an exercise price of $0.54. |
(2) | In February 2023, we issued to three accredited investors an aggregate of 146,330 of our common shares in connection with loans to Sprout Foods, Inc. |
(3) | In January 2023, we issued (i) 71,665 common shares to our financial advisor in connection with our strategic review and (ii) to two accredited investors the January 2023 Warrants, which permits the investors to purchase an aggregate of 850,000 of our common shares at an exercise price of $0.53 per common share. |
(4) | In October 2022, we issued to accredited investors the Series E Warrants in the Private Placement, which permits the investors to purchase an aggregate of 6,417,114 of our common shares at an exercise price of $1.62 per common share. |
(5) | In July and September 2022, we issued to two accredited investors an aggregate of 409,435 common shares in connection with loans to Sprout Foods, Inc. |
(6) | In June 2022 we issued 7,104 common shares to our financial advisor in connection with our proposed divestiture of our Canadian cannabis business. |
(7) | In October 2020, we issued 462,963 common shares and 300,926 warrants to purchase common shares at an offering of $75.60 per share to institutional investors. |
Repurchases of Equity Securities
We did not repurchase any of our equity securities during the years ended March 31, 2023 and 2022.
BUSINESS
Overview
General
Neptune Wellness Solutions Inc. (“Neptune”, the “Company”, “we”, “us” or “our”) is a modern consumer packaged goods (“CPG”) company driven by a singular purpose: to transform the everyday for a healthier tomorrow. Neptune is a diversified health and wellness company with multiple brand units. With a mission to redefine health and wellness, Neptune is focused on building a broad portfolio of high quality, affordable consumer products in response to long-term secular trends and market demand for natural, plant-based, sustainable and purpose-driven lifestyle brands. The Company utilizes a highly flexible, cost-efficient manufacturing and supply chain infrastructure that can be scaled up and down or into adjacent product categories to identify new innovation opportunities, quickly adapt to consumer preferences and demand, and bring new products to market through its mass retail partners and e-commerce channels. Leveraging decades of expertise in extraction and product formulation, Neptune is a provider of turnkey product development and supply chain solutions to business customers across several health and wellness verticals, including nutraceuticals and white label consumer packaged goods. Neptune has expanded its operations since June 2020 into brand units in order to better address its markets.
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The main brand units are Nutraceuticals and Organic Foods & Beverages. All amounts in this prospectus are in US dollars, unless otherwise noted.
History
Neptune was incorporated under Part IA of the Companies Act (Québec) on October 9, 1998 under the name Neptune Technologies & Bioresources Inc. Since its incorporation, Neptune has amended its articles of incorporation on numerous occasions. The Company first amended its articles on May 30, 2000 to convert its then issued and outstanding shares into newly-created classes of shares. The Company’s articles were also amended on May 31, 2000 to create Series A Preferred Shares. On August 29, 2000, the Company converted all its issued and outstanding Class A shares into Class B subordinate shares. On September 25, 2000, the Company further amended its share capital to eliminate its Class A shares and converted its Class B subordinate shares into Common Shares. On November 1, 2013, the Company amended its articles of incorporation to reflect certain changes to items relating to board matters. The Company’s Common Shares are listed and posted for trading on the Nasdaq under the symbol, “NEPT”.
On June 9, 2022, we effected a one for thirty-five (1-for-35) reverse split of our common shares, which we refer to as the “Share Consolidation,” as approved by our board of directors. Trading of our common shares on both the TSX and Nasdaq on a post-consolidated basis commenced as of the open of markets on June 13, 2022. On August 15, 2022, the Company voluntarily delisted its Common Shares from the TSX.
Our Properties and Operations
The following table sets forth the Company’s principal physical properties:
Type | Material Properties Location | Leased / Owned | ||
Office | Laval, Québec | Leased | ||
Office | Vaudreuil, Québec | Leased | ||
Office / Laboratory | Laval, Québec | Leased | ||
Office | Jupiter, Florida | Leased |
Our headquarters is located in leased offices in Laval, Québec, where our general and administrative departments primarily operate. We also lease laboratory space in Laval, Quebec where testing and development of many of our products takes place. On December 5, 2022, our U.S. operations opened an office in Jupiter, Florida which serves as the U.S. headquarters.
We previously owned a production facility in Sherbrooke, Quebec where we conducted our cannabis operations including laboratory testing. On October 17, 2022, we announced that we had entered into a binding agreement for the sale of our cannabis business, which would include the sale of our cannabis brands and the Sherbrooke building in one or more transactions. The disposition of our cannabis operations occurred on November 9, 2022. We believe the divestment of the cannabis assets will allow us to realize significant cost savings and operational streamlining from redirected resources towards our simplified corporate structure.
We also have leased offices in Vaudreuil, Province of Québec, Canada, which have been sub-leased to a third-party tenant.
Business Strategy
Neptune’s vision is to change consumer habits through the creation and distribution of environmentally friendly, ethical and innovative consumer product goods. Our mission is to redefine health and wellness and help humanity thrive by providing sustainable consumer focused solutions. Despite the decline in global economic activity since the outbreak of the COVID-19 virus, Neptune has taken transformative, and successful, actions to increase its sales, distribution and reach in both the business-to-business (“B2B”) and business-to-consumer (“B2C”) models in the 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 and Organic Foods & Beverages. Neptune’s current brand portfolio across these verticals include Sprout®, Neptune Wellness™, Forest Remedies®, and MaxSimil®.
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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.
Neptune’s future will be focused on brand creation, accelerating organic growth with emphasis on increased efficiency and margin expansion. This will be complemented by accretive acquisitions with a proven track record of operational excellence. On July 22, 2021, the Company launched Forest Remedies’ plant-based Omega 3-6-9 gummies and soft gels. Neptune is focused on expanding its exclusive Omega-3 delivery technology MaxSimil® while improving growth and profitability in its Nutraceuticals vertical. The MaxSimil® product lineup will be expanded with the launch of two new consumer products: MaxSimil® with CoQ10 and MaxSimil® with Curcumin. Additionally, the Company launched a new consumer line of Vitamin Sprays and Pumps for both children and adults with selected retail partners. To support anticipated accelerated growth, the Nutraceuticals U.S. sales force has been expanded to maximize awareness and distribution of the capabilities and expertise in nutraceuticals, including prebiotics and probiotics, and proteins within this important vertical.
Products, Principal Markets, Methods of Distribution and Brands
Products
Our Nutraceutical products and Organic Foods and Beverages are manufactured by third party manufacturers. In order to meet demand for our products, we have developed relationships with selected contract manufacturers. 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 of quality procedures and certifications 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
On October 16, 2022, Neptune entered into an asset sale and purchase agreement (the “ASPA”) with a third-party, for its Canadian cannabis business including the Sherbrooke facility, following the planned divestiture of this business announced on June 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 on November 9, 2022. Some assets were excluded from the ASPA and were written down accordingly. On November 10, 2022, the Company filed a notice of cessation of cannabis activities with Health Canada and requested that its cannabis processing and research licenses be revoked. As of November 11, 2022, all cannabis was removed from the Sherbrooke facility and the Company no longer possesses or conducts any activities with cannabis.
Markets
Nutraceuticals
Neptune offers a variety of specialty ingredients, including our licensed specialty ingredient MaxSimil®, a technology that helps increase digestion and absorption of fat-soluble and nutritional ingredients. Additionally, the Company sources a variety of other marine oils, seed oils and specialty ingredients that are available for sale as raw material or transformed into finished products. The Company has recently launched a new line of Vitamin Sprays and Pumps for both children and adults. Neptune is focused on expanding its exclusive Omega-3 delivery technology MaxSimil® while improving growth and profitability in its Nutraceuticals vertical through its brand Biodroga.
Neptune’s core strength is product innovation with a focus on specialty ingredients offered in bulk soft gels and liquid delivery systems. The Company continues to expand its delivery system capabilities with projects for pumps, sprays and roll-ons. All of Neptune’s
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Nutraceutical products are available under distributors’ private labels, primarily sold in the Canadian and U.S. nutraceutical markets. Neptune, through its nutraceuticals products business, also formulates, develops and provides customers with turnkey nutrition solutions.
The Company sells wellness products to the Nutraceutical market through its Forest Remedies brand. Forest Remedies offers plant-based supplements, including first-of-its kind multi-omega gummies and soft gels with packaging that is 100% plastic-free. Neptune announced, on March 10, 2022, the launch of its Forest Remedies Multi Omega 3-6-9 line of supplements. This distribution agreement marks another important milestone in our efforts to transform Neptune into a high-growth branded CPG company.
Organic Foods and Beverages
In February 2021, Neptune acquired a controlling interest in Sprout Foods, Inc., an organic plant-based baby food and toddler snack company. Sprout is an integral piece of Neptune’s health and wellness portfolio and represents a key brand within the Organic Foods and Beverages vertical. Since completing the Sprout acquisition, the Company has begun expansion efforts in Sprout’s distribution across substantially all of Target’s U.S. retail stores. The Company also announced, on July 27, 2021, the initial launch of Sprout products into Canada, in Metro grocery stores in the province of Ontario. Neptune further expects to launch Sprout products in North America throughout the remainder of the fiscal year. The Company expects the Neptune/Sprout combination to result in significant incremental revenue growth, with several near and long-term revenue synergy opportunities identified within Neptune’s existing relationships and current sales channels. As described above, Neptune also announced on June 9, 2021, an exclusive multi-year licensing agreement between Sprout and CoComelon, the #1 children’s entertainment and educational show in the world with more than 110 million subscribers worldwide. This co-branded product line is now available on Walmart.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 the U.S., accounting for approximately 90 percent of the overall market.
On May 2, 2023, Neptune announced that four of its most popular Sprout Organics x CoComelon co-branded, organic toddler pouches have been picked up by Target and are now available in select Target Stores across the United States, and Target.com. The Sprout Organics x CoComelon line includes 15 SKU’s that are made up of toddler pouches, Wafflez snacks, and plant-based snack bars, each leveraging CoComelon’s brand as the #1 Kids YouTube Channel in the world. In addition to the CoComelon partnership, Sprout Organics SKU’s consist of organic toddler pouches, toddler meals, toddler snacks and the newly launched Big Kid Mealz; Sprouts first product out of the baby aisle.
In the last year, Sprout has made the following major distribution gains and sales milestones:
Distribution: Now available in 90% of the organic baby food market, Sprout x CoComelon being a key driver of sales velocity.
Target SKU Count: 4 Sprout x CoComelon SKUs launched in select Target stores nationwide and Target.com.
Added Distribution: In the last year, Sprout has established substantial distribution gains with leading retailers, and Target has contributed to that growth.
CoComelon Co-Brand: Yes Yes Veggie product is now Sprout’s #1 highest selling pouch in the latest 26 weeks in Total US xAOC*.
Geographic Presence: Now available in all 50 states, as well as in Canada.
*Sales velocity: Sales dollars per total point of distribution; Nielsen AOD; Total US x AOC Latest 26 weeks W/E 3-25-23
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.
The Company sells its Neutraceutical products through distributors and directly to retail outlets in the United States. It also sells its products online through its own website forestremedies.com as well as e-commerce sites.
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Organic Foods and Beverages
The Company, though its Sprout subsidiary, sells its products to mass retailers, grocery stores and other retail outlets, as well as online through e-commerce sites and its own website sproutorganics.com.
Our B2C Brand Portfolio Strategy
We are currently working on accelerating brand equity for our brand portfolio:
| Biodroga™. Neptune, through its Biodroga subsidiary, provides product development and turnkey solutions (4PL) to its customers throughout North America. Biodroga offers a full range of services, whether it is leveraging our global network of suppliers to find the best ingredients or developing unique formulations that set our 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. | |
| ||
| | MaxSimil. Neptune 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 predigest omega-3 fatty acids. The Journal of Nutrition, by the Oxford University Press, recently released the results of a clinical study that evidences MaxSimil’s superior absorption as compared with standard fish oil supplements. MaxSimil was first introduced to the market in 2018, and is sold as a straight omega-3 supplement with standard and unique concentration of EPA/DHA. MaxSimil is also starting to be presented in combination with specialty ingredients such as Curcumin and Vitamin K2. |
| ||
| | 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. |
| ||
| | Sprout®. Neptune entered a new market with the Neptune/Sprout combination. Sprout has created a trusted organic baby food brand with a comprehensive range of products that are always USDA certified organic, non-GMO and contain nothing artificial. Sprout’s products target four segments: Stage 2 (children 6 months and up), Stage 3 (children 8 months and up), Toddler (children aged 12 months and up) and Snacks (children 8 months and up). Since our acquisition of a controlling interest in Sprout, the Company has begun expansion efforts in Sprouts’ distribution substantially in all of Target’s U.S. retail stores. The Company also announced on July 27, 2021, its initial launch into the Canadian market through its partnership with food retailer Metro Inc. Certain toddler snacks under this brand label are now available in Metro grocery stores in the province of Ontario. |
Competition
The nutraceutical 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 prospectus.
Regulatory
Our Nutraceutical and Organic Food and Beverage businesses are subject to varying degrees of regulation by a number of government authorities in Canada and the U.S., including Health Canada, the FDA, the Federal Trade Commission (FTC), the Consumer Product
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Safety Commission, the U.S. Department of Agriculture, and the Environmental Protection Agency. Various provincial, state and local agencies in areas where we operate and in which our products are sold also regulate our business. The areas of our business regulated by both these and other authorities include, among others:
● | 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 in Canada and the U.S., while other agencies regulate marketing and advertising claims. Under Health Canada and FDA rules, companies that manufacture, package, label, distribute or hold nutritional supplements are required to meet certain GMP’s to ensure such products are of the quality specified and are properly packaged and labeled. We are committed to meeting or exceeding the standards set by Health Canada and the FDA and believe we are currently operating within the mandated GMP.
Health Canada and he FDA also regulate the labeling and marketing of dietary supplements and nutritional products, including the following:
● | 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 in Canada and the U.S., including those relating to health, safety, bioterrorism, taxes, labor, employment, import and export, the environment and intellectual property. All of these regulations require significant financial and operational resources to ensure compliance, and we cannot assure you we will always be in compliance despite our best efforts to do so or that complying will not become prohibitively costly to our business.
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.
Licenses
On January 31, 2020, Neptune entered into an exclusive, worldwide, and royalty-bearing licensing agreement with SCF Pharma Inc. for the development, manufacturing, formulation, distribution, sub-licensing and sale of the MaxSimil® technology in nutraceutical products.
On May 28, 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. The licensing agreement, which expires December 31, 2023, will automatically extend until December 31, 2026 provided there has not been a material breach of the agreement, the Company does not provide notice of an intent
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to not extend by October 1, 2023, and the Company has accrued royalties of $195,000 or more under the agreement before October 1, 2023. The Company expects to meet the minimum royalty threshold later this year, on time.
Employees
As of March 31, 2023, we had 50 employees working at our business offices in Jupiter and Laval, or remotely, down from 161 employees at March 31, 2022. Our employees possess specialized skills and knowledge, which we believe are valuable assets of the Company. As of March 31, 2023, 21 of our employees were in Canada while 29 were in the United States. We also had 21 temporary personnel. None 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.
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 in October 2022, June 2022 and March 2022. We also issued promissory notes in July 2022, November 2022 and March 2023, issued senior secured notes in January 2023 and entered into an accounts receivable factoring facility in January 2023; an inventory factoring facility was also added in May 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 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”).
Growth Drivers
We remain enthusiastic about the growth prospects of our business, with opportunity across all three of our core verticals. We have successfully made the transition to a fully-integrated consumer packaged goods company with a diverse suite of better-for-you brands, available in some of the country’s largest retail chains. At the same time, we are driving consumer relevance by pursuing the right strategic partnerships for co-branded product lines and expanding our product offerings in key wellness categories.
Major Distribution Gains
Since acquiring a majority stake in Sprout Organics in February 2021, we have expanded Sprout baby foods and toddler snacks substantially, both online and in store at major retailers like Target and Walmart. Earlier in March 2022, we announced the launch of our Forest Remedies Multi Omega 3-6-9 line of supplements into more than 340 Sprouts Farmers Market stores across the U.S. This distribution agreement marks another important milestone in our efforts to transform Neptune into a high-growth branded CPG company.
Strategic Partnerships
In February 2022, we brought Walmart a first-of-its-kind collaboration between Sprout Organics and popular kids’ entertainment platform CoComelon. This co-branded product line is now available on Walmart.com and in 900 Walmart stores and has been very well-received. With this launch, Sprout Organics now sells into the top organic baby food retailers in the U.S., accounting for approximately 90 percent of the overall market.
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Investing in Our Prospects
On November 15, 2021 we initiated a strategic review and made some big changes to get on track to becoming a profitable diversified CPG company. These actions have taken effect, and we are starting to see the results. The third quarter of fiscal year 2022 was the first quarter where we posted a positive gross margin since transitioning to a CPG-focused model. 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. For the three-month period ended March 31, 2023, consolidated gross profit margin was (21.14)% of net sales, up from (49.39)% for the same period last year. For the twelve-month period ended March 31, 2023 the gross profit margin was (4.70)% up from (15.44)% for the same period of the prior year. However, there can be no assurances that revenue or gross profit 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 on June 8, 2022 the launch of a new 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) the 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 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.
On October 16, 2022, Neptune entered into an asset sale and purchase agreement (the “ASPA”) with a third- party, for its Canadian cannabis business including the Sherbrooke facility, following the divestiture of this business announced on June 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 on November 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.
Recent Corporate Developments
Neptune’s Presence in Canada’s Cannabis Market
During the year ended on March 31, 2022, Neptune supplied the market with premium cannabis extracts and dried flower, under its Mood Ring™ and PanHash™ brands, and completed its launch of all significant regulated product categories. All cannabis products were manufactured and packaged at the Company’s purpose-built facility in Sherbrooke, Quebec. On June 8, 2022, the Company announced a planned accelerated 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 ended December 31, 2022. On October 16, 2022, Neptune entered into an asset sale and purchase agreement (the “ASPA”) with a third-party, for its Canadian cannabis business including the Sherbrooke facility, following the planned divestiture of this business announced on June 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 on November 9, 2022. Some assets were excluded from the ASPA and were written-down accordingly, on October 17, 2022 we announced that we had entered into a binding agreement for the sale of our cannabis business and the sale closed on November 9, 2022.
Launch of a New CPG Focused Strategic Plan
On June 8, 2022, Neptune announced the launch of a new Consumer Packaged Goods (“CPG”) focused strategic plan to reduce costs, improve the Company’s path to profitability and enhance current shareholder value. This plan builds on the Company’s initial strategic review that took place in fall of 2021 and focuses on two primary actions: (1) 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.
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Neptune Announces New Line of CoComelon® Co-Branded Products
Neptune announced on May 26, 2022 a new line up of CoComelon co-branded organic snack bars for toddlers. The snack bars are the latest innovation in the Sprout Organics x CoComelon product line launched in 2022, 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
Neptune announced on June 8, 2022 that Sarah Tynan, Sprout’s Chief Customer Officer, was promoted to CEO of Sprout. Ms. Tynan resigned from her position at Sprout as of July 7, 2023.
On June 14, 2022, Neptune announced the appointment of Raymond Silcock as Chief Financial Officer, effective July 25, 2022. Mr. Silcock, who is based out of Neptune’s Jupiter, Florida office, previously served as Executive Vice President and Chief Financial Officer at Perrigo Plc, as well as CFO at Diamond Foods, The Great Atlantic and Pacific Tea Company, UST Inc., and Cott Corporation. In addition, he has previously served as Chair of both Audit and Strategy Committees on several Boards including Pinnacle Foods Inc., American Italian Pasta Company, Prestige Brands and Bacardi Limited. Mr. Silcock replaces Randy Weaver who was Interim CFO up to July 22, 2022.
Receipt of Nasdaq Notifications
On November 15, 2022, the Company filed a Notification of Late Filing on Form 12b-25 (the “Form 12b-25”) with the SEC, which stated that it was unable to file its Form 10-Q for the quarter ended September 30, 2022 by the prescribed due date without unreasonable effort or expense because it required additional time to finalize its financial statements to be included in the Form 10-Q. The Company did not file its Form 10-Q by the fifth calendar day delay after the prescribed due date. On November 22, 2022, the Company received a Deficiency Notice from Nasdaq indicating that, as a result of not having timely filed the Form 10-Q with the SEC, the Company is not in compliance with Nasdaq Listing Rule 5250(c)(1) (the “Listing Rule”), which requires timely filing of all required periodic financial reports with the SEC. The Deficiency Notice had no immediate effect on the listing or trading of the Company’s common shares on the Nasdaq. The Deficiency Notice indicated that the Company could regain compliance with the Listing Rule at any time prior to January 23, 2023 by filing the Form 10-Q. If the Company failed to file the Form 10-Q by such date, the Company could submit a plan to regain compliance with the Listing Rule prior to such date and, following receipt of such plan, Nasdaq may grant an extension of 180 calendar days from the Form 10-Q due date, or until May 15, 2023, for the Company to regain compliance. On December 20, 2022, the Company filed its Form 10-Q for the quarter ended December 31, 2022 and, thereby, regained compliance with the Listing Rule.
On February 15, 2023, the Company filed a Form 12b-25 with the SEC, which stated that it was unable to file its Form 10-Q for the quarter ended December 31, 2022 by the prescribed due date without unreasonable effort or expense because it required additional time to finalize its financial statements to be included in the Form 10-Q. The Company did not file its Form 10-Q by the fifth calendar day delay after the prescribed due date. On February 23, 2023, the Company received a Deficiency Notice from Nasdaq indicating that, as a result of not having timely filed the Form 10-Q with the SEC, the Company is not in compliance with the Listing Rule, which requires timely filing of all required periodic financial reports with the SEC. The Deficiency Notice had no immediate effect on the listing or trading of the Company’s common shares on the Nasdaq. The Deficiency Notice indicated that the Company could regain compliance with the Listing Rule at any time prior to April 24, 2023 by filing the Form 10-Q. If the Company failed to file the Form 10-Q by such date, the Company may submit a plan to regain compliance with the Listing Rule prior to such date and, following receipt of such plan, Nasdaq may grant an extension of 180 calendar days from the Form 10-Q due date, or until August 21, 2023, for the Company to regain compliance. On March 30, 2023, the Company filed its Form 10-Q for the quarter ended December 31, 2022 and, thereby, regained compliance with the Listing Rule.
On December 29, 2022, we received a Deficiency Notice from Nasdaq informing us that our Common Shares have failed to comply with the $1.00 minimum bid price required for continued listing under Nasdaq Listing Rule 5550(a)(2) based upon the closing bid price of our Common Shares for the 30 consecutive business days prior to the date of the Deficiency Notice. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we were given 180 calendar days from December 29, 2022, or until June 27, 2023, to regain compliance with Rule 5550(a)(2). On June 27, 2023, the Company filed for an extension to this deadline and the Nasdaq has determined that the Company is eligible for an additional 180 calendar day period, or until December 26, 2023, to regain compliance. If at any time before
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December 26 2023, the bid price of our Common Shares closes at $1.00 per share or more for a minimum of 10 consecutive business days, the Nasdaq will provide written confirmation that we have regained compliance.
On July 19, 2023, we received a deficiency notice from Nasdaq informing us that our reported stockholders’ equity as reported in our recent Annual Report on Form 10-K has decreased below the minimum stockholders’ equity requirement for continued listing on the Nasdaq Capital Market under the equity criteria under Nasdaq Listing Rule 5550(b)(1) (“Rule 5550(b)(1)”). The Company has 45 calendar days, or until September 5, 2023, to submit a plan to regain compliance. If the plan is accepted, Nasdaq can grant an extension of 180 calendar days from the date of the letter to evidence compliance.
Change in Auditor
On May 30, 2023, the Company announced the appointment of Berkowitz Pollack Brant Advisors + CPAs (“BPB”) as its independent registered public accounting firm, to audit our consolidated financial statements for the year ending March 31, 2024. Accordingly, KPMG LLP (“KPMG”), which previously served as the Company’s independent auditors, was dismissed upon completion of their audit on July 14, 2023 of the Company’s consolidated financial statements as of and for the year ended March 31, 2023 and the issuance of their report thereon. The appointment of BPB was made after a thorough evaluation process and has been approved by our board of directors and our Audit Committee.
Closing of a $5,000,000 Registered Direct Offering Priced At-The-Market Under Nasdaq Rules
On June 22, 2022, Neptune announced that it entered into definitive agreements with several institutional investors for the purchase and sale of an aggregate of 1,300,000 Common Shares and 645,526 pre-funded warrants to purchase up to an aggregate of 645,526 Common Shares (the “June 2022 Pre-Funded Warrants”) of the Company, and two series of warrants each to purchase up to 1,945,526 Common Shares (for an aggregate of 3,891,052 Common Shares) (the “Series C Warrants “ and “Series D Warrants ,” and together, the “June 2022 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 (the “June 2022 Offering”). The June 2022 Warrants each have an exercise price of $2.32 per share and were immediately exercisable upon issuance. The Series D Warrants will expire two years following the date of issuance and the Series C Warrants will expire five years following the date of issuance. The gross proceeds from the June 2022 Offering were $5 million, prior to deducting placement agent fees and other offering expenses payable by Neptune and assuming none of the June 2022 Warrants are exercised for cash. The offering closed on June 23, 2022. The June 2022 Pre-Funded Warrants issued in the offering were fully exercised on June 24, 2022 for $64.55. Additionally, on October 6, 2022, 972,763 Series C common share purchase warrants were amended to provide for an extended expiration date of June 23, 2029.
Expansion of the Existing Secured Promissory Notes
On July 13, 2022, Neptune announced that Sprout 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 by Morgan Stanley Expansion Capital (“Morgan Stanley” or “MSEC”) have agreed to immediately commit an additional $3 million under the expanded Secured Promissory Notes to Sprout. This amount was received July 13, 2022. 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. Effective April 18, 2023, the MSEC Note maturity date was extended to December 31, 2024, and which will bear interest at the rate of 15.0% per annum through and including December 31, 2023, payable in kind, and 10.0% per annum, payable in kind, and 5.0% per annum payable in cash, from and after January 1, 2024. The other Notes will mature on February 1, 2024 and 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 November 8, 2022, Sprout entered into an agreement to issue an additional $525,000 of Secured Promissory Notes, on the same terms as the Secured Promissory Note discussed. In connection with this financing, Neptune issued common shares to the holders of these Secured Promissory Notes for a value of $105,000.
Closing of a $6,000,000 Registered Direct Offering Priced At-The-Market Under Nasdaq Rules and Concurrent Private Placement
On October 6, 2022, Neptune announced that it entered into definitive agreements with institutional investors for the purchase and sale of 3,208,557 Common Shares pursuant to a registered direct offering priced at-the-market under Nasdaq rules and warrants to purchase up to 6,417,114 Common Shares in a concurrent private placement. The combined purchase price for one Common Share and one warrant was $1.87. The warrants have an exercise price of $1.62 per Common Share, are exercisable immediately following the date of issuance and 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 $5.1 million. The offering and concurrent private placement closed on October 11, 2022.
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Closing of a Debt Financing
On January 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 Shares, with each warrant exercisable for 5 years following the initial issuance at a price of $0.53 per common share. On March 9, 2023, the Company entered into a Waiver and First Amendment to the Note Purchase Agreement (the “First Waiver Agreement”). The First Waiver Agreement waives certain administrative, regulatory and financial statement related covenants as further described in the First 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 First 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 to May 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 First Waiver Agreement. The First Waiver Agreement also provide that the principal prepayment required pursuant to Section 3.2(d)(ii) of the Note Purchase Agreement be extended from March 31, 2023 to no later than May 15, 2023 (the “Mandatory Prepayment”). On May 22, 2023, the Company entered into a Waiver and Second Amendment to the Note Purchase Agreement (the “Second Waiver Agreement”). Pursuant to the Second Waiver Agreement, the Notes were amended to provide that the Mandatory Prepayment of $2 million, due as of May 15, 2023, was waived, in part, until July 31, 2023, or for an additional thirty days thereafter if the Company has filed a registration statement on Form S-1 with the SEC by July 31, 2023. Pursuant to the Second Waiver Agreement, the Company was required to pay, and paid, $1 million of the Mandatory Prepayment. Until the date that the entire Mandatory Prepayment, including interest and fees is paid, interest on the sum of the outstanding principal amounts continues to accrue at the rate of 24% per annum. Thereafter, interest will revert to the rate otherwise provided under the Note Purchase Agreement. The Company also agreed to pay an extension fee in an aggregate amount of $138,606, which was added to the principal amount due.
Accounts Receivable and Inventory Factoring Facility
On January 25, 2023, Neptune announced that its organic baby food brand subsidiary, Sprout Organics, has entered into an accounts receivable factoring facility with Alterna 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, effective January 23, 2023, and will be automatically renewed. Neptune provided a commercial guaranty in connection with this agreement. On May 10, 2023, Neptune announced that Sprout has secured inventory financing through an Invoice Purchase and Security Agreement partnership with Alterna, effective April 21, 2023. The inventory line will provide Sprout with working capital for additional inventory to meet consumer demand and product line expansion. The maximum available has been amended to $7.5 million, from $5.0 million previously announced on January 25, 2023, adding a line of inventory to the accounts receivable factoring facility that is already in place.
May 2023 Registered Public Offering
On May 15, 2023, the Company closed a registered public offering of 12,121,212 of its Common Shares (or pre-funded warrants in lieu thereof) and accompanying warrants to purchase up to an aggregate of 12,121,212 common shares at a combined public offering price of $0.33 per common share and accompanying warrant, resulting in gross proceeds of approximately $4 million. In connection with the offering, the Company entered into a Securities Purchase Agreement with certain institutional investors, pursuant to which the Company agreed to sell, issue, and deliver to these institutional investors through the offering approximately $3.5 million of securities in the Company consisting of: (i) 2,900,000 Common Shares, (ii) pre-funded warrants to purchase up to 7,706,050 Common Shares, and (iii) warrants to purchase up to 10,606,050 Common Shares. Each Common Share and accompanying warrant were sold together at a purchase price of $0.33. Each pre-funded warrant and accompanying warrant were sold together at a purchase price of $0.3299, which represents the same price as the Common Share and accompanying warrant less the $0.0001 exercise price of the pre-funded warrant. The warrants are exercisable at a price of $0.33 per share and have a five-year term. The pre-funded warrants may be exercised at any time until all of the pre-funded warrants are exercised in full. The balance of 1,515,162 Common Shares and 1,515,162 warrants were purchased directly by other investors under the registration statement filed in connection with the offering. In addition, certain warrants historical warrants were repriced in connection with this offering.
Additional Information
The Company’s head office and registered office is located at 545 Promenade du Centropolis, Suite 100, Laval, Québec, Canada, H7T 0A3. The Company’s website address is www.neptunecorp.com. The information provided on the Neptune website is not part of this or
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any other report we file with or furnish to the SEC. The Exchange Act requires us to file reports, proxy statements, and other information with the SEC. These materials may be obtained electronically by accessing the SEC’s home page at www.sec.gov.
Our Code of Conduct is available on our website, www.neptunewellness.com. We will post on our website amendments to the Code of Conduct or waivers from its provisions, if any, which are applicable to any of our directors or executive officers in accordance with the requirements of the SEC or Nasdaq.
The information on our website is not a part of, nor is it incorporated by reference, into this prospectus. Further, our references to the URLs for these websites are intended to be inactive textual references only.
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LEGAL PROCEEDINGS
The Company is engaged from time-to-time in various legal proceedings and claims that have arisen in the ordinary course of business. The outcome of such proceedings and claims against the Company is subject to future resolution, including the uncertainties of litigation. Decisions relating to the legal proceedings described below in items (i), (ii) and (vi) are expected imminently, and an adverse decision may have a material adverse effect on the Company. Based on information currently known to the Company, the most significant outstanding proceedings and claims are as follows:
(i) | In September 2020, Neptune submitted a claim and demand for arbitration against Peter M. Galloway and PMGSL Holdings, LLC (collectively “PMGSL”) in accordance with the SugarLeaf Asset Purchase Agreement (“APA”) dated May 9, 2019 between Neptune, PMGSL, Peter M. Galloway and Neptune Holding USA, Inc. Separately, PMGSL submitted a claim and demand for arbitration against Neptune. The Neptune claims and PMGSL claims have been consolidated into a single arbitration and each are related to the purchase by Neptune of substantially all of the assets of the predecessor entities of PMGSL Holdings, LLC. Neptune is claiming, among other things, breach of contract and negligent misrepresentation by PMGSL in connection with the APA and is seeking, among other things, equitable restitution and any and all damages recoverable under law. PMGSL is claiming, among other things, breach of contract by Neptune and is seeking, among other things, payment of certain compensation contemplated by the APA. A merit hearing in the arbitration started in April 2022 with a further week of testimony from August 1-5, 2022. On June 15, 2022, a one-day hearing took place on Neptune’s motion to enforce a settlement agreement reached on April 2021 (which was repudiated by PMGSL in June 2021). Following oral argument on July 7, 2022, that motion was denied and a fee award of approximately $68,000 was entered against Neptune. On April 13, 2023, PMGSL filed a lawsuit in Florida Superior Court to collect that fee award. Neptune disputes the Florida Court’s jurisdiction in over that action. While Neptune believes there is no merit to the claims brought by PMGSL, a judgment in favor of PMGSL may have a material adverse effect on our business and Neptune intends to continue vigorously defending itself. |
(ii) | On March 16, 2021, a purported class action, captioned Marvin Gong v. Neptune Wellness Solutions, et al., was filed in the United States District Court for the Eastern District of New York against the Company and certain of its current and former officers. On October 21, 2022, the Company announced that it had agreed to settle and resolve the lawsuit for a gross payment to the class of between $4 and $4.25 million, with the exact amount being within the Company’s control and dependent on the type of consideration used. The settlement was subject to court approval and certification by the court of the class. On March 16, 2023, the settlement offer was accepted and the first payment in the amount of $500,000 was paid on March 22, 2023. Two additional payments of $500,000 each were subsequently made. The court will hold a final approval hearing in the upcoming days. Neptune intends to pay the balance of the settlement in securities worth $2,750,000 within 31 days after the Final Approval Order is entered. |
(iii) | On March 21, 2019, the Company received a judgment from the Court regarding certain previously disclosed claims made by a corporation controlled by the former CEO against the Company in respect to certain royalty payments alleged to be owed and owing to the former CEO pursuant to the terms of an agreement entered into on February 23, 2001 between Neptune and the former CEO (the “Agreement”). The Court declared that under the terms of the agreement, the Company is required to pay royalties of 1% of its revenues in semi-annual installments, for an unlimited period. Refer to note 7 to our consolidated financial statements. |
(iv) | On October 11, 2022, a warehousing company called Carolina Rework Solutions, LLC filed a lawsuit against Neptune Health & Wellness Innovation, Inc. for breach of a warehousing contract with damages of $0.2 million plus additional unspecified damages estimated to be in excess of $1.0 million for disposal of hand sanitizer product housed at its warehouse. On May 30, 2023, Carolina Rework Solution, LLC received leave of court to add Neptune Holding USA, Inc. and Neptune Wellness Solutions, Inc. as additional defendants to the claim on a veil-piercing theory. Neptune Holding USA, Inc. and Neptune Wellness Solutions, Inc. intend to deny that the court has jurisdiction over them and deny that veil piercing is appropriate. |
(v) | On February 28, 2023, a warehousing company called Freight Connections filed a lawsuit against Neptune Health & Wellness Innovation, Inc. for breach of a warehousing contract, breach of duty of good faith and fair dealing, quantum meruit and fraud with damages of $0.3 million plus punitive and consequential damages related to hand sanitizer product at plaintiff’s facility. |
(vi) | On October 22, 2020, Iron Lab, S.A. de C.V. submitted a claim and demand for arbitration against Neptune Wellness Solutions Inc., Neptune Health & Wellness Innovation, Inc. and Biodroga Nutraceuticals Inc., claiming that Neptune and its subsidiaries breached their obligations under a purported agreement with Iron Lab regarding the purchase of hand sanitizer. |
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Neptune and the other respondents dispute the existence of any binding agreements or jurisdiction to hear the arbitration, and have asserted counterclaims based on Iron Lab’s delivery of non-conforming product based on Neptune’s purchase orders. The parties are currently awaiting an award from the arbitration panel. |
(vii) | Neptune was recently served with a lawsuit by H.C. Wainwright & Co., who previously served as the Company’s placement agent, seeking a tail commission fee of approximately $390,000 plus $25,000 in legal fees, plus fees and costs of the lawsuit. |
Further, on February 24, 2021, the Office of the Attorney General of the State of New Mexico (“NMAG”) delivered to Sprout a civil investigative demand requesting similar documents and information with regards to the Report and the NMAG’s investigation into possible violations of the False Advertising Act of New Mexico. Sprout is responding to the requests of the NMAG.
Since February 2021, several putative consumer class action lawsuits have been brought against Sprout alleging that its products (the “Products”) contain unsafe and undisclosed levels of various naturally occurring heavy metals, namely lead, arsenic, cadmium and mercury. Sprout has denied the allegations in these lawsuits and contends that its baby foods are safe and properly labeled. The claims raised in these lawsuits were brought in the wake of the highly publicized Report. All such putative class actions have since been dismissed.
In addition to the consumer class actions discussed above, Sprout is currently named in three lawsuits (filed in California State Court on June 16, 2021, filed in Hawaii State Court on January 9, 2023 and filed in Nevada Federal Court on March 3, 2023, respectively) alleging some form of personal injury from the ingestion of Sprout’s Products, purportedly due to unsafe and undisclosed levels of various naturally occurring heavy metals. These lawsuits generally allege injuries related to neurological development disorders such as autism spectrum disorder and attention deficit hyperactivity disorder. Sprout denies that its Products contributed to any of these injuries. In addition, the Office of the Attorney General for the District of Columbia (“OAG”) sent a letter to Sprout dated October 1, 2021, similar to letters sent to other baby food manufacturers, alleging potential labeling and marketing misrepresentations and omissions regarding the health and safety of its baby food products, constituting an unlawful trade practice. Sprout has agreed to meet with the OAG and will vigorously defend against the allegations.
54
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All references in this management’s discussion and analysis of financial condition and results of operations, or MD&A, to the “Company”, “Neptune”, “we”, “us”, or “our” refer to Neptune Wellness Solutions Inc., unless otherwise indicated or the context requires otherwise. The following MD&A is for the year ended March 31, 2023 and should be read in conjunction with the audited consolidated financial statements for the year ended March 31, 2023 and 2022 included in this Registration Statement/prospectus (collectively, the “Financial Statements”), which have been prepared by management in accordance with GAAP as issued by the FASB. All dollar amounts refer to U.S. dollars, except as stated otherwise. Unless otherwise stated herein, all share and per share numbers relating to the Company’s Common Shares prior to the effectiveness of the Reverse Share Split have been adjusted to give effect to the Reverse Share Split.
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.
Going Concern
The Company’s consolidated 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, convertible debt, the proceeds from research grants and research tax credits, and the exercises of warrants, rights and options. For the twelve-month period ended March 31, 2023, the Company incurred a net loss of $88.8 million and negative cash flows from operations of $28.6 million, and had an accumulated deficit of $383.6 million as at March 31, 2023. For the twelve-month period ended March 31, 2022, the Company incurred a net loss of $84.4 million and negative cash flows from operations of $54.3 million. Furthermore, as at March 31, 2023, the Company’s trade and other payables 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. In addition, the Company defaulted on certain conditions of its notes subsequent to year end and while the default was subsequently waived (see note 25 to the consolidated financial statements), there is no assurance as to the Company’s ability to continue to comply with the terms in fiscal 2024.
As of the date the financial statements are authorized for issuance, the cash balance is minimal and expected to be sufficient to operate the business for less than one month. The Company requires funding in the very near term in order to continue its operations. The Company’s lack of cash resources and current share price may adversely affect its ability to raise new capital and execute its business strategy. If the Company is unable to obtain funding in the very 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 and subject to market conditions. The Company’s business plan is dependent upon, among other things, its ability to achieve profitability, continue to obtain adequate ongoing debt and/or equity financing to finance operations within and beyond the next twelve months. 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.
55
Selected Consolidated Annual and Quarterly Information
The following tables set out selected consolidated financial information and are prepared in accordance with US GAAP.
| | | | | | ||||
| | Three-month periods ended | | Twelve-month periods ended | | ||||
| | March 31, | | March 31, | | March 31, | | March 31, | |
| | 2023 | | 2022 | | 2023 | | 2022 | |
| | | | Recasted | | | | Recasted | |
| | $ | | $ | | $ | | $ | |
Total revenues |
| 12.147 |
| 11.532 |
| 52.615 |
| 48.797 |
|
Adjusted EBITDA1 | | (12.963) | | (12.762) | | (39.660) | | (53.258) | |
Net loss | | (44.513) | | (36.662) | | (88.803) | | (84.425) | |
Net loss attributable to equity holders of the Company | | (26.566) | | (31.942) | | (60.460) | | (74.972) | |
Net loss attributable to non-controlling interest | | (17.947) | | (4.720) | | (28.343) | | (9.453) | |
Basic and diluted loss per share | | (3.74) | | (7.47) | | (7.52) | | (17.50) | |
Basic and diluted loss per share attributable to equity holders of the Company | | (2.23) | | (6.51) | | (5.12) | | (15.54) | |
| |||||||
|
| As at |
| As at |
| As at |
|
| | March 31, 2023 | | March 31, 2022 | | March 31, 2021 | |
| | $ | | $ | | $ | |
Total assets | | 30.928 | | 104.955 | | 186.948 | |
Working capital2 | | (17.484) | | 7.071 | | 54.718 | |
Non-current financial liabilities | | 17.455 | | 13.800 | | 14.593 | |
Equity attributable to equity holders of the Company | | (11.940) | | 48.116 | | 115.368 | |
Equity attributable to non-controlling interest | | (15.621) | | 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. Isn the quarter ended September 30, 2022, the Company recasted comparative Adjusted EBITDA to conform to its 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, and write-down of inventories and deposits. |
2 | Working capital is calculated by subtracting current liabilities from current assets. Because there is no standard method endorsed by US GAAP, the results may not be comparable to similar measurements presented by other public companies. Current assets as at March 31, 2023, 2022 and 2021 were $23.550, $37.388 and $89.528 respectively, and current liabilities as at March 31, 2023, 2022 and 2021 were $41.034, $30.317 and $34.809 respectively. |
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.
56
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 the quarter ended September 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, for the year ended March 31, 2023
Three-month periods ended |
| Twelve-month periods ended | ||||||||||
| March 31, 2023 |
| Recast -March 31, 2021 |
| March 31, 2023 |
| Recast -March 31, 2021 | |||||
Net loss for the period | $ | (44.513) | $ | (36.662) | $ | (88.803) | $ | (84.425) | ||||
Add (deduct): |
| |||||||||||
Depreciation and amortization |
| 0.843 | 1.656 |
| 3.234 |
| 6.791 | |||||
Revaluation of derivatives |
| | 1.374 | | | 1.672 |
| | (14.710) |
| | (7.035) |
Net finance costs |
| | 1.166 | | | 1.266 |
| | 3.823 |
| | 2.823 |
Equity classified stock-based compensation |
| | 0.671 | | | 1.565 |
| | 3.504 |
| | 7.817 |
Non-employee compensation related to warrants |
| | — | | | — |
| | — |
| | 0.179 |
System migration, conversion, implementation |
| | — | | | (0.001) |
| | — |
| | 0.327 |
Impairment loss on long-lived assets | | | 27.511 | | | 17.177 | | | 53.292 | | | 19.581 |
Costs related to conversion from IFRS to US GAAP |
| | — | | | 0.577 |
| | — |
| | 0.577 |
Change in revaluation of marketable securities |
| | — | | | — |
| | — |
| | 0.107 |
Income tax recovery |
| | (0.015) | | | (0.012) |
| | — |
| | — |
Adjusted EBITDA1 | $ | (12.963) | $ | (12.762) | $ | (39.660) | $ | (53.258) |
1 | The Adjusted EBITDA is not a standard measure endorsed by US GAAP requirements. |
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.
57
Geographical information
Revenue is attributed to geographical locations based on the origin of customers’ location.
| | Three-month periods ended | | Twelve-month periods ended | ||||||||
|
| March 31, |
| March 31, |
| March 31, |
| March 31, | ||||
| | Total Revenues | | Total Revenues | | Total Revenues | | Total Revenues | ||||
Canada | | $ | 1.343 | | $ | 3.527 | | $ | 8.418 | | $ | 12.447 |
United States | | | 10.752 | | | 7.686 | | | 43.378 | | | 35.330 |
Other countries | | | 0.052 | | | 0.319 | | | 0.819 | | | 1.020 |
| | $ | 12.147 | | $ | 11.532 | | $ | 52.615 | | $ | 48.797 |
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 | |||||||
| | March 31, 2023 | |||||||
|
| Property, plant |
| Goodwill |
| Intangible assets | |||
Canada | | $ | 0.251 | | $ | 2.426 | | $ | 1.607 |
United States | | | 1.152 | | | — | | | — |
Total | | $ | 1.403 | | $ | 2.426 | | $ | 1.607 |
| | 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 |
58
Results Analysis
Summary of Changes to the Consolidated Statements of Loss
Three-month period ended March 31, 2023 compared to March 31, 2022
|
| | For the three-month period ended |
| Changes |
| |||||
| | | March 31, | | | March 31, | | Changes in | | Changes in | |
| | | 2023 |
| | 2022 |
| $ |
| % | |
Total revenues | | $ | 12.147 | | $ | 11.532 | | 0.615 | | 5.3 | % |
Total cost of sales | | | (14.716) | | | (17.228) | | 2.512 | | 14.6 | % |
Gross loss | | | (2.569) | | | (5.696) | | 3.127 | | 54.9 | % |
Gross loss margin | | | (21.1) | % | | (49.4) | % | 28.2 | % | (57.2) | % |
| | | | | | | | | | | |
Research and development expenses, net of tax credits and grants | | | (0.033) | | | (0.228) | | 0.195 | | 85.5 | % |
Selling, general and administrative expenses | | | (11.235) | | | (10.635) | | (0.600) | | (5.6) | % |
Impairment losses | | | (27.511) | | | (17.177) | | (10.334) | | (60.2) | % |
Other elements from the operating loss | | | (0.343) | | | — | | (0.343) | | 100.0 | % |
Loss from operating activities | | | (41.691) | | | (33.736) | | (7.955) | | (23.6) | % |
| | | | | | | | | | | |
Net finance costs | | | (1.166) | | | (0.967) | | (0.199) | | (20.6) | % |
Foreign exchange loss | | | (0.111) | | | (0.299) | | 0.188 | | 62.9 | % |
Loss on issuance and change in fair value of derivatives | | | (1.374) | | | (1.672) | | 0.298 | | 17.8 | % |
Other changes in revaluation and fair value | | | — | | | — | | — | | 0.0 | % |
Other elements from the loss before income taxes | | | (0.186) | | | — | | (0.186) | | 100.0 | % |
| | | (2.837) | | | (2.938) | | 0.101 | | 3.4 | % |
Loss before income taxes | | | (44.528) | | | (36.674) | | (7.854) | | (21.4) | % |
| | | | | | | | | | | |
Income tax recovery | | | 0.015 | | | 0.012 | | 0.003 | | 25.0 | % |
Net loss | | | (44.513) | | | (36.662) | | (7.851) | | (21.4) | % |
| | | | | | | | | | | |
Adjusted EBIDTA | | | (12.963) | | | (12.762) | | (0.201) | | (1.6) | % |
Revenues
Total consolidated revenues for the three-month period ended March 31, 2023 amounted to $12.1 million representing an increase of $0.6 million or 5% compared to $11.5 million for the three-month period ended March 31, 2022.
Food and beverages revenues represented a $2.5 million increase in comparison to the three-month period ended March 31, 2022, resulting from Sprout’s extended distribution in all 50 U.S. states and Canada. This increase was offset by the decrease in revenues in the cannabis market from the now-divested Cannabis business.
When compared to the previous quarter, the consolidated revenues decreased by $0.1 million or 1%, which was mainly attributable to timing of shipping of nutraceuticals products (decrease of $0.2 million) as well as decrease in royalty revenues, partially offset by an increase of $0.4 million in food and beverages revenues.
Geographic Revenues
From a geographic point of view, revenues for the current quarter decreased by $2.2 million or 62% in Canada, increased by $3.1 million or 40% in the United States and decreased by $0.267 million or 84% for other countries (all royalty revenues) compared to the quarter ended March 31, 2022.
The decrease of revenue in Canada for the quarter is mainly due to the divestiture of the Cannabis business.
59
Gross Profit (Loss)
Gross profit (loss) is calculated by deducting the cost of sales from total revenues. Cost of sales consists primarily of costs incurred to manufacture products, including sub-contractors, freight expenses and duties on raw materials, storage and handling costs and lab testing on raw materials, and to acquire finished goods.
The consolidated gross profit (loss) for the three-month period ended March 31, 2023 amounted to $(2.6) million compared to $(5.7) million for the three-month period ended March 31, 2022, an improvement of $3.1 million or 55%.
The change for the quarter is mainly attributable to reduction in sales and related cost of sales from the now-divested Cannabis business, and an increase in sales from food and beverages. The divestiture of the Cannabis business contributed to a decrease of $4.5 million in gross loss for the three-month period ended March 31, 2023, compared to the three-month period ended March 31, 2022.
Gross Margin Percentage
For the three-month periods ended March 31, 2023 and 2022, the consolidated gross margin went from (49.4)% in 2022 to (21.1)% in 2023, an increase of 28.2 basis points.
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
For the quarter ended March 31, 2023, the consolidated R&D expenses net of tax credits and grants amounted to $0.0 million, compared to $0.2 million for the quarter ended March 31, 2022, a decrease of $0.2 million or 85%.
Impairment losses
Aggregate impairment losses amounted to $27.5 million compared to $17.2 million for the same period last year, an increase of $10.3 million or 60%. The current period impairment losses are due to the impairment of the goodwill and tradenames related to Sprout.
Selling, General and Administrative (“SG&A”) Expenses
Consolidated SG&A expenses net of subsidies for the quarter ended March 31, 2023 amounted to $11.2 million compared to $10.6 million for the same period the prior year, an increase of $0.6 million or 6% primarily due to the benefits of the strategic review and continued cost controls.
Finance costs
Net finance costs, foreign exchange and loss on issuance of derivatives amounted to a loss of $2.8 million for the quarter ended March 31, 2023, compared to a loss of $2.9 million for the three-month period ended March 31, 2022, a change of $0.1 million or 3% for the quarter ended March 31, 2023. The variation for this period is mainly attributable to the increase in interest expense on the Company’s financing facilities, partially offset by 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
Income tax expense (recovery) was nominal for the three-month periods ended March 31, 2023 and 2022. As entities are in carry forward loss positions, there is nominal impact to income taxes for the quarter.
Net loss
For the quarter ended March 31, 2023, the net loss amounted to $44.5 million compared to $36.7 million for the quarter ended March 31, 2022, an increase of $7.9 million or 21%. This increase in net loss is mostly attributable to the impairment losses discussed in the section above, offset by the Company’s execution of its strategic review plan by refocusing on its core businesses.
60
Adjusted EBITDA
Consolidated Adjusted EBITDA loss increased by $0.2 million or 2% for the quarter ended March 31, 2023 to an Adjusted EBITDA loss of $13.0 million compared to $12.8 million for the quarter ended March 31, 2022. The increase in Adjusted EBITDA loss for the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 was driven by additional costs for settlements with suppliers, warehousing of legacy products as well as legacy litigations, partially offset by the Company’s execution of its strategic review plan of refocusing on its core products.
Twelve-month period ended March 31, 2023 compared to March 31, 2022
|
| For the twelve-month period ended |
| Changes |
| ||||||
| | March 31, |
| March 31, | | Changes in |
| Changes in | | ||
Total revenues | | $ | 52.615 | | $ | 48.797 | | 3.818 | | 7.8 | % |
Total cost of sales | | | (55.090) | | | (56.333) | | 1.243 | | 2.2 | % |
Gross loss | | | (2.475) | | | (7.536) | | 5.061 | | 67.2 | % |
Gross loss margin | | | (4.7) | % | | (15.4) | % | 10.7 | % | (69.5) | % |
| | | | | | | | | | | |
Research and development expenses, net of tax credits and grants | | | (0.484) | | | (0.880) | | 0.396 | | 45.0 | % |
Selling, general and administrative expenses | | | (46.424) | | | (60.539) | | 14.115 | | 23.3 | % |
Impairment losses | | | (53.292) | | | (19.581) | | (33.711) | | (172.2) | % |
Other elements from the operating loss | | | (0.173) | | | 0.006 | | (0.179) | | (2983.3) | % |
Loss from operating activities | | | (102.848) | | | (88.530) | | (14.318) | | (16.2) | % |
| | | | | | | | | | | |
Net finance costs | | | (3.823) | | | (2.137) | | (1.686) | | (78.9) | % |
Foreign exchange gain (loss) | | | 6.435 | | | (0.686) | | 7.121 | | 1038.0 | % |
Gain on issuance and change in fair value of derivatives | | | 11.553 | | | 7.035 | | 4.518 | | 64.2 | % |
Other changes in revaluation and fair value | | | — | | | (0.107) | | 0.107 | | 100.0 | % |
Other elements from the loss before income taxes | | | (0.120) | | | — | | (0.120) | | 100.0 | % |
| | | 14.045 | | | 4.105 | | 9.940 | | 242.1 | % |
Loss before income taxes | | | (88.803) | | | (84.425) | | (4.378) | | (5.2) | % |
| | | | | | | | | | | |
Income tax recovery | | | — | | | — | | — | | 0.0 | % |
Net loss | | | (88.803) | | | (84.425) | | (4.378) | | (5.2) | % |
| | | | | | | | | | | |
Adjusted EBIDTA | | | (39.660) | | | (53.258) | | 13.598 | | 25.5 | % |
Revenues
For the twelve-month period ended March 31, 2023, consolidated revenues totaled $52.6 million representing an increase of $3.8 million or 8% compared to $48.8 million for the twelve-month period ended March 31, 2022.
The $3.8 million increase was mainly attributable to the increase in the Food and Beverages revenues, offset by the decrease in sales related to the now-divested Cannabis business. Food and Beverages revenues increased by $8.2 million or 32% and revenues from the sale of nutraceutical productions increased by $1.5 million or 11%. This was offset by the decrease in sales of cannabis productions of $5.3 million or 66% related to the divestiture of the Cannabis business.
Geographic Revenues
Revenues for the year decreased by $4.0 million or 32% in Canada, increased by $8.0 million or 23% in the United States and decreased by $0.267 million or 20% for other countries (all royalty revenues) compared to the twelve-month period ended March 31, 2022.
The increase in revenues for the twelve-month period ended March 31, 2023 in the United States is mostly attributable to the increase in sales of Sprout.
61
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 twelve-month period ended March 31, 2023, the consolidated gross profit (loss) amounted to $(2.5) million compared to $(7.5) million for the twelve-month period ended March 31, 2022, an improvement of $5.1 million or 67%.
The improvement is mainly attributable to reduction in sales and related cost of sales from the Cannabis business and partially offset by inventory write-downs. For the March 31, 2023 period, the gross loss improved by $5.0 million from the divestiture of the cannabis business. The gross loss improvement was partially offset by an increase of $1.7 million on inventory impairment.
Gross Margin Percentage
For the twelve-month periods ended March 31, 2023 and 2022, the consolidated gross margin went from (15.44)% in 2022 to (4.7%) in 2023, an increase of 10.7 basis points.
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
Consolidated R&D expenses net of tax credits and grants amounted to $0.5 million in the twelve-month period ended March 31, 2023 compared to $0.9 million for the same period the prior year, a decrease of $0.4 million or 45%.
Impairment losses
Aggregate impairment losses amounted to $53.3 million compared to $19.6 million for the same period last year, an increase of $33.7 million or 172%. This increase is primarily due to the divestiture from the Cannabis business and impairment of the intangible assets and goodwill related to Sprout.
Selling, General and Administrative (“SG&A”) Expenses
Regarding the twelve-month period ended March 31, 2023 compared to the same period in 2022, consolidated SG&A expenses net of subsidies amounted to $46.4 million compared to $60.5 million, a decrease of $14.1 million or 23% primarily from cost reduction measures related to the previously announced strategic review partially offset by higher legal and other costs.
Finance costs
For the twelve-month period ended March 31, 2023, the net finance costs, foreign exchange, loss on issuance of derivatives and derivatives revaluations amounted to a gain of $14.0 million, compared to a gain of $4.1 million for the twelve-month period ended March 31, 2022, a change of $9.9 million or 242% for the twelve-month period ended March 31, 2023. The variation for this period is mainly attributable to gain on reevaluation of derivatives related to the decrease in stock price.
Income taxes
Income tax expense (recovery) was nominal for the twelve-month periods ended March 31, 2023 and 2022. As entities are in carry forward loss positions, there is nominal impact to income taxes for the year.
Adjusted EBITDA
Consolidated Adjusted EBITDA loss decreased by $13.6 million or 26% for the twelve-month period ended March 31, 2023 to an Adjusted EBITDA loss of $39.7 million compared to $53.3 million for the twelve-month period ended March 31, 2022. The decrease in Adjusted EBITDA loss for the twelve-month period ended March 31, 2023 compared to the twelve-month period ended March 31, 2022 is explained by the Company’s execution of its strategic review plan of refocusing on its core products, partially offset by additional costs for settlements with suppliers, warehousing of legacy products as well as legacy litigations.
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Net loss
The net loss for the twelve-month period ended March 31, 2023 totaled $88.8 million compared to $84.4 million for the twelve-month period ended March 31, 2022, an increase of $4.4 million or 5%. This is mostly due to the impairment losses on assets held for sale, intangible assets and goodwill, partially offset by the Company’s execution of its strategic review plan of refocusing over its core products and businesses.
Financial and Capital Management
Use of Proceeds
The use of proceeds for the three and six-monthtwelve-month periods ended September 30,March 31, 2023 and 2022, and 2021, in millions of dollars, was as follows:
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| Three-month periods ended |
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| | March 31, | | March 31, | | March 31, | | March 31, | ||||
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| 2022 | | 2023 |
| 2022 | ||||
Sources: | | | | | | | | | | | | |
Proceeds from the issuance of shares and warrants through a Direct Offering | | $ | — | | $ | 8.000 | | $ | 5.000 | | $ | 8.000 |
Proceeds from the issuance of shares and warrants through a Direct Offering Priced At-The-Market and Concurrent Private Placement | | | — | | | — | | | 6.000 | | | — |
Proceeds from exercise of options and pre-funded warrants | | | — | | | 0.001 | | | — | | | 0.001 |
Proceeds from sale of Cannabis assets | | | — | | | — | | | 3.122 | | | — |
Proceeds from sale of assets | | | — | | | — | | | 0.170 | | | — |
Proceeds from sale of Acasti shares1 | | | — | | | — | | | — | | | 0.044 |
Increase in loans and borrowings | | | 6.567 | | | — | | | 10.367 | | | — |
Foreign exchange gain on cash and cash equivalents held in foreign currencies | | | 0.418 | | | 0.066 | | | 0.180 | | | — |
| | | 6.985 | | | 8.067 | | | 24.839 | | | 8.045 |
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Uses: | | | | | | | | | | | | |
Acquisition of property, plant and equipment | | | 0.329 | | | 0.904 | | | 0.931 | | | 1.939 |
Acquisition of intangible assets | | | — | | | (0.001) | | | — | | | 0.433 |
Costs of issuance of shares and warrants | | | 0.171 | | | 0.637 | | | 1.501 | | | 0.637 |
Withholding taxes paid pursuant to the settlement of non-treasury RSUs | | | — | | | 0.433 | | | 0.574 | | | 1.412 |
Foreign exchange loss on cash and cash equivalents held in foreign currencies | | | — | | | — | | | — | | | 0.389 |
Cash flows used in operating activities | | | 7.896 | | | 10.526 | | | 28.566 | | | 54.346 |
| | | 8.396 | | | 12.499 | | | 31.572 | | | 59.156 |
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Net cash outflows | | $ | (1.411) | | $ | (4.432) | | $ | (6.733) | | $ | (51.111) |
Six-month periods ended | ||||||||
September 30, 2022 | September 30, 2021 | |||||||
Sources: | ||||||||
Proceeds from the issuance of shares through a Direct Offering | $ | 5.000 | $ | — | ||||
Proceeds from sale of property, plant and equipment | 0.085 | — | ||||||
Increase in loans and borrowings | 3.250 | — | ||||||
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8.335 | — | |||||||
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Uses: | ||||||||
Acquisition of property, plant and equipment | 0.602 | 0.525 | ||||||
Acquisition of intangible assets | — | 0.436 | ||||||
Costs of issuance of shares | 0.465 | — | ||||||
Withholding taxes paid pursuant to the settlement of non-treasury RSUs | 0.260 | 0.978 | ||||||
Foreign exchange loss on cash and cash equivalents held in foreign currencies | 0.256 | 0.013 | ||||||
Cash flows used in operating activities | 14.084 | 33.566 | ||||||
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15.667 | 35.518 | |||||||
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Net cash (outflows) | $ | (7.332 | ) | $ | (35.518 | ) | ||
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Sources and Uses of Funds
three-monthFor the twelve-month period ended September 30, 2022 compared to September 30, 2021
ForMarch 31, 2023, the three-month period ended September 30, 2022, increase in loans and borrowings, net of repayments, was $3.25$10.4 million and proceeds from direct offerings were of $11.0 million; in addition, the Company received $3.3 million for the sale of assets. The proceeds were mainly used for operating activities, primarily inventory procurement, salaries and professional fees.
For the three-monthtwelve-month period ended September 30, 2021, thereMarch 31, 2022, gross proceeds of $8.0 million were no significant sourcesraised from a Direct Offering with $54.3 million of funds. In the same period, funds werecash being used for operating activities primarily inventory procurement, paymentsand an additional $5.9 million for legacy Healthother purposes, bringing net cash outflows in the year to $51.1 million.
Direct Offerings
On March 14, 2022, Neptune issued a total of 528,572 (18,500,000 pre-consolidation) common shares of the Company (“Common Shares”), along with 185,715 (6,500,000 pre-consolidation) pre-funded warrants (“Pre-Funded Warrants”), as part of a registered direct offering (“Direct Offering”), with each Pre-Funded Warrant exercisable for one Common Share. The Common Shares and Wellness the Pre-
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Funded Warrants were sold together with 714,286 (25,000,000 pre-consolidation) Series A Warrants (the “Series A Warrants”) and professional714,286 (25,000,000 pre-consolidation) Series B Warrants (the “Series B Warrants” and collectively with the Series A Warrants, the “Common Warrants”) to purchase up to an aggregate of 1,428,572 (50,000,000 pre-consolidation) Common Shares. Each Common Share and Pre Funded Warrants and the accompanying Common Warrants were sold together at a combined offering price of $11.20 (or $0.32 pre-consolidation), for aggregate gross proceeds of $8.0 million before deducting fees as well as acquisition and integration costs.
six-month period ended September 30, 2022 comparedother estimated offering expenses. The Pre-Funded Warrants a funded in full at closing except for a nominal exercise price of $0.0035 (or $0.0001 pre-consolidation) and are exercisable commencing on the Closing Date, and will terminate when such Pre-Funded Warrants are exercised in full. 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 date of issuance. The net proceeds of the transaction amounted to September 30, 2021
For the six-month period ended September 30, 2022, the increase in loans and borrowings was $3.25 million and direct offerings of $5.0$3.6 million. The proceeds were used for operating activities, primarily inventory procurement, salaries and professional fees.
For the six-month period ended September 30, 2021, there were no significant sources of funds. In the same period, uses of funds were for operating activities, primarily inventory procurement, payments for legacy Health and Wellness COVID-19 related products, salaries and professional fees, as well as acquisition and integration costs.
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Direct Offering
On June 23, 2022, Neptune closed agreements with several institutional investors for the purchase and sale of an aggregate of 1,300,000 common shares of the 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 $5.00$5.0 million, prior to deducting placement agent’s fees and other offering expenses payable by Neptune. The pre-funded warrants were fully exercised on June 24, 2022 for $65.
Secured Promissory NotesOn October 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.
Loans and borrowings
On July 13, 2022, Neptune announced that Sprout 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 by Morgan Stanley Expansion Capital (“Morgan Stanley” or “MSEC”) have agreed to immediately commit an additional $3 million in Secured Promissory Notes to Sprout. The maturity date of the note facility of February 1, 2024 is consistent with the maturity date of the existing Secured Promissory Notes with MSEC and Neptune. The $13.0 million of amended Secured Promissory Notes have a 10% interest rate per annum, increasing by 1% per annum every three months during the term of the Secured Promissory Notes. The interest will be compounded and added to the principal amount on a quarterly basis. The amended Secured Promissory Notes may be converted, in whole or in part, at any time upon the mutual consent of Sprout, the 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. On April 27, 2023, the Company announced that Sprout extended the maturity of its existing $13 million secured promissory note with MSEC. The note maturity has been extended from February 1, 2024 to December 31, 2024, which will bear interest at the rate of 15.0% per annum through and including December 31, 2023, payable in kind, and 10.0% per annum, payable in kind, and 5.0% per annum payable in cash, from and after January 1, 2024.
On September 9,August 26, 2022, Neptune’s Sprout subsidiary entered in ana new $0.25 million Secured Promissory Note agreement. The maturity date of the new note facility is February 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.
On November 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 on February 15, 2023, for the payment of borrowing costs.
On January 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
CAPITAL RESOURCES FOR THE FISCAL YEAR ENDED MARCH64
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. On March 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 to May 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. On May 22, 2023, the “Company” entered into a Waiver and Second Amendment to Note Purchase Agreement (the “Second Waiver Agreement”), with CCUR Holdings, Inc. (“Collateral Agent”) and the purchasers named therein, related to the Note Purchase Agreement dated as of January 12, 2023 (the “Note Purchase Agreement”). The Second Waiver Agreement provides that the required prepayment of $2 million (the “Mandatory Prepayment”), due as of May 15, 2023, is waived, in part, until July 31, 2023, or for an additional thirty days thereafter if the Company has filed a Registration on Form S-1 with the Securities and Exchange Commission by July 31, 2023. Pursuant to the Second Waiver Agreement, the Company was required to pay, and has paid, $1 million of the Mandatory Prepayment. For the period beginning on March 31, 2023, through and including the date that the entire Mandatory Prepayment, including interest and fees is paid, interest on the sum of the outstanding principal amounts will accrue at the rate of 24% per annum. Thereafter, interest will revert to the rate otherwise provided under the Note Purchase Agreement. The Company also agreed to pay an extension fee in an aggregate amount of $138,606, which was added to the principal amount due
On January 25, 2023, Neptune announced that its organic baby food brand subsidiary, Sprout Organics, has entered into an accounts receivable factoring facility with Alterna 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, effective January 23, 2023, and will be automatically renewed. Neptune provided a commercial guaranty in connection with this agreement. On May 10, 2023, Neptune announced that Sprout has secured inventory financing through an Invoice Purchase and Security Agreement partnership with Alterna, effective April 21, 2023. The inventory line will provide Sprout with working capital for additional inventory to meet consumer demand and product line expansion. The maximum available has been amended to $7.5 million, from $5.0 million previously announced on January 25, 2023, adding a line of inventory to the accounts receivable factoring facility that is already in place.
On March 10, 2023, Sprout issued promissory notes for gross proceeds of $0.3 million to various investors, on the same terms as the MSEC promissory notes. Pursuant to the terms of the promissory notes, the Company also issued to these investors warrants (“March 2023 Warrants”) to purchase an aggregate of 111,111 shares of Neptune common stock, with each warrant exercisable for 5 years following the initial issuance at a price of $0.54 per common share. The aggregate fair value on issuance of the March 2023 Warrants was $0.0 million.
Sale of assets
On June 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 on October 16, 2022 were $3.1 million. The transaction closed on November 9, 2022. In addition, Neptune received $0.2 million for the sale of assets unrelated to the cannabis business during the fiscal year ended March 31, 2023.
Capital Resources
Liquidity position
As at March 31, 2022,2023, the Company’s liquidity position, consisting of cash and cash equivalents, was $8.7$2.0 million. Furthermore, as at March 31, 2023, the Company’s trade and other payables 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. As of the date the financial statements are authorized for issuance, the cash balance is expected to be sufficient to operate the business for less than 1 month under the current business plan. The Company also has a short-term investmentrequires 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.
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Liquidity and Capital Resources
Cash flows and financial condition between the three-month periods ended March 31, 20222023 and 20212022.
Summary
As at March 31, 2022,2023, cash and cash equivalent totaled $8.7$2.0 million, a decrease of $51.1$6.7 million or 85% compared to cash and cash equivalents totaling $59.8 million as at March 31, 2021.
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Operating activities
During the three-month period ended March 31, 2022 our operating activities used cash of $10.5 million compared to $6.2 million in the three-month period ended March 31, 2021. For the twelve months ended March 31, 2022, our operating activities used cash of $54.3 million compared to $56.6 million in the prior year.
Investing activities
The Company’s business models require low capital expenditures future investments. For the year ended March 31, 2022, $2.3 million was used for investing activities. In the prior year, $10.1 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 $8.0 million Registered Direct Offering closed on March 14, 2022. 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 intended to withdraw the Form F-3 following the date of its Annual Report. 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.
As of the date the financial statements for the year ended March 31, 2022 were authorized for issuance, the Company’s cash position will be sufficient to support its financial needs for two to three months. Should the Company’s financing initiatives discussed above 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 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Going Concern.
The financial commitments and obligations of the Company are limited. Furthermore, certain liabilities, such as the warrant liabilities, are dependent on Neptune’s share price and would only become payable if they are in the money. The warrants, if exercised, settle in common shares of the Company and therefore do impact on the Company’s cash. Indeed, warrant holders are required to pay the cash strike price to exercise the warrant and thus the exercise of warrants would result in a cash infusion to the Company.
Loans and borrowings
On February 10, 2021, as part of the Sprout acquisition, Sprout issued a promissory note of $10.0 million guaranteed by the Company and secured by a first-ranking mortgage on all movable assets of Sprout current and future, corporeal and incorporeal, and tangible and intangible. The outstanding principal balance bears interest at the rate of 10.0% per annum. Interest is accrued and added to the principal amount of the loan. The principal is payable on February 1, 2024.
On July 13, 2022, Neptune announced that Sprout Foods Inc. (“Sprout”), the Corporation’s organic plant-based baby food and toddler snack company, has entered into an amendment of each of its existing Secured Promissory Notes. In connection with this amendment, investment funds managed by Morgan Stanley Expansion Capital
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(“Morgan Stanley” or “MSEC”) invested an additional $3 million in Sprout in exchange for Secured Promissory Notes. The maturity date of the note facility of February 1, 2024 is consistent with the maturity date of the existing Secured Promissory Notes with MSEC and Neptune. The $13.0 million of amended Secured Promissory Notes have a 10% interest rate per annum, increasing by 1% per annum every three months during the term of the Secured Promissory Notes. The interest will be compounded and added to the principal amount on a quarterly basis. The amended Secured Promissory Notes may be converted, in whole or in part, at any time upon the mutual consent of Sprout, the Corporation and MSEC, into common shares of the Corporation. MSEC was issued 372,670 common shares of Neptune, of an approximate value of $500,000, in connection with this commitment.
In September 2022, we issued to one additional accredited investor 36,765 common shares in connection with loans to Sprout Foods, Inc. and the issuance of a Secured Promissory Note.
In June 2022 we issued 7,104 common shares to our financial advisor in connection with our proposed divestiture of our Canadian cannabis business.
Equity
Equity consists of the following items:
March 31, 2022 | March 31, 2021 | |||||||
Share capital | $ | 317.051 | $ | 306.618 | ||||
Warrants | 6.080 | 5.901 | ||||||
Additional paid-in capital | 55.981 | 59.625 | ||||||
Accumulated other comprehensive loss | (7.814 | ) | (8.567 | ) | ||||
Deficit | (323.182 | ) | (248.210 | ) | ||||
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Total equity attributable to equity holders of the Corporation | $ | 48.116 | $ | 115.367 | ||||
Total equity attributable to non-controlling interest | 12.722 | 22.178 | ||||||
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Total equity | $ | 60.838 | $ | 137.545 | ||||
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CAPITAL RESOURCES FOR THE QUARTER ENDED SEPTEMBER 30, 2022
Liquidity position
As at September 30, 2022, the Company’s liquidity position, consisting of cash and cash equivalents, was $1.4 million.
Liquidity and Capital Resources
Cash flows and financial condition for the three and six-month periods ended September 30, 2022 and 2021
Summary
As of September 30, 2022, cash and cash equivalent totaled $1.4 million, a decrease of $7.3 million or 84%77% compared to cash and cash equivalents totaling $8.7 million as of September 30, 2021.at March 31, 2022.
Operating activities
ForDuring the three-month period ended September 30, 2022, increase in loans and borrowings was $3.25 million and the proceeds were used forMarch 31, 2023 our operating activities primarily inventory procurement, salaries and professional fees.
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Forused cash of $7.9 million compared to $10.5 million in the three-month period ended September 30, 2021, there were no significant sources of funds. InMarch 31, 2022. For the sametwelve-month period funds were used forended March 31, 2023, our operating activities primarily inventory procurement, payments for legacy Health and Wellness COVID-19 related products, salaries and professional fees, as well as acquisition and integration costs. Forused cash of $28.6 million compared to $54.3 million in the six-month period ended September 30, 2022, the increase in loans and borrowings was $3 million and direct offerings of $5.0 million. The proceeds were used for operating activities, primarily inventory procurement, salaries and professional fees.prior year.
For the six-month period ended September 30, 2022, the increase in loans and borrowings was $3.0 million and direct offerings of $5.0 million. The proceeds were for operating activities, primarily inventory procurement, salaries and professional fees.
For the six-month period ended September 30, 2021, there were no significant sources of funds. In the same period, uses of funds were for operating activities, primarily inventory procurement, payments for legacy Health and Wellness COVID-19 related products, salaries and professional fees, as well as acquisition and integration costs.
Investing activities
The Company’s business models require low capital expenditures (“CAPEX”CAPEX”) future investments. For the quarteryear ended September 30, 2022, $0.6March 31, 2023, $2.4 million was used infor investing activities. In the same periodactivities; in the prior year, $0.4$2.3 million was also used for investing activities. As for the six-month periodquarter ended September 30, 2022, $0.6March 31, 2023, $0.3 million was used infor investing activities, compared to $1.0$0.9 million for the same period the priorprevious 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 and since2021. Since then, it has not incurred financing until the Company entered into Registered Direct Offerings closed on March 14, 2022 ($8.0 million), June 23, 2022 ($5.0 million) and October 11, 2022 ($6.0 million). Other than the securedSecured promissory notes totaling $4.1 million were also issued during the twelve-month period ended March 31, 2023 by Sprout (including $0.3 million during the Company has limited debt.last quarter). During the quarter ended March 31, 2023, Sprout entered into an accounts receivable factoring facility, for which the maximum available is $5.0 million (of which $2.8 million was used as at March 31, 2023), and Neptune issued secured senior notes for gross proceeds of $4.0 million.
The Company’s current cash position will be sufficient to support its financial needs for only two to three months.less than 1 month under the current business plan. 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.
Loans and borrowings
On February 10, 2021, as part of the Sprout acquisition, Sprout issued a promissory note of $10.0 million guaranteed by the Company and secured by a first-ranking mortgage on all movable assets of Sprout current and future, corporeal and incorporeal, and tangible and intangible. The outstanding principal balance bears interest at the rate of 10.0% per annum. Interest is accrued and added to the principal amount of the loan. The principal is payable on February 1, 2024.
On July 13, 2022, Neptune announced that Sprout Foods Inc. (“Sprout”), the Company’s organic plant-based baby food and toddler snack company, has entered into an amendment of each of its existing Secured Promissory
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Notes. In connection with this amendment, investment funds managed by Morgan Stanley Expansion Capital (“Morgan Stanley” or “MSEC”) agreed to commit an additional $3 million in Secured Promissory Notes to Sprout. The maturity date of the note facility of February 1, 2024 is consistent with the maturity date of the existing Secured Promissory Notes with MSEC and Neptune. The $13.0 million of amended Secured Promissory Notes have a 10% interest rate per annum, increasing by 1% per annum every three months during the term of the Secured Promissory Notes. The interest will be compounded and added to the principal amount on a quarterly basis. The amended Secured Promissory Notes may be converted, in whole or in part, at any time upon the mutual consent of Sprout,On April 27, 2023, the Company announced that Sprout extended the maturity of its existing $13 million secured promissory note with MSEC. The note maturity has been extended from February 1, 2024 to December 31, 2024, which will bear interest at the rate of 15.0% per annum through and MSEC, into common shares of the Company. MSEC was issued 372,670 common shares of Neptune, of an approximate value of $500,000,including December 31, 2023, payable in connection with this commitment.kind, and 10.0% per annum, payable in kind, and 5.0% per annum payable in cash, from and after January 1, 2024.
On September 9,August 26, 2022, Sprout entered in a new $250,000$0.25 million Secured Promissory Note agreement. The maturity date of the new note facility is February 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
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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 $75,736$0.1 million in connection with this Secured Promissory Note, for the payment of borrowing costs.
On November 8, 2022, Sprout entered into an agreement to issue an additional $525,000$0.55 million of Secured Promissory Notes, on the same terms as the Secured Promissory Note entered into with MSEC. InOn February 15, 2023, in connection with this financing, Neptune will issueissued 146,330 common shares to the holders of these Secured Promissory Notes for a value of $105,000.$0.1 million.
On January 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. On March 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 to May 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.
On January 25, 2023, Neptune announced that its organic baby food brand subsidiary, Sprout Organics, has entered into an accounts receivable factoring facility with 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, effective January 23, 2023, and will be automatically renewed. Neptune provided a commercial guaranty in connection with this agreement. On May 10, 2023, Neptune announced that Sprout has secured inventory financing through an Invoice Purchase and Security Agreement partnership with Alterna, effective April 21, 2023. The inventory line will provide Sprout with working capital for additional inventory to meet consumer demand and product line expansion. The maximum available has been amended to $7.5 million, from $5.0 million previously announced on January 25, 2023, adding a line of inventory to the accounts receivable factoring facility that is already in place.
On March 10, 2023, Sprout issued promissory notes for gross proceeds of $0.3 million to various investors, on the same terms as the MSEC promissory notes. Pursuant to the terms of the promissory notes, the Company also issued to these investors warrants (“March 2023 Warrants”) to purchase an aggregate of 111,111 shares of Neptune common stock, with each warrant exercisable for 5 years following the initial issuance at a price of $0.54 per common share.
Form S-3 Limitations
As a result of our inability to timely file this Quarterlythe Annual Report for the year ended March 31, 2023 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 the SEC 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 beare required to file a long-form registration statement on Form S-1 and have it reviewed and declared effective by the SEC. This may limit our ability to access the public markets to raise debt or equity.
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Equity
Equity consists of the following items (in millions):items:
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Share capital | | $ | 321.946 | | $ | 317.051 |
Warrants | | | 6.155 | | | 6.080 |
Additional paid-in capital | | | 58.139 | | | 55.981 |
Accumulated other comprehensive loss | | | (14.539) | | | (7.814) |
Deficit | | | (383.641) | | | (323.182) |
Total equity (deficiency) attributable to equity holders of the Company | | $ | (11.940) | | $ | 48.116 |
Total equity (deficiency) attributable to non-controlling interest | | | (15.621) | | | 12.722 |
Total equity (deficiency) | | $ | (27.561) | | $ | 60.838 |
September 30, 2022 | March 31, 2022 | |||||||
Share capital | $ | 321.770 | $ | 317.051 | ||||
Warrants | 6.080 | 6.080 | ||||||
Additional paid-in capital | 56.306 | 55.981 | ||||||
Accumulated other comprehensive loss | (14.308 | ) | (7.814 | ) | ||||
Deficit | (358.364 | ) | (323.182 | ) | ||||
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Total equity attributable to equity holders of the Company | $ | 11.484 | $ | 48.116 | ||||
Total equity attributable to non-controlling interest | 4.112 | 12.722 | ||||||
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Total equity | $ | 15.596 | $ | 60.838 | ||||
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CONTRACTUAL OBLIGATIONS FOR THE FISCAL YEAR ENDED MARCH 31, 2022Contractual Obligations
The following are the contractual maturities of financial liabilities and other contracts as at March 31, 2022:2023:
Required payments per year | Carrying amount | Contractual Cash flows | Less than 1 year | 1 to 3 years | 4 to 5 years | March 31, 2022 More than 5 years | ||||||||||||||||||
Trade and other payables and long-term payables | $ | 22.701 | $ | 22.701 | $ | 22.701 | $ | — | $ | — | $ | — | ||||||||||||
Lease liabilities1 | 2.705 | 3.861 | 0.798 | 1.612 | 1.091 | 0.360 | ||||||||||||||||||
Loans and borrowings2 | 11.648 | 12.088 | 1.000 | 11.088 | — | — | ||||||||||||||||||
Other liability3 | 0.089 | 15.000 | — | — | — | 15.000 | ||||||||||||||||||
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$ | 37.143 | $ | 53.650 | $ | 24.499 | $ | 12.700 | $ | 1.091 | $ | 15.360 | |||||||||||||
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Trade and other payables and long-term payables | $ | 30.000 | $ | 27.250 | $ | 27.250 | $ | — | $ | — | $ | — | ||||||
Lease liabilities1 |
| 2.358 |
| 2.961 |
| 0.519 |
| 0.991 |
| 0.778 |
| 0.673 | ||||||
Loans and borrowings2,4 |
| 22.951 |
| 22.951 |
| 7.538 |
| 15.413 |
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Other liability3 |
| 0.024 |
| 15.000 |
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| — |
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$ | 55.333 | $ | 68.162 | $ | 35.307 | $ | 16.404 | $ | 0.778 | $ | 15.673 |
(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. |
(4) | Taking into account the April 27, 2023 announcement stating that Sprout extended the maturity of its existing $13 million secured promissory note with MSEC. The note maturity has been extended from February 1, 2024 to December 31, 2024. |
Liabilities related to warrants are excluded from the table above, as they are to be settled in shares. A $2.75 million accrual for the settlement of a legal case was also excluded from the contractual cash flows for trade and other payables and provisions, as the Company intends to settle in shares.
Under the terms of its financing agreements, the Company is not required to meet financial covenants. However the Company does have several covenants related to other matters such as financial statement deadlines, which if not respected, provide for certain obligations to become due on demand. The Company does not currently have funds available to repay lenders were that to occur.
On November 14, 2021, the Company and its CEO entered into an agreement pursuant to which the CEO’s existing employment agreement was amended to waive the Company’s obligation to procure directors and officers insurance coverage of up to $15 million for the period covering July 1, 2021 to July 31, 2022. The parties agreed that if the Company had successfully completed a strategic partnership prior to December 31, 2021, the CEO would have been entitled to approximately $6.9 million in cash and would have been granted fully vested options to purchase 8.5 million shares of the Company’s common stock. The parties also agreed that if certain contingencies did not occur by December 31, 2021, the parties would negotiate for a period of 30 days and, in the absence of an agreement, would be entitled to a grant of vested restricted stock units (“RSUs”)RSUs with a value of approximately $4.7$8.6 million (or if the Company is unable to grant such RSUs, then a combination of cash and vested RSUs with equivalent value). On January 31, 2022, the parties agreed to extend the 30-day negotiation period for an additional 30 days. As the strategic partnership was not consummated by December 31, 2021, the CEO will be entitled to the compensation mentioned above. The Company has accrued in trade and other payable the liability to the CEO of $4.7
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$8.6 million as at March 31, 2022.2023. The related charge for the three-month and twelve-month periods ended March 31, 20222023 is nil and $4.7$1.2 million, respectively, is included in selling general and administrative expenses.
The Company is required to pay royalties of 1% of its revenues in semi-annual instalments,installments, for an unlimited period to the former CEO. A provision of $0.4$1.0 million for royalty payments is included in the table above for amounts currently due and is not otherwise included in table above.
Refer also to provisions disclosed in note 11, commitments disclosed in note 22(a) and legal proceedings in note 22(b) of the consolidated financial statements for the years ended March 31, 20222023 and 2021.2022.
The Company has no significant off-balance sheet arrangements as at March 31, 2022,2023, other than those mentioned above and the commitments disclosed in note 22 of the consolidated financial statements for the years ended March 31, 20222023 and 2021.2022.
Accounting Policies
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CONTRACTUAL OBLIGATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2022
The following are the contractual obligations as at September 30, 2022:
Required payments per year | Carrying amount | Contractual Cash flows | Less than 1 year | 1 to 3 years | 4 to 5 years | September 30, 2022 More than 5 years | ||||||||||||||||||
Trade and other payables and provisions | $ | 28.821 | $ | 28.821 | $ | 28.821 | $ | — | $ | — | $ | — | ||||||||||||
Lease liabilities1 | 2.929 | 2.900 | 0.673 | 1.130 | 0.273 | 0.824 | ||||||||||||||||||
Loans and borrowings2 | 14.692 | 14.692 | — | 14.692 | — | — | ||||||||||||||||||
Other liability3 | 0.024 | 15.000 | — | — | — | 15.000 | ||||||||||||||||||
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$ | 46.466 | $ | 61.413 | $ | 29.494 | $ | 15.822 | $ | 0.273 | $ | 15.824 | |||||||||||||
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Liabilities related to warrants are excluded from the table above, as they are to settle in shares.
Under the terms of its financing agreements, the Company is not required to meet financial covenants.
On November 14, 2021, the Company and its CEO entered into an agreement pursuant to which the CEO’s existing employment agreement was amended to waive the Company’s obligation to procure directors and officers insurance coverage of up to $15 million for the period covering July 1, 2021 to July 31, 2022. The parties agreed that if the Company had successfully completed a strategic partnership prior to December 31, 2021, the CEO would have been entitled to approximately $6.9 million in cash and would have been granted fully vested options to purchase 8.5 million shares of the Company’s common stock. As the strategic partnership was not consummated by December 31, 2021, the CEO is entitled to a grant of vested RSUs with a value of approximately $0.4 million. The balance of the liability accrual to the CEO is $0.4 million as at September 30, 2022, in trade and other payables. The revaluation of the liability amounted to gain (loss) of $(1,750) and $3.2 million for the three and six-month periods ended September 30, 2022 and were recorded into SG&A (2021 – losses of $1.7 million and $1.7 million, respectively). During the three and six-month periods ended September 30, 2022, settlements in RSUs were of $235,683 and $1.4 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 $0.5 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 at September 30, 2022, other than those mentioned above and the commitments disclosed in note 15 of the condensed consolidated interim financial statements for the three and six-month periods ended September 30, 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 six-month periods ended September 30, 2022 and 2021.
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ACCOUNTING POLICIES
OUR ACCOUNTING POLICIESOur Accounting Policies
Please refer to Note 3 of the annual consolidated financial statements as at March 31, 20222023 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 JUDGEMENTSCritical Accounting Estimates and Judgments
The consolidated financial statements are prepared in accordance with US GAAP. In preparing the consolidated financial statements for the years ended March 31, 20222023 and 2021 and for the three-month periods ended September 30, 2022, and 2021, Management made estimates in determining transaction amounts and statement of financial position balances. Certain policies have more importance than others. We consider them critical if their application entails a substantial degree of judgment or if they result from a choice between numerous accounting alternatives and the choice has a material impact on reported results of operation or financial position. Please refer to the annual consolidated financial statements as at March 31, 20222023 for more information about the Company’s most significant accounting policies and the items for which critical estimates were made in the financial statements and should be read in conjunction with the notes to the consolidated financial statements for the years ended March 31, 20222023 and 2021.2022.
Estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
Critical accounting estimates are:
Estimating the write down of inventories
Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. As necessary, the Corporation records write-downs for excess, slow moving and obsolete inventory. To determine these amounts, the Corporation regularly reviews inventory quantities on hand and compares them to estimates of historical utilization, future product demand, and production requirements. Write-downs of inventories to net realizable value are recorded in cost of sales in the consolidated financial statements.
In the years ended March 31, 2022 and 2021, inventories have been reduced by $3.7 million and $19.0 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 fiscal 2022 was largely related to the completion of inventory write-downs of legacy Health and Wellness products as well as inventory write downs for legacy products related to the SugarLeaf facility. Both write offs of inventories occurred in the first six months of fiscal 2022, resulting in $3.7 million of expense.
The write-off of inventory in fiscal 2021 was largely related to hand sanitizer products.
In the six-months ended September 30, 2022 and 2021, inventories have been reduced by $3.1 million and $3.0 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 three and six-month periods ended September 30, 2022 was related to cannabis products.
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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 and publicly owned companies. The profile and credit quality of the Corporation’sCompany’s customers vary significantly. Adverse changes in a customer’s financial position could cause the CorporationCompany to limit or discontinue conducting business with that customer, require the CorporationCompany 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.
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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 CorporationCompany will temporarily transact with customers on a prepayment basis where circumstances warrant. The Corporation’sCompany’s credit controls and processes cannot eliminate credit risk.
During the year ended March 31, 2022,2023, the CorporationCompany transacted with a few new customers for which financial positions deteriorated during the year. The CorporationCompany has recorded specific provisions related to these customers.
The expected credit loss for the year ended March 31, 20222023 was $1.7$1.4 million and for March 31, 20212022 was $7.0$1.7 million. As at March 31, 2022, 69%2023, 82% of our trade receivables are past due (March 31, 20212022 – 83%71%). We have provided for 58%66% of past due receivables as at March 31, 20222023 (March 31, 2021—68%2022 - 58%). Most of the past due trade receivables are from legacy customers of B2B cannabis services revenues as well as legacy Health and Wellness customers, for which they were provided for in fiscal 2021.
Expected credit loss is subject to estimation risk and measurement uncertainty because the financial health of certain customers is difficult to predict.
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 years ended March 31, 2023 and 2022, inventories have been reduced by $5.5 million and $3.8 million respectively, as a result of a write-down to their net realizable value, which is included in cost of sales.
The expected credit losswrite-off of inventory for the quarterstwelve-month period ended March 31, 2023 was mostly related to slow moving items and raw materials related to discontinued items.
The write-off of inventory for the twelve-month period ended March 31, 2022 was largely related to the completion of inventory write-downs of legacy Health and Wellness products as well as inventory write downs for legacy products related to the SugarLeaf facility. Both write-offs of inventories occurred in the first six months of fiscal 2022, resulting in $3.8 million of expense.
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 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.
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 at September 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 ended September 30, 2022.
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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%.
In the third quarter of 2022 due to the Company’s sustained decrease in share price, the Company concluded a triggering event occurred and 2021 were $0.02 millionperformed 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 $0.04 million, respectively. Expected credit loss isinterest 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 estimation risksignificant 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 measurement uncertainty becauseno impairment was recognized.
The most significant assumptions used to estimate the financial healthfair 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.
As of certain customers is difficult to predict.March 31, 2023, the Company made the following assessments:
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Biodroga – As part of its annual impairment test, Management determined that the fair value of Biodroga was higher than its carrying value and thus no impairment charge was recorded for the reporting unit. The most significant assumptions used to estimate the fair values using 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 an impairment charge. Should these projections not be realized, an impairment loss may be needed in future periods. As atof March 31, 2022,2023, the assumptions used in determining the fair value were not subject to a degree of uncertainty that would have caused impairment to be recorded, as there was sufficient headroom between the fair value of the reporting unit and its carrying value.
Sprout – In 2022,2023, as part of the annual impairment test of Sprout, Management determined that the fair value of the reporting unit was lower than its carrying amount. As a result, an impairment charge of $1.5$18.0 million was allocated to the Sprout tradename and an impairment charge of $3.3$19.5 million was allocated
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to the goodwill of Sprout. The most significant assumptions used to estimate the fair values using 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 an impairment charge. Should these projections not be realized, an impairment loss may be needed in future periods. Due to the impairment losses recorded in the second and fourth quarter of fiscal 2022, 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.2023, these assets are now carried at a nil value.
Cannabis – The Corporation identified a trigger of impairment related to its Canadian cannabis asset group. Impairment indicators such as increased operating losses, decline in the share price and negative industry and economic trends were identified in the fourth quarter. The fair value of the asset group was determined to be less than the carrying value, resulting in an impairment loss of $12.3 million allocated between the building and components ($3.1 million) and the laboratory and plant equipment ($9.2 million). Management announced on June 8, 2022 the divestiture of the Canadian cannabis business. As a result, if the Corporation is unable to sell the asset of the Canadian cannabis group at their fair value, additional impairment charges may be required in fiscal 2023.
There were impairment triggers identified in the quarter ended September 30, 2022 which resulted in an impairment of goodwill and intangible assets of $10,164,000. There were no impairment triggers identified in the quarter ended September 30, 2021, and no impairment losses on goodwill, intangibles, and property, plant and equipment were recorded, except as noted in the following paragraph.
Estimating the fair value less costs to sell of our assets held for sale.
On June 8, 2022, the Company announced a planned divestiture of the Canadian cannabis business and the Corporation will focus on winding up its cannabis operations pending one or more sales transactions. Following this announcement, the Corporation had Canadian disposal group assets that met the criteria to be classified as held for sale. As at September 30, 2022, non-current assetsJudgment related to the Canadian cannabis business are 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 on October 16, 2022 for approximately $3,790,340 ($5,150,000 CAD), with expected cost to sell the Canadian cannabis disposal group asset in the amount of $586,783, for net assets held for sale of $3,203,557, resulting in impairment losses of $14,530,458 and $15,346,119 respectively for the three and six-month periods ended September 30, 2022. The transaction closed on November 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 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 retrospective 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
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inventory levels, availability of actual results and expectations of demand. For fiscal 2022, the Corporation revised its estimated provision for returns of the cannabis sales as a result of new information and experience with sales returns. The impact of the revised estimate for year ended March 31, 2022 is a reduction of the provision of $1.1 million and an increase in revenue from sales and services.
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 expectedrecognition period to be returned within prepaid expenses and other assets on the consolidated balance sheets with a corresponding reduction of cost of sale.
Judgment related to revenue recognitionused in determining whether the Companyrecording stock-based compensation that 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.
Estimating the fair value of bonus based on market and non-market conditions (note 16(notes 10 and 12 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 values the long-term incentive with the risk-neutral Monte Carlo simulation method. Based on the model, the Corporation could reach this market capitalization in 6.51 years. 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 2.32% and a volatility of 67.35% (respectively 1.74% and 66.46% for the previous year). The assumptions used in the simulation include a risk free-rate of 3.76% and a volatility of 76.49% for the six-month period ended September 30, 2022 (respectively 2.32% and 67.35% for the six-month period ended September 30, 2021). An increase or decrease in the volatility assumption significantly impacts the fair value of the long-term incentive.
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On July 8, 2019, the Corporation granted 157,143 market performance options under the Corporation stock option plan at an exercise price of $4.43 per share to the CEO, expiring on July 8, 2029. The options were vest after the attainment of market performance conditions within the following ten years. The market condition was factored into the fair value. Some of these market performance options required the approval of amendments to the stock option plan and therefore the fair value of these options was revaluated up to the date of approval of the amendments (grant date).
On July 8, 2019, the Corporation granted 100,000 non-market performance options under the Corporation stock option plan at an exercise price of $4.43 per share to the CEO, expiring on July 8, 2029. These options vest after the attainment of non-market performance conditions within the following ten years. These non-market performance options required the approval of amendments to the stock option plan and therefore the fair value of these options was revalued up to the date of approval of the amendments (grant date).
On July 8, 2019, the Company granted 100,000 non-market performance options under the Company stock option plan at an exercise price of $4.43$155.05 per share to the CEO, expiring on July 8, 2029. These options vest after the attainment of non-market performance conditions within the following ten years. These non-market performance options required the approval of amendments to the stock option plan and therefore the fair
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value of these options was revalued up to the date of approval of the amendments (grant date). These options are valued based on level 3 inputs. During the twelve-month period ended March 31, 2022, changes in estimated probability of achievement of the non-market performance conditions or the expected number of years to achieve the performance conditions resulted in a recovery of stock-based compensation recognized under this plan. None of these non-market performance options have vested as at September 30, 2022.March 31, 2023. Changes in these assumptions would impact the timing of which the expense is recognized. These options were not exercisable as at September 30, 2022March 31, 2023 and March 31, 2022.
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On July 8, 2019, the Company granted 157,142 market performance options under the Company stock option plan at an exercise price of $155.05 per share to the CEO, expiring on July 8, 2029. The options 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).
Estimating the fair value of various financings (notes 12, 13 and 14 of the consolidated financial statements)
On June 23, 2022, Neptune issued a total of 645,526 pre-funded warrants (“(“Pre-Funded Warrants”), along with 1,300,000 common shares of the Corporation,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 Warrants Warrant and the accompanying June 2022 Common Warrants were sold together at a combined offering price of $2.57, for aggregate gross proceeds of $5.0 million before deducting fees and other estimated offering expenses. The Pre-Funded Warrants are funded in full at closing except for a nominal exercise price of $0.0001 and are exercisable commencing on the closing dateClosing Date and will terminate when such Pre-Funded Warrants are exercised in full. The Series C Warrants and the Series D Warrants have an exercise price of $2.32 per share and can be exercised for a period of 5 years and 2 years respectively from the date of issuance.
Proceeds of the June 2022 Direct Offering were allocated between common shares and warrants first by allocating proceeds to the warrants classified as a liability based on their fair value and then allocating the residual to the equity instruments, which includes the Pre-Funded Warrants. The fair value of the liability-classified warrants was determined using the Black-Scholes model, resulting in an initial warrant liability of $4,046,836 for the Series C Warrants and $3,080,121 for the Series D Warrants. Because the fair value of the liability classified warrant exceeds the total proceeds, no consideration was allocated to the Common Shares and Pre-Funded Warrants and a loss of $2,126,955 was immediately recognized in the net loss of the period as there were no additional rights or privileges identified. Total issue costs related to this private placement of $465,211, was recorded under finance costs.
On October 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.
On January 12, 2023, Neptune closed on a senior secured notes financing (such notes, the “Notes”) for gross proceeds of $4,000,000 with CCUR Holdings, Inc. and Symbolic Logic, Inc. (collectively, the “Noteholders”). Pursuant to the terms of the Notes, the Company also issued to the Noteholders warrants (“January 2023 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. The fair value of the warrants as at the date of closing was determined using a Black-Scholes model.
On March 10, 2023, Sprout issued promissory notes for gross proceeds of $300,000 to various investors. Pursuant to the terms of those promissory notes, the Company also issued to these investors warrants (“March 2023 Warrants”) to purchase an aggregate of 111,111 shares of Neptune common stock, with each warrant exercisable for 5 years following the initial issuance at a price of $0.54 per common share. The aggregate fair value on issuance of the March 2023 Warrants was $0.0 million.
Estimating the fair value of the identifiable assets acquired, liabilities assumed, and consideration transferred of the acquired business, including the related call option (the “Call Option”)bonus-based on market conditions (note 416(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 3.48% and a volatility of 81.02% for the twelve-month period ended March 31, 2023
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(respectively 2.32% and 67.35% for the purchase price was based on management’s estimate oftwelve-month period ended March 31, 2022). An increase or decrease in the volatility assumption significantly impacts the fair values of the acquired identifiable assets and assumed liabilities using valuation techniques including income, cost and market approaches (Level 3). The Corporation utilized both the cost and market approaches to value fixed assets, which consider external transactions and other comparable transactions, estimated replacement and reproduction costs, and estimated useful lives and consideration for physical, functional and economic obsolescence. We utilized the income approach to value intangible assets, which considers the present value of the long-term incentive.
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 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 cash flows expectedamount when it does not meet the criteria to be generated by the intangible assets,considered a principal.
Changes in Accounting Policies and excluding cash flows related to contributory assets.Future Accounting Changes
As at the close of the transaction, the value of the asset related to the Call Option was determined to be $5.5 million, representing the difference between the market price and the contract value of the Call Option, discounted at a rate of 8.9% and assuming the transaction would take place on January 1, 2023. To establish the market price, the multiples selected were 2.3x for revenues and 12.0x for EBITDA, based on analysis of average and median industry multiples, and were adjusted to consider a 20% discount; the multiples to be used as per the contract are 3.0x for revenues and 15.0x for EBITDA, weighted at 50%.
CHANGES IN ACCOUNTING POLICIES AND FUTURE ACCOUNTING CHANGES
The accounting policies and basis of measurement applied in the consolidated financial statements for the years ended March 31, 20222023 and 2021 and for the three months ended September 30, 2022 and 2021 are the same other than as disclosed, if any, in note 3 to the consolidated 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”) to U.S. dollars (“USD”), effective October 1, 2022. This change in functional currency has been applied prospectively from the date of the change.
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ISSUED AND OUTSTANDING SECURITIES
The following table details the number of issued and outstanding securities as at the date of this prospectus:
Number of Securities | |||||
Issued and Outstanding | |||||
Common shares | 21,822,149 | ||||
Share options | 671,713 | ||||
Deferred share units | 4,308 | ||||
Restricted share units | 2,789 | ||||
Warrants | |||||
| 26,683,271 | ||||
Total number of securities | |||||
| 49,184,230 |
The Company’s common shares are being traded on NASDAQNasdaq 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.
Internal Controls Disclosure
85Disclosure Controls and Procedures (“DC&P”) and Internal Control Over Financial Reporting (“ICFR”)
As required by applicable rules of the SEC, Management is responsible for the establishment and maintenance of DC&P and ICFR. Our DC&P and ICFR has been designed based on the 2013 Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with US GAAP. Regardless of how well the DC&P and ICFR are designed, internal controls have inherent limitations and can only provide reasonable assurance that the controls are providing reliable financial reporting information in accordance with US GAAP. These inherent limitations include, but are not limited to, human error and circumvention of controls and as such, there can be no assurance that the controls will prevent or detect all misstatements due to errors or fraud, if any.
Evaluation of DC&P
The Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), with assistance from other members of management, have evaluated the design and effectiveness of our Disclosure Controls and Procedures as of March 31, 2023 and, based on their evaluation,
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have concluded that the Disclosure Controls and Procedures were not effective as of that date due to a material weaknesses disclosed below.
Internal controls over financial reporting (“ICFR”)
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with US GAAP.
Internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error or overriding of controls. Because of the inherent limitations, only reasonable assurance with respect to financial statement preparation and presentation can be provided and misstatements may not be prevented or detected. Management evaluated the design and effectiveness of the Company’s internal control over financial reporting as of March 31, 2023 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control Integrated Framework 2013. Based on its evaluation, management concluded that our internal control over financial reporting was not effective as of March 31, 2023 due to material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis.
Consistent with March 31, 2022, the Company did not effectively design, implement and operate effective process-level control activities related to its key processes (such as the financial reporting process (including consolidation and journal entries), the purchase to pay process (including cutoff), the inventory process, the order to cash process and the equity process (financial instruments and stock-based compensation), account level assertions and disclosures, including entity level controls and information technology general controls (“ITGCs”).
Further, there were inadequate controls over user and privileged access to information technology (IT) systems for multiple components to adequately restrict access to appropriate finance and IT personnel and enforce appropriate segregation of duties. As a result, process-level automated control activities and manual control activities that are dependent upon information derived from IT systems were also ineffective. The pervasive nature of these deficiencies contributed to the other material weaknesses below:
● | Inadequate oversight processes and procedures to guide individuals in applying internal control over financial reporting to prevent or timely detect material accounting errors and ensuring adherence to applicable accounting standards; |
● | Ineffective risk assessment process, including (i) potential for fraud and (ii) identification and assessment of changes in the business that could impact our system of internal controls; |
● | Ineffective design and implementation of control activities, general controls over technology and deployment of policies and procedures; |
● | Relevant and quality information to support the functioning of internal controls was not consistently generated, used, or reviewed by the Company; |
● | The Company did not sufficiently select, develop, and perform ongoing evaluations to determine that components of internal control are present and functioning; |
● | The evaluation and communication process of internal control deficiencies was not timely; |
● | Inability to prepare on a timely basis the financial statements, supporting accounting records and account reconciliations; and |
● | Lack of sufficient complement of personnel with an appropriate level of knowledge and experience. |
● | Lack of review of the information communicated to management’s expert and the impairment analysis performed by management’s expert. |
As a result of these deficiencies, material misstatements were identified and corrected in the consolidated financial statements as of and for the year ended March 31, 2023. Because there is a reasonable possibility that material misstatement of the consolidated financial statements will not be prevented or detected on a timely basis, we concluded the deficiencies represent material weaknesses in our internal control over financial reporting and our internal control over financial reporting was not effective as of March 31, 2023.
Our CEO and CFO have taken additional steps to support that the financial statements as of and for the twelve-month period ended March 31, 2023 are presented fairly in accordance with US GAAP.
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Changes in ICFR
For the quarter ended March 31, 2023, the Company has concluded that there were no changes in its ICFR that has materially affected or is reasonably likely to materially affect the Company’s ICFR for the three-month period ended March 31, 2023.
We are a non-accelerated filer under the Exchange Act and not required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002. Therefore, this annual report does not include an attestation report of our registered public accounting firm regarding our management’s assessment of internal control over financial reporting.
Remediation Plan
Beginning during the year ended March 31, 2021, and under the direction of our CEO and CFO, we have been developing a comprehensive plan to remediate the identified material weaknesses. We began implementing certain measures as part of the remediation plan including: (i) development of a detailed remediation plan addressing the material weaknesses related to the control environment, risk assessment and monitoring, (ii) institution of policies and processes to support the functioning of internal controls over financial reporting, (iii) design of a comprehensive risk assessment process, (iv) process level and IT general controls design enhancement and (v) hiring of individuals with appropriate skills and experience.
The turnover in accounting personnel experienced in the last nine months has delayed the implementation of the remediation plan. We remain committed to the identification, design and implementation of steps still needed to remediate the material weaknesses in our internal controls and to ensure that our internal controls over financial reporting will be designed and operating effectively by:
● | Addressing the material weaknesses related to information and communication. |
● | Continuing to institute policies and processes to support the functioning of internal controls over financial reporting. |
● | Implementing a comprehensive and continuous risk assessment process to identify and assess risks of material misstatement (including fraud risks). |
● | Ensuring the proper implementation and operating effectiveness of process-level and IT general controls that support automated and manual control activities. |
● | Establishing an adequate reporting structure to ensure authority guidelines and reinforcing communications protocols, including required information and expectations, to enable personnel to carry out their responsibilities and producing accurate financial reports. |
● | Reinforcing internal control and financial reporting expertise across the organization. |
● | Holding individuals accountable for their role related to internal control and providing continuous training. |
● | Designing and implementing additional monitoring controls to assess the consistent operation of controls and to remediate deficiencies in a timely manner. |
The material weaknesses being addressed by the above-mentioned remediation plan will not be considered remediated until the applicable controls operate for a sufficient period of time, and management concludes, through testing, that these controls are operating effectively. This has not occurred to date.
Although we have commenced the remediation process and intend to complete it as promptly as possible, we cannot estimate how long it will take to remediate these material weaknesses. In addition, new material weaknesses may be discovered that require additional time and resources to remediate. Until the remediation is complete, we plan to continue to perform additional analyses and other procedures to ensure that our consolidated financial statements are prepared in accordance with US GAAP.
CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Relationships and Transactions
Other than the compensation agreements and other arrangements described under “Executive Compensation” and “Director Compensation” discussed below in this prospectus and the transactions described below, since April 1, 2020,2023, there has not been and there is not currently proposed, any transaction or series of similar transactions to which we were, or will be, a party in which the amount involved exceeded, or will exceed, $120,000 and in which any director, executive officer, holder of five percent or more of any class of our capital stock or any member of the immediate family of, or entities affiliated with, any of the foregoing persons, had, or will have, a direct or indirect material interest.
In March 2022, we completed a registered direct offering (the “March Offering”), pursuant to which we issued and sold an aggregate75
In June 2022, we completed a registered direct offering (the “June Offering”), pursuant to which we issued and sold an aggregate of 1,945,526 common shares and equivalents and 3,891,052 warrants to purchase common shares, at a price equal to $2.57 per share and accompanying warrants. Armistice Capital Master Fund Ltd. and Sabby Volatility Warrant Master Fund, Ltd., beneficial owners of more than 5% of our voting securities, each purchased 972,763 common shares and equivalents and were each issued warrants to purchase 1,945,526 common shares in the June Offering.
On October 11, 2022, the Company announced the closing of a registered direct offering of 3,208,557 of its Common Shares and the Series E Warrants in the concurrent Private Placement. Armistice Capital Master Fund Ltd., Sabby Volatility Warrant Master Fund, Ltd., and Empery Asset Master, LTD (and related entities), beneficial owners of more than 5% of our voting securities, each purchased 1,069,519 common shares, in the registered direct offering and were each issued warrants to purchase 2,139,048 common shares, respectively, in the Private Placement.Contents
Director Independence
Nasdaq rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and corporate governance committees be independent and that audit committee members also satisfy independence criteria set forth in Rule 10A-3 under the Exchange Act and that compensation committee members satisfy independence criteria set forth in Rule 10C-1 under the Exchange Act. Under applicable Nasdaq rules, a director will only qualify as an “independent director” if, in the opinion of the listed company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In order to be considered independent for purposes of Rule 10A-3, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee, accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the listed company or any of its subsidiaries or otherwise be an affiliated person of the listed company or any of its subsidiaries. In addition, in affirmatively determining the independence of any director who will serve on a company’s compensation committee, Rule 10C-1 under the Exchange Act requires that a company’s board of directors must consider all factors specifically relevant to determining whether a director has a relationship to such company which is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member, including: the source of compensation to the director, including any consulting, advisory or other compensatory fee paid by such company to the director, and whether the director is affiliated with the company or any of its subsidiaries or affiliates.
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Our board of directors has determined that all members of the board of directors, except Michael Cammarata, are independent directors, including for purposes of the rules of Nasdaq and the SEC. In making such independence determination, our board of directors considered the relationships that each non-employee director has with us and all other facts and circumstances that our board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director. In considering the independence of the directors listed above, our board of directors considered the association of our directors with the holders of more than 5% of our common shares. There are no family relationships among any of our directors or executive officers. Mr. Cammarata is not an independent director under these rules because he is an executive officer of the Company.
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MANAGEMENT
Director and Executive Officer Biographies
The following table provides information regarding our executive officers and directors as of January 24,[●], 2023:
Name | Age | Position(s) | |||
Executive Officers and Employee Director: | |||||
Michael Cammarata | 37 | President and Chief Executive Officer, Director | |||
Raymond Silcock | 72 | Chief Financial Officer | |||
John S. Wirt | 59 | Executive Vice President, Legal & Business Affairs (Chief Legal Officer) | |||
Non-Employee Directors: | |||||
Julie Phillips | 40 | Chairperson of the Board | |||
Joseph Buaron | 41 | Director | |||
Michael | 46 | Director | |||
Ronald Denis | 70 | Director | |||
Philip Sanford | 69 | Director |
Executive Officers
Michael Cammarata was appointed as President, Chief Executive Officer and a director of Neptune on July 8, 2019. He invested in and cofounded Schmidt’s Naturals, one of the world’s fastest growing wellness brands, leading it from fledgling start-up to acquisition in 2017 by Unilever and onto record breaking growth in 2018. He remained CEO of Schmidt’s Naturals until June 2019, leading its rapid expansion into new and innovative products, retailers and global markets. Mr. Cammarata is a new breed of unconventional CEO with a personal mission to invest and scale companies globally that will make sustainable innovation and modern wellness solutions accessible to the world. He believes that natural products are the future and that every person deserves natural products that work and minimize their harm to people, the planet and animals. Through all his investments, Mr. Cammarata is looking toward future technologies, including AI and machine learning, to create stronger connections and personalized products for customers. He is a passionate advocate for ending animal testing in cosmetics. Raised in New York, Mr. Cammarata’s dyslexia made school challenging, but that perspective allowed him to identify opportunities others missed. We believe that Mr. Cammarata is qualified to serve as a member of our board of directors based on the perspective and experience he brings as our President and Chief Executive Officer.
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Raymond Silcock was named Chief Financial Officer in July 2022. Prior to joining Neptune, Mr. Silcock served as Executive Vice President and Chief Financial Officer of Perrigo Company PLC from March 2019, Chief Financial Officer at INW Holdings from 2018 to 2019 and as Executive Vice President and Chief Financial Officer of CTI Foods from 2016 to 2018. In March 2019, CTI Foods filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code in U.S. Bankruptcy Court in Delaware. From 2013 until the company’s sale in 2016, Mr. Silcock was Executive Vice President and Chief Financial Officer of Diamond Foods, Inc. and previously held Chief Financial Officer roles at UST, Inc., Swift & Co. and Cott Corporation. He also served on the board of Pinnacle Foods Inc. from 2008 until the company was sold in 2018. His early career was highlighted by an 18-year tenure in positions of increasing responsibility at Campbell Soup Company. Mr. Silcock is a Fellow of the Chartered Institute of Management Accountants (UK).
John S. Wirt became Chief Legal Officer, Executive Vice President of Legal and Business Affairs, and General Counsel of Neptune in August 2021. Prior to joining Neptune, Mr. Wirt served as the President of Epic Sports & Entertainment, Inc. from 2018 and the CEO of Square Ring, Inc. from 2008, both companies engaged in the sports and entertainment industries. He has also served as the President of the law firm of Wirt & Wirt, P.A.
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since 2014. Mr. Wirt is an AV-rated Martindale Hubble Martindale-Hubbell attorney who has been practicing law for over thirty years. Mr. Wirt began his legal career as an associate at Jenner & Block and followed that as an associate at Sidley & Austin. He earned his B.A., graduating magna cum laude from Knox College in 1985. In 1986, he received his CPA certificate from the University of Illinois, and in 1989, he graduated with honors from the University of Illinois, where he earned his Jurisprudence degree. Mr. Wirt’s previous business experience includes serving on the Board of Directors for Interactive Television Networks, a NASDAQNasdaq listed public company, where he also served as Chair of the Audit Committee. He presently serves as a director of Epic Sports, Square Ring, Wirt & Wirt, and tmc Content Group AG, a publicly-traded Swiss corporation involved in the motion picture and video industries.
Non-Employee Directors
Julie Phillips has been a director of Neptune since August 2021. She currently serves as Chief Operating Officer and Chief Creative Officer for Blackhall, a new streaming video on demand service, launching in 2024. Prior, she served as Vice President for Herschend Entertainment Studios, the media and franchise arm of Herschend Enterprises, which owns, operates and manages family-oriented themtheme parks, aquariums, attractions and hospitality properties in the United States in Canada, where she had held this and prior roles since 2013. Ms. Phillips also has served since April 2019 as a member of the Board of Directors of the Lane Thomas Foundation, which is dedicated to supporting families of children needing life-saving organ transplants. Previously, she served as a business development manager for Miramax and as a senior financial analyst for Raytheon (NYSE: RTX). Ms. Phillips holds an MBA from Harvard Business School and a Bachelor of Arts in Business Administration from Pepperdine University. We believe that Ms. Phillips is qualified to serve as a member of our board of directors based on her experience in marketing and her educational background.
Joseph Buaron has been a director of Neptune since April 2020. He is co-founder and CTO of goPeer, Canada’s first regulated consumer peer-to-peer lender, he additionally serves as Chief Strategy Officer to Loti Wellness Inc., a Canadian self-care consumer brand. Prior, Mr. Buaron served as CTO of Schmidt’s Naturals, where he led the technology, AI, digital marketing and consumer support divisions through transition from start-up to enterprise, and subsequently through the acquisition by Unilever, and the integration that followed. Mr. Buaron is a seasoned CTO with over two-decades related experience as an entrepreneur, investor, programmer, solutions architect, and DevOps engineer. His passion for technology reflects his recognition for the tremendous impact it has on our lives and its potential for creating a better tomorrow. Immersed in technology, Mr. Buaron strives to provide vision, leadership, form relationships, and eliminate barriers to allow the brightest minds to flourish. We believe that Mr. Buaron is qualified to serve on our board of directors due to his experience as a leader in technology roles.
Michael De Geus has been a director of Neptune since April 2020. He is a highly accomplished security executive with domestic and international cyber investigative and physical security experience. He is the founder and Chief Executive Officer of Leatherback Gear, LLC., a producer of bullet proof backpacks. He also served as a Special Agent in federal law enforcement with the Department of Homeland Security and has served on various assignments both physically and with cyber security since 2008. Previously, he served as the Director of Sales at Koro Sun Resort in the Fiji Islands and as a consultant for MD Consulting, working on various projects from developing branding and new store layouts to helping with various start-up companies. Mr. De Geus is a Ph.D. Candidate in Public Policy specializing in Homeland Security at Walden University, holds a Master of Science in International Relations from Troy State University and holds a Bachelor of Science in Criminal Justice from California State University Fullerton. We believe that Mr. De Geus is qualified to serve on our board of directors due to his management and leadership experience.
Ronald Denis has been a director of Neptune since January 2001. He has been Chief of Surgery and director of the Trauma Program at Hôpital du Sacré-Coeur in Montréal since 1997. Also, since 1987, Dr. Denis has occupied the position of medical co-director of the Canadian Formula 1 Grand Prix. Dr. Denis sits on several scientific boards and management committees. We believe that Dr. Denis is qualified to serve on our board of directors because of his extensive scientific experience.
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Philip Sanford has been a director of Neptune since May 2022. He previously served on the executive team at N3 LLC, a global technology-enabled inside sales organization that was acquired by Accenture in 2020. He has advised a number of leading private equity firms and investment banks on mergers and acquisitions and going-private transactions in the consumer sector, including Bain Capital, Carlyle, Moelis, Blackstone, Kelso, Mid-Ocean Partners, Morgan Stanley Private Equity and Morgan Stanley Expansion Capital. He currently serves on the Advisory Board of Morgan Stanley Expansion Capital Funds, as well as the Boards of Ecentria, CMX and Image Skincare and formerly served as Chairman of the Board of Sprout Organics. Mr. Sanford has previously served on the Boards of Chattem, Inc and Caribou Coffee. He holds a Bachelor of Science degree in Finance, Economics and Philosophy from Austin Peay State University in Clarksville, Tenn. We believe that Mr. Sanford is qualified to serve on our board of directors due to his business and leadership experience, merger and acquisition experience, and extensive financial, accounting and governance knowledge.
Legal Proceedings with Directors or Executive Officers
There are no legal proceedings related to any of our directors or executive officers that require disclosure pursuant to Items 103 or 401(f) of Regulation S-K.
Family Relationships
There are no family relationships between or among any of our directors or executive officers. There is no arrangement or understanding between any of our directors and any other person or persons pursuant to which he or she is to be selected as a director.
Board Leadership Structure and Board’s Role in Risk Oversight
Ms. Phillips is the current chairperson of the board of directors. We believe that separating the positions of Chief Executive Officer and chairperson of the board of directors allows our Chief Executive Officer to focus on our day-to-day business, while allowing a chairperson of the board of directors to lead the board of directors in its fundamental role of providing advice to and independent oversight of management. Our board of directors recognizes the time, effort and energy that the Chief Executive Officer is required to devote to his position in the current business environment, as well as the commitment required to serve as our chairperson, particularly as the board of directors’ oversight responsibilities continue to grow. While our bylaws and corporate governance guidelines do not require that our chairperson and Chief Executive Officer positions be separate, our board of directors believes that having separate positions is the appropriate leadership structure for us at this time and demonstrates our commitment to good corporate governance.
Risk is inherent to every business, and how well a business manages risk can ultimately determine its success. We face a number of risks, including risks relating to our financial condition, development and commercialization activities, operations, strategic direction, and intellectual property. Management is responsible for the day-to-day management of risks we face, while our board of directors, as a whole and through its committees, has responsibility for the oversight of risk management. In its risk oversight role, our board of directors has the responsibility to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed.
The role of the board of directors in overseeing the management of our risks is conducted primarily through committees of the board of directors, as disclosed in the descriptions of each of the committees below and in the charters of each of the committees. The full board of directors (or the appropriate board of directors committee in the case of risks that are under the purview of a particular committee) discusses with management our major risk exposures, their potential impact on us, and the steps we take to manage them. When a board of directors committee is responsible for evaluating and overseeing the management of a particular risk or risks, the chairperson of the relevant committee reports on the discussion to the full board of directors during the
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committee reports portion of the next board meeting. This enables the board of directors and its committees to coordinate the risk oversight role, particularly with respect to risk interrelationships.
Information Regarding Committees of the Board
Our board of directors has established an audit committee, a compensation and human resources committee, a nominating committee, and a governance committee. Each of the audit committee, compensation committee, and nominating and corporate governance committee operates under a charter that satisfies the applicable standards of the SEC and Nasdaq. A current copy of the charter for each of the audit committee, compensation committee, nominating and corporate governance committee, and research and development committee is posted on the corporate governance section of our website, http:https://ir.checkmatepharma.com/corporate-governance/documents-and-charters.www.investors.neptunewellness.com/governance/governance-documents/default.aspx.
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EXECUTIVE COMPENSATION
The information in this section summarizes the compensation earned by our executive officers.
Our named executive officers for the year ended March 31, 2022,2023, which consist of our principal executive officer, up to two other most highly compensated executive officers who were serving as executive officers as of March 31, 20222023 and up to two additional individuals who would have been another most highly compensated executive officer but for the fact that such individual was not serving as an executive officer as of March 31, 2022,2023, are:
Michael Cammarata, our President and Chief Executive Officer;
Randy Weaver, our former Interim Chief Financial Officer*;
John S. Wirt, our Executive Vice President, Legal & Business Affairs (Chief Legal Officer and General Counsel); and
Toni Rinow, our former Chief Financial Officer and Chief Operating Officer**.
● | Michael Cammarata, our President and Chief Executive Officer; |
● | Raymond Silcock, our Chief Financial Officer; |
● | John S. Wirt, our Executive Vice President, Legal & Business Affairs (Chief Legal Officer and General Counsel); and |
● | Randy Weaver, our former Interim Chief Financial Officer*. |
* | Mr. Weaver left the Company on July 25, 2022. |
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20222023 Summary Compensation Table
The following table presents the compensation awarded to, earned by or paid to each of our named executive officers for the years indicated.
Year | Salary ($) | Bonus ($) | Stock Awards ($)(1) | Option Awards ($)(1) | All Other Compensation ($) | Total ($) | ||||||||||||||||||||||
Michael Cammarata | ||||||||||||||||||||||||||||
President and Chief Executive Officer | 2022 | 1,103,628 | 750,000 | 1,252,600 | (2) | — | 58,612 | (3) | 3,164,840 | |||||||||||||||||||
2021 | 1,083,333 | 750,000 | 2,762,841 | (2) | 1,966,117 | (2) | 1,500,000 | (2) | 8,062,291 | |||||||||||||||||||
Randy Weaver(4) | ||||||||||||||||||||||||||||
Former Interim Chief Financial Officer | 2022 | 144,000 | — | — | 273,386 | — | 417,386 | |||||||||||||||||||||
2021 | — | — | — | — | — | — | ||||||||||||||||||||||
John S. Wirt | ||||||||||||||||||||||||||||
Executive Vice President, Legal & Business Affairs | 2022 | 373,653 | — | — | 978,453 | — | 1,352,106 | |||||||||||||||||||||
Chief Legal Officer and General Counsel | 2021 | — | — | — | — | — | — | |||||||||||||||||||||
Toni Rinow(5) | ||||||||||||||||||||||||||||
Former Chief Financial Officer and | 2022 | 612,237 | (6) | — | — | — | — | 612,237 | ||||||||||||||||||||
Chief Operating Officer | 2021 | 292,979 | 135,260 | — | 628,063 | — | 1,056,302 |
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| Option |
| All Other |
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Salary | Bonus | Awards | Awards | Compensation | Total | |||||||||
Year | ($) | ($) | ($)(1) | ($)(1) | ($) | ($) | ||||||||
Michael Cammarata |
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President and Chief Executive Officer |
| 2023 |
| 1,050,000 | | — | | 1,512,542 | (2) | — | | 14,730 | (3) | 2,577,272 |
| 2022 |
| 1,103,628 | 750,000 |
| 1,252,600 | (2) | — |
| 58,612 | (3) | 3,164,840 | ||
| | | | | | | | | | | | | | |
Raymond Silcock(4) |
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Chief Financial Officer |
| 2023 |
| 392,308 | | — | | — | | 119,721 | | 125 | | 512,154 |
| | 2022 | | — | | — | | — | | — | | — | | — |
John S. Wirt |
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Executive Vice President, Legal & Business Affairs |
| 2023 |
| 600,000 | | | | — | | — | | 24,192 | | 624,192 |
Chief Legal Officer and General Counsel | | 2022 | | 373,653 | | — | | — | | 978,453 | | — | | 1,352,106 |
| | | | | | | | | | | | | | |
Randy Weaver(5) |
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Former Interim Chief Financial Officer |
| 2023 |
| — | | — | | — | | — | | — | | — |
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| 2022 |
| — |
| — |
| — |
| 273,386 |
| — |
| 417,386 |
(1) | The amounts in these columns represent the aggregate grant date fair value of the awards computed in accordance with Financial Accounting Standards Board (“ |
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(2) | Represents compensation in lieu of additional |
(3) | All Other Compensation for Mr. Cammarata includes contributions to Mr. Cammarata’s account under retirement plans, country club dues, premiums on group term life insurance, and occasional use of his Company-provided assistant for personal reasons. |
(4) | Mr. Raymond Silcock replaced Mr. Weaver as Chief Financial Officer on July 25, 2022. |
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(5) | Mr. Weaver was appointed Interim Chief Financial Officer on September 27, 2021 and was replaced by Mr. Raymond Silcock on July 25, 2022. |
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Narrative Disclosure to Summary Compensation Table
Our board of directors and compensation committee review compensation annually for our chief executive officer and his direct reports. In setting executive base salaries and bonuses, and granting equity incentive awards, board of directors or compensation committee considers compensation for comparable positions in the market, the historical compensation levels of our executives, individual performance as compared to our expectations and objectives, our desire to motivate our employees to achieve short-and long-term results that are in the best interests of our shareholders, and a long-term commitment to our Company. We target a generally competitive position, based on independent third-party benchmark analytics to inform the mix of compensation of base salary, bonus or long-term incentives.
Our board of directors has historically determined our executives’ compensation. Our compensation committee typically reviews and discusses management’s proposed compensation with the chief executive officer for all of his direct reports. Based on those discussions and its discretion, taking into account the factors noted above, the compensation committee determines the compensation for each executive officer other than the chief executive officer. Our board of directors discusses the compensation committee’s recommendations and ultimately approves the compensation of our chief executive officer without the chief executive officer and chief financial officer present.
Annual base salary
Each named executive officer’s base salary is a fixed component of annual compensation for performing specific duties and functions and has been established by our board of directors taking into account each individual’s role, responsibilities, skills, and experience. Base salaries for our named executive officers are reviewed annually by our compensation committee, typically in connection with our annual performance review process, and adjusted from time to time, based on the recommendation of the compensation committee, to realign salaries with market levels after taking into account individual responsibilities, performance, and experience. The base salary of each named executive officer is noted below for fiscal 2022:2023:
| | |||
| 2023 Base | |||
Name | Salary | |||
Michael Cammarata | $ | 1,050,000 | | |
John S. Wirt | $ | 600,000 | | |
Raymond Silcock | $ | 600,000 | |
Name | 2022 Base Salary | |||
Michael Cammarata | $ | 1,050,000 | ||
John S. Wirt | $ | 600,000 | ||
Toni Rinow | $ | 338,602 |
Mr. Weaver did not earn a base salary as he provided services as Interim Chief Financial Officer pursuant to an independent contractor agreement, as discussed further below.
Bonuses
For the year ended March 31, 2022, Mr. Cammarata was awarded an annual bonus of $750,000. No annual bonuses were paid to our other named executive officers and except as discussed below, none of our named executive officers received any non-equity incentive compensation.
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On September 9, 2021, our board of directors approved the payment to Mr. Cammarata of (i) a cash retention bonus of $750,000 for fiscal year 2022.
Long-term equity incentives
Our equity grant program is intended to align the interests of our named executive officers with those of our shareholders and to motivate them to make important contributions to our performance. In fiscal 2022,2023, we did not grant any long-term equity incentive awards to our named executive officers, with the exception of inducement grants.
Employment and Severance Agreements
Michael Cammarata
The Company entered into an agreement with Mr. Cammarata on July 8, 2019 in connection with his appointment as the President and Chief Executive Officer of the Company (the “Cammarata“Cammarata Employment Agreement”Agreement”). The Cammarata Employment Agreement
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provided for an initial annual base salary of $1 million, an annual target bonus opportunity of at least 75% of his base salary, inducement equity incentive awards granted in the form of options and restricted share units, and a one-time cash award of $15 million payable only when the Corporation’sCompany’s United States market capitalization based on the 30 day volume weighted average trading price of the Common Shares on Nasdaq is at least $1 billion (the “LTIP Award”“LTIP Award”). His employment agreement contains a 12 month post-employment non-compete covenant and 18 month post-employment customer and employee non-solicit covenants.
The Cammarata Employment Agreement further provides that the Company must maintain certain levels of directors’ and officers’ liability insurance. For fiscal 2020 and 2021, in light of the expense associated with obtaining this coverage, Mr. Cammarata received (i) in fiscal 2020, $1.5 million in cash and 49,954 RSUs, each representing a right to receive one (1) Common Share, and 47,094 options to purchase Common Shares of the Corporation,Company, and (ii) in fiscal 2021, 87,290 RSUs. Mr. Cammarata and the Company signed an amendment to the Cammarata Employment Agreement providing that Mr. Cammarata shall be issued an aggregate of 523,740 RSUs, including the 87,290 RSUs issued in fiscal 2021, in connection with this requirement. Subsequent to the end of fiscal 2021, the Company obtained the required directors’ and officers’ liability coverage.
Mr. Cammarata’s employment may be terminated at any time and for any reason. If Mr. Cammarata’s employment is terminated by the Company without Cause or by Mr. Cammarata for Good Reason, as those terms are defined in the Cammarata Employment Agreement, Mr. Cammarata will, subject to certain conditions, be entitled to (a) an amount equal to (i) 18 months of his then-current base salary; and (ii) one-half times his then current target bonus, payable in substantially equal installments for 18 months, (b) a pro-rated bonus equal to the then-current target bonus for the year in which Mr. Cammarata’s employment was terminated, (c) a lump-sum payment equal to 18 months’ premiums for health coverage, (d) the continued vesting of all of Mr. Cammarata’s unvested equity awards for 18 months and the continued exercisability of all stock options for the remainder of their full term, and (e) continued eligibility for the LTIP Award for 18 months following the date of termination if the conditions of such LTIP Award is met in such period.
Upon a Change in Control (as such term is defined in the Equity Incentive Plan), Mr. Cammarata will be entitled to (a) payment of the LTIP award, if the condition to such award has been met based on the implied valuation under the Change in Control Transaction, and (b) (i) vesting of all unvested equity awards, and (ii) all stock options that have vested shall remain exercisable for the remainder of their full term, in any event only for equity awards that constitute deferred compensation within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended if the Change of Control constitutes a “change of control event” within the meaning of Treasury Regulation section 1.409A-3(i)(5)(i). In the event Mr. Cammarata’s employment is terminated within 24 months following a Change in Control (as defined in the Equity Incentive Plan), Mr. Cammarata will be
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entitled to (a) an amount equal to the sum of (i) 24 months of his then-current base salary, (ii) two (2) times his then-current target bonus, and (iii) a pro-rated bonus equal to the then current target bonus for the year in which he is terminated, payable as a lump sum, and (b) a lump-sum payment equal to 18 months’ premiums for health coverage.
Raymond Silcock
The Company entered into an agreement with Mr. Silcock on June 13, 2022 in connection with his appointment as Chief Financial Officer (the “Silcock Employment Agreement”). The Silcock Employment Agreement provided for an initial annual base salary of $600,000, an annual target bonus opportunity of approximately 75% of his base salary, subject to targets set by the board of directors, and an inducement grant of options to purchase 114,286 common shares of the Company. His employment agreement contains a 12 month post-employment non-compete and customer and employee non-solicit covenants.
Mr. Silcock’s employment may be terminated at any time and for any reason. If Mr. Silcock’s employment is terminated by the Company without Cause, as that term is defined in the Silcock Employment Agreement, Mr. Silcock will, subject to certain conditions, be entitled to (a) an amount equal to (i) 12 months of his then-current base salary; and (ii) any unpaid bonus for the immediately prior year, based on actual performance and payable when others are paid, and (b) reimbursement of COBRA premiums for health coverage. Upon a termination in anticipation of or on or following a “Change in Control”, Mr. Silcock will be entitled to 18 months of his then-current base salary.
John S. Wirt
The Company entered into an agreement with Mr. Wirt on August 10, 2021 in connection with his appointment as Executive Vice President, Legal & Business Affairs (Chief Legal Officer and General Counsel) (the “Wirt Employment Agreement”). The Wirt Employment Agreement provided for an initial annual base salary of $600,000, an annual target bonus opportunity of approximately 75% of his base salary, subject to targets set by the board of directors, and an inducement grant of options to purchase 85,715 common
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shares of the Company. His employment agreement contains a 12 month post-employment non-compete and customer and employee non-solicit covenants.
Mr. Wirt’s employment may be terminated at any time and for any reason. If Mr. Wirt’s employment is terminated by the Company without Cause, as that term is defined in the Wirt Employment Agreement, Mr. Wirt will, subject to certain conditions, be entitled to (a) an amount equal to (i) 12 months of his then-current base salary; and (ii) any unpaid bonus for the immediately prior year, based on actual performance and payable when others are paid, and (b) reimbursement of COBRA premiums for health coverage. Upon a termination in anticipation of or on or following a “Change in Control”, Mr. Wirt will be entitled to 18 months of his then-current base salary.
Randy Weaver
The Company entered into an interim services agreement with CSuite Financial Partners (“CSuite”CSuite”) on September 23, 2021 (the “Weaver“Weaver Services Agreement”Agreement”), pursuant to which Mr. Weaver, a resource of CSuite, was engaged as Interim Chief Financial Officer of the Company. The Weaver Services Agreement provided that CSuite would be paid a monthly fee of $40,000 for the services, and that the Weaver Services Agreement could be terminated upon at least five days’ written notice. Mr. Weaver’s services were terminated as of July 25, 2022.
John S. Wirt
The Company entered into an agreement with Mr. Wirt on August 10, 2021 in connection with his appointment as Executive Vice President, Legal & Business Affairs (Chief Legal Officer and General Counsel) (the “Wirt Employment Agreement”). The Wirt Employment Agreement provided for an initial annual base salary of $600,000, an annual target bonus opportunity of approximately 75% of his base salary, subject to targets set by the board of directors, and an inducement grant of options to purchase 85,715 common shares of the Company. His employment agreement contains a 12 month post-employment non-compete and customer and employee non-solicit covenants.
Mr. Wirt’s employment may be terminated at any time and for any reason. If Mr. Wirt’s employment is terminated by the Company without Cause, as that term is defined in the Wirt Employment Agreement, Mr. Wirt will, subject to certain conditions, be entitled to (a) an amount equal to (i) 12 months of his then-current base salary; and (ii) any unpaid bonus for the immediately prior year, based on actual performance and payable when others are paid, and (b) reimbursement of COBRA premiums for health coverage. Upon a termination in anticipation of or on or following a “Change in Control”, Mr. Wirt will be entitled to 18 months of his then-current base salary.
Toni Rinow
Effective as of November 15, 2021, we entered into a separation agreement (the “Separation Agreement”) with Dr. Rinow in connection with her departure from the Company in her role as Chief Operating Officer of the Company. Pursuant to the Separation Agreement, Dr. Rinow was entitled to receive (i) an amount equal to 26 weeks of her base salary, payable as salary continuation over such period, (ii) reimbursement of the cost of private benefits coverage up to the earlier of 26 weeks or upon her acceptance of employment with another company and (iii) all accrued salary and vacation days. The Separation Agreement also contains a reaffirmation of Dr. Rinow’s confidentiality and non-solicitation obligations to the Company and a general release of claims by Dr. Rinow.
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Outstanding Equity Awards at Fiscal Year End
The following table presents information regarding all outstanding common share awards and options to purchase common shares held by each of our named executive officers as of March 31, 2022.2023.
Option awards | Share awards | |||||||||||||||||||||||||||||||
Name | Grant Date | Number of securities underlying unexercised options (#) exercisable | Number of unexercisable | Number of securities underlying unexercised unearned options (#) | Option exercise price per share ($) | Option expiration date | Number of shares or units of stock that have not vested (#) | Market value of shares or units of stock that have not vested(1) ($) | ||||||||||||||||||||||||
Michael Cammarata | 7/8/2019 | (2) | 5,239 | 477 | 155.05 | 7/8/2029 | — | — | ||||||||||||||||||||||||
7/8/2019 | (3) | 21,429 | — | 235,715 | 155.05 | 7/8/2029 | — | — | ||||||||||||||||||||||||
7/8/2019 | (2) | — | — | — | — | — | 6,667 | 51,336 | ||||||||||||||||||||||||
12/16/2020 | (2) | 20,674 | 26,163 | — | 55.65 | 12/16/2030 | — | — | ||||||||||||||||||||||||
Randy Weaver | 2/14/2022 | (4) | — | 14,286 | 28,572 | 10.50 | 2/14/2027 | — | — | |||||||||||||||||||||||
John S. Wirt | 8/13/2021 | (5) | 28,572 | 57,143 | — | 25.55 | 8/13/2026 | — | — |
Option awards | Share awards | |||||||||||||||
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Number of | Number of | value of | ||||||||||||||
Number of | Number of | securities | shares or | shares or | ||||||||||||
securities | securities | underlying | Option | units of | units of | |||||||||||
underlying | underlying | unexercised | exercise | stock that | stock that | |||||||||||
unexercised | unexercised | unearned | price per | Option | have not | have not | ||||||||||
options (#) | options (#) | options | share | expiration | vested | vested(1) | ||||||||||
Name | Grant Date | exercisable | unexercisable | (#) | ($) | date | (#) | ($) | ||||||||
Michael Cammarata |
| 7/8/2019 | (2) | 5,715 |
| — |
|
| 155.05 |
| 7/8/2029 |
| — |
| — | |
| 7/8/2019 | (3) | 21,429 |
| — |
| 235,715 |
| 155.05 |
| 7/8/2029 |
| — |
| — | |
| 12/16/2020 | (2) | 36,627 |
| 10,467 |
| — |
| 55.65 |
| 12/16/2030 |
| — |
| — | |
Raymond Silcock | 8/18/2022 | (4) | 28,572 | 85,714 | — | 1.55 | 8/18/2027 |
| — |
| — | |||||
John S. Wirt |
| 8/13/2021 | (5) | 57,144 |
| 28,571 |
| — |
| 25.55 |
| 8/13/2026 |
| — |
| — |
(1) | Represents the market value of the unvested shares underlying the share awards as of March 31, |
(2) | Vests in equal monthly installments over three years, subject to the terms, conditions and restrictions of the award agreement governing the grant. |
(3) | Vest in accordance with market-based performance criteria, subject to the terms, conditions and restrictions of the award agreement governing the grant. |
(4) | Vests |
(5) | Vests in equal annual installments over three years, with the first tranche vesting on the date of grant, subject to the terms, conditions and restrictions of the award agreement governing the grant. |
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Non-Employee Director Compensation
Effective July 21, 2021, our board of directors approved an amended non-employee director compensation policy. Pursuant to such policy, our non-employee directors were paid the following amounts for the year ended March 31, 20222023 (prorated for service for a partial year): (i) CDN$100,000 per year to the chairperson of the board; (ii) CDN$50,000 per year to each other non-employee director; (iii) an additional CDN$10,000 per year to the chairperson of the each committee (other than the Audit Committee); (iv) an additional CDN$25,000 per year to the chairperson of the audit committee; and (iv) an additional CDN$10,000 per year to each member of a committee (per committee).
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The following table sets forth summary information concerning compensation paid or accrued to the members of our Boardboard of Directorsdirectors for services rendered to us for the fiscal year ended March 31, 2022.2023.
Name(1) | Fees Earned or Paid in Cash ($) | Option Awards ($)(2) | Stock Awards ($)(2)(3) | All Other Compensation ($) | Total ($) | |||||||||||||||
Joseph Buaron | 67,830 | — | 18,841 | — | 86,671 | |||||||||||||||
Michael De Geus | 35,910 | — | 18,841 | — | 54,751 | |||||||||||||||
Ronald Denis | 60,648 | — | — | — | 60,648 | |||||||||||||||
John Moretz(4) | 127,680 | — | — | — | 127,680 | |||||||||||||||
Jane Pemberton(5) | 21,945 | — | — | — | 21,945 | |||||||||||||||
Frank Rochon(5) | 34,912 | — | — | — | 34,912 | |||||||||||||||
Richard Schottenfeld(6) | 7,980 | — | — | — | 7,980 | |||||||||||||||
Julie Phillips(7) | 61,845 | 15,329 | 18,841 | — | 96,015 |
| Fees |
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Earned | ||||||||||
or Paid | Option | Stock | All Other | |||||||
in Cash | Awards | Awards | Compensation | Total | ||||||
Name(1) | ($) | ($)(2) | ($)(2) | ($) | ($) | |||||
Joseph Buaron |
| 48,029 | | — | | — | | — | | 48,029 |
Michael De Geus |
| 45,258 | | — | | — | | — | | 45,258 |
Ronald Denis |
| 59,112 | | — | | — | | — | | 59,112 |
Philip Sanford(3) |
| 70,196 | | 1,497 | | — | | — | | 71,693 |
Julie Phillips |
| 114,530 | | — | | — | | — | | 114,530 |
(1) | Michael Cammarata, our President and Chief Executive Officer and one of our named executive officers, is not included in this table as he is an employee of ours and therefore receives no compensation for his service as a director. Mr. Cammarata’s compensation is included in the section entitled “Summary Compensation Table” of this prospectus above. |
(2) | The amounts in these columns represent the aggregate grant date fair value of the awards computed in accordance with FASB ASC Topic 718. Assumptions used in the calculation of these amounts are included in Note 16 to our consolidated financial statements included in this prospectus. These amounts do not reflect the actual economic value that will be realized by the director upon the vesting of the awards or the sale of the common shares underlying such awards. |
(3) |
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Mr. |
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Compensation Committee Interlocks and Insider Participation
None of our executive officers serve, or have served during the last fiscal year, as a member of the board of directors, compensation committee, or other board committee performing equivalent functions of any other entity that has one or more executive officers serving as one of our directors or on our compensation committee.
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DESCRIPTION OF THE REGISTRANT’S SECURITIES TO BE REGISTERED
DESCRIPTION OF COMMON SHARES AND PREFERRED SHARESDescription of Common Shares, Preferred Shares and Warrants
The authorized share capital of the Company is comprised of an unlimited number of Common Shares and an unlimited number of Preferred Shares, issuable in one or more series. As permitted by the by-laws, in accordance with its articles of incorporation, the Company created the “Series A Preferred Shares”, which are non-voting shares. The Company is offering an aggregate of 7,267,114up to [●] Common Shares which underlyand up to [●] Common Warrants. [We are also offering up [●] to Pre-Funded Warrants to those purchasers whose purchase of Common Shares in this offering would result in the Warrants.purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding Common Shares, or as such purchaser shall otherwise elect, following the consummation of this offering in lieu of the Common Shares that would result in such excess ownership.]
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Common Shares
Voting Rights
Each Common Share entitles its holder to receive notice of, and to attend and vote at, all annual or special meetings of the shareholders of the Company. Each Common Share entitles its holder to one vote at any meeting of the shareholders, other than meetings at which only the holders of a particular class or series of shares are entitled to vote due to statutory provisions or the specific attributes of this class or series.
Dividends
Subject to the prior rights of the holders of Preferred Shares ranking before the Common Share as to dividends, the holders of Common Shares are entitled to receive dividends as declared by the board of directors of the Company from the Company’s funds that are duly available for the payment of dividends.
Winding-up and Dissolution
In the event of the Company’s voluntary or involuntary winding-up or dissolution, or any other distribution of the Company’s assets among its shareholders for the purposes of winding up its affairs, the holders of Common Shares shall be entitled to receive, after payment by the Company to the holders of Preferred Shares ranking prior to Common Shares regarding the distribution of the Company’s assets in the case of winding-up or dissolution, share for share, the remainder of the property of the Company, with neither preference nor distinction.
The foregoing description of the terms of the Common Shares does not purport to be complete and is subject to and qualified in its entirety by reference to the articles and general by-laws of the Company, each of which is attached hereto as an exhibit.
Preferred Shares
The Preferred Shares carry no voting rights. Preferred Shares may be issued at any time, in one or more series. The Company’s board of directors has the power to set the number of Preferred Shares and the consideration per share, as well as to determine the provisions attaching to each series of Preferred Shares (including dividends, redemption rights and conversion rights, where applicable). The shares in each series of Preferred Shares rank prior to the Common Shares of the Company with regard to payment of dividends, reimbursement of capital and division of assets in the event of the Company winding-up or dissolution. The holders of Preferred Shares shall not be entitled to receive notice of, or to attend or vote at the meetings of the shareholders, except: (i) in the event of a separate meeting or vote by class or by series as specified by law, (ii) where entitled to vote by class or series on amendments to the attributes attaching to the class or series, or (iii) where applicable, in the event of the Company’s omission to pay the number of periodical dividends, whether consecutive or not, as applicable to any series.
The board of directors of the Company has passed a by-law creating the Series A Preferred Shares. Series A Preferred Shares may be issued only as part of an acquisition by the Company of other companies or material
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assets. Series A Preferred Shares are non-voting, and entitle holders thereof to a fixed, preferential and non-cumulative annual dividend of 5% of the amount paid for the said shares.
As of the date of this prospectus, there are no Preferred Shares outstanding.
The foregoing description of the terms of the Preferred Shares does not purport to be complete and is subject to and qualified in its entirety by reference to the articles and general by-laws of the Company, each of which is attached hereto as an exhibit.
[Pre-Funded Warrants
The Pre-Funded Warrants issued under the offering will be issued in certificated form. The following description is subject to the detailed provisions of the form of certificate for the Pre-Funded Warrants (the “Pre-Funded Warrant Certificate”). Reference should be made to the Pre-Funded Warrant Certificate for the full text of attributes of the Pre-Funded Warrants.
Each whole Pre-Funded Warrant will entitle the holder to acquire, subject to adjustment as summarized below, one Pre-Funded Warrant Share at any time until the Pre-Funded Warrants are exercised in full. The exercise price will be pre-funded except for a nominal exercise price of US$0.0001 per Pre-Funded Warrant. The Pre-Funded Warrants will be exercisable, at the option of the holder, in whole or in
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part, by delivering to the Company a duly executed notice of exercise, thereby canceling all or a portion of such holder’s Pre-Funded Warrants. The Pre-Funded Warrants may be exercised on a “net” or “cashless” basis at any time.
The Pre-Funded Warrant Certificate will provide that the number of underlying Pre-Funded Warrant Shares and exercise price of the Pre-Funded Warrants will be subject to adjustment in the event of certain share dividends or distributions or of a subdivision or consolidation of the common shares or similar events.
The Pre-Funded Warrant Certificate will also provide that, during the period in which the Pre-Funded Warrants are exercisable, it will give notice to holders of Pre-Funded Warrants of certain stated events, at least 5 days prior to the record date or effective date, as the case may be, of such events.
In connection with certain specified mergers, sales, business combinations, recapitalizations or similar events (a “Fundamental Transaction”), holders of the Pre-Funded Warrants will have the right to receive, upon exercise, the same consideration as holders of common shares in respect of the Pre-Funded Warrant Shares that would be issuable upon exercise of the Pre-Funded Warrants immediately prior to such Fundamental Transaction, in addition to any additional consideration receivable by holders of common shares in connection with such Fundamental Transaction.
There is currently no market through which the Pre-Funded Warrants may be sold, and Purchasers may not be able to resell the Pre-Funded Warrants purchased under this prospectus. The Pre-Funded Warrant Certificate will also contain restrictions on the number of Pre-Funded Warrant Shares that may be acquired by the holder of Pre-Funded Warrants upon any exercise of the Pre-Funded Warrants that would result in the holder and its affiliates holding in excess of 9.99% of the number of common shares outstanding immediately after giving effect to the issuance of common shares upon exercise of such Pre-Funded Warrants, which beneficial ownership limitation may be increased or decreased up to 9.99% upon notice to us, provided that any increase in the beneficial ownership limitation shall not be effective until 61 days following notice to us. No fractional Pre-Funded Warrant Shares will be issuable upon the exercise of any Pre-Funded Warrants. Holders of Pre-Funded Warrants will not have any voting or pre-emptive rights or any other rights which a holder of common shares would have, except as set forth in the Pre-Funded Warrants.]
Common Warrants
The following is a summary of certain terms and provisions of the Common Warrants that are being offered hereby is not complete and is subject to, and qualified in its entirety by, the provisions of the Common Warrant, the form of which will be filed as an exhibit to the registration statement of which this prospectus forms a part. Prospective investors should carefully review the terms and provisions of the form of Common Warrant for a complete description of the terms and conditions of the Common Warrants.
Duration and Exercise Price
Each Common Warrant offered hereby will have an exercise price equal to $[●]. The Common Warrants will be immediately exercisable and may be exercised until the five-year anniversary of the issuance date. The exercise price and number of Common Shares upon exercise is subject to appropriate adjustment in the event of share dividends, share splits, reorganizations or similar events affecting our Common Shares and the exercise price. The Common Warrants will be issued separately from the Common Shares [or Pre-Funded Warrants, respectively], and may be transferred separately immediately thereafter. Common Warrants will be issued in certificated form only.
Exercisability
The Common Warrants will be exercisable, at the option of each holder, in whole or in part, by delivering to us a duly executed exercise notice accompanied by payment in full for the number of Common Shares purchased upon such exercise (except in the case of a cashless exercise as discussed below). A holder (together with its affiliates) may not exercise any portion of such holder’s Common Warrants to the extent that the holder would own more than 4.99% of the outstanding Common Shares immediately after exercise, except that upon at least 61 days’ prior notice from the holder to us, the holder may increase the amount of ownership of outstanding stock after exercising the holder’s Common Warrants up to 9.99% of the number of Common Shares outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Common Warrants.
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[Cashless Exercise
If, at the time a holder exercises its Common Warrants, a registration statement registering the issuance of the Common Shares underlying the Common Warrants under the Securities Act is not then effective or available for the issuance of such shares, then in lieu of making the cash payment otherwise contemplated to be made to us upon such exercise in payment of the aggregate exercise price, the holder may elect instead to receive upon such exercise (either in whole or in part) the net number of Common Shares determined according to a formula set forth in the Common Warrant.]
Fundamental Transactions
In the event of any fundamental transaction, as described in the Common Warrants and generally including any merger or consolidation with or into another entity, sale of all or substantially all of our assets, tender offer or exchange offer, or reclassification of our Common Shares, then upon any subsequent exercise of a Common Warrant, the holder will have the right to receive as alternative consideration, for each share of our Common Shares that would have been issuable upon such exercise immediately prior to the occurrence of such fundamental transaction, the number of Common Shares of the successor or acquiring corporation or of our company, if it is the surviving corporation, and any additional consideration receivable upon or as a result of such transaction by a holder of the number of Common Shares for which the Common Warrant is exercisable immediately prior to such event. Notwithstanding the foregoing, in the event of a fundamental transaction, the holders of the Common Warrants have the right to require us or a successor entity to redeem the Common Warrants for cash in the amount of the Black-Scholes Value (as defined in each Common Warrant) of the remaining unexercised portion of the Common Warrants on the date of the consummation of such fundamental transaction, concurrently with or within 30 days following the consummation of a fundamental transaction.
However, in the event of a fundamental transaction which is not in our control, including a fundamental transaction not approved by our board of directors, the holders of the Common Warrants will only be entitled to receive from us or our successor entity, as of the date of consummation of such fundamental transaction the same type or form of consideration (and in the same proportion), at the Black Scholes Value of the unexercised portion of the Common Warrant that is being offered and paid to the holders of our Common Shares in connection with the fundamental transaction, whether that consideration is in the form of cash, stock or any combination of cash and stock, or whether the holders of our Common Shares are given the choice to receive alternative forms of consideration in connection with the fundamental transaction.
Transferability
Subject to applicable laws, a Common Warrant may be transferred at the option of the holder upon surrender of the Common Warrant to us together with the appropriate instruments of transfer.
Fractional Shares
No fractional Common Shares will be issued upon the exercise of the Common Warrants. Rather, the number of Common Shares to be issued will, at our election, either be rounded up to the nearest whole number or we will pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the exercise price.
Right as a Shareholder
Except as otherwise provided in the Common Warrants or by virtue of the holder’s ownership of Common Shares, such holder of Common Warrants does not have the rights or privileges of a holder of our Common Shares, including any voting rights, until such holder exercises such holder’s Common Warrants.
Waivers and Amendments
No term of the Common Warrants may be amended or waived without the written consent of each holder of the Common Warrants purchased in this offering.
[Pre-Funded Warrants
The following summary of certain terms and provisions of the Pre-Funded Warrants that are being offered hereby is not complete and is subject to, and qualified in its entirety by, the provisions of the Pre-Funded Warrant, the form of which will be filed as an exhibit to
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the registration statement of which this prospectus forms a part. Prospective investors should carefully review the terms and provisions of the form of Pre-Funded Warrant for a complete description of the terms and conditions of the Pre-Funded Warrants.]
Duration and Exercise Price
Each Pre-Funded Warrant offered hereby will have an initial exercise price per Common Share equal to $0.0001. The Pre-Funded Warrants will be immediately exercisable and will expire when exercised in full. The exercise price and number of Common Shares issuable upon exercise is subject to appropriate adjustment in the event of share dividends, share splits, reorganizations or similar events affecting our Common Shares and the exercise price. Subject to the rules and regulations of the applicable trading market, we may at any time during the term of the Pre-Funded Warrant, subject to the prior written consent of the holders, reduce the then current exercise price to any amount and for any period of time deemed appropriate by our board of directors.
Exercisability
The Pre-Funded Warrants will be exercisable, at the option of each holder, in whole or in part, by delivering to us a duly executed exercise notice accompanied by payment in full for the number of Common Shares purchased upon such exercise (except in the case of a cashless exercise as discussed below). A holder (together with its affiliates) may not exercise any portion of the Pre-Funded Warrant to the extent that the holder would own more than 4.99% of the outstanding Common Shares immediately after exercise, except that upon at least 61 days’ prior notice from the holder to us, the holder may increase the amount of beneficial ownership of outstanding shares after exercising the holder’s Pre-Funded Warrants up to 9.99% of the number of our Common Shares outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Pre-Funded Warrants. Purchasers of Pre-Funded Warrants in this offering may also elect prior to the issuance of the Pre-Funded Warrants to have the initial exercise limitation set at 9.99% of our outstanding Common Shares.
Cashless Exercise
In lieu of making the cash payment otherwise contemplated to be made to us upon such exercise in payment of the aggregate exercise price, the holder may elect instead to receive upon such exercise (either in whole or in part) the net number of Common Shares determined according to a formula set forth in the Pre-Funded Warrants.
Fractional Shares
No fractional Common Shares will be issued upon the exercise of the Pre-Funded Warrants. Rather, at the Company’s election, the number of Common Shares to be issued will be rounded up to the nearest whole number or the Company will pay a cash adjustment in an amount equal to such fraction multiplied by the exercise price.
Transferability
Subject to applicable laws, a Pre-Funded Warrant may be transferred at the option of the holder upon surrender of the Pre-Funded Warrants to us together with the appropriate instruments of transfer.
Right as a Shareholder
Except as otherwise provided in the Pre-Funded Warrants or by virtue of such holder’s ownership of Common Shares, the holders of the Pre-Funded Warrants do not have the rights or privileges of holders of our Common Shares, including any voting rights, until they exercise their Pre-Funded Warrants. The Pre-Funded Warrants will provide that holders have the right to participate in distributions or dividends paid on our Common Shares.
Fundamental Transaction
In the event of a fundamental transaction, as described in the Pre-Funded Warrants and generally including any reorganization, recapitalization or reclassification of our Common Shares, the sale, transfer or other disposition of all or substantially all of our properties or assets, our consolidation or merger with or into another person, the acquisition of more than 50% of our outstanding securities, or any person or group becoming the beneficial owner of 50% of the voting power represented by our outstanding shares of securities, the holders of the Pre-Funded Warrants will be entitled to receive upon exercise of the Pre-Funded Warrants the kind and amount of
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securities, cash or other property that the holders would have received had they exercised the Pre-Funded Warrants immediately prior to such fundamental transaction on a net exercise basis.]
Listing of Securities
Our Common Shares are listed on the Nasdaq under the symbol “NEPT.” There is no trading market available for the Common Warrants [or Pre-Funded Warrants] on any securities exchange or nationally recognized trading system. We do not intend to list the Common Warrants [or Pre-Funded Warrants] on any securities exchange or nationally recognized trading system.
Transfer Agent and Warrant Agent
The transfer agent for our Common Shares is Computershare Investor Services Inc.
CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
99The following summarizes the principal Canadian federal income tax consequences applicable to the acquisition, holding, and disposition of Common Shares (including a Common Share issued on the exercise of a Common Warrant or a Pre-Funded Warrant), Common Warrants, and Pre-Funded Warrants by a holder who (1) is not, and is not deemed to be, a resident of Canada for the purposes of the Income Tax Act (Canada) (the “Tax Act”), (2) deals at arm’s length with the Company and is not affiliated with the Company in each case for purpose of the Tax Act, (3) holds and beneficially owns such Common Shares, Common Warrants or Pre-Funded Warrants solely as capital property, (4) does not use or hold, and is not deemed to use or hold, the Common Shares, Common Warrants or Pre-Funded Warrants in connection with a business carried on, or deemed to be carried on, in Canada, and (5) for purposes of the United States of America with Respect to Taxes on Income and on Capital, signed September 26, 1980, as amended (the “Canada-U.S. Tax Convention”), is a resident of the U.S., has never been a resident of Canada, does not have an has not had, at any time, a permanent establishment or fixed base in Canada, and is a qualifying person or otherwise qualifies for the full benefits of the Canada-U.S. Tax convention and (6) has not acquired such Common Shares, Common Warrants or Pre-Funded Warrants in a transaction or transactions considered to be an adventure in the nature of trade, referred to in this summary as a “U.S. Holder”.
This summary is not applicable to a U.S. Holder that is (i) an insurer carrying on an insurance business in Canada and elsewhere, or (ii) an “authorized foreign bank” (as defined in the Tax Act) or (iii) another U.S. Holder of special status. Such U.S. Holders should consult their own Tax Advisors.
This summary is based on the current provisions of the Tax Act, the regulations thereunder, all amendments thereto publicly proposed by the government of Canada, the published administrative practices of the Canada Revenue Agency, and the current provisions of the Canada-U.S. Tax Convention. Except as otherwise expressly provided, this summary does not take into account any provincial, territorial or foreign (including without limitation, any United States) tax law or treaty. It has been assumed that all currently proposed amendments will be enacted substantially as proposed and that there is no other relevant change in any governing law or practice, although no assurance can be given in these respects.
This summary is of a general nature only and is not intended to be, nor should it be construed to be, legal or tax advice to any particular purchaser, and no representations with respect to the income tax consequences to any purchaser are made. Prospective purchasers should consult their own tax advisors for advice with respect to the tax consequences to them or acquiring Common Shares, Common Warrants or Pre-Funded Warrants pursuant to this offering having regard to their particular circumstances.
Each U.S. Holder is advised to obtain tax and legal advice applicable to such U.S. Holder’s particular circumstances.
Currency Conversion
In general, for purposes of the Tax Act, all amounts relating to the acquisition, holding or disposition of the Common Shares, Common Warrants, and Pre-Funded Warrants must be converted into Canadian dollars based on the applicable exchange rate quoted by the Bank of Canada for the relevant day or such other rate of exchange that is acceptable to the Canada Revenue Agency.
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Allocation of Cost for Common Shares and Common Warrants
A U.S. Holder who acquires Common Shares and Common Warrants pursuant to this Offering will be required to allocate the price paid for a Common Share and Warrant on a reasonable basis between the Common Share and the Common Warrant in order to determine their respective costs to such U.S. Holder for the purposes of the Tax Act.
For our purposes, we intend to allocate $[●] to each Common Share and $0.0001 to each Common Warrant that is being sold in combination with a Common Share based on a combined public offering price of $[●], and believe that such allocation is reasonable. The Company’s allocation, however, is not binding on the Canada Revenue Agency or on a U.S. Holder.
No gain or loss will be realized by a U.S. Holder of a Common Warrant upon the exercise of such Common Warrant. When a Common Warrant is exercised, the U.S. Holder’s cost of the Common Share acquired thereby will be equal to the adjusted cost base of the Common Warrant to such U.S. Holder, plus the amount paid on the exercise of the Common Warrant.
The adjusted cost base to a U.S. Holder of each Common Share (including a Common Share acquired on the exercise of a Common Warrant) acquired pursuant to this Offering will be determined by averaging the cost of such Common Share with the adjusted cost base to such U.S. Holder of all other Common Shares (if any) held by the U.S. Holder as capital property immediately prior to the acquisition.
Allocation of Cost for Pre-Funded Warrants and Common Warrants
A U.S. Holder who acquires Pre-Funded Warrants and Common Warrants pursuant to this Offering will be required to allocate the price paid for a Pre-Funded Warrant and Common Warrant on a reasonable basis between the Pre-Funded Warrant and the Common Warrant in order to determine their respective costs to such U.S. Holder for the purposes of the Tax Act.
For our purposes, we intend to allocate $[●] to each Pre-Funded Warrant and $0.0001 to each Common Warrant that is being sold in combination with a Pre-Funded Warrant based on a combined public offering price of $[●] and believe that such allocation is reasonable. The Company’s allocation, however, is not binding on the Canada Revenue Agency or on a U.S. Holder.
No gain or loss will be realized by a U.S. Holder of a Pre-Funded Warrant upon the exercise of such Pre-Funded Warrant. When a Pre-Funded Warrant is exercised, the U.S. Holder’s cost of the Common Share acquired thereby will be equal to the adjusted cost base of the Pre-Funded Warrant to such U.S. Holder, plus the amount paid on the exercise of the Pre-Funded Warrant.
The adjusted cost base to a U.S. Holder of each Common Share acquired on the exercise of a Pre-Funded Warrant acquired pursuant to this Offering will be determined by averaging the cost of such Common Share with the adjusted cost base to such U.S. Holder of all other Common Shares (if any) held by the U.S. Holder as capital property immediately prior to the acquisition.
For the income tax consequences of the exercise of a Common Warrant, see “Allocation of Cost for Common Shares and Common Warrants” above.
Dividends
Every U.S. Holder is liable to pay a Canadian withholding tax on every dividend that is or is deemed to be paid or credited to the U.S. Holder on the U.S. Holder’s Common Shares. The statutory rate of withholding tax is 25% of the gross amount of the dividend paid. The Canada-U.S. Tax Convention reduces the statutory rate with respect to dividends paid to a U.S. Holder, if that U.S. Holder is a resident of the U.S. for purposes of, and is eligible for and entitled to benefits under, the Canada-U.S. Tax Convention. Where applicable, the rate of withholding tax is generally reduced under the Canada-U.S. Tax Convention to 15% of the gross amount of the dividend if the recipient of the dividend is a resident of the U.S. for purposes of, and is eligible for and entitled to benefits under, the Canada-U.S. Tax Convention and is the beneficial owner of the dividend. If the U.S. Holder is a company that is a resident of the U.S. for purposes of, and is eligible for and entitled to benefits under, the Canada-U.S. Tax Convention, and that owns at least 10% of the voting stock of the Company and beneficially owns the dividend, the rate of withholding tax is 5% for dividends paid or credited to such corporate U.S. Holder. The Company is required to withhold the applicable tax from the dividend payable to the U.S. Holder, and to remit the tax to the Receiver General of Canada for the account of the U.S. Holder.
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Disposition of Common Shares, Common Warrants or Pre-Funded Warrants
A U.S. Holder generally will not be subject to tax under the Tax Act in respect of a capital gain realized on the disposition or deemed disposition of a Common Share (including a Common Share issued on the exercise of a Common Warrant or a Pre-Funded Warrant), Common Warrant or Pre- Funded Warrant unless such securities constitute “taxable Canadian property” of the U.S. Holder for purposes of the Tax Act and the gain is not exempt from tax pursuant to the terms of the Canada-U.S. Tax Convention.
Provided that the Common Shares are listed on a “designated stock exchange” for purposes of the Tax Act at the time of disposition (which currently includes Nasdaq), the Common Shares, Common Warrants and Pre-Funded Warrants generally will not constitute “taxable Canadian property” of a U.S. Holder, unless at any time during the 60 month period immediately preceding the disposition: (i) the U.S. Holder, persons with whom the U.S. Holder did not deal at “arm’s length” for the purposes of the Tax Act, partnerships in which the U.S. Holder or a person with whom the U.S. Holder did not deal at “arm’s length” for the purposes of the Tax Act holds a membership interest directly or indirectly through one or more partnerships, or the U.S. Holder together with all such persons, owned 25% or more of the issued shares of any class of the Company and; (ii) more than 50% of the fair market value of the Common Shares was derived directly or indirectly from one or any combination of real or immovable property situated in Canada, “Canadian resource properties” (as defined in the Tax Act), “timber resource properties” (as defined in the Tax Act), or options in respect of, or interests in, or for civil law rights in, such property whether or not such property exists. Notwithstanding the foregoing, the Common Shares, Common Warrants and Pre-Funded Warrants may otherwise in certain circumstances be deemed to be taxable Canadian property to a U.S. Holder for the purposes of the Tax Act.
Even if a Common Share, Common Warrant or Pre-Funded Warrant is considered to be “taxable Canadian property” to a U.S. Holder, the U.S. Holder may be exempt from tax under the Tax Act if such securities are “treaty-protected property” for the purposes of the Tax Act. Common Shares, Common Warrants or Pre-Funded Warrants owned by a U.S. Holder will generally be “treaty-protected property” if the gain from the disposition of such securities would, because of the Canada-U.S. Tax Convention, be exempt from tax under Part I of the Tax Act.
U.S. Holders who may hold Common Shares, Common Warrants or Pre-Funded Warrants as “taxable Canadian property” should consult their own tax advisors.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of certain U.S. federal income tax considerations applicable to a U.S. Holder (as defined below) arising from and relating to the acquisition, ownership and disposition of Common Shares, Common Units and Pre-Funded Units (such Common Units and Pre-Funded Units, collectively, “Units”) acquired pursuant to this offering and exercise, disposition, and lapse of Pre-Funded Warrants or Common Warrants acquired pursuant to this offering, and the acquisition, ownership, and disposition of the Common Shares received upon exercise of such Pre-Funded Warrants or Common Warrants, as the case may be (the “Warrant Shares”). The term “securities” as used in this summary includes the Units, Common Shares, Pre-Funded Warrants, Common Warrants, and Warrant Shares, as applicable.
This summary is for general information purposes only and does not purport to be a complete analysis or listing of all potential U.S. federal income tax considerations that may apply to a U.S. Holder as a result of the acquisition of securities pursuant to this offering. In addition, this summary does not take into account the individual facts and circumstances of any particular U.S. Holder that may affect the U.S. federal income tax consequences to such U.S. Holder, including specific tax consequences to a U.S. Holder under an applicable tax treaty. Accordingly, this summary is not intended to be, and should not be construed as, legal or U.S. federal income tax advice with respect to any particular U.S. Holder. This summary does not address the U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and non-U.S. tax consequences to U.S. Holders of the acquisition, ownership, and disposition of the securities. In addition, except as specifically set forth below, this summary does not discuss applicable tax reporting requirements. Each U.S. Holder should consult its own tax advisor regarding the U.S. federal, U.S. federal net investment income, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and non-U.S. tax consequences relating to the acquisition, ownership and disposition of the securities.
No opinion from legal counsel or ruling from the Internal Revenue Service (the “IRS”) has been requested, or will be obtained, regarding the U.S. federal income tax considerations applicable to U.S. Holders as discussed in this summary. This summary is not binding on the IRS, and the IRS is not precluded from taking a position that is different from, and contrary to, the positions taken in this summary. In addition, because the authorities on which this summary is based are subject to various interpretations, the IRS and the U.S. courts could disagree with one or more of the positions taken in this summary.
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Scope of this Summary
Authorities
This summary is based on the Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations (whether final, temporary, or proposed) promulgated under the Code, published rulings of the IRS, published administrative positions of the IRS and U.S. court decisions, that are in effect and available, as of the date of this document. Any of the authorities on which this summary is based could be changed in a material and adverse manner at any time, and any such change could be applied retroactively. This summary does not discuss the potential effects, whether adverse or beneficial, of any proposed legislation that, if enacted, could be applied on a retroactive or prospective basis.
U.S. Holders
For purposes of this summary, the term “U.S. Holder” means a beneficial owner of the securities acquired pursuant to this offering that is for U.S. federal income tax purposes:
● | a citizen or individual resident of the United States; |
● | a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) organized under the laws of the United States, any state thereof or the District of Columbia; |
● | an estate whose income is subject to U.S. federal income taxation regardless of its source; or |
● | a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person. |
U.S. Holders Subject to Special U.S. Federal Income Tax Rules Not Addressed
This summary does not address the U.S. federal income tax considerations applicable to U.S. Holders that are subject to special provisions under the Code, including U.S. Holders that: (a) are tax-exempt organizations, qualified retirement plans, individual retirement accounts, or other tax-deferred accounts; (b) are financial institutions, underwriters, insurance companies, real estate investment trusts, or regulated investment companies; (c) are brokers or dealers in securities or currencies or U.S. Holders that are traders in securities that elect to apply a mark-to-market accounting method; (d) have a “functional currency” other than the U.S. dollar; (e) own securities as part of a straddle, hedging transaction, conversion transaction, constructive sale, or other integrated transaction; (f) acquired the securities in connection with the exercise of employee stock options or otherwise as compensation for services; (g) hold the securities other than as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment purposes); (h) are partnerships and other pass-through entities (and investors in such partnerships and entities); (i) are subject to special tax accounting rules; (j) own, have owned or will own (directly, indirectly, or by attribution) 10% or more of the total combined voting power or value of our outstanding shares; (k) are U.S. expatriates or former long-term residents of the U.S.; or (l) are subject to taxing jurisdictions other than, or in addition to, the United States. U.S. Holders that are subject to special provisions under the Code, including U.S. Holders described immediately above, should consult their own tax advisors regarding the U.S. federal, U.S. federal net investment income, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and non-U.S. tax consequences relating to the acquisition, ownership and disposition of the securities.
If an entity or arrangement that is classified as a partnership for U.S. federal income tax purposes holds the securities, the U.S. federal income tax consequences to such entity or arrangement and the owners of such entity or arrangement generally will depend on the activities of such entity or arrangement and the status of such owners. This summary does not address the tax consequences to any such entity or arrangement or owner. Owners of entities or arrangements that are classified as partnerships for U.S. federal income tax purposes should consult their own tax advisor regarding the U.S. federal income tax consequences arising from and relating to the acquisition, ownership, and disposition of the securities.
U.S. Federal Income Tax Consequences of the Acquisition of a Unit
No statutory, administrative or judicial authority directly addresses the treatment of a Unit or instruments similar to a Unit for U.S. federal income tax purposes and, therefore, that treatment is not entirely clear. The acquisition of a Unit should be treated for U.S. federal income tax purposes as the acquisition of a Common Share and a Common Warrant (in the case of a Common Unit) or a Common Warrant and a Pre-Funded Warrant (in the case of a Pre-Funded Unit). The purchase price for each Unit will be allocated between a Common Share and a Common Warrant (in the case of a Common Unit) or a Common Warrant and a Pre-Funded Warrant (in the case
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of a Pre-Funded Unit) in proportion to their relative fair market values at the time such securities are issued to the U.S. Holder. Each investor must make his or her own determination of such value based on all the relevant facts and circumstances. This allocation of the purchase price for each such Unit will establish a U.S. Holder’s initial tax basis for U.S. federal income tax purposes in the Common Share and a Common Warrant (in the case of a Common Unit) or a Common Warrant and a Pre-Funded Warrant (in the case of a Pre-Funded Unit) that comprise each such type of Unit. Any disposition of a Unit should be treated for U.S. federal income tax purposes as a disposition of a Common Share and a Common Warrant (in the case of a Common Unit) or a Common Warrant and a Pre-Funded Warrant (in the case of a Pre-Funded Unit) and the amount realized on the disposition should be allocated between the Common Share and the Common Warrant (in the case of a Common Unit) or the Common Warrant and the Pre-Funded Warrant (in the case of a Pre-Funded Unit) based on their respective relative fair market values at the time of disposition (as determined by each such Unit holder based on all relevant facts and circumstances).
The foregoing treatment of the Unit and a holder’s purchase price allocation are not binding on the IRS or the courts. Because there are no authorities that directly address instruments that are similar to the Units, no assurance can be given that the IRS or the courts will agree with the characterization described above or the discussion below. Accordingly, each prospective investor is urged to consult its own tax advisors regarding the tax consequences of an investment in a Unit (including alternative characterizations of a Unit). The balance of this discussion assumes that the characterization of the Units described above is respected for U.S. federal income tax purposes.
Treatment of Pre-Funded Warrants
Although it is not entirely free from doubt, we believe a Pre-Funded Warrant should be treated as a separate class of common shares for U.S. federal income tax purposes and a U.S. Holder of Pre-Funded Warrants should generally be taxed in the same manner as a holder of Common Shares except as described below. Accordingly, no gain or loss should be recognized upon the exercise of a Pre-Funded Warrant and, upon exercise, the holding period of a Pre-Funded Warrant should carry over to the Warrant Shares received. Similarly, the tax basis of the Pre-Funded Warrant should carry over to the Warrant Shares received upon exercise, increased by the exercise price of US$0.0001 per share. However, such characterization is not binding on the IRS, and the IRS may treat the Pre-Funded Warrant as warrants to acquire Common Shares. If so, the amount and character of a U.S. Holder’s gain with respect to an investment in Pre-Funded Warrant could change, and a U.S. Holder may not be entitled to make the “QEF Election” or “Mark-to-Market Election” described below to mitigate PFIC consequences in the event that we are classified as a PFIC. Accordingly, each U.S. Holder should consult its own tax advisor regarding the risks associated with the acquisition of a Pre-Funded Warrant pursuant to this offering (including potential alternative characterizations). The balance of this discussion generally assumes that the characterization described above is respected for U.S. federal income tax purposes.
Passive Foreign Investment Company Rules
If we are considered a “passive foreign investment company” within the meaning of Section 1297 of the Code (a “PFIC”) at any time during a U.S. Holder’s holding period, the following sections will generally describe the potentially adverse U.S. federal income tax consequences to U.S. Holders of the acquisition, ownership, and disposition of the securities.
In any year in which we are classified as a PFIC, a U.S. Holder will be required to file an annual report with the IRS containing such information as Treasury Regulations and/or other IRS guidance may require. In addition to penalties, a failure to satisfy such reporting requirements may result in an extension of the time period during which the IRS can assess a tax. U.S. Holders should consult their own tax advisors regarding the requirements of filing such information returns under these rules, including the requirement to file an IRS Form 8621.
We generally will be a PFIC for any tax year in which (a) 75% or more of our gross income for such tax year is passive income (the “PFIC income test”) or (b) 50% or more of the value of our assets either produce passive income or are held for the production of passive income, based on the quarterly average of the fair market value of such assets (the “PFIC asset test”). “Gross income” generally includes sales revenues less the cost of goods sold, plus income from investments and from incidental or outside operations or sources, and “passive income” generally includes, for example, dividends, interest, certain rents and royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions. Active business gains arising from the sale of commodities generally are excluded from passive income if substantially all of a foreign corporation’s commodities are stock in trade or inventory, depreciable property used in a trade or business, or supplies regularly used or consumed in the ordinary course of its trade or business, and certain other requirements are satisfied.
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For purposes of the PFIC income test and PFIC asset test described above, if we own, directly or indirectly, 25% or more of the total value of the outstanding shares of another corporation, we will be treated as if we (a) held a proportionate share of the assets of such other corporation and (b) received directly a proportionate share of the income of such other corporation. In addition, for purposes of the PFIC income test and PFIC asset test described above, “passive income” does not include any interest, dividends, rents, or royalties that are received or accrued by us from a “related person” (as defined in Section 954(d)(3) of the Code), to the extent such items are properly allocable to the income of such related person that is not passive income.
Under certain attribution rules, if we are a PFIC, U.S. Holders will be deemed to own their proportionate share of any of our subsidiaries which is also a PFIC (a “Subsidiary PFIC”), and will generally be subject to U.S. federal income tax under the “Default PFIC Rules Under Section 1291 of the Code” discussed below on their proportionate share of any (i) distribution on the shares of a Subsidiary PFIC and (ii) disposition or deemed disposition of shares of a Subsidiary PFIC, both as if such U.S. Holders directly held the shares of such Subsidiary PFIC. Accordingly, U.S. Holders should be aware that they could be subject to tax under the PFIC rules even if no distributions are received and no redemptions or other dispositions of the securities are made. In addition, U.S. Holders may be subject to U.S. federal income tax on any indirect gain realized on the stock of a Subsidiary PFIC on the sale or disposition of the securities.
Based on our current operations, income, assets and certain estimates and projections, including as to the relative values of our assets, including goodwill, which is based on the expected price of our Common Shares, we believe that we were not a PFIC for the taxable year ended March 31, 2023. The determination of our status as a PFIC for the taxable year ending March 31, 2024 cannot be made at this time. The determination of PFIC status for any year is very fact specific, being based on the types of income we earn and the types and value of our assets from time to time, all of which are subject to change, as well as, in part, the application of complex U.S. federal income tax rules, which are subject to differing interpretations. As a result, there can be no assurance in this regard, and the IRS may challenge our classification. Accordingly, it is possible that we may be classified as a PFIC in a past year, in the current taxable year, or in future years. If we are classified as a PFIC in any year during which a U.S. Holder holds the securities, we generally will continue to be treated as a PFIC as to such U.S. Holder in all succeeding years, regardless of whether we continue to meet the PFIC income test or PFIC asset test discussed above.
Default PFIC Rules Under Section 1291 of the Code
If we are a PFIC, the U.S. federal income tax consequences to a U.S. Holder of the acquisition, ownership, and disposition of the securities will depend on whether such U.S. Holder makes a “qualified electing fund” or “QEF” election (a “QEF Election”) or makes a mark-to-market election under Section 1296 of the Code (a “Mark-to-Market Election”) with respect to the Common Shares, Pre-Funded Warrants, or the Warrant Shares. A U.S. Holder that does not make either a QEF Election or a Mark-to-Market Election (a “Non-Electing U.S. Holder”) will be taxable as described below.
A Non-Electing U.S. Holder will be subject to the rules of Section 1291 of the Code with respect to (a) any gain recognized on the sale or other taxable disposition of the securities and (b) any excess distribution received on the securities. A distribution generally will be an “excess distribution” to the extent that such distribution (together with all other distributions received in the current tax year) exceeds 125% of the average distributions received during the three preceding tax years (or during a U.S. Holder’s holding period for the securities, if shorter).
Under Section 1291 of the Code, any gain recognized on the sale or other taxable disposition of the securities of a PFIC (including an indirect disposition of shares of a Subsidiary PFIC), and any excess distribution received on such securities (or a distribution by a Subsidiary PFIC to its shareholder that is deemed to be received by a U.S. Holder) must be ratably allocated to each day in a Non-Electing U.S. Holder’s holding period for the securities. The amount of any such gain or excess distribution allocated to the tax year of disposition or distribution of the excess distribution and to years before the entity became a PFIC, if any, would be taxed as ordinary income (and not eligible for certain preferential tax rates, as discussed below). The amounts allocated to any other tax year would be subject to U.S. federal income tax at the highest tax rate applicable to ordinary income in each such year, and an interest charge would be imposed on the tax liability for each such year, calculated as if such tax liability had been due in each such year. A Non-Electing U.S. Holder that is not a corporation must treat any such interest paid as “personal interest,” which is not deductible.
If we are a PFIC for any tax year during which a Non-Electing U.S. Holder holds the securities, it will continue to be treated as a PFIC with respect to such Non-Electing U.S. Holder, regardless of whether it ceases to be a PFIC in one or more subsequent tax years. If we cease to be a PFIC, a Non-Electing U.S. Holder may terminate this deemed PFIC status with respect to the Common Shares, Pre-Funded Warrants, and Warrant Shares by electing to recognize gain (which will be taxed under the rules of Section 1291 of the Code as discussed above) as if such securities were sold on the last day of the last tax year for which we were a PFIC. No such election, however, may be made with respect to the Common Warrants.
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Under proposed Treasury Regulations, if a U.S. Holder has an option, warrant, or other right to acquire stock of a PFIC (such as the Common Warrants), such option, warrant or right is considered to be PFIC stock subject to the default rules of Section 1291 of the Code. Under rules described below, the holding period for the Warrant Shares will begin on the date a U.S. Holder acquires the related Common Warrant. This will impact the availability of the QEF Election and Mark-to-Market Election with respect to the Warrant Shares. Thus, a U.S. Holder will have to account for the Warrant Shares, Common Shares and Pre-Funded Warrants under the PFIC rules and the applicable elections differently.
QEF Election
A U.S. Holder that makes a QEF Election for the first tax year in which its holding period of its Common Shares or Pre-Funded Warrants begins generally will not be subject to the rules of Section 1291 of the Code discussed above with respect to its Common Shares or Pre-Funded Warrants. However, a U.S. Holder that makes a QEF Election will be subject to U.S. federal income tax on such U.S. Holder’s pro rata share of (a) our net capital gain, which will be taxed as long-term capital gain to such U.S. Holder, and (b) our ordinary earnings, which will be taxed as ordinary income to such U.S. Holder. Generally, “net capital gain” is the excess of (a) net long-term capital gain over (b) net short-term capital loss, and “ordinary earnings” are the excess of (a) ”earnings and profits” over (b) net capital gain. A U.S. Holder that makes a QEF Election will be subject to U.S. federal income tax on such amounts for each tax year in which we are a PFIC, regardless of whether such amounts are actually distributed to such U.S. Holder by us. However, for any tax year in which we are a PFIC and have no net income or gain, U.S. Holders that have made a QEF Election would not have any income inclusions as a result of the QEF Election. If a U.S. Holder that made a QEF Election has an income inclusion, such a U.S. Holder may, subject to certain limitations, elect to defer payment of current U.S. federal income tax on such amounts, subject to an interest charge. If such U.S. Holder is not a corporation, any such interest paid will be treated as “personal interest,” which is not deductible.
A U.S. Holder that makes a timely QEF Election generally (a) may receive a tax-free distribution from us to the extent that such distribution represents “earnings and profits” that were previously included in income by the U.S. Holder because of such QEF Election and (b) will adjust such U.S. Holder’s tax basis in the Common Shares or Pre-Funded Warrants to reflect the amount included in income or allowed as a tax-free distribution because of such QEF Election. In addition, a U.S. Holder that makes a QEF Election generally will recognize capital gain or loss on the sale or other taxable disposition of Common Shares or Pre-Funded Warrant.
The procedure for making a QEF Election, and the U.S. federal income tax consequences of making a QEF Election, will depend on whether such QEF Election is timely. A QEF Election will be treated as “timely” for purposes of avoiding the default PFIC rules discussed above if such QEF Election is made for the first year in the U.S. Holder’s holding period for the Common Shares or Pre-Funded Warrants in which we were a PFIC. A U.S. Holder may make a timely QEF Election by filing the appropriate QEF Election documents at the time such U.S. Holder files a U.S. federal income tax return for such year.
A QEF Election will apply to the tax year for which such QEF Election is made and to all subsequent tax years, unless such QEF Election is invalidated or terminated or the IRS consents to revocation of such QEF Election. If a U.S. Holder makes a QEF Election and, in a subsequent tax year, we cease to be a PFIC, the QEF Election will remain in effect (although it will not be applicable) during those tax years in which we are not a PFIC. Accordingly, if we become a PFIC in another subsequent tax year, the QEF Election will be effective and the U.S. Holder will be subject to the QEF rules described above during any subsequent tax year in which we qualify as a PFIC.
As discussed above, under proposed Treasury Regulations, if a U.S. Holder has an option, warrant or other right to acquire stock of a PFIC (such as the Common Warrants), such option, warrant or right is considered to be PFIC stock subject to the default rules of Section 1291 of the Code. However, a U.S. Holder of an option, warrant or other right to acquire stock of a PFIC may not make a QEF Election that will apply to the option, warrant or other right to acquire PFIC stock. In addition, under proposed Treasury Regulations, if a U.S. Holder holds an option, warrant or other right to acquire stock of a PFIC, the holding period with respect to shares of stock of the PFIC acquired upon exercise of such option, warrant or other right will include the period that the option, warrant or other right was held.
Consequently, under the proposed Treasury Regulations, if a U.S. Holder of the Common Shares or Pre-Funded Warrants makes a QEF Election, such election generally will not be treated as a timely QEF Election with respect to Warrant Shares and the rules of Section 1291 of the Code discussed above will continue to apply with respect to such U.S. Holder’s Warrant Shares. However, a U.S. Holder of Warrant Shares should be eligible to make a timely QEF Election if such U.S. Holder makes a “purging” or “deemed sale” election to recognize gain (which will be taxed under the rules of Section 1291 of the Code discussed above) as if such Warrant Shares were sold for fair market value. As a result of the “purging” or “deemed sale” election, the U.S. Holder will have a new basis and holding period in the Warrant Shares acquired upon the exercise of the Warrants for purposes of the PFIC rules. In addition, gain recognized on
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the sale or other taxable disposition (other than by exercise) of the Common Warrants by a U.S. Holder will be subject to the rules of Section 1291 of the Code discussed above. Each U.S. Holder should consult its own tax advisor regarding the application of the PFIC rules to the securities.
Upon the exercise of a Pre-Funded Warrant, a U.S. Holder may be required to make a new QEF Election with respect to the Warrant Shares received. Each U.S. Holder should consult its own tax advisor regarding the application of the QEF Election rules to the Pre-Funded Warrants and Warrant Shares upon exercise thereof.
If we determine that we are a PFIC for this year or any future taxable year, we can make no assurances that we would provide the information necessary for U.S. Holders to make a QEF Election. U.S. Holders should consult with their own tax advisors regarding the potential application of the PFIC rules to the ownership and disposition of the securities, and the availability of certain U.S. tax elections under the PFIC rules.
A U.S. Holder makes a QEF Election by attaching a completed IRS Form 8621, including a PFIC Annual Information Statement, to a timely filed U.S. federal income tax return. However, if we do not provide the required information with regard to us or any of our Subsidiary PFICs, U.S. Holders will not be able to make a QEF Election for such entity and will continue to be subject to the rules of Section 1291 of the Code discussed above that apply to Non-Electing U.S. Holders with respect to the taxation of gains and excess distributions.
Mark-to-Market Election
A U.S. Holder may make a Mark-to-Market Election with respect to the Common Shares, Pre-Funded Warrants, and Warrant Shares only if such shares are marketable stock. The Common Shares and Warrant Shares generally will be “marketable stock” if the Common Shares and Warrant Shares are regularly traded on (a) a national securities exchange that is registered with the SEC, (b) the national market system established pursuant to Section 11A of the Exchange Act or (c) a foreign securities exchange that is regulated or supervised by a governmental authority of the country in which the market is located, provided that (i) such foreign exchange has trading volume, listing, financial disclosure, and other requirements and the laws of the country in which such foreign exchange is located, together with the rules of such foreign exchange, ensure that such requirements are actually enforced and (ii) the rules of such foreign exchange ensure active trading of listed stocks. If such stock is traded on such a qualified exchange or other market, such stock generally will be considered “regularly traded” for any calendar year during which such stock is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter. Provided that the Common Shares and Warrant Shares are “regularly traded” as described in the preceding sentence, such shares are expected to be marketable stock. There can be no assurance that such shares will be “regularly traded” in subsequent calendar quarters. U.S. Holders should consult their own tax advisors regarding the marketable stock rules. A Mark-to-Market Election will likely not be available with respect to the Common Warrants and Pre-Funded Warrants. Accordingly, each U.S. Holder should consult its own tax advisor regarding the availability of a Mark-to-Market Election with respect to the Common Warrants and Pre-Funded Warrants. The balance of this discussion generally assumes that a Mark-to-Market Election may be made with respect a Pre-Funded Warrant.
A U.S. Holder that makes a Mark-to-Market Election with respect to its Common Shares, Warrant Shares or Pre-Funded Warrants generally will not be subject to the rules of Section 1291 of the Code discussed above with respect to such Common Shares, Warrant Shares or Pre-Funded Warrants. However, if a U.S. Holder does not make a Mark-to-Market Election beginning in the first tax year of such U.S. Holder’s holding period for the Common Shares, Warrant Shares or Pre-Funded Warrants and such U.S. Holder has not made a timely QEF Election, the rules of Section 1291 of the Code discussed above will apply to certain dispositions of, and distributions on, the Common Shares, Warrant Shares and Pre-Funded Warrants.
Any Mark-to-Market Election made by a U.S. Holder for the Common Shares will also apply to such U.S. Holder’s Warrant Shares. As a result, if a Mark-to-Market Election has been made by a U.S. Holder with respect to its Common Shares, any Warrant Shares received will automatically be marked-to-market in the year of exercise. Because, under the proposed Treasury Regulations, a U.S. Holder’s holding period for Warrant Shares includes the period during which such U.S. Holder held the Common Warrants, a U.S. Holder will be treated as making a Mark-to-Market Election with respect to its Warrant Shares after the beginning of such U.S. Holder’s holding period for the Warrant Shares unless the Warrant Shares are acquired in the same tax year as the year in which the U.S. Holder acquired its securities. Consequently, the default rules under Section 1291 described above generally will apply to the mark-to-market gain realized in the tax year in which Warrant Shares are received. However, the general mark-to-market rules will apply to subsequent tax years.
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A U.S. Holder that makes a Mark-to-Market Election will include in ordinary income, for each tax year in which we are a PFIC, an amount equal to the excess, if any, of (a) the fair market value of the Common Shares, Pre-Funded Warrants, and any Warrant Shares as of the close of such tax year over (b) such U.S. Holder’s tax basis in such securities. A U.S. Holder that makes a Mark-to-Market Election will be allowed a deduction in an amount equal to the excess, if any, of (i) such U.S. Holder’s adjusted tax basis in the Common Shares, Pre-Funded Warrants, and any Warrant Shares, over (ii) the fair market value of such securities (but only to the extent of the net amount of previously included income as a result of the Mark-to-Market Election for prior tax years).
A U.S. Holder that makes a Mark-to-Market Election generally also will adjust such U.S. Holder’s tax basis in the Common Shares, Pre-Funded Warrants, and Warrant Shares to reflect the amount included in gross income or allowed as a deduction because of such Mark-to-Market Election. In addition, upon a sale or other taxable disposition of such securities, a U.S. Holder that makes a Mark-to-Market Election will recognize ordinary income or ordinary loss (not to exceed the excess, if any, of (a) the amount included in ordinary income because of such Mark-to-Market Election for prior tax years over (b) the amount allowed as a deduction because of such Mark-to-Market Election for prior tax years).
A U.S. Holder makes a Mark-to-Market Election by attaching a completed IRS Form 8621 to a timely filed U.S. federal income tax return. A timely Mark-to-Market Election applies to the tax year in which such Mark-to-Market Election is made and to each subsequent tax year, unless the securities cease to be “marketable stock” or the IRS consents to revocation of such election. Each U.S. Holder should consult its own tax advisor regarding the availability of, and procedure for making, a Mark-to-Market Election.
Although a U.S. Holder may be eligible to make a Mark-to-Market Election with respect to the Common Shares, Pre-Funded Warrants, and Warrant Shares, no such election may be made with respect to the stock of any Subsidiary PFIC that a U.S. Holder is treated as owning because such stock is not marketable. Hence, the Mark-to-Market Election will not be effective to eliminate the interest charge and other income inclusion rules described above with respect to deemed dispositions of Subsidiary PFIC stock or distributions from a Subsidiary PFIC to its shareholder.
Because the U.S. federal income tax characterization of the Pre-Funded Warrants is unclear, U.S. Holders of Pre-Funded Warrants should consult with their tax advisors as to the availability of a QEF Election or Mark-to-Market election with respect to the Pre-Funded Warrants.
Other PFIC Rules
Under Section 1291(f) of the Code, the IRS has issued proposed Treasury Regulations that, subject to certain exceptions, would cause a U.S. Holder that had not made a timely QEF Election to recognize gain (but not loss) upon certain transfers of securities that would otherwise be tax-deferred (e.g., gifts and exchanges pursuant to corporate reorganizations). However, the specific U.S. federal income tax consequences to a U.S. Holder may vary based on the manner in which the securities are transferred.
If finalized in their current form, the proposed Treasury Regulations applicable to PFICs would be effective for transactions occurring on or after April 1, 1992. Because the proposed Treasury Regulations have not yet been adopted in final form, they are not currently effective, and there is no assurance that they will be adopted in the form and with the effective date proposed. Nevertheless, the IRS has announced that, in the absence of final Treasury Regulations, taxpayers may apply reasonable interpretations of the Code provisions applicable to PFICs and that it considers the rules set forth in the proposed Treasury Regulations to be reasonable interpretations of those Code provisions. The PFIC rules are complex, and the implementation of certain aspects of the PFIC rules requires the issuance of Treasury Regulations which in many instances have not been promulgated and which, when promulgated, may have retroactive effect. U.S. Holders should consult their own tax advisors about the potential applicability of the proposed Treasury Regulations.
Certain additional adverse rules will apply with respect to a U.S. Holder if we are a PFIC, regardless of whether such U.S. Holder makes a QEF Election. For example, under Section 1298(b)(6) of the Code, a U.S. Holder that uses the securities as security for a loan will, except as may be provided in Treasury Regulations, be treated as having made a taxable disposition of such securities.
In addition, a U.S. Holder who acquires securities from a decedent will not receive a “step up” in tax basis of such securities to fair market value.
Special rules also apply to the amount of foreign tax credit that a U.S. Holder may claim on a distribution from a PFIC. Subject to such special rules, foreign taxes paid with respect to any distribution in respect of stock in a PFIC are generally eligible for the foreign tax credit. The rules relating to distributions by a PFIC and their eligibility for the foreign tax credit are complicated, and a U.S. Holder should consult with their own tax advisor regarding the availability of the foreign tax credit with respect to distributions by a PFIC.
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The PFIC rules are complex, and each U.S. Holder should consult its own tax advisor regarding the PFIC rules (including the applicability and advisability of a QEF Election and Mark-to-Market Election) and how the PFIC rules may affect the U.S. federal income tax consequences of the acquisition, ownership, and disposition of the securities.
U.S. Federal Income Tax Consequences of the Exercise and Disposition of Common Warrants
The following discussion describes the general rules applicable to the ownership and disposition of the Common Warrants but is subject in its entirety to the special rules described above under the heading “Passive Foreign Investment Company Rules.”
Exercise of Common Warrants
A U.S. Holder should not recognize gain or loss on the exercise of a Common Warrant and related receipt of a Warrant Share (unless cash is received in lieu of the issuance of a fractional Warrant Share). A U.S. Holder’s initial tax basis in the Warrant Share received on the exercise of a Common Warrant should be equal to the sum of (a) such U.S. Holder’s tax basis in such Common Warrant plus (b) the exercise price paid by such U.S. Holder on the exercise of such Common Warrant. It is unclear whether a U.S. Holder’s holding period for the Warrant Share received on the exercise of a Common Warrant would commence on the date of exercise of the Common Warrant or the day following the date of exercise of the Common Warrant. If we are a PFIC, a U.S. Holder’s holding period for the Warrant Share for PFIC purposes will begin on the date on which such U.S. Holder acquired its Common Warrant. If the acquisition of a Pre-Funded Warrant is not treated as an acquisition of Common Shares for U.S. federal income tax purposes as described above in under the heading “Treatment of Pre-Funded Warrants”, then the foregoing rules described in this paragraph would also apply to the exercise of a Pre-Funded Warrant.
Disposition of Common Warrants
A U.S. Holder will recognize gain or loss on the sale or other taxable disposition of a Common Warrant in an amount equal to the difference, if any, between (a) the amount of cash plus the fair market value of any property received and (b) such U.S. Holder’s tax basis in the Common Warrant sold or otherwise disposed of. Subject to the PFIC rules discussed above, any such gain or loss generally will be a capital gain or loss, which will be long-term capital gain or loss if the Common Warrant is held for more than one year. Deductions for capital losses are subject to complex limitations under the Code.
Expiration of Common Warrants Without Exercise
Upon the lapse or expiration of a Common Warrant, a U.S. Holder will recognize a loss in an amount equal to such U.S. Holder’s tax basis in the Common Warrant. Any such loss generally will be a capital loss and will be long-term capital loss if the Common Warrants are held for more than one year. Deductions for capital losses are subject to complex limitations under the Code.
Certain Adjustments to the Common Warrants
Under Section 305 of the Code, an adjustment to the number of Warrant Shares that will be issued on the exercise of the Common Warrants, or an adjustment to the exercise price of the Common Warrants, may be treated as a constructive distribution to a U.S. Holder of the Common Warrants if, and to the extent that, such adjustment has the effect of increasing such U.S. Holder’s proportionate interest in the “earnings and profits” or our assets, depending on the circumstances of such adjustment (for example, if such adjustment is to compensate for a distribution of cash or other property to the shareholders). Adjustments to the exercise price of Common Warrants made pursuant to a bona fide reasonable adjustment formula that has the effect of preventing dilution of the interest of the holders of the Common Warrants should generally not be considered to result in a constructive distribution. Any such constructive distribution would be taxable whether or not there is an actual distribution of cash or other property. (See more detailed discussion of the rules applicable to distributions made by us at ”— Distributions on the Common Shares, Pre-Funded Warrants, and Warrant Shares” below).
General Rules Applicable to U.S. Federal Income Tax Consequences of the Acquisition, Ownership, and Disposition of the Common Shares, Pre-Funded Warrants, and Warrant Shares
The following discussion describes the general rules applicable to the ownership and disposition of the Common Shares, Pre-Funded Warrants, and Warrant Shares, but is subject in its entirety to the special rules described above under the heading “Passive Foreign Investment Company Rules.”
Distributions on the Common Shares, Pre-Funded Warrants, and Warrant Shares
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A U.S. Holder that receives a distribution, including a constructive distribution, with respect to a Common Share,
Pre-Funded Warrant, or Warrant Share (as well as any constructive distribution on a Common Warrant as described above) will be required to include the amount of such distribution in gross income as a dividend (without reduction for any Canadian income tax withheld from such distribution) to the extent of our current and accumulated “earnings and profits”, as computed under U.S. federal income tax principles. A dividend generally will be taxed to a U.S. Holder at ordinary income tax rates if we are a PFIC for the tax year of such distribution or the preceding tax year. To the extent that a distribution exceeds our current and accumulated “earnings and profits,” such distribution will be treated first as a tax-free return of capital to the extent of a U.S. Holder’s tax basis in such securities and thereafter as gain from the sale or exchange of such securities (see “Sale or Other Taxable Disposition of the Common Shares, Pre-Funded Warrants and Warrant Shares” below). However, we may not maintain the calculations of earnings and profits in accordance with U.S. federal income tax principles, and each U.S. Holder may be required to assume that any distribution by us with respect to such securities will constitute ordinary dividend income. Dividends received on such securities generally will not be eligible for the “dividends received deduction” generally applicable to corporations. Subject to applicable limitations and provided we are eligible for the benefits of the Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital, signed September 26, 1980, as amended, or the Common Shares or Warrant Shares are readily tradable on a United States securities market, dividends paid by us to non-corporate U.S. Holders, including individuals, generally will be eligible for the preferential tax rates applicable to long-term capital gains for dividends, provided certain holding period and other conditions are satisfied, including that we not be classified as a PFIC in the tax year of distribution or in the preceding tax year. The dividend rules are complex, and each U.S. Holder should consult its own tax advisor regarding the application of such rules.
Sale or Other Taxable Disposition of the Common Shares, Pre-Funded Warrants, and Warrant Shares
Upon the sale or other taxable disposition of the Common Shares, Pre-Funded Warrants, or Warrant Shares, a U.S. Holder generally will recognize capital gain or loss in an amount equal to the difference between (a) the amount of cash plus the fair market value of any property received and (b) such U.S. Holder’s tax basis in such securities sold or otherwise disposed of. Gain or loss recognized on such sale or other taxable disposition generally will be long-term capital gain or loss if, at the time of the sale or other taxable disposition, such securities have been held for more than one year. Preferential tax rates may apply to long-term capital gain of a U.S. Holder that is an individual, estate, or trust. There are no preferential tax rates for long-term capital gain of a U.S. Holder that is a corporation. Deductions for capital losses are subject to significant limitations under the Code.
Additional Tax Considerations
Receipt of Foreign Currency
The amount of any distribution paid to a U.S. Holder in foreign currency or on the sale, exchange or other taxable disposition of the securities generally will be equal to the U.S. dollar value of such foreign currency based on the exchange rate applicable on the date of receipt (regardless of whether such foreign currency is converted into U.S. dollars at that time). If the foreign currency received is not converted into U.S. dollars on the date of receipt, a U.S. Holder will have a tax basis in the foreign currency equal to its U.S. dollar value on the date of receipt. Any U.S. Holder who receives payment in foreign currency and engages in a subsequent conversion or other disposition of the foreign currency may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss, and generally will be U.S. source income or loss for foreign tax credit purposes. Different rules apply to U.S. Holders who use the accrual method of tax accounting. Each U.S. Holder should consult its own U.S. tax advisor regarding the U.S. federal income tax consequences of receiving, owning, and disposing of foreign currency.
Foreign Tax Credit
Subject to the PFIC rules discussed above, a U.S. Holder that pays (whether directly or through withholding) Canadian income tax with respect to dividends paid on the securities (or with respect to any constructive dividend on the Common Warrants) generally will be entitled, at the election of such U.S. Holder, to receive either a deduction or a credit for such Canadian income tax paid. Generally, a credit will reduce a U.S. Holder’s U.S. federal income tax liability on a dollar-for-dollar basis, whereas a deduction will reduce a U.S. Holder’s income subject to U.S. federal income tax. This election is made on a year-by-year basis and applies to all foreign taxes paid or accrued (whether directly or through withholding) by a U.S. Holder during a year. The foreign tax credit rules are complex and involve the application of rules that depend on a U.S. Holder’s particular circumstances. Accordingly, each U.S. Holder should consult its own tax advisor regarding the foreign tax credit rules.
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Net Investment Income Tax
U.S. Holders that are individuals, estates or trusts are required to pay an additional 3.8% tax on the lesser of (1) the U.S. Holder’s “net investment income” for the relevant taxable year and (2) the excess of the U.S. Holder’s modified adjusted gross income for the taxable year over a certain threshold. A U.S. Holder’s “net investment income” generally includes, among other things, dividends and net gains from disposition of property (other than property held in the ordinary course of the conduct of a trade or business). Accordingly, dividends on and capital gain from the sale, exchange or other taxable disposition of the securities may be subject to this additional tax. U.S. Holders are urged to consult their own tax advisors regarding the additional tax on passive income.
Information Reporting; Backup Withholding Tax
Under U.S. federal income tax laws certain categories of U.S. Holders must file information returns with respect to their investment in, or involvement in, a foreign corporation. For example, U.S. return disclosure obligations (and related penalties) are imposed on U.S. Holders that hold certain specified foreign financial assets in excess of certain threshold amounts. The definition of specified foreign financial assets includes not only financial accounts maintained in foreign financial institutions, but also, unless held in accounts maintained by a financial institution, any stock or security issued by a non-U.S. person. U. S. Holders may be subject to these reporting requirements unless the securities are held in an account at certain financial institutions. Penalties for failure to file certain of these information returns are substantial. U.S. Holders should consult their own tax advisors regarding the requirements of filing information returns, including the requirement to file IRS Form 8938.
Payments made within the U.S., or by a U.S. payor or U.S. middleman, of dividends on, and proceeds arising from the sale or other taxable disposition of the securities generally may be subject to information reporting and backup withholding tax, currently at the rate of 24%, if a U.S. Holder (a) fails to furnish its correct U.S. taxpayer identification number (generally on Form W-9), (b) furnishes an incorrect U.S. taxpayer identification number, (c) is notified by the IRS that such U.S. Holder has previously failed to properly report items subject to backup withholding tax, or (d) fails to certify, under penalty of perjury, that it has furnished its correct U.S. taxpayer identification number and that the IRS has not notified such U.S. Holder that it is subject to backup withholding tax. However, certain exempt persons, such as U.S. Holders that are corporations, generally are excluded from these information reporting and backup withholding tax rules. Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a credit against a U.S. Holder’s U.S. federal income tax liability, if any, or will be refunded, if such U.S. Holder furnishes required information to the IRS in a timely manner.
The discussion of reporting requirements set forth above is not intended to constitute a complete description of all reporting requirements that may apply to a U.S. Holder. A failure to satisfy certain reporting requirements may result in an extension of the time period during which the IRS can assess a tax and, under certain circumstances, such an extension may apply to assessments of amounts unrelated to any unsatisfied reporting requirement. Each U.S. Holder should consult its own tax advisors regarding the information reporting and backup withholding rules.
THE ABOVE SUMMARY IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF ALL TAX CONSIDERATIONS APPLICABLE TO U.S. HOLDERS WITH RESPECT TO THE ACQUISITION, OWNERSHIP, AND DISPOSITION OF THE SECURITIES. U.S. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX CONSIDERATIONS APPLICABLE TO THEM IN THEIR OWN PARTICULAR CIRCUMSTANCES.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of January 24,[●], 2023, with respect to the beneficial ownership of our common shares by:
● | each of our directors; |
● | each of the named executive officers; |
● | all of our current directors and executive officers as a group; and |
● | each person, or group of affiliated persons, known to us to be the beneficial owner of more than five percent of our common shares. |
each of our directors;
each of the named executive officers;
all of our current directors and executive officers as a group; and
each person, or group of affiliated persons, known to us to be the beneficial owner of more than five percent of our common shares.
The column entitled “Beneficial Ownership of Common Shares” is based on a total of 11,850,057[●] common shares outstanding as of January 24,[●], 2023.
Beneficial ownership is determined in accordance with the rules and regulations of the SEC and includes voting or investment power with respect to our common stock. Common sharesShares. Common Shares subject to options that are currently exercisable or exercisable within 60 days of January 24,
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[●], 2023 are considered outstanding and beneficially owned by the person holding the options for the purpose of calculating the percentage ownership of that person but not for the purpose of calculating the percentage ownership of any other person. Except as otherwise noted, the persons and entities in this table have sole voting and investing power with respect to all of the shares of our common stockCommon Shares beneficially owned by them, subject to community property laws, where applicable. Unless otherwise indicated below, the address for each natural person listed below is care of Neptune Wellness Solutions Inc., 100-545 Promenade du Centropolis, Laval, Quebec H7T 0A3 Canada.
| Beneficial Ownership of | ||||
Common Shares | |||||
Number of Shares |
| % | |||
Greater than 5% Shareholders: | |||||
Armistice Capital Master Fund Ltd(1) | 2,313,745 | 9.99 | % | ||
Sabby Volatility Warrant Master Fund, Ltd.(2) | 2,300,353 | 9.99 | % | ||
Named Executive Officers and Directors | | | | | |
Michael Cammarata(4) | | 532,821 | | 2.4 | % |
Raymond Silcock(5) | | 38,095 | | * | |
John S. Wirt(6) | | 86,671 | | * | |
Joseph Buaron(7) | | 2,641 | | * | |
Michael De Geus(8) | | 2,641 | | * | |
Ronald Denis | | — | | — | |
Julie Phillips(9) | | 3,782 | | * | |
Philip Sanford(1021) | | 6,094 | | * | |
All current executive officers and directors as a group (8 persons) | | 672,745 | | 3.1 | % |
Beneficial Ownership of Common Shares | ||||||||
Number of Shares | % | |||||||
Greater than 5% Shareholders: | ||||||||
Armistice Capital Master Fund Ltd(1) | 975,295 | 7.8 | % | |||||
Sabby Volatility Warrant Master Fund, Ltd.(2) | 1,095,913 | 8.7 | % | |||||
Empery Asset Management, LP(3) | 989,812 | 7.9 | % | |||||
Shohaib Kassam Sumar(4) | 600,000 | 5.1 | % | |||||
Named Executive Officers and Directors | ||||||||
Michael Cammarata(5) | 524,973 | 4.2 | % | |||||
Raymond Silcock(6) | 19,048 | * | ||||||
John S. Wirt(7) | 58,099 | * | ||||||
Joseph Buaron(8) | 2,245 | * | ||||||
Michael De Geus(9) | 2,425 | * | ||||||
Ronald Denis | — | — | ||||||
Julie Phillips(10) | 5,449 | * | ||||||
Philip Sanford(11) | 5,618 | * | ||||||
All current executive officers and directors as a group (8 persons) | 608,333 | 4.8 | % |
* | Denotes less than 1%. |
(1) | Comprised of 975,295 common shares held directly (based upon information available to the Company as of October 31, 2022) |
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of the |
(2) | Comprised of 1,095,913 common shares held directly (based upon information available to the Company as of January 9, 2023) |
(3) |
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Mr. Cammarata’s holdings consist of (i) 462,510 common shares held directly, and (ii) |
Mr. Silcock’s holdings consist of |
Mr. Wirt’s holdings consist of (i) 956 common shares owned by John S. Wirt IRA and (ii) |
Mr. Buaron’s holdings consist of (i) 1,454 common shares issuable pursuant to deferred share units that will be vested within 60 days after |
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Mr. De Geus’ holdings consist of (i) 180 common shares held directly, (ii) 1,454 common shares issuable pursuant to deferred share units that will be vested within 60 days after |
Ms. Phillips’ holdings consist of (i) 1,793 common shares held directly, (ii) 1,036 common shares issuable pursuant to deferred share units that will be vested within 60 days after |
Mr. Sanford’s holdings consist of (i) 5,618 common shares held |
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SELLING SHAREHOLDERSTable of Contents
This prospectus relatesPLAN OF DISTRIBUTION
[●], who we refer to herein as the [Placement Agent], has agreed to act as our exclusive [Placement Agent] in connection with this offering subject to the resale by the Selling Shareholders from time to time of up to 7,267,114of our common shares. The Selling Shareholders may from time to time offerterms and sell any or allconditions of the common shares set forth below pursuant to this prospectus and any accompanying prospectus supplement. As used in this prospectus, the term “Selling Shareholders” includes the persons listed in the table below, together with any additional[Placement Agent] agreement dated [●], 2023. The [Placement Agent] is not purchasing or selling shareholders listed in a subsequent amendment to this prospectus, and their pledgees, donees, transferees, assignees, successors, designees and others who later come to hold any of the Selling Shareholders’ interests in the common shares, other than through a public sale.
Except as set forth in the footnotes below, the following table sets forth, based on written representations from the Selling Shareholders, certain information as of October 31, 2022 regarding the beneficial ownership of our common shares by the Selling Shareholders and the common shares beingsecurities offered by this prospectus, nor is it required to arrange the Selling Shareholders. The applicable percentage ownershippurchase or sale of common shares is based on approximately 11,850,057 common shares outstanding asany specific number or dollar amount of January 24, 2023. Information with respectsecurities, but has agreed to common shares owned beneficially after the offering assumesuse its [reasonable best efforts] to arrange for the sale of all of the common shares registeredsecurities offered hereby. The Selling Shareholders[We will enter into a securities purchase agreement directly with the investors, at the investor’s option, who purchase our securities in this offering. Investors who do not enter into a securities purchase agreement shall rely solely on this prospectus in connection with the purchase of our securities in this offering.]
We will deliver the securities being issued to each investor upon receipt of such investor’s funds for the purchase of the securities offered pursuant to this prospectus. We expect to deliver the securities being offered pursuant to this prospectus on or about [●], 2023.
We have agreed to indemnify the [Placement Agent] and specified other persons against specified liabilities, including liabilities under the Securities Act, and to contribute to payments the [Placement Agent] may offerbe required to make in respect thereof, to the extent permitted by applicable law.
Fees and sell some, allExpenses
We have engaged [●] as our exclusive [Placement Agent] in connection with this offering. This offering is being conducted on a [“reasonable best efforts”] basis and the [Placement Agent] has no obligation to buy any of the securities from us or noneto arrange for the purchase or sale of their common shares.
Exceptany specific number or dollar amount of securities. We have agreed to pay the [Placement Agent] a fee based on the aggregate proceeds as set forth in the footnotes below, none of the Selling Shareholders has had a material relationship with us other than as a shareholder at any time within the past three years or has ever been an officer or director of one of our affiliates. Each of the Selling Shareholders has acquired (or will acquire) the common shares to be resold hereunder in the ordinary course of business and, at the time of acquisition, none of the Selling Shareholders was a party to any agreement or understanding, directly or indirectly, with any person to distribute the common shares to be resold by such Selling Shareholders under this Registration Statement of which this prospectus forms a part.
Since a Selling Shareholder may sell, some or none of the common shares that it holds that are covered by this prospectus, and because the offering contemplated by this prospectus is not underwritten, no estimate can be given as to the number of our common shares that will be held by Selling Shareholders upon the termination of the offering. The information set forth in the following table regarding the beneficial ownership after the resale of shares is based upon the assumption that the Selling Shareholders will sell all of the common shares covered by this prospectus.
We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished to us that Selling Shareholders have sole voting and investment power with respect to all common shares that they beneficially own, subject to applicable community property laws. Except as otherwise described below, based on the information provided to us by the Selling Shareholders, no Selling Shareholders is a broker-dealer or an affiliate of a broker dealer.
Under the terms of the warrants, a selling shareholder may not exercise the warrants to the extent such exercise would cause such selling shareholder, together with its affiliates and attribution parties, to beneficially own a number of common shares which would exceed 4.99%, as applicable, of our then outstanding common shares following such exercise, excluding for purposes of such determination common shares issuable upon exercise of such warrants which have not been exercised. The number of shares in the second and fourth columns do not reflect this limitation, but the percentages set forth in the fifth column do give effect to this limitation.
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Please see the section titled “Plan of Distribution” in this prospectus for further information regarding the Selling Shareholders’ method of distributing these shares.
Shares Underlying the Warrants | ||||||||||||||||
Name | Number Beneficially Owned Prior to Offering | Number Registered For Sale Hereby | Number Beneficially Owned After Offering | Percent Owned After Offering | ||||||||||||
Empery Asset Master, Ltd. | 1,973,004 | (1) | 1,348,846 | 624,158 | 3.4 | % | ||||||||||
Empery Tax Efficient, LP | 487,447 | (2) | 333,240 | 154,207 | * | |||||||||||
Empery Tax Efficient III, LP | 668,399 | (3) | 456,952 | 211,447 | 1.2 | % | ||||||||||
Sabby Volatility Warrant Master Fund, Ltd. | 910,278 | (4) | 2,139,038 | 910,278 | (5) | 5.0 | % | |||||||||
Armistice Capital Master Fund Ltd. | 975,295 | (6) | 2,139,038 | 975,295 | (7) | 5.4 | % | |||||||||
CCUR Holdings, Inc. | 484,500 | (8) | 484,500 | — | — | |||||||||||
Symbolic Logic, Inc. | 365,500 | (9) | 365,500 | — | — |
below:
| Per Common Share | [Per Pre- | Total | ||||||
Public offering price | $ | [●] | $ | [●] | $ | [●] | |||
[Placement Agent] fees(1) | $ | [●] | $ | [●] | $ | [●] | |||
Proceeds to us, before expenses(2) | $ | [●] | $ | [●] | $ | [●] |
(1) |
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PLAN OF DISTRIBUTION
We are registering 7,267,114Common Shares underlying Warrants previously issued to the Selling Shareholders to permit the resale of these shares by the holders of such shares from time to time after the date of this prospectus. We will not receive any of theaggregate proceeds from the sale by the Selling Shareholders of the Common Shares. We will bear all fees and expenses incident to our obligation to register the Common Shares.
The Selling Shareholders may sell all or a portion of the Common Shares beneficially owned by them and offered hereby from time to time directly or through one or more underwriters, broker-dealers or agents. If the Common Shares are sold through underwriters or broker-dealers, the Selling Shareholders will be responsible for underwriting discounts or commissions or agent’s commissions. The Common Shares may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale, or at negotiated prices. The Selling Shareholders will act independently of us in making decisions with respect to the timing, manner and size of each sale. These sales may be effected in transactions, which may involve crosses or block transactions:
on any national securities exchange or quotation service on which the securities may be listed or quoted at the time of sale;
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|
through the writing of options, whether such options are listed on an options exchange or otherwise;
ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
an exchange distribution in accordance with the rules of the applicable exchange;
privately negotiated transactions;
short sales;
through the distribution of the Common Shares by any Selling Shareholders to its partners, members or shareholders;
through one or more underwritten offerings on a firm commitment or best efforts basis;
sales pursuant to Rule 144;
broker-dealers may agree with the Selling Shareholders to sell a specified number of such shares at a stipulated price per share;
a combination of any such methods of sale; and
any other method permitted pursuant to applicable law.
If the Selling Shareholders effect such transactions by selling Common Shares to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or agents may receive commissions in the form of discounts, concessions or commissions from the Selling Shareholders or commissions from purchasers of the Common Shares for whom they may act as agent or to whom they may sell as principal (which discounts, concessions or commissions as to particular underwriters, broker-dealers or agents may be in excess of those customary in the types of transactions involved). In connection with sales of the Common Shares or otherwise, the Selling Shareholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the Common Shares in the course of hedging in positions they assume. The Selling Shareholders
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may also sell Common Shares short and deliver Common Shares covered by this prospectus to close out short positions and to return borrowed shares in connection with such short sales. The Selling Shareholders may also loan or pledge Common Shares to broker-dealers that in turn may sell such shares.
The Selling Shareholders may pledge or grant a security interest in some or all of the Common Shares owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the Common Shares from time to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending, if necessary, the list of Selling Shareholders to include the pledgee, transferee or other successors in interest as Selling Shareholders under this prospectus. The Selling Shareholders also may transfer and donate the Common Shares in other circumstances in which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.
The Selling Shareholders and any broker-dealer participating in the distribution of the Common Shares [and Pre-Funded Warrants] sold in this offering. We have also agreed to reimburse the [Placement Agent] for certain expenses incurred in connection with this offering.
(2) | The amount of the offering proceeds to us presented in this table does not give effect to any exercise of the [Pre-Funded Warrants or] Common Warrants being issued in this offering. |
We have also agreed to reimburse the [Placement Agent] at closing (i) for legal and other expenses incurred by them in connection with the offering in an aggregate amount up to $[●], and (ii) [●]. We estimate the total expenses payable by us for this offering, excluding the [Placement Agent] fees and expenses, will be approximately $[●].
The [Placement Agent] may be deemed to be “underwriters”an underwriter within the meaning of Section 2(a)(11) of the Securities Act, and any commission paid, orcommissions received by it and any discounts or concessions allowed to, any such broker-dealer mayprofit realized on the resale of the securities sold by it while acting as principal might be deemed to be underwriting commissionsdiscounts or discountscommissions under the Securities Act. AtAs an underwriter, the time a particular offering[Placement Agent] would be required to comply with the requirements of the Common Shares is made, a prospectus supplement, if required, will be distributed which will set forth the aggregate amount of Common Shares being offeredSecurities Act and the terms of the offering,Exchange Act, including, the name or names of any broker-dealers or agents, any discounts, commissions and other terms constituting compensation from the Selling Shareholders and any discounts, commissions or concessions allowed or reallowed or paid to broker-dealers. The Selling Shareholders may indemnify any broker-dealer that participates in transactions involving the sale of the Common Shares against certain liabilities, including liabilities arisingwithout limitation, Rule 415(a)(4) under the Securities Act.
UnderAct and Rule 10b-5 and Regulation M under the securities laws of some states, the Common Shares may be sold in such states only through registered or licensed brokers or dealers. In addition, in some states the Common Shares may not be sold unless such shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.
There can be no assurance that any Selling Shareholder will sell any or all of the Common Shares registered pursuant to the Registration Statement of which this prospectus forms a part.
The Selling Shareholders and any other person participating in such distribution will be subject to applicable provisions of the Securities Exchange Act of 1934 and theAct. These rules and regulations thereunder, including, without limitation, Regulation M of the Securities Exchange Act of 1934, which may limit the timing of purchases and sales of securities by the [Placement Agent] acting as principal. Under these rules and regulations, the [Placement Agent]:
● | may not engage in any stabilization activity in connection with our securities; and |
● | may not bid for or purchase any of our securities or attempt to induce any person to purchase any of our securities, other than as permitted under the Exchange Act, until it has completed its participation in the distribution. |
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Listing
Our Common Shares are listed on The Nasdaq Capital Market under the trading symbol “NEPT.” We do not plan to list [the Pre-Funded Warrants or] the Common Warrants on The Nasdaq Capital Market or any other securities exchange or trading market.
Standstill
We have agreed that, subject to certain exceptions, (i) we will not conduct any issuances of our Common Shares for a period of [●] days following closing of this offering and that (ii) we will not enter into a variable rate transaction for a period of [●] months following the closing of this offering.
Determination of Offering Price
The public offering price of the securities we are offering was negotiated between us and the investors, in consultation with the [Placement Agent] based on the trading of our Common Shares prior to the offering, among other things. Other factors considered in determining the public offering price of the securities we are offering include our history and prospects, the industry in which we operate, our past and present operating results, the stage of development of our business, our business plans for the future and the extent to which they have been implemented, the previous experience of our executive officers, general conditions of the securities markets at the time of the offering and such other factors as were deemed relevant.
Discretionary Accounts
The [Placement Agent] does not intend to confirm sales of the securities offered hereby to any accounts over which it has discretionary authority.
Other Activities and Relationships
The [Placement Agent] and certain of its affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. The [Placement Agent] and certain of its affiliates have, from time to time, performed, and may in the future perform, various commercial and investment banking and financial advisory services for us and our affiliates, for which they received or will receive customary fees and expenses.
In the ordinary course of their various business activities, the [Placement Agent] and certain of its affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investment and securities activities may involve securities and/or instruments issued by us and our affiliates. If the [Placement Agent] or its affiliates have a lending relationship with us, they routinely hedge their credit exposure to us consistent with their customary risk management policies. The [Placement Agent] and its affiliates may hedge such exposure by entering into transactions that consist of either the purchase of credit default swaps or the creation of short positions in our securities or the securities of our affiliates, including potentially the Common Shares offered hereby, in accordance with all applicable securities laws. Any such short positions could adversely affect future trading prices of the Common Shares by the Selling Shareholdersoffered hereby. The [Placement Agent] and any other participating person. Regulation Mcertain of its affiliates may also restrict the abilitycommunicate independent investment recommendations, market color or trading ideas and/or publish or express independent research views in respect of such securities or instruments and may at any person engagedtime hold, or recommend to clients that they acquire, long and/or short positions in the distributionsuch securities and instruments.
The foregoing does not purport to be a complete statement of the Common Sharesterms and conditions of the placement agency agreement or the securities purchase agreement, copies of which are attached to engagethe registration statement of which this prospectus is a part. See “Where You Can Find More Information.”
LEGAL MATTERS
Troutman Pepper Hamilton Sanders LLP has acted as our United States counsel in market-making activitiesconnection with this offering and will pass on certain legal matters with respect to United States law in connection with this offering. Osler, Hoskin & Harcourt LLP, Canadian counsel for the Common Shares. All ofCompany, has passed upon the foregoing may affect the marketabilityvalidity of the Common Shares and the ability of any person or entity to engage in market-making activities with respect to the Common Shares.
We will pay all expenses of the registration of the Common Shares pursuant to the Registration Statement to whichWarrants offered by this prospectus forms a part; provided, however, that a Selling Shareholder will pay all underwriting discounts and selling commissions, if any. We will indemnify the Selling Shareholders against liabilities, including some liabilities under the Securities Act,certain legal matters as to Canadian law. The [Placement Agent] is being represented by [●] in accordanceconnection with any registration rights agreement entered into between us and a Selling Shareholder, or the Selling Shareholders will be entitled to contribution. We may be indemnified by the Selling Shareholders against civil liabilities, including liabilities under the Securities Act, that may arise from any written information furnished to us by the Selling Shareholders specifically for use in this prospectus, in accordance with any registration rights agreement entered into between us and a Selling Shareholder, or we may be entitled to contribution.offering.
Once sold under the Registration Statement of which this prospectus forms a part, the Common Shares will be freely tradable in the hands of persons other than our affiliates.
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EXPERTS
KPMG, an independent registered public accounting firm, audited the consolidated financial statements of Neptune as of March 31, 2022at and for the yearyears ended March 31, 2023 and March 31, 2022, which consolidated financial statements have been included herein and in the registration statement in reliance on the report of KPMG, LLP, and upon the authority of said firm as experts in accounting and auditing. The audit report contains an explanatory paragraph that states there is substantial doubt about Neptune Wellness Solutions Inc.’s ability to continue as a going concern, including that it requires funding in the very near term in order to continue its operations and if it is unable to obtain funding in the upcoming days,very near term, it may have to cease operations and liquidate its assets. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT
On May 25, 2023, our Audit Committee approved the engagement of Berkowitz Pollack Brant Advisors + CPAs (“BPB”) as the Company’s independent registered public accounting firm to audit the Company’s consolidated financial statements for the year ended March 31, 2024. Accordingly, KPMG, the Company’s prior independent registered public accounting firm was informed that it would be dismissed upon completion of their audit of the Company’s consolidated financial statements as of and for the year ended March 31, 2023 and the issuance of their report thereon, which occurred on July 14, 2023.
As disclosed in the Form 8-K filed on May 30, 2023, KPMG’s report on the Company’s consolidated balance sheet as of March 31, 2022, the related consolidated statements of loss and comprehensive loss, changes in equity and cash flows for the year ended March 31, 2022 and the related notes to the recoverability and classificationfinancial statements did not contain any adverse opinion or disclaimer of recorded asset amounts and classification of liabilitiesopinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles, except as follows: KPMG’s report contained separate paragraphs stating that might be necessary should(i) there is substantial doubt about the Company’s ability to continue as a going concern, basis not be valid. The audit report also refersincluding that 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, and (ii) the retroactive adoption of U.S. generally accepted accounting principles and the change in its reporting currency from Canadian dollars to U.S. dollars.dollars applied retrospectively.
During the period from April 1, 2021 through May 30, 2023, there were no disagreements with KPMG on any matter of accounting principles or practices, financial statement disclosures or auditing scope or procedures, which disagreements if not resolved to KPMG’s satisfaction would have caused KPMG to make reference to the subject matter of the disagreement in connection with its report. However, there were reportable events as defined in Item 304(a)(1)(v) of Regulation S-K under the Exchange Act. The consolidated financial statementsreportable events are the material weaknesses as described by the Company in Item 9A of Neptune as of March 31, 2021 andthe Company’s Annual Report on Form 10-K for the year ended March 31, 2022 and updated in Item 4 of our Quarterly Reports of fiscal 2023, relating to:
The Company did not effectively design, implement and operate effective process-level control activities related to its key processes (such as the financial reporting process (including consolidation and journal entries), the purchase to pay process (including cutoff), the inventory process, the order to cash process and the equity process (financial instruments and stock-based compensation), account level assertions and disclosures, including entity level controls and information technology general controls (“ITGCs”).
Further, there were inadequate controls over user and privileged access to information technology (IT) systems for multiple components to adequately restrict access to appropriate finance and IT personnel and enforce appropriate segregation of duties. As a result, process-level automated control activities and manual control activities that are dependent upon information derived from IT systems were also ineffective. The pervasive nature of these deficiencies contributed to the other material weaknesses below:
● | Inadequate oversight processes and procedures to guide individuals in applying internal control over financial reporting to prevent or timely detect material accounting errors and ensuring adherence to applicable accounting standards. |
● | Ineffective risk assessment process, including (i) potential for fraud and (ii) identification and assessment of changes in the business that could impact our system of internal controls. |
● | Ineffective design and implementation of control activities, general controls over technology and deployment of policies and procedures. |
● | Relevant and quality information to support the functioning of internal controls was not consistently generated, used, or reviewed by the Company. |
● | The Company did not sufficiently select, develop, and perform ongoing evaluations to determine that components of internal control are present and functioning. |
● | The evaluation and communication process of internal control deficiencies was not timely. |
● | Inability to prepare on a timely basis the financial statements, supporting accounting records and account reconciliations. |
104
● | Lack of sufficient complement of personnel with an appropriate level of knowledge and experience. |
During the period from April 1, 2021 appearingto March 31, 2023, and the interim period through May 25, 2023, the Company did not consult BPB with respect to either (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s financial statements, and no written report or oral advice was provided to the Company by BPB that BPB concluded was an important factor considered by the Company in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, predecessor independent registered publicreaching a decision as to the accounting, firm,auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement, as set forth in their report thereon (which contains an explanatory paragraph describing conditions that raise substantial doubt about Neptune’s ability to continue as a going concern asterm is described in Note 1Item 304(a)(1)(iv) of Regulation S-K under the Exchange Act and the related instructions to Item 304 of Regulation S-K under the Exchange Act, or a reportable event, as that term is defined in Item 304(a)(1)(v) of Regulation S-K under the Exchange Act.
We provided KPMG with a copy of the disclosures made by us in response to Item 304(a) of Regulation S-K under the Exchange Act, and requested that KPMG furnish us with a letter addressed to the consolidated financial statements), included therein. Such consolidated financialSEC stating whether it agrees with the statements are included hereinmade by us in reliance upon such report given onresponse to Item 304(a) of Regulation S-K under the authority of such firmExchange Act and, if not, stating the respects in which it does not agree. A letter from KPMG is attached hereto as experts in auditing and accounting.Exhibit 16.1.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1, including exhibits, under the Securities Act of 1933, as amended, with respect to the securities offered by this prospectus. This prospectus does not contain all of the information included in the registration statement. For further information pertaining to us and our securities, you should refer to the Registration Statement/prospectus and our exhibits.
In addition, we file annual, quarterly and current reports, proxy statements and other information with the SEC. Our SEC filings are available to the public on a website maintained by the SEC located at www.sec.gov. We also maintain a website at www.promisneurosciences.com.www.neptunecorp.com. Through our website, we make available, free of charge, annual, quarterly and current reports, proxy statements and other information as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The information contained on, or that may be accessed through, our website is not part of, and is not incorporated into, this prospectus.
107
105
Consolidated Financial Statements
For the years ended March 31, 20222023 and 2021
| | |||
Financial Statements | | |||
Report of Independent Registered Public Accounting Firm (Auditor PCAOB Firm ID: 85) | F-2 | |||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-8 | ||||
F-9 |
F-1
To the Shareholders and Board of Directors
Neptune Wellness Solutions Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Neptune Wellness Solutions Inc. (the Corporation)Company) as of March 31, 2023 and 2022, the related consolidated statements of loss and comprehensive loss, changes in equity, and cash flows for the yearyears ended March 31, 2023 and 2022, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the CorporationCompany as of March 31, 2023 and 2022, and the results of its operations and its cash flows for the yearyears ended March 31, 2023 and 2022, in conformity with U.S. generally accepted accounting principles.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the CorporationCompany will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the CorporationCompany incurred a net losssignificant operating losses and negative cash flows from operations for the year ended March 31, 2022,since inception, had an accumulated deficit, and trade and other payables exceed its total current assets at March 31, 20222023. The Company is required to actively manage its liquidity and has no committed sourcesexpenses and payments of financing available. As ofpayables are not being made as 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 two to three months under the current business plan.amounts become due. The CorporationCompany requires funding in the very near term in order to continue its operations. If the CorporationCompany is unable to obtain funding in the upcoming days,very near-term, it may have to cease operations and liquidate its assets. These conditions cast substantial doubt about the Corporation’sCompany’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Corporation’sCompany’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the CorporationCompany in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditaudits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The CorporationCompany is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit,audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Corporation’sCompany’s internal control over financial reporting. Accordingly, we express no such opinion.
Our auditaudits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our auditaudits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit providesaudits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the consolidated financial statements that werewas communicated or required to be communicated to the audit committee and that: (1) relaterelates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit mattersmatter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.it relates.
F-2
Valuation of goodwill and tradenames related to Sprout
As discussed in note 9 to the consolidated financial statements, the Corporation’sCompany’s tradenames intangible asset balance was $19,272,574 and the goodwill balance was $19,550,590 related to Sprout were written down to nil as of March 31, 2022.2023. As discussed in note 3(k)3(l), the Corporation’sCompany’s long-lived assets, including amortizable tradename intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The CorporationCompany identified a triggertriggers of impairment related to its long-lived assets and recorded an impairment charge of $1,527,000charges totaling $17,979,060 for trademarks.Sprout trademarks during fiscal 2023. The CorporationCompany also assesses goodwill impairment annually in the fourth quarter. As part of the goodwill impairment test, the Corporationand compared the carrying amount of the Sprout reporting unit to the fair value, and recorded angoodwill impairment charge of $3,288,847.charges totaling $19,542,436 during fiscal 2023. The fair value was determined using a discounted cash flow model and for goodwill,trademark intangible assets, the Corporation alsoCompany used the market multiples valuation approach.relief from royalty model. Significant assumptions used to estimate the fair values included the forecasted revenue, gross margins, and net working capital investment, weighted average cost of capital and terminal value. Forvalue, and for trademarks, the goodwill impairment test, the market revenue multiple was also a significant assumption.
We identified the evaluation of tradenames and goodwill impairment analysis as a critical audit matter. Subjective auditor judgement was involved in evaluating the valuation models used and the significant assumptions used to determine the fair values. Minor changes to certain of the significant assumptions had a significant effect on the Corporation’sCompany’s estimate of the fair value.values. Additionally, the audit effort associated with the estimate requires specialized skills and knowledge.
The following are the primary procedures we performed to address this critical audit matter. We compared revenue growth rates, gross margins and net working capital investment and revenue growth rates to historical actual results and to the Corporation’sCompany’s most recent plans. In addition, we involved valuation professionals with specialized skills and knowledge who assisted in:
● | Assessing the appropriateness of the valuation models used by the Company |
● | Comparing the discount rate used by the Company in the valuation to discount rate ranges that were independently developed using publicly available market data for comparable companies |
● | Comparing the terminal value used by the Company to economic growth forecast |
● | Comparing the fair value of the trademarks used by the Company to an independently developed amount using the excess earnings method. |
/s/ KPMG LLP
We have served as the Corporation’sCompany’s auditor since 2021.
Montreal, Quebec
July 14, 2023
F-3
NEPTUNE WELLNESS SOLUTIONS INC.
(in U.S. dollars)
Notes | As at March 31, 2022 | As at March 31, 2021 | ||||||||||
Assets | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | $ | 8,726,341 | $ | 59,836,889 | ||||||||
Short-term investment | 19,255 | 19,145 | ||||||||||
Trade and other receivables | 5 | 7,599,584 | 8,667,209 | |||||||||
Prepaid expenses | 3,983,427 | 3,686,851 | ||||||||||
Inventories | 6 | 17,059,406 | 17,317,423 | |||||||||
Total current assets | 37,388,013 | 89,527,517 | ||||||||||
Property, plant and equipment | 7 | 21,448,123 | 37,345,716 | |||||||||
Operating lease right-of-use | 8 | 2,295,263 | 2,899,199 | |||||||||
Intangible assets | 9 | 21,655,035 | 25,956,830 | |||||||||
Goodwill | 9 | 22,168,288 | 25,453,372 | |||||||||
Marketable securities | 21 | — | 150,000 | |||||||||
Other financial assets | 4 | — | 5,615,167 | |||||||||
Total assets | $ | 104,954,722 | $ | 186,947,801 | ||||||||
Liabilities and Equity | ||||||||||||
Current liabilities: | ||||||||||||
Trade and other payables | 10 | $ | 22,700,849 | $ | 19,881,995 | |||||||
Current portion of operating lease liabilities | 8 | 641,698 | 230,016 | |||||||||
Deferred revenues | 285,004 | 1,989,632 | ||||||||||
Provisions | 11 | 1,118,613 | 2,245,658 | |||||||||
Liability related to warrants | 12 | 5,570,530 | 10,462,137 | |||||||||
Total current liabilities | 30,316,694 | 34,809,438 | ||||||||||
Operating lease liabilities | 8 | 2,063,421 | 2,886,940 | |||||||||
Loans and borrowings | 13 | 11,648,320 | 11,312,959 | |||||||||
Other liability | 16(c) | 88,688 | 393,155 | |||||||||
Total liabilities | 44,117,123 | 49,402,492 | ||||||||||
Shareholders’ Equity: | ||||||||||||
Share capital—without par value (5,554,456 shares issued and outstanding as of March 31, 2022; 4,732,090 shares issued and outstanding as of March 31, 2021) | 14 | 317,051,125 | 306,618,482 | |||||||||
Warrants | 14(f) | 6,079,890 | 5,900,973 | |||||||||
Additional paid-in capital | 55,980,367 | 59,625,356 | ||||||||||
Accumulated other comprehensive loss | (7,814,163 | ) | (8,567,106 | ) | ||||||||
Deficit | (323,181,697 | ) | (248,209,952 | ) | ||||||||
Total equity attributable to equity holders of the Corporation | 48,115,522 | 115,367,753 | ||||||||||
Non-controlling interest | 15 | 12,722,077 | 22,177,556 | |||||||||
Total shareholders’ equity | 60,837,599 | 137,545,309 | ||||||||||
Commitments and contingencies | 22 | |||||||||||
Subsequent events | 25 | |||||||||||
Total liabilities and shareholders’ equity | $ | 104,954,722 | $ | 186,947,801 | ||||||||
| | | | | | | | | |
|
| | |
| As at |
| As at | ||
| | | | | March 31, | | March 31, | ||
| | Notes | | 2023 | | 2022 | |||
Assets | | | | | | | | | |
Current assets: |
| |
|
| |
|
| |
|
Cash and cash equivalents | | | | | $ | 1,993,257 |
| $ | 8,726,341 |
Short-term investment | |
| | |
| 17,540 |
| | 19,255 |
Trade and other receivables | |
| 5 | |
| 7,507,333 |
| | 7,599,584 |
Prepaid expenses | |
| | |
| 1,025,969 |
| | 3,983,427 |
Inventories | |
| 6 | |
| 13,006,074 |
| | 17,059,406 |
Total current assets | |
| | |
| 23,550,173 |
| | 37,388,013 |
| | | | | | | | | |
Property, plant and equipment | |
| 7 | |
| 1,403,264 |
| | 21,448,123 |
Operating lease right-of-use assets | |
| 8 | |
| 1,941,347 |
| | 2,295,263 |
Intangible assets | |
| 9 | |
| 1,607,089 |
| | 21,655,035 |
Goodwill | |
| 9 | |
| 2,426,385 |
| | 22,168,288 |
Total assets | | | | | $ | 30,928,258 |
| $ | 104,954,722 |
| | | | | | | | | |
Liabilities and Equity | |
|
| |
|
|
| |
|
Current liabilities: | |
|
| |
|
|
| |
|
Trade and other payables | |
| 10 | | $ | 27,051,561 | | $ | 22,700,849 |
Current portion of operating lease liabilities | |
| | |
| 339,620 | |
| 641,698 |
Loans and borrowings | | | 13 | | | 7,538,369 | | | — |
Deferred revenues | |
| | |
| — | |
| 285,004 |
Provisions | |
| 11 | |
| 2,948,340 | |
| 1,118,613 |
Liability related to warrants | |
| 12 | |
| 3,156,254 | |
| 5,570,530 |
Total current liabilities | |
| | |
| 41,034,144 | |
| 30,316,694 |
| | | | | | | | | |
Operating lease liabilities | |
| | |
| 2,017,888 | |
| 2,063,421 |
Loans and borrowings | |
| 13 | |
| 15,412,895 | |
| 11,648,320 |
Other liability | |
| 16(c) | |
| 24,000 | |
| 88,688 |
Total liabilities | |
| | |
| 58,488,927 | |
| 44,117,123 |
| | | | | | | | | |
Shareholders' Equity (Deficiency): | |
|
| |
|
| |
|
|
Share capital - without par value (11,996,387 shares issued and outstanding as of March 31, 2023; 5,560,829 shares issued and outstanding as of March 31, 2022) | |
| 14 | |
| 321,946,102 | |
| 317,051,125 |
Warrants | |
| 16(e) | |
| 6,155,323 | |
| 6,079,890 |
Additional paid-in capital | |
| | |
| 58,138,914 | |
| 55,980,367 |
Accumulated other comprehensive loss | |
| | |
| (14,538,830) | |
| (7,814,163) |
Deficit | |
| | |
| (383,641,363) | |
| (323,181,697) |
Total equity (deficiency) attributable to equity holders of the Company | |
| | |
| (11,939,854) | |
| 48,115,522 |
| | | | | | | | | |
Non-controlling interest | |
| 15 | |
| (15,620,815) | |
| 12,722,077 |
Total shareholders' equity (deficiency) | |
| | |
| (27,560,669) | |
| 60,837,599 |
| | | | | | | | | |
Commitments and contingencies | |
| 22 | |
| | |
| |
Subsequent events | |
| 25 | |
| | |
| |
Total liabilities and shareholders' equity (deficiency) | | | | | $ | 30,928,258 | | $ | 104,954,722 |
See accompanying notes to the consolidated financial statements.
On behalf of the Board: | | |
| | |
/s/ Julie Philips | /s/ Michael Cammarata | |
Julie Philips | | Michael Cammarata |
Chairman of the Board | | President and CEO |
F-4
NEPTUNE WELLNESS SOLUTIONS INC.
(in U.S. dollars)
Years ended | ||||||||||
Notes | March 31, 2022 | March 31, 2021 | ||||||||
Revenue from sales and services, net of excise taxes of $1,877,543 (2021—$38,056) | $ | 47,695,828 | $ | 34,261,647 | ||||||
Royalty revenues | 1,019,861 | 1,109,678 | ||||||||
Other revenues | 81,435 | 28,994 | ||||||||
Total revenues | 23 | 48,797,124 | 35,400,319 | |||||||
Cost of sales other than loss on inventories, net of subsidies of $924,644 (2021—$932,483 ) | (52,561,404 | ) | (30,964,709 | ) | ||||||
Cost of services | — | (12,846,937 | ) | |||||||
Impairment loss on inventories | 6 | (3,772,066 | ) | (18,962,254 | ) | |||||
Total Cost of sales and services | (56,333,470 | ) | (62,773,900 | ) | ||||||
Gross profit (loss) | (7,536,346 | ) | (27,373,581 | ) | ||||||
Research and development expenses, net of tax credits and grants of nil (2021—$12,272 ) | (880,151 | ) | (1,922,195 | ) | ||||||
Selling, general and administrative expenses, net of subsidies of $99,840 (2021—$1,431,033) | (60,538,424 | ) | (63,824,118 | ) | ||||||
Impairment loss related to intangible assets | 9 | (1,527,000 | ) | — | ||||||
Impairment loss related to property, plant and equipment | 7 | (14,765,582 | ) | (10,747,692 | ) | |||||
Impairment loss related to right-of-use | — | (107,650 | ) | |||||||
Impairment loss related to goodwill | 9 | (3,288,847 | ) | (26,898,016 | ) | |||||
Net gain on sale of assets | 6,469 | — | ||||||||
Loss from operating activities | (88,529,881 | ) | (130,873,252 | ) | ||||||
Finance income | 17 | 7,123 | 825,745 | |||||||
Finance costs | 17 | (2,143,978 | ) | (1,786,781 | ) | |||||
Foreign exchange loss | (685,708 | ) | (4,051,418 | ) | ||||||
Change in revaluation of marketable securities | (107,203 | ) | 169,216 | |||||||
Gain on revaluation of derivatives | 4, 12, 21 | 7,035,118 | 7,974,549 | |||||||
4,105,352 | 3,131,311 | |||||||||
Loss before income taxes | (84,424,529 | ) | (127,741,941 | ) | ||||||
Income tax recovery | 18 | — | 3,477,711 | |||||||
Net loss | (84,424,529 | ) | (124,264,230 | ) | ||||||
Other comprehensive income | ||||||||||
Net change in unrealized foreign currency gains on translation of net investments in foreign operations (tax effect of nil for both periods) | 750,248 | 6,737,947 | ||||||||
Total other comprehensive income | 750,248 | 6,737,947 | ||||||||
Total comprehensive loss | $ | (83,674,281 | ) | $ | (117,526,283 | ) | ||||
Net loss attributable to: | ||||||||||
Equity holders of the Corporation | $ | (74,971,745 | ) | $ | (123,170,020 | ) | ||||
Non-controlling interest | 15 | (9,452,784 | ) | (1,094,210 | ) | |||||
Net loss | $ | (84,424,529 | ) | $ | (124,264,230 | ) | ||||
Total comprehensive loss attributable to: | ||||||||||
Equity holders of the Corporation | $ | (74,218,802 | ) | $ | (116,206,145 | ) | ||||
Non-controlling interest | (9,455,479 | ) | (1,320,138 | ) | ||||||
Total comprehensive loss | $ | (83,674,281 | ) | $ | (117,526,283 | ) | ||||
Basic and diluted loss per share attributable to: | ||||||||||
Equity holders of the Corporation | $ | (15.54 | ) | $ | (35.55 | ) | ||||
Non-controlling interest | $ | (1.96 | ) | $ | (0.32 | ) | ||||
Total loss per share | 19 | $ | (17.50 | ) | $ | (35.86 | ) | |||
Basic and diluted weighted average number of common shares | 4,824,336 | 3,465,059 | ||||||||
| | | | | | | | | |
| | | | | Years ended | ||||
|
| | |
| March 31, |
| March 31, | ||
| | Notes | | 2023 | | 2022 | |||
| | | | | | | | | |
Revenue from sales, net of excise taxes of $643,476 (2022 - $1,877,543 ) | | | | | $ | 51,744,817 |
| $ | 47,695,828 |
Royalty revenues | | | | |
| 818,584 |
| | 1,019,861 |
Other revenues | | | | |
| 51,937 |
| | 81,435 |
Total revenues | |
| 23 | |
| 52,615,338 |
| | 48,797,124 |
| | | | | | | | | |
Cost of sales other than impairment loss on inventories, net of subsidies of nil (2022 - $924,644 ) | |
| | |
| (49,591,156) |
| | (52,561,404) |
Impairment loss on inventories | |
| 6 | |
| (5,498,347) |
| | (3,772,066) |
Total Cost of sales | |
| | |
| (55,089,503) |
| | (56,333,470) |
Gross profit (loss) | |
| | |
| (2,474,165) |
| | (7,536,346) |
| | | | | | | | | |
Research and development expenses | |
| | |
| (484,224) |
| | (880,151) |
Selling, general and administrative expenses, net of subsidies of nil (2022 - $99,840 ) | |
| | |
| (46,424,295) |
| | (60,538,424) |
Impairment loss related to intangible assets | |
| 9 | |
| (17,979,060) |
| | (1,527,000) |
Impairment loss related to property, plant and equipment | |
| 7 | |
| — |
| | (14,765,582) |
Impairment loss on assets held for sale | | | 4 | | | (15,346,119) | | | — |
Impairment loss on right of use assets | |
| | |
| (424,454) |
| | — |
Impairment loss related to goodwill | |
| 9 | |
| (19,542,436) |
| | (3,288,847) |
Net gain (loss) on sale of property, plant and equipment | |
| | |
| (172,945) |
| | 6,469 |
Loss from operating activities | |
| | |
| (102,847,698) |
| | (88,529,881) |
| | | | | | | | | |
Finance income | |
| | |
| 1,445 |
| | 7,123 |
Finance costs | |
| | |
| (3,824,030) |
| | (2,143,978) |
Loss on issuance of derivatives | |
| 12 | |
| (3,156,569) |
| | — |
Foreign exchange gain (loss) | | | | | | 6,434,510 | | | (685,708) |
Change in revaluation of marketable securities | | | | | | — | | | (107,203) |
Gain on revaluation of derivatives | |
| 12, 21 | |
| 14,709,805 |
| | 7,035,118 |
Loss on settlement of liability | |
| | |
| (120,021) |
| | — |
| |
| | |
| 14,045,140 | | | 4,105,352 |
Loss before income taxes | |
| | |
| (88,802,558) |
| | (84,424,529) |
| | | | | | | | | |
Income tax recovery | |
| 18 | |
| — |
| | — |
Net loss | |
| | |
| (88,802,558) |
| | (84,424,529) |
| | | | | | | | | |
Other comprehensive income (loss) | |
|
| |
| |
| | |
Net change in unrealized foreign currency gains (losses) on translation of net investments in foreign operations (tax effect of nil for all periods) | | | | |
| (6,724,667) |
|
| 750,248 |
Total other comprehensive income (loss) | | | | |
| (6,724,667) |
|
| 750,248 |
| | | | | | | | | |
Total comprehensive loss | | | | | $ | (95,527,225) |
| $ | (83,674,281) |
| | | | | | | | | |
Net loss attributable to: | |
|
| |
| |
| | |
Equity holders of the Company | | | | | $ | (60,459,666) |
| $ | (74,971,745) |
Non-controlling interest | |
| 15 | |
| (28,342,892) |
| | (9,452,784) |
Net loss | | | | | $ | (88,802,558) |
| $ | (84,424,529) |
| | | | | | | | | |
Total comprehensive loss attributable to: | |
|
| |
| |
| | |
Equity holders of the Company | | | | | $ | (67,184,333) |
| $ | (74,218,802) |
Non-controlling interest | | | 15 | |
| (28,342,892) |
|
| (9,455,479) |
Total comprehensive loss | | | | | $ | (95,527,225) |
| $ | (83,674,281) |
| | | | | | | | | |
Basic loss per share attributable to: | |
|
| |
| |
| | |
Common Shareholders of the Company | | | 19 | | $ | (5.12) |
| $ | (15.54) |
| | | | | | | | | |
Diluted loss per share attributable to: | | | | | | |
| | |
Common Shareholders of the Company | |
| 19 | | $ | (5.12) | | $ | (15.54) |
| | | | | | | | | |
Basic and diluted weighted average number of common shares | |
| 19 | |
| 11,812,337 | |
| 4,824,336 |
See accompanying notes to the consolidated financial statements.
F-5
(in U.S. dollars)
Share Capital | Accumulated other comprehensive income (loss) | |||||||||||||||||||||||||||||||||||||
Notes | Number | Dollars | Warrants | Additional paid-in capital | Cumulative translation account | Deficit | Equity attributable to equity holders of the Corporation | Equity attributable to non-controlling interest | Total | |||||||||||||||||||||||||||||
Balance as at March 31, 2021 | 4,732,090 | $ | 306,618,482 | $ | 5,900,973 | $ | 59,625,356 | $ | (8,567,106 | ) | $ | (248,209,952 | ) | $ | 115,367,753 | $ | 22,177,556 | $ | 137,545,309 | |||||||||||||||||||
Net loss for the period | — | — | — | — | — | (74,971,745 | ) | (74,971,745 | ) | (9,452,784 | ) | (84,424,529 | ) | |||||||||||||||||||||||||
Other comprehensive income for the period | — | — | — | — | 752,943 | — | 752,943 | (2,695 | ) | 750,248 | ||||||||||||||||||||||||||||
�� | ||||||||||||||||||||||||||||||||||||||
Total comprehensive loss for the period | — | — | — | — | 752,943 | (74,971,745 | ) | (74,218,802 | ) | (9,455,479 | ) | (83,674,281 | ) | |||||||||||||||||||||||||
Transaction with equity holders recorded directly in equity | ||||||||||||||||||||||||||||||||||||||
Contributions by and distribution to equity holders | ||||||||||||||||||||||||||||||||||||||
Share-based payment | 16 | — | — | — | 7,816,845 | — | — | 7,816,845 | — | 7,816,845 | ||||||||||||||||||||||||||||
Warrants in exchange of services rendered by non-employees | 14(f) | — | — | 178,917 | — | — | — | 178,917 | — | 178,917 | ||||||||||||||||||||||||||||
RSUs released, net of withholding taxes | 14(d), 16(b)(ii) | 108,079 | 10,050,319 | — | (11,461,834 | ) | — | — | (1,411,515 | ) | — | (1,411,515 | ) | |||||||||||||||||||||||||
Direct Offering, net of issuance costs | 14(h) | 714,287 | 382,324 | — | — | — | — | 382,324 | — | 382,324 | ||||||||||||||||||||||||||||
Total contributions by and distribution to equity holders | 822,366 | 10,432,643 | 178,917 | (3,644,989 | ) | — | — | 6,966,571 | — | 6,966,571 | ||||||||||||||||||||||||||||
Balance as at March 31, 2022 | 5,554,456 | $ | 317,051,125 | $ | 6,079,890 | $ | 55,980,367 | $ | (7,814,163 | ) | $ | (323,181,697 | ) | $ | 48,115,522 | $ | 12,722,077 | $ | 60,837,599 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | other | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | comprehensive | | | | | | | | | | | | | |
| | | | Share Capital | | | | | | | | loss | | | | | | | | | | | | | ||||
|
| |
| |
| | |
| | |
| | |
| | |
| | |
| Equity |
| | | |
| | |
| | | | | | | | | | | | | | | | | | | | | attributable | | Equity | | | | ||
| | | | | | | | | | | | | | | | | | | | | to equity | | attributable | | | | ||
| | | | | | | | | | | | Additional | | Cumulative | | | | | holders of | | to | | | | ||||
| | | | | | | | | | | | paid-in | | translation | | | | | the | | non-controlling | | | | ||||
|
| Notes |
| Number |
| Dollars |
| Warrants |
| capital |
| account |
| Deficit |
| Company |
| interest |
| Total | ||||||||
Balance as at March 31, 2022 | | | | 5,560,829 | | $ | 317,051,125 | | $ | 6,079,890 | | $ | 55,980,367 | | $ | (7,814,163) | | $ | (323,181,697) | | $ | 48,115,522 | | $ | 12,722,077 | | $ | 60,837,599 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss for the period | | | | — | | | — | | | — | | | — | | | — | | | (60,459,666) | | | (60,459,666) | | | (28,342,892) | | | (88,802,558) |
Other comprehensive loss for the period |
| |
| — |
| | — |
| | — |
| | — |
| | (6,724,667) |
| | — |
| | (6,724,667) |
| | — | |
| (6,724,667) |
Total comprehensive loss for the period |
| |
| — |
| | — |
| | — |
| | — |
| | (6,724,667) |
| | (60,459,666) |
| | (67,184,333) |
| | (28,342,892) | |
| (95,527,225) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Transaction with equity holders recorded directly in equity |
|
|
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | | |
| |
Contributions by and distribution to equity holders |
|
|
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | | |
| |
Share-based payment |
| 16 |
| — |
| | — |
| | — |
| | 3,503,582 |
| | — |
| | — |
| | 3,503,582 |
| | — | |
| 3,503,582 |
Common shares and warrants issued in connection with debt financing | | 13, 14(f), 14(g) | | 555,765 | | | 742,499 | | | 37,723 | | | 65,514 | | | — | | | — | | | 845,736 | | | — | | | 845,736 |
Common shares issued in exchange of services rendered by non-employees | | 14(j) | | 78,769 | | | 57,797 | | | — | | | 99,178 | | | — | | | — | | | 156,975 | | | — | | | 156,975 |
Warrants reclassified from liability |
| 12, 14(f) |
| — |
| | — |
| | 37,710 |
| | — |
| | — |
| | — |
| | 37,710 |
| | — | |
| 37,710 |
Warrants exercised | | 12 | | 384,446 | | | 1,769,000 | | | — | | | — | | | — | | | — | | | 1,769,000 | | | — | | | 1,769,000 |
RSUs released, net of withholding taxes |
| 14(d), 16(b)(ii) |
| 262,495 |
| | 2,325,681 |
| | — |
| | (1,509,727) |
| | — |
| | — |
| | 815,954 |
| | — | |
| 815,954 |
Direct Offering (including pre-funded warrants), net of issuance costs |
| 14(h), 14(i) |
| 5,154,083 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — | |
| — |
Total contributions by and distribution to equity holders |
| |
| 6,435,558 |
| | 4,894,977 |
| | 75,433 |
| | 2,158,547 |
| | — |
| | — |
| | 7,128,957 |
| | — | |
| 7,128,957 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as at March 31, 2023 |
| | | 11,996,387 | | $ | 321,946,102 | | $ | 6,155,323 | | $ | 58,138,914 | | $ | (14,538,830) | | $ | (383,641,363) | | $ | (11,939,854) | | $ | (15,620,815) | | $ | (27,560,669) |
See accompanying notes to the consolidated financial statements.
F-6
NEPTUNE WELLNESS SOLUTIONS INC.
Consolidated Statements of Changes in Equity (Continued)
(in U.S. dollars)
Share Capital | Accumulated other comprehensive income (loss) | |||||||||||||||||||||||||||||||||||||
Notes | Number | Dollars | Warrants | Additional paid-in capital | Cumulative translation account | Deficit | Equity attributable to equity holders of the Corporation | Equity attributable to non-controlling interest | Total | |||||||||||||||||||||||||||||
Balance as at March 31, 2020 | 2,838,233 | $ | 181,970,882 | $ | 3,997,402 | $ | 57,565,035 | $ | (15,530,981 | ) | $ | (125,039,932 | ) | $ | 102,962,406 | $ | — | $ | 102,962,406 | |||||||||||||||||||
Net loss for the period | — | — | — | — | — | (123,170,020 | ) | (123,170,020 | ) | (1,094,210 | ) | (124,264,230 | ) | |||||||||||||||||||||||||
Other comprehensive income (loss) for the period | — | — | — | — | 6,963,875 | — | 6,963,875 | (225,928 | ) | 6,737,947 | ||||||||||||||||||||||||||||
Total comprehensive loss for the period | — | — | — | — | 6,963,875 | (123,170,020 | ) | (116,206,145 | ) | (1,320,138 | ) | (117,526,283 | ) | |||||||||||||||||||||||||
Transaction with equity holders recorded directly in equity | ||||||||||||||||||||||||||||||||||||||
Contributions by and distribution to equity holders | ||||||||||||||||||||||||||||||||||||||
Share-based payment | 16 | — | — | — | 9,885,138 | — | — | 9,885,138 | — | 9,885,138 | ||||||||||||||||||||||||||||
Warrants in exchange of services rendered by non-employees | 14(f) | — | — | 1,903,571 | — | — | — | 1,903,571 | — | 1,903,571 | ||||||||||||||||||||||||||||
Share options exercised | 14(b), 16(a) | 142,909 | 10,992,879 | — | (3,513,919 | ) | — | — | 7,478,960 | — | 7,478,960 | |||||||||||||||||||||||||||
DSUs released | 14(c), 16(b)(i) | 1,381 | 98,093 | — | (98,093 | ) | — | — | — | — | — | |||||||||||||||||||||||||||
RSUs released, net of withholding taxes | 14(d), 16(b)(ii) | 16,414 | 3,402,824 | — | (4,119,959 | ) | — | — | (717,135 | ) | — | (717,135 | ) | |||||||||||||||||||||||||
Restricted shares issued | 14(e), 16(b)(iii) | 850 | 92,846 | — | (92,846 | ) | — | — | — | — | — | |||||||||||||||||||||||||||
At-The-Market | 14(g) | 154,619 | 13,069,149 | — | — | — | — | 13,069,149 | — | 13,069,149 | ||||||||||||||||||||||||||||
Direct Offering, net of issuance costs | 14(h) | 136,389 | 12,017,902 | — | — | — | — | 12,017,902 | — | 12,017,902 | ||||||||||||||||||||||||||||
Private Placement, net of issuance costs | 14(i) | 462,963 | 21,608,448 | — | — | — | — | 21,608,448 | — | 21,608,448 | ||||||||||||||||||||||||||||
Business combinations | 4, 14(j) | 192,617 | 17,595,505 | — | — | — | — | 17,595,505 | 23,497,694 | 41,093,199 | ||||||||||||||||||||||||||||
Registered Direct Offering Priced At-The-Market | 14(k) | 785,715 | 45,769,954 | — | — | — | — | 45,769,954 | — | 45,769,954 | ||||||||||||||||||||||||||||
Total contributions by and distribution to equity holders | 1,893,857 | 124,647,600 | 1,903,571 | 2,060,321 | — | — | 128,611,492 | 23,497,694 | 152,109,186 | |||||||||||||||||||||||||||||
Balance as at March 31, 2021 | 4,732,090 | $ | 306,618,482 | $ | 5,900,973 | $ | 59,625,356 | $ | (8,567,106 | ) | $ | (248,209,952 | ) | $ | 115,367,753 | $ | 22,177,556 | $ | 137,545,309 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | other | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | comprehensive | | | | | | | | | | | | | |
| | | | Share Capital | | | | | | | | loss | | | | | | | | | | | | | ||||
|
| |
| |
| | |
| | |
| | |
| | |
| | |
| Equity |
| | |
| | | |
| | | | | | | | | | | | | | | | | | | | | attributable | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | to | | Equity | | | | ||
| | | | | | | | | | | | | | | | | | | | | equity | | attributable | | | | ||
| | | | | | | | | | | | Additional | | Cumulative | | | | | holders | | to | | | | ||||
| | | | | | | | | | | | paid-in | | translation | | | | | of the | | non-controlling | | | | ||||
| | Notes | | Number | | Dollars | | Warrants | | capital | | account | | Deficit |
| Company | | interest | | Total | ||||||||
Balance as at March 31, 2021 |
| | | 4,732,090 | | $ | 306,618,482 | | $ | 5,900,973 | | $ | 59,625,356 | | $ | (8,567,106) | | $ | (248,209,952) | | $ | 115,367,753 | | $ | 22,177,556 | | $ | 137,545,309 |
Net loss for the period |
| | | — | |
| — | |
| — | |
| — | |
| — | |
| (74,971,745) | |
| (74,971,745) |
| | (9,452,784) | |
| (84,424,529) |
Other comprehensive income for the period |
| | | — | |
| — | |
| — | |
| — | |
| 752,943 | |
| — | |
| 752,943 |
| | (2,695) | |
| 750,248 |
Total comprehensive loss for the period |
| | | — | |
| — | |
| — | |
| — | |
| 752,943 | |
| (74,971,745) | |
| (74,218,802) |
| | (9,455,479) | |
| (83,674,281) |
Transaction with equity holders recorded directly in equity |
|
| |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| |
| |
|
|
Contributions by and distribution to equity holders |
|
| |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| |
| |
|
|
Share-based payment |
| 16 | | — | |
| — | |
| — | |
| 7,816,845 | |
| — | |
| — | |
| 7,816,845 |
| | — | |
| 7,816,845 |
Warrants in exchange of services rendered by non-employees |
| 14(f) | | — | |
| — | |
| 178,917 | |
| — | |
| — | |
| — | |
| 178,917 |
| | — | |
| 178,917 |
RSUs released, net of withholding taxes |
| 14(d), 16(b)(ii) | | 108,079 | |
| 10,050,319 | |
| — | |
| (11,461,834) | |
| — | |
| — | |
| (1,411,515) |
| | — | |
| (1,411,515) |
Direct Offering, net of issuance costs |
| 14(h), 14(i) | | 714,287 | |
| 382,324 | |
| — | |
| — | |
| — | |
| — | |
| 382,324 |
| | — | |
| 382,324 |
Total contributions by and distribution to equity holders |
| | | 822,366 | | | 10,432,643 | |
| 178,917 | |
| (3,644,989) | | | — | |
| — | | | 6,966,571 | |
| — | |
| 6,966,571 |
Balance as at March 31, 2022 |
| | | 5,554,456 | | $ | 317,051,125 | | $ | 6,079,890 | | $ | 55,980,367 | | $ | (7,814,163) | | $ | (323,181,697) | | $ | 48,115,522 | | $ | 12,722,077 | | $ | 60,837,599 |
See accompanying notes to the consolidated financial statements.
F-7
(in U.S. dollars)
Years ended | ||||||||||||
Notes | March 31, 2022 | March 31, 2021 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net loss for the period | $ | (84,424,529 | ) | $ | (124,264,230 | ) | ||||||
Adjustments: | ||||||||||||
Depreciation of property, plant and equipment | 2,723,751 | 3,961,317 | ||||||||||
Non-cash lease expense | 710,984 | 320,669 | ||||||||||
Amortization of intangible assets | 3,356,728 | 15,100,717 | ||||||||||
Impairment loss on goodwill | 9 | 3,288,847 | 26,898,016 | |||||||||
Share-based payment | 16 | 7,816,845 | 9,885,138 | |||||||||
Impairment loss on inventories | 6 | 3,772,066 | 18,962,254 | |||||||||
Expected credit losses | 1,675,390 | 6,995,747 | ||||||||||
Non-employee compensation related to warrants | 14(f) | 178,917 | 1,903,571 | |||||||||
Net finance expense | 2,136,855 | 961,036 | ||||||||||
Unrealized foreign exchange gain | (117,297 | ) | (1,794,737 | ) | ||||||||
Change in revaluation of marketable securities | 107,203 | (169,216 | ) | |||||||||
Interest received | 8,649 | 37,911 | ||||||||||
Interest paid | (970,900 | ) | (689,574 | ) | ||||||||
Revaluation of derivatives | (7,035,118 | ) | (7,974,549 | ) | ||||||||
Impairment loss on property, plant and equipment | 7 | 14,765,582 | 10,747,692 | |||||||||
Impairment loss on right-of-use | — | 107,650 | ||||||||||
Impairment loss on intangibles | 1,527,000 | — | ||||||||||
Payment of lease liabilities | (703,686 | ) | (343,064 | ) | ||||||||
Income taxes expense (recovery) | — | (3,477,711 | ) | |||||||||
Net loss from sale of property, plant and equipment | — | (2,635 | ) | |||||||||
Changes in operating assets and liabilities | 20 | (3,163,414 | ) | (13,811,460 | ) | |||||||
Net cash used in operating activities | (54,346,127 | ) | (56,645,458 | ) | ||||||||
Cash flows from investing activities: | ||||||||||||
Maturity of previously restricted short-term investments | — | 9,037 | ||||||||||
Acquisition of a subsidiary, net of cash acquired | 4 | — | (3,137,242 | ) | ||||||||
Acquisition of property, plant and equipment | (1,938,870 | ) | (6,618,016 | ) | ||||||||
Acquisition of intangible assets | (432,714 | ) | (389,784 | ) | ||||||||
Proceeds from sale of property, plant and equipment | — | 14,503 | ||||||||||
Sales of Acasti shares | 21 | 44,360 | — | |||||||||
Net cash used in investing activities: | (2,327,224 | ) | (10,121,502 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||
Repayment of loans and borrowings | — | (2,457,839 | ) | |||||||||
Withholding taxes paid pursuant to the settlement of non-treasury RSUs | (1,411,515 | ) | (717,135 | ) | ||||||||
Proceeds from the issuance of shares through an At-The-Market | 14(g) | — | 13,736,868 | |||||||||
Proceeds from the issuance of shares and warrants through a Direct Offering | 14(h) | 8,000,000 | 12,833,713 | |||||||||
Proceeds from the issuance of shares and warrants through a Private Placement | 14(i) | — | 35,300,844 | |||||||||
Proceeds from the issuance of shares and warrants through a Registered Direct Offering Priced At-The-Market | 14(k) | — | 55,000,000 | |||||||||
Issuance of shares and warrants costs | 14 | (636,847 | ) | (6,174,452 | ) | |||||||
Proceeds from exercise of options and pre-funded warrants | 14(b) | 650 | 7,478,960 | |||||||||
Net cash provided by financing activities: | 5,952,288 | 115,000,959 | ||||||||||
Foreign exchange loss on cash and cash equivalents | (389,485 | ) | (185,672 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents | (51,110,548 | ) | 48,048,327 | |||||||||
Cash and cash equivalents, beginning of period | 59,836,889 | 11,788,562 | ||||||||||
Cash and cash equivalents as at March 31, 2022 and 2021 | $ | 8,726,341 | $ | 59,836,889 | ||||||||
Cash and cash equivalents is comprised of: | ||||||||||||
Cash | $ | 8,726,341 | $ | 59,836,889 | ||||||||
| | | | | | | | |
|
| | | Years ended | ||||
| | | | March 31, | | March 31, | ||
| | Notes | | 2023 | | 2022 | ||
Cash flows from operating activities: | | | |
| | | |
|
Net loss for the year | | | | $ | (88,802,558) |
| $ | (84,424,529) |
Adjustments: | | | |
| |
| | |
Depreciation of property, plant and equipment | | | |
| 1,068,550 |
| | 2,723,751 |
Non-cash lease expense | | | |
| 505,940 |
| | 710,984 |
Amortization of intangible assets | | | |
| 1,659,323 |
| | 3,356,728 |
Impairment loss on goodwill | | 9 | |
| 19,542,436 |
| | 3,288,847 |
Share-based payment | | 16 | |
| 3,503,582 |
| | 7,816,845 |
Impairment loss on inventories | | 6 | |
| 5,498,347 |
| | 3,772,066 |
Expected credit losses | | | |
| 1,358,133 |
| | 1,675,390 |
Non-employee compensation related to warrants | | 14(f) | |
| — |
| | 178,917 |
Loss on issuance of derivatives | | | | | 3,156,569 | | | — |
Net finance expense | | | |
| 3,822,585 |
| | 2,136,855 |
Unrealized foreign exchange loss | | | |
| (6,434,510) |
| | (117,297) |
Change in revaluation of marketable securities | | | |
| — |
| | 107,203 |
Interest received | | | |
| 1,445 |
| | 8,649 |
Interest paid | | | |
| (369,468) |
| | (970,900) |
Loss on settlement of liability | | | | | 120,021 | | | — |
Revaluation of derivatives | | | |
| (14,709,805) |
| | (7,035,118) |
Impairment loss on property, plant and equipment | | 7 | |
| — |
| | 14,765,582 |
Impairment loss on assets held for sale | | 4 | | | 15,346,119 | | | — |
Impairment loss on right-of-use assets | | | |
| 424,454 |
| | — |
Impairment loss on intangibles | | 9 | |
| 17,979,060 |
| | 1,527,000 |
Common shares issued in exchange of services rendered by non-employees | | | | | 156,975 | | | — |
Payment of lease liabilities | | | |
| (323,246) |
| | (703,686) |
Net loss on sale of property, plant and equipment | | | |
| 172,945 |
| | — |
Changes in operating assets and liabilities | | 20(a) | |
| 7,757,734 |
| | (3,163,414) |
Income taxes paid | | | | | (360) | | | — |
Net cash used in operating activities | | | |
| (28,565,729) |
| | (54,346,127) |
Cash flows from investing activities: | |
| |
| |
| | |
Proceeds on sale of assets | | | |
| 170,000 |
| | — |
Net proceeds from the sale of Cannabis assets | | 4 | |
| 3,121,778 |
| | — |
Acquisition of property, plant and equipment | | | |
| (931,107) |
| | (1,938,870) |
Acquisition of intangible assets | | | |
| — |
| | (432,714) |
Sales of Acasti shares | | 21 | |
| — |
| | 44,360 |
Net cash provided by (used in) investing activities | | | |
| 2,360,671 |
| | (2,327,224) |
Cash flows from financing activities: | |
| |
| |
| |
|
Increase in loans and borrowings, net of financing fees | | | |
| 10,366,767 |
| | — |
Withholding taxes paid pursuant to the settlement of non-treasury RSUs | | | |
| (574,153) |
| | (1,411,515) |
Gross proceeds from the issuance of shares and warrants through a Direct Offering | | 12 | |
| 5,000,002 |
| | 8,000,000 |
Proceeds from the issuance of shares and warrants through a Registered Direct Offering Priced At-The-Market and Concurrent Private Placement | | 12 | |
| 6,000,002 |
| | — |
Warrants issuance costs | | 12 | |
| (1,500,950) |
| | (636,847) |
Proceeds from exercise of options and pre-funded warrants | | 12 | |
| 65 |
| | 650 |
Net cash provided by financing activities | | | |
| 19,291,733 |
| | 5,952,288 |
Foreign exchange gain (loss) on cash and cash equivalents | | | |
| 180,241 |
| | (389,485) |
Net decrease in cash and cash equivalents | | | |
| (6,733,084) |
| | (51,110,548) |
Cash and cash equivalents, beginning of period | | | |
| 8,726,341 |
| | 59,836,889 |
Cash and cash equivalents as at March 31, 2023 and 2022 | | | | $ | 1,993,257 |
| $ | 8,726,341 |
Cash and cash equivalents is comprised of: | | | |
| |
| | |
Cash | | | | $ | 1,993,257 |
| $ | 8,726,341 |
See accompanying notes to the consolidated financial statements.
F-8
1. | Reporting entity: |
Neptune Wellness Solutions Inc. (the “Corporation”"Company" or “Neptune”"Neptune") is incorporated under the Business Corporations Act (Québec) (formerly Part 1A of the Companies Act (Québec)). The CorporationCompany is domiciled in Canada and its registered office is located at
Neptune is a diversified and fully integrated health and wellness company. Through its flagship consumer-facing brands, Neptune Wellness, Forest Remedies
On June 8, 2022, Neptune announced the launch of a new Consumer Packaged Goods ("CPG") focused strategic plan to reduce costs, improve the Company's path to profitability and home care.
Sale of Cannabis Assets
On October 17, 2022, Neptune announced an agreement to sell substantially all of its Cannabis assets (including, but not limited to, the production facility located in Sherbrooke, Québec and certain legal entities including various related brand names and trademarks, including MoodRing and PanHash) to PurCann Pharma Inc. These assets were reported as Assets Held For Sale ("AHFS") as of September 30, 2022. On November 9, 2022 the sale to PurCann Pharma Inc. was completed.
Share consolidation
On June 9, 2022, Neptune announced the completion of the Corporation’sCompany's proposed consolidation of its common shares (the “Common Shares”"Common Shares") on the basis of one (1) post-consolidation Common Share for every thirty-five
On July 29, 2022, Neptune announced that it has applied and received approval for a voluntary delisting of its common shares from the Toronto Stock Exchange ("TSX"). The delisting from the TSX will not affect the Company's listing on the Nasdaq Capital Market ("Nasdaq"). Neptune's common shares were delisted from the TSX at the close of trading on August 15, 2022.
Going concern
These consolidated financial statements have been prepared on a going concern basis, which presumes that the CorporationCompany will continue realizing its assets and discharging its liabilities in the normal course of business for the foreseeable future. The CorporationCompany has incurred significant operating losses and negative cash flows from operations since inception. To date, the CorporationCompany has financed its operations primarily through the public offering and private placement of Common Shares,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 yeartwelve-month period ended March 31, 2023, the Company incurred a net loss of $88.8 million and negative cash flows from operations of $28.6 million, and had an accumulated deficit of $383.6 million as of March 31, 2023. For the twelve-month period ended March 31, 2022, the CorporationCompany incurred a net loss of $84.4 million and negative cash flows from operations of $54.3 million, and had an accumulated deficit of $323.2 million as at March 31, 2022.million. Furthermore, as at March 31, 2022,2023, the Corporation’sCompany’s trade and other payables exceed its total current liabilities and expected level of expenses forassets. Accordingly, the next twelve months exceed cash on hand of $8.7 million. The Corporation currently has no committed sources of financing available.
F-9
As of the date these financial statements are authorized for issuance, thethere is minimal cash balance is expected to be sufficient to operate the business for only the next two to three months under the current business plan.balance. The CorporationCompany requires funding in the very near term in order to continue its operations. The Company’s lack of cash resources and current share price may adversely affect its ability to raise new capital and execute its business strategy. If the CorporationCompany is unable to obtain funding in the upcoming days,very near-term, it may have to cease operations and liquidate its assets.
These conditions cast substantial doubt about the Corporation’sCompany's ability to continue as a going concern.
Going forward, the CorporationCompany will seek additional financing in various forms as part of its plan to have the right funding structure in place.forms. To achieve the objectives of its business plan, Neptune plans to raise the necessary funds through additional financingssecurities offerings and the establishment of strategic alliances as well as additional research grants and research tax credits. While the Corporation has limited debt, all of which is subordinated, assets available for financing include real estate, accounts receivable and inventories.alliances. The ability of the CorporationCompany to complete the needed financing and ultimately achieve profitable operations is dependent on a number of factors outside of the Corporation’s control.Company’s control and subject to market conditions. The Corporation’sCompany’s business plan is dependent upon, amongstamong other things, its ability to achieve and maintain profitability, and continue to obtain adequate ongoing debt and/or equity financing with creditors, officers, directors and stakeholders to finance operations within and beyond the next twelve months.
These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the going concern basis not be valid. These adjustments could be material.
2. | Basis of preparation: |
(a) | Accounting framework: |
These consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“US GAAP”). The consolidated financial statements of(GAAP) as codified in the Corporation have been prepared in accordance with US GAAP for all periods presented. Comparative figures, which were previously prepared in accordance with International Financial Reporting Standards (”IFRS”) as issued by the International Accounting Standards Board have been adjusted as required to be compliant with the Corporation’s accounting policies under US GAAP.
(b) | Functional and reporting currency: |
Effective March 31, 2022, the Corporation hasCompany changed its reporting currency from Canadian dollars (“CAD”) to U.S. dollars (“USD”). This change in reporting currency has been applied retrospectivelyretroactively such that all amounts in the consolidated financial statements of the CorporationCompany and the accompanying notes thereto are expressed in U.S. dollars. References to “$”"$" and “USD”"USD" are U.S dollars and references to “CAD $” and “CAD”"CAD" are to Canadian dollars. For comparative purposes, historical consolidated financial statements were recast in U.S. dollars by translating (i) assets and liabilities at the closing exchange rate in effect at the end of the respective period, (ii) revenues, expenses and cash flows at the average exchange rate in effect for the respective period and (iii) equity transactions at historical exchange rates. Translation gains and losses are included as part of the cumulative foreign currency translation adjustment, which is reported as a component of shareholders’ equity under accumulated other comprehensive loss.
The assets and liabilities of foreign operations with a functional currency other than the U.S. dollar are translated into U.S. dollars at the exchange rate in effect at the balance sheet date. Revenue and expenses are translated at the monthly average exchange rates for the period. Differences arising from the exchange rate changes are recorded within foreign currency translation adjustments, a component of other comprehensive income (loss).
Transactions in foreign currencies are translated to the respective functional currencies of the Corporation’sCompany’s subsidiaries at the average exchange rates for the period. The monetary items denominated in currencies other than the functional currency of a subsidiary are translated at the exchange rates prevailing at the balance sheet date.
As a result of the divestiture of its Canadian cannabis business, a significant portion of its remaining revenues, expenses, assets and liabilities are denominated in US dollars. In addition and as a result of the increasing operations in the U.S., Neptune changed its functional currency from Canadian dollars (“CAD”) to U.S. dollars (“USD”), effective October 1, 2022. This change in functional currency has been applied prospectively from the date of the change.
All assets and liabilities were reported using the same USD values as previously reported under the USD reporting currency described above. The cumulative translation account in Neptune was effectively frozen and the accumulated balance as at September 30, 2022 is carried forward. Changes in the cumulative translation account after October 1, 2022 relate to conversion of subsidiary financial statements whose functional currency is not USD. As of October 1, 2022, the 2020 Warrants and 2021 Warrants no longer met the
F-10
criteria for liability classification as a result of the change in functional currency and therefore were reclassified to equity on this date (see note 14(f)).
(c) | Use of estimates: |
The preparation of the consolidated financial statements in accordance with U.S. GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from the estimates made by management.
Estimates are based on management’s best knowledge of current events and actions that the CorporationCompany may undertake in the future. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
Estimates include the following:
Estimating the write down of |
● | Estimating expected credit losses for receivables. |
● | Estimating the recoverable amount of non-financial assets, to determine and |
● | Estimating the lease term of contracts with |
● | Estimating the revenue from contracts with customers subject to variable consideration. |
● | Estimating the fair value of bonus, options and warrants that are based on market and non-market conditions (note 12). |
● | Estimating the fair value of the |
Estimating the litigation provision as it depends upon the outcome of proceedings (note 11). |
3.Significant accounting policies:
(a) | Basis of consolidation: |
These consolidated financial statements include the accounts of the CorporationCompany and its subsidiaries in which the CorporationCompany has a controlling financial interest. All intercompany balances and transactions have been eliminated from the Corporation’sCompany’s consolidated financial statements. On February 10, 2021, Neptune acquired a 50.1% interest in Sprout Foods, Inc. (“Sprout” or “Sprout Foods”). The accounts of the subsidiary are included in the consolidated financial statements from that date.
(b) | Business combinations and related goodwill: |
Business combinations are accounted for using the acquisition method as at the acquisition date when control is transferred. The consideration transferred for the acquisition of a business is the fair value of the assets transferred, and any liability and equity interests issued by the CorporationCompany to the former owners of the acquired business on the date control of the acquired company is obtained. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are generally measured initially at their fair values at the acquisition date. Restructuring, transaction costs other than those associated with the issue of debt or equity securities, and other direct costs of a business combination are not considered part of the business acquisition transaction and are expensed as incurred.
The CorporationCompany measures goodwill as the fair value for the consideration transferred less the net recognized amount of the identifiable assets acquired and liabilities assumed, including the recognized amount of any
(c) | Derivative over its own equity: |
The CorporationCompany has issued liability-classified derivatives over its own equity and has a call option on the
F-11
An embedded derivative is separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss.
Derivatives and separable embedded derivatives are recognized initially at fair value and attributable transaction costs are expensed as incurred. Subsequent to the initial recognition, derivatives and separable embedded derivatives are measured at fair value and all changes in the fair value are recognized in profit or loss, in the line item “Gain on revaluation of derivatives”.
(d) | Cash and cash equivalents: |
The CorporationCompany considers all highly liquid, short-term investments with original maturities of three months or less at the time of purchase to be cash equivalents. Cash equivalents consist of time deposits with a number of U.S. and
(e) | Investments: |
Investments in equity investments in publicly traded companies in which the CorporationCompany does not exercise significant influence are classified as
(f) | Trade accounts receivable: |
Trade accounts receivable consist of amounts due from normal business activities. 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
(g) | Inventories: |
Inventories are measured at the lower of cost and net realizable value. The cost of finished goods, raw materials, supplies and spare parts is based on the weighted-average cost method. The cost of finished goods and work in progress includes expenditures incurred in acquiring the inventories, production or conversion costs,
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 CorporationCompany records write-downs for excess, slow moving and obsolete inventory. To determine these amounts, the CorporationCompany 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.
(h) | Property, plant and equipment, net: |
Property, plant and equipment are measured at historical cost less accumulated depreciation and accumulated impairment losses, if any. Historical cost includes expenditures that are directly attributable to the acquisition of the asset, including all costs incurred in bringing the asset to its present location and condition.
Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment.
Depreciation is calculated on the cost of an asset using either a straight-line basis or a declining basis over the estimated useful lives of each item of property, plant and equipment.
F-12
| | | | | |
Asset | Method | Period/Rate | |||
Building and building components | Straight-line | 20 to 40 years | | ||
Laboratory, and plant equipment | Straight-line | 10 to 20 years | | ||
Furniture and office equipment | Declining balance | 20% to | % | ||
Computer equipment | Straight-line | 2 to 5 years | |
(i) | Goodwill and other Intangible assets: |
(i) | Initial recognition: |
Goodwill represents the excess purchase price over the estimated fair value of net assets acquired in a business combination. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses.
Intangible assets with finite lives are carried at cost less accumulated amortization and impairment losses, if any, and are amortized on a straight-line basis over the estimated useful life of the intangible asset.
| | | | |
Asset | Method | Period/Rate | ||
Customer relationships | Straight-line | 10 years | ||
License agreements | Straight-line | 31 months to 12 years | ||
Website and trademarks | Straight-line | 4 years | ||
Tradenames | Straight-line | 15 years | ||
Computer software | Straight-line | 3 to 5 years |
(ii) | Subsequent expenditure: |
Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditures, including expenditure on internally generated goodwill and brands, are recognized in profit or loss as incurred.
(j) | Assets held for sale: |
The Company classifies long-lived assets or disposal groups to be sold as assets held for sale in the period in which all of the following conditions are met: management, having the authority to approve the action, commits to a plan to sell the asset or disposal group; the asset or disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets or disposal groups; an active program to locate a buyer and other actions required to complete the plan to sell the asset or disposal group have been initiated; the sale of the asset or disposal group is probable, and transfer of the asset or disposal group is expected to qualify for recognition of a completed sale within one year; the assets of disposal group are subject to an asset sale and purchase agreement (see note 4); and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
Assets and liabilities directly associated with assets held for sale are measured at the lower of carrying amount and fair value less costs to sell immediately prior to their classification. Any loss resulting from this measurement is recognized in the period in which the held-for sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset or disposal group until the date of the sale.
Assets classified as held for sale, and the assets and liabilities included within the disposal group classified as held for sale are presented separately on the face of the balance sheet. Non-current assets that are classified as held for sale are not depreciated.
(k) | Research and development: |
Research and development expenditures are expensed as incurred. These costs primarily consist of employees’ salaries and benefits related to research and development activities, consultants that conduct the Corporation’sCompany’s clinical trials, independent auditors and consultants to perform investigation activities on behalf of the Corporation,Company, clinical trial materials, stock-based compensation expense, and other
F-13
(l) | Impairment: |
(i) | Long-lived assets: |
Long-lived assets, such as property, plant, and equipment, and finite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
(ii) | Goodwill: |
Goodwill is assessed for impairment annually in the fourth quarter or more frequently if events or changes in circumstances indicate that the carrying value of a reporting unit more likely than not exceeds its fair value. Goodwill is tested for impairment at the reporting unit level, which is the operating segment, or a component, which is one level below that operating segment. Components are aggregated as a single reporting unit if they have similar economic characteristics.
Goodwill is tested for impairment when there is a triggering event indicating that the carrying amount may be impaired. When impairment indicators are identified, the CorporationCompany compares the reporting unit’s fair value to its carrying amount, including goodwill. An impairment loss is recognized as the difference, if any, between the reporting unit’s carrying amount and its fair value, to the extent the difference does not exceed the total amount of goodwill allocated to the reporting unit. Any impairment loss recognized is not reversed in future periods.
For the purposes of annual impairment testing, the carrying amounts of goodwill are allocated to the reporting units. In conducting its annual impairment test, the CorporationCompany first reviews qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. Factors considered in a qualitative assessment include, among other things, macroeconomic conditions, industry and market considerations, financial performance of the respective reporting unit and other relevant entity and reporting-unit specific considerations. If factors indicate that the fair value of the reporting unit is less than its carrying amount, the CorporationCompany performs a quantitative assessment. The fair value of the reporting unit is determined by analyzing scenarios of business projections and sensitivities attempting to model various assumptions as to how the revenues and cash flows of the business may evolve depending on factors including macroeconomic conditions, industry and market considerations, cost factors and overall financial performance specific to the reporting unit. The CorporationCompany estimates the fair values of its reporting units based on discounted cash flow (“DCF”) methodology reflecting the latest projections.
(m) | Revenue: |
The Corporation’sCompany’s revenue is comprised of sales of (i) nutraceutical products, (ii) cannabis and hemp products, (iii) food and beverages products, (iv) innovation products and (v) processing services. Payment terms are short-term in nature and are generally less than one year. In addition, if the good is transferred and payment is received within one year, the Company does not determine significant financing components.
Sale of products:
The Corporation’sCompany’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
F-14
for sales refunds within other current liabilities with a corresponding decrease in revenues. Furthermore, the CorporationCompany 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.
Processing services:
Prior to the divestiture of Cannabis (see note 4), the Company was involved in the extraction, purification and formulation of health and wellness products. Revenue earned on processing services is recognized as the services are rendered in accordance with contractual terms, recovery of the consideration is probable and the amount of revenue can be measured reliably. The CorporationCompany recognizes revenue from processing services in proportion to the stage of completion of the service at the reporting date. The stage of completion is assessed based on surveys of work performed. All related production costs are expensed as incurred.
Royalty revenues:
Royalties are earned under the terms of the applicable agreement and are recognized when it is probable that the economic benefits associated with the transaction will be received and the amount can be measured reliably.
Principal versus agent arrangements:
The CorporationCompany 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 CorporationCompany must determine whether it is a principal in these transactions by evaluating the nature of its promise to the customer. The CorporationCompany 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 CorporationCompany records revenue as the net amount when it does not meet the criteria to be considered a principal.
(n) | Cost of revenue: |
Cost of revenue includes all costs directly related to the manufacturing of products, including the cost of raw materials, direct labor, packaging, direct production costs, plant overhead, depreciation expense related to manufacturing and corresponding
(o) | Selling, general and administrative expenses: |
Selling, general and administrative (“SG&A”) expenses include selling and administrative personal costs, sales and marketing expenses, professional fees, depreciation expense related to
(p) | Government grants: |
Government grants, consisting of grants, subsidies and Quebec provincial investment tax credits, are recorded as a reduction of the related expense or cost of the asset acquired. Government grants are recognized when there is reasonable assurance that the CorporationCompany has met or will meet the requirements of the approved grant program and there is reasonable assurance that the grant will be received.
Grants that compensate the CorporationCompany for expenses incurred are recognized in profit or loss in reduction thereof on a systematic basis in the same years in which the expenses are recognized. Grants that compensate the CorporationCompany for the cost of an asset are recognized in profit or loss on a systematic basis over the useful life of the asset.
(q) | Leases: |
The CorporationCompany determines if an arrangement is or contains a lease at contract inception and classifies it as either an operating or finance lease. In addition to lease agreements, the CorporationCompany reviews all material contracts that could contain an embedded lease for potential embedded lease obligations. The CorporationCompany recognizes a
F-15
The lease liability is recognized based on the present value of the remaining fixed or
Variable lease payments that do not depend on an index or a specified rate are not included in the measurement of lease liabilities but instead are recognized as expenses in the period in which the event or condition that triggers the payment occurs.
The lease term for purposes of lease accounting may include options to extend or terminate the lease when it is reasonably certain that the CorporationCompany will exercise that option as of the commencement date of the lease. For operating leases, the lease expense is recognized on a straight-line basis over the
After the commencement date, the carrying amount of lease liabilities is increased to reflect the accretion of interest and reduced to reflect lease payments made. In addition, the carrying amount of lease liabilities is remeasured when there is a change in future lease payments arising from a change in an index or specified rate, if there is a modification to the lease terms and conditions, a change in the estimate of the amount expected to be payable under residual value guarantee, or if the CorporationCompany changes its assessment of whether it will exercise a termination, extension or purchase option. The
Leases with an initial term of twelve months or less are not recorded on the consolidated balance sheets; the CorporationCompany recognizes lease expense for these leases over their lease term.
(r) | Share-based payment: |
The CorporationCompany offers a stock option plan, which is further described in Note 16, Share-based payments.
For equity-settled awards, the grant date fair value of share-based payment awards is recognized as an expense, with a corresponding increase in equity, over the applicable vesting period of the awards. The grant date fair value takes into consideration market performance conditions when applicable. The CorporationCompany has elected to record awards that vest on multiple instalmentsinstallments as multiple awards, otherwise referred to as graded vesting. For performance-based options issued, the fair value of the instrument is measured at the grant date and expensed over the vesting term when the performance targets are considered probable of being achieved. The CorporationCompany also elected to adjust the amount recognized as an expense to reflect the number of awards for which the related service and
Equity based awards, consisting of RSUs, DSUs and cash bonus based on the price of the CorporationCompany common share price, are initially measured based on the fair value of the share-based payment awards at grant date. The cash bonus is remeasured at the end of each reporting period, until settlement.
The fair value of the share-based payment transactions is measured using the Black-Scholes model. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility (based on the historical volatility), weighted average expected life of the instruments (based on contractual life, tranche vesting term and general option holder behavior), expected dividends, and the risk-free interest rate (based on government bonds). Service and
F-16
(s) | Income tax: |
Income taxes are comprised of current and deferred taxes. These taxes are accounted for using the liability method. Current tax is recognized in connection with income for tax purposes, unrealized tax
Deferred tax is recognized on the difference between the carrying amount of an asset or a liability, as reflected in the financial statements, and the corresponding tax base, used in the computation of income for tax purposes (temporary differences) and measured using the enacted tax rates and laws as at the balance sheet date that are expected to apply to the income that the CorporationCompany expects to arise for tax purposes in the period during which the difference is expected to reverse. Management assesses the likelihood that a deferred tax asset will be realized, and a valuation allowance is provided to the extent that it is more likely than not that all or a portion of a deferred tax asset will not be realized. The determination of both current and deferred taxes reflects the Corporation’sCompany’s interpretation of the relevant tax rules and judgement.
An unrealized tax benefit may arise in connection with a period that has not yet been reviewed by the relevant tax authority. A change in the recognition or measurement of an unrealized tax benefit is reflected in the period during which the change occurs.
Income taxes are recognized in the consolidated statement of loss, except when they relate to an item that is recognized in other comprehensive income (loss) or directly in equity, in which case, the taxes are also recognized in other comprehensive income (loss) or directly in equity respectively. Where income taxes arise from the initial accounting for a business combination, these are included in the accounting for the business combination.
Interest and penalties in respect of income taxes are not recognized in the consolidated statement of loss as a component of income taxes but as a component of interest expense.
(t) | Net earnings or loss per share: |
Basic net earnings or loss per share is calculated by dividing the profit or loss attributable to common shareholders of the CorporationCompany by the weighted average number of common shares outstanding during the period. Diluted net earnings or loss per share is determined by adjusting the profit or loss attributable to common shareholders and the weighted average number of common shares outstanding, adjusted for own shares held, for the effects of all dilutive potential common shares, which comprise warrants, share options, deferred share units, restricted share units and restricted shares granted to employees and directors.
(u) | New standards and interpretations not yet adopted: |
Accounting pronouncements not yet adopted
In October 2021, the FASB issued ASU
F-17
In June 2016, the FASB issued ASU 2016-13, Financial instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which amends the guidance on the impairment of financial instruments by requiring measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, and earlier adoption is permitted beginning in the first quarter of fiscal 2019. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates (“ASU 2019-10”). The purpose of this amendment is to create a two-tier rollout of major updates, staggering the effective dates between larger public companies and all other entities. This granted certain classes of companies, including Smaller Reporting Companies (“SRCs”), additional time to implement major FASB standards, including ASU 2016-13. Larger public companies will still have an effective date for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All other entities are permitted to defer adoption of ASU 2016-13, and its related amendments, until the earlier of fiscal periods beginning after December 15, 2022. The Company will adopt ASU 2016-13 for its fiscal year beginning April 1, 2023, and the Company’s evaluation of the above amendments.
4.Business combination and disposal:
(a) | Divesture of the Cannabis assets: |
On June 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 Canadian cannabis disposal group assets met the criteria to be classified as held for sale. At September 30, 2022, the disposal group had no business acquisitionsbeen 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 on October 16, 2022 for $3,790,340 ($5,150,000 CAD), with cost to sell the Canadian cannabis disposal group asset in the amount of $586,783, for net assets held for sale of $3,203,557, resulting in an impairment loss of $15,346,119 for the year ended March 31, 2022. 2023.
The Corporation acquired the following business for the year ended March 31, 2021:
(b) | Acquisition of a controlling interest in Sprout Foods: |
On February 10, 2021, Neptune acquired a 50.1% equity interest in Sprout Foods, Inc. (“Sprout” or “Sprout Foods”). Through Sprout Foods, Neptune entered a new market: the organic baby food market. Sprout is committed to offering products that contain whole foods, no preservatives, no concentrates, no added sugar, are USDA certified organic and are
Sprout’s other equity interest owners granted Neptune a call option (the “Call Option”) to purchase the remaining 49.9% outstanding equity interests of Sprout, at any time beginning on January 1, 2023 and ending on December 31, 2023. The total consideration payable for the additional
As at the close of the transaction, the value of the asset related to the Call Option was determined to be $5,523,255, representing the difference between the market price and the contract value of the Call Option, discounted at a rate of 8.9% and assuming the transaction would take place on January 1, 2023. To establish the market price, the multiples selected were 2.3x for revenues and 12.0x for EBITDA, based on analysis of average and median industry multiples, and were adjusted to consider a 20% discount; the multiples to be used as per the contract are 3.0x for revenues and 15.0x for EBITDA, weighted at 50%. As at March 31, 2022, the fair value of the asset was remeasured to nil, (2021 – $5,615,167), generating a loss on
5.Trade and excluding cash flows related to contributory assets.
| | | | | | |
|
| March 31, |
| March 31, | ||
| | 2023 | | 2022 | ||
Trade receivables | | $ | 5,699,816 | | $ | 6,987,865 |
Sales taxes receivable | |
| 981,594 | |
| 497,824 |
Accrued and other receivables | |
| 825,923 | |
| 47,985 |
Tax credits receivable | |
| — | |
| 14,487 |
Grants and subsidies receivables | |
| — | |
| 51,423 |
| | $ | 7,507,333 | | $ | 7,599,584 |
F-18
Fair value recognized on acquisition | ||||
Assets acquired | ||||
Cash and cash equivalents | $ | 2,862,758 | ||
Trade receivables | 2,062,773 | |||
Inventories | 7,705,273 | |||
Prepaid expenses and other current assets | 178,229 | |||
Property and equipment | 140,619 | |||
Right-of-use | 892,472 | |||
Tradenames | 22,364,000 | |||
Other assets | 5,550,279 | |||
41,756,403 | ||||
Liabilities assumed | ||||
Trade and other payables | $ | 5,163,813 | ||
Lease liability | 892,472 | |||
Promissory note | 11,446,356 | |||
17,502,641 | ||||
Total identifiable net assets at fair value | 24,253,762 | |||
Non-controlling interest measured at fair value (49.9%) | (23,497,694 | ) | ||
Goodwill arising on acquisition | 22,839,437 | |||
Purchase price | $ | 23,595,505 | ||
Consist of: | ||||
Cash | $ | 6,000,000 | ||
Common shares issued, at fair value | 17,595,505 | |||
Total consideration | $ | 23,595,505 | ||
2021 | ||||
March 31, 2022 | March 31, 2021 | |||||||
Trade receivables | $ | 6,987,865 | $ | 6,099,627 | ||||
Sales taxes receivable | 497,824 | 740,201 | ||||||
Accrued and other receivables | 47,985 | 547,039 | ||||||
Tax credits receivable | 14,487 | — | ||||||
Grants and subsidies receivables | 51,423 | 1,280,342 | ||||||
$ | 7,599,584 | $ | 8,667,209 | |||||
No wage and rent subsidies related to the Canada Emergency Wage Subsidy (CEWS) and Canada Emergency Rent Subsidy (CERS) were recorded during the year ended March 31, 2022 in the amount of2023 (2022- $1,024,484 with $51,423 receivable as at March 31, 2022). For the year ended March 31, 2022, (2021 – $2,363,516 and $1,280,342 respectively). Thisthis has been recorded in cost of goods sold and selling, general and administrative expenses, against the related salary and rent expenses, in the amounts of $924,644 and $99,840 respectively, compared to $932,483 and $1,431,033 for the previous year.
The aging of trade receivable balances and the allowance for doubtful accounts as at March 31, 20222023 and 20212022 were as follows:
March 31, 2022 | March 31, 2021 | |||||||
Current | $ | 4,898,533 | $ | 2,372,855 | ||||
Past due 0-30 days | 909,643 | 1,002,752 | ||||||
Past due 31-120 days | 423,836 | 1,001,901 | ||||||
Past due over 121 days | 10,388,106 | 9,637,609 | ||||||
Trade receivables | 16,620,118 | 14,015,117 | ||||||
Less expected credit loss | (9,632,253 | ) | (7,915,490 | ) | ||||
$ | 6,987,865 | $ | 6,099,627 | |||||
| | | | | | |
|
| March 31, |
| March 31, | ||
| | 2023 | | 2022 | ||
Current | | $ | 2,945,122 | | $ | 4,898,533 |
Past due 0-30 days | |
| 3,229,269 | |
| 909,643 |
Past due 31-120 days | |
| 415,201 | |
| 423,836 |
Past due over 121 days | |
| 10,122,002 | |
| 10,388,106 |
Trade receivables | |
| 16,711,594 | |
| 16,620,118 |
Less expected credit loss | |
| (11,011,778) | |
| (9,632,253) |
| | $ | 5,699,816 | | $ | 6,987,865 |
The movement in expected credit loss in respect of trade receivables was as follows:
March 31, 2022 | March 31, 2021 | |||||||
Balance, beginning of year | $ | 7,915,490 | $ | 514,595 | ||||
Bad debt expenses | 2,505,738 | 7,339,626 | ||||||
Foreign exchange loss | 41,373 | 405,148 | ||||||
Recoveries collected | (830,348 | ) | (343,879 | ) | ||||
Balance, end of year | $ | 9,632,253 | $ | 7,915,490 | ||||
| | | | | | |
|
| March 31, |
| March 31, | ||
| | 2023 | | 2022 | ||
Balance, beginning of year | | $ | 9,632,253 | | $ | 7,915,490 |
Bad debt expense | |
| 1,358,133 | |
| 2,505,738 |
Foreign exchange loss | |
| 21,392 | |
| 41,373 |
Recoveries collected | |
| — | |
| (830,348) |
Balance, end of year | | $ | 11,011,778 | | $ | 9,632,253 |
Credit risk is the risk of a loss if a customer or counterparty to a financial asset fails to meet its contractual obligations, and arises primarily from the Corporation’sCompany’s trade receivables. The CorporationCompany may also have credit risk relating to cash and cash equivalents and short-term investments, which are managed by dealing only with highly-rated Canadian institutions. The carrying amount of these financial assets, as disclosed in the consolidated statements of financial position, represents the Corporation’sCompany’s credit exposure at the reporting date. The Corporation’sCompany’s trade receivables and credit exposure fluctuate throughout the year. The Corporation’sCompany’s average trade receivables and credit exposure during the year may be higher than the balance at the end of that reporting period.
As
Most of the Corporation’sCompany's customers are distributors for a given territory and are privately-held provincially owned andor publicly owned companies. The profile and credit quality of the Corporation’sCompany’s customers vary significantly. Adverse changes in a customer’s financial position could cause the CorporationCompany to limit or discontinue conducting business with that customer, require the CorporationCompany 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’sCompany’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 CorporationCompany will temporarily transact with customers on a prepayment basis where circumstances warrant. The Corporation’sCompany’s credit controls and processes cannot eliminate credit risk.
During the year ended March 31, 2022,2023, the CorporationCompany transacted with a few new customers, for which financial positions deteriorated during the year. The CorporationCompany has recorded specific provisions related to these customers.
March 31, 2022 | March 31, 2021 | |||||||
Raw materials | $ | 7,920,190 | $ | 6,917,716 | ||||
Work in progress | 1,016,916 | 5,912,935 | ||||||
Finished goods | 7,974,690 | 3,455,365 | ||||||
Supplies and spare parts | 147,610 | 1,031,407 | ||||||
$ | 17,059,406 | $ | 17,317,423 | |||||
F-19
6.Inventories:
| | | | | | |
|
| March 31, |
| March 31, | ||
| | 2023 | | 2022 | ||
Raw materials | | $ | 5,314,450 | | $ | 7,920,190 |
Work in progress | |
| — | |
| 1,016,916 |
Finished goods | |
| 7,360,850 | |
| 7,974,690 |
Supplies and spare parts | |
| 330,774 | |
| 147,610 |
| | $ | 13,006,074 | | $ | 17,059,406 |
During the years ended March 31, 20222023 and 2021,2022, inventories have been reduced by $3,772,066$5,498,347 and $18,962,254$3,772,066 respectively, as a result of a write-down to their net realizable value, which is included in cost of sales.
Years ended | ||||||||
March 31, 2022 | March 31, 2021 | |||||||
Land | $ | 182,831 | $ | 182,001 | ||||
Building and building components | 27,226,065 | 26,499,100 | ||||||
Laboratory and plant equipment | 37,372,148 | 36,583,756 | ||||||
Furniture and office equipment | 597,075 | 539,648 | ||||||
Computer equipment | 878,101 | 692,855 | ||||||
Total | $ | 66,256,220 | $ | 64,497,360 | ||||
Less: Accumulated depreciation and impairment loss | (44,808,097 | ) | (27,151,644 | ) | ||||
$ | 21,448,123 | $ | 37,345,716 | |||||
| | | | | | |
| | Years ended | ||||
|
| March 31, |
| March 31, | ||
| | 2023 | | 2022 | ||
Land | | $ | — | | $ | 182,831 |
Building and building components | |
| 1,520,833 | |
| 27,226,065 |
Laboratory and plant equipment | |
| 558,083 | |
| 37,372,148 |
Furniture and office equipment | |
| 37,291 | |
| 597,075 |
Computer equipment | |
| 608,284 | |
| 878,101 |
Total | | $ | 2,724,491 | | $ | 66,256,220 |
Less: Accumulated depreciation and impairment losses | |
| (1,321,227) | |
| (44,808,097) |
| | $ | 1,403,264 | | $ | 21,448,123 |
Depreciation expense has been recorded in the following accounts in the consolidated statements of loss:
Years ended | ||||||||
March 31, 2022 | March 31, 2021 | |||||||
Cost of sales | $ | 1,902,214 | $ | 2,442,208 | ||||
Selling, general and administrative expenses | 821,537 | 1,519,109 | ||||||
$ | 2,723,751 | $ | 3,961,317 | |||||
| | | | | | |
| | Years ended | ||||
|
| March 31, |
| March 31, | ||
| | 2023 | | 2022 | ||
Cost of sales | | $ | 303,274 | | $ | 1,902,214 |
Selling, general and administrative expenses | |
| 765,276 | |
| 821,537 |
| | $ | 1,068,550 | | $ | 2,723,751 |
As at September 30, 2022, property, plant and equipment related to the Canadian cannabis asset group were classified as assets held for sale on the balance sheet (refer to note 4). As indicated in note 4, the Cannabis related assets were written down, resulting in an impairment loss of $15,346,119 for the year ended March 31, 2023.
As of March 31, 2022, the CorporationCompany identified a trigger of impairment related to its Canadian cannabis asset group and recorded an impairment charge of $12,361,123. Impairment indicators such as increased operating losses, decline in the share price and negative industry and economic trends were identified in the fourth quarter. The fair value of the asset group was determined to be less than the carrying value, resulting in an impairment loss of $3,150,663 of the building and components and $9,210,460 to the laboratory and plant equipment. After impairment, the carrying value of the Canadian cannabis asset group as of March 31, 2022 was $20,290,929 which included the production facility land and building of $17,101,160 and equipment of $3,189,769. The fair value of the asset group was determined using the market multiple valuation approach with the significant assumption of market revenue multiple. The fair value of the individual assets of land, building and equipment was determined using market prices for comparable asset (level 3).
During the year ended March 31, 2023, the Company disposed of office equipment resulting in a gain on disposal of property, plant and equipment of $213,350. In addition, the Company wrote off deposits with a vendor to purchase assets that are not going to be delivered, representing a loss of $386,295.
F-20
During the second quarter of the year ended September 30, 2021,March 31, 2022, the CorporationCompany impaired certain equipment of the Canadian cannabis long lived assets and the long-lived assets of the Sugarleaf reporting unit as they were no longer generating economic benefits.unit. The fair value of these long-lived assets was establishedwere determined to be nil, and as such anresulting in impairment chargelosses of $979,942 was recorded.
8.Leases:
The fair value was estimated to $1,475,880 based on comparable transactions and market data (level 3). Consequently, an impairment loss of $9,213,926 was recognized as at March 31, 2021 on the consolidated statement of loss and comprehensive loss, under impairment loss related to property, plant and equipment.
The operating lease costs, included within cost of sales and general and administrative expenses amounted to $710,984 (2021 – $320,669)nil (2022 - $710,984).
During the years ended March 31, 2023 and 2022, the Company entered into no significant operating leases. During the year ended March 31, 2021,2023, the Corporation entered into the following significant operating leases:
Additional information related to operating leases was as follows:
The following table summarizes the lease liabilities amounts recognized in the consolidated balance sheets:
March 31, 2022 | March 31, 2021 | |||||||
Current | $ | 641,698 | $ | 230,016 | ||||
Non-current | 2,063,421 | 2,886,940 | ||||||
Total | $ | 2,705,119 | $ | 3,116,956 | ||||
| | | | | | |
|
| March 31, |
| March 31, | ||
| | 2023 | | 2022 | ||
Current | | $ | 339,620 | | $ | 641,698 |
Non-current | |
| 2,017,888 | |
| 2,063,421 |
Total | | $ | 2,357,508 | | $ | 2,705,119 |
The following table summarizes the movements in cash and
Years ended | ||||||||
March 31, 2022 | March 31, 2021 | |||||||
Operating cash flow payments for operating lease liabilities | $ | (25,201 | ) | $ | (36,445 | ) | ||
Operating cash inflow payments for sublease classified as operating lease | 61,166 | 21,320 | ||||||
Operating leases from business combination | — | 892,472 | ||||||
Operating lease right-of-use assets obtained in exchange for operating lease liabilities | 275,840 | 1,282,743 |
| | | | | | |
| | Years ended | ||||
|
| March 31, |
| March 31, | ||
| | 2023 | | 2022 | ||
Operating cash flow payments for operating lease liabilities | | $ | (35,466) | | $ | (25,201) |
Operating cash inflow payments for sublease classified as operating lease | |
| 49,894 | | | 61,166 |
Operating lease right-of-use assets obtained in exchange for operating lease liabilities | |
| 945,145 | | | 275,840 |
The CorporationCompany has calculated the weighted-average remaining lease term, presented in years below, and the weighted-average discount rate for the operating lease population. The CorporationCompany uses the incremental borrowing rate as the lease discount rate, unless the lessor’s rate implicit in the lease is readily determinable, in which case it is used.
March 31, 2022 | March 31, 2021 | |||||||
Weighted-average remaining operating lease term (in years) | 6.34 | 5.38 | ||||||
Weighted-average operating lease discount rate | 5.69 | % | 6.12 | % |
| | | | | |
|
| March 31, |
| March 31, |
|
| | 2023 | | 2022 | |
Weighted-average remaining operating lease term (in years) |
| 6.41 |
| 6.34 | |
Weighted-average operating lease discount rate |
| 8.47 | % | 5.69 | % |
(a) | Maturity analysis – contractual undiscounted cash flows: |
| | | |
|
| March 31, | |
| | 2023 | |
2024 | | $ | 519,033 |
2025 | |
| 510,260 |
2026 | |
| 480,398 |
2027 | |
| 491,288 |
2028 | |
| 287,143 |
2029 and thereafter | |
| 673,107 |
Total lease liabilities payments | | $ | 2,961,229 |
Less: Imputed interest | |
| (603,721) |
Total operating lease liabilities | | $ | 2,357,508 |
F-21
March 31, 2022 | ||||
2023 | $ | 753,444 | ||
2024 | 575,223 | |||
2025 | 457,263 | |||
2026 | 340,263 | |||
2027 | 194,593 | |||
2028 and thereafter | 878,569 | |||
Total lease liabilities payments | $ | 3,199,355 | ||
Less: Imputed interest | (494,236 | ) | ||
Total operating lease liabilities | $ | 2,705,119 | ||
As at March 31, 2022 | Cost | Accumulated amortization | Accumulated impairment losses | Net | Weighted remaining average useful life (in years) | |||||||||||||||
Customer relationships | 11,127,771 | (9,896,889 | ) | — | 1,230,882 | 4.75 | ||||||||||||||
Farmer relationships | 10,446,700 | (10,446,700 | ) | — | — | — | ||||||||||||||
Patents | 288,541 | (288,541 | ) | — | — | — | ||||||||||||||
License agreements | 4,088,843 | (3,050,053 | ) | — | 1,038,790 | 3.79 | ||||||||||||||
Website and trademarks | 529,441 | (457,836 | ) | — | 71,605 | 1.00 | ||||||||||||||
Computer software | 710,525 | (669,341 | ) | — | 41,184 | 0.25 | ||||||||||||||
Tradenames | 22,504,329 | (1,704,755 | ) | (1,527,000 | ) | 19,272,574 | 14.00 | |||||||||||||
Intangible assets | $ | 49,696,150 | $ | (26,514,115 | ) | $ | (1,527,000 | ) | $ | 21,655,035 | 7.73 | |||||||||
Goodwill | $ | 127,442,658 | $ | — | $ | (105,274,370 | ) | $ | 22,168,288 | N/A | ||||||||||
As at March 31, 2021 | Cost | Accumulated amortization | Accumulated impairment losses | Net | Weighted remaining average useful life (in years) | |||||||||||||||
Customer relationships | 11,077,278 | (9,525,598 | ) | — | 1,551,680 | 5.75 | ||||||||||||||
Farmer relationships | 10,399,298 | (10,399,298 | ) | — | — | — | ||||||||||||||
Patents | 287,231 | (287,231 | ) | — | — | — | ||||||||||||||
License agreements | 4,070,290 | (2,309,950 | ) | — | 1,760,340 | 4.79 | ||||||||||||||
Website and trademarks | 95,221 | (24,554 | ) | — | 70,667 | 2.00 | ||||||||||||||
Computer software | 707,301 | (297,006 | ) | — | 410,295 | 1.25 | ||||||||||||||
Tradenames | 22,364,201 | (200,353 | ) | — | 22,163,848 | 15.00 | ||||||||||||||
Intangible assets | $ | 49,000,820 | $ | (23,043,990 | ) | $ | — | $ | 25,956,830 | 8.57 | ||||||||||
Goodwill | $ | 126,864,388 | $ | — | $ | (101,411,016 | ) | $ | 25,453,372 | N/A | ||||||||||
| | | | | | | | | | | | | | |
|
| | |
| | |
| | |
| | |
| Weighted |
| | | | | | | | Accumulated | | | | | remaining | |
| | | | | Accumulated | | impairment | | | | | average useful | ||
As at March 31, 2023 | | Cost | | amortization | | losses | | Net | | life (in years) | ||||
Customer relationships | | $ | 3,029,631 | | $ | (2,195,217) | | $ | — | | $ | 834,414 | | 3.75 |
License agreements |
| | 1,703,837 |
| | (931,162) |
| | — |
| | 772,675 |
| 4.22 |
Tradenames |
| | 22,504,329 |
| | (2,998,269) |
| | (19,506,060) |
| | — |
| — |
Intangible assets | | $ | 27,237,797 | | $ | (6,124,648) | | $ | (19,506,060) | | $ | 1,607,089 |
| 3.98 |
Goodwill | | $ | 21,968,821 | | $ | — | | $ | (19,542,436) | | $ | 2,426,385 |
| N/A |
| | | | | | | | | | | | | | |
|
| | |
| | |
| | |
| | |
| Weighted |
| | | | | | | | Accumulated | | | | | remaining | |
| | | | | Accumulated | | impairment | | | | | average useful | ||
As at March 31, 2022 | | Cost | | amortization | | losses | | Net | | life (in years) | ||||
Non-compete agreements | | $ | 319,872 | | $ | (319,872) | | $ | — | | $ | — | | — |
Customer relationships | | | 11,127,771 | | | (9,896,889) | | | — | | | 1,230,882 | | 4.75 |
Farmer relationships | | | 10,446,700 | | | (10,446,700) | | | — | | | — | | — |
Patents | | | 288,541 | | | (288,541) | | | — | | | — | | — |
License agreements |
| | 4,088,843 |
| | (3,050,053) |
| | — |
| | 1,038,790 |
| 3.79 |
Website and trademarks |
| | 529,441 |
| | (457,836) |
| | — |
| | 71,605 |
| 1.00 |
Computer software |
| | 710,525 |
| | (669,341) |
| | — |
| | 41,184 |
| 0.25 |
Tradenames |
| | 22,504,329 |
| | (1,704,755) |
| | (1,527,000) |
| | 19,272,574 |
| 14.00 |
Intangible assets | | $ | 49,696,150 | | $ | (26,514,115) | | $ | (1,527,000) | | $ | 21,655,035 |
| 7.73 |
Goodwill | | $ | 127,442,658 | | $ | — | | $ | (105,274,370) | | $ | 22,168,288 |
| N/A |
Amortization expense has been recorded in the following accounts in the consolidated statementstatements of loss:
Years ended | ||||||||
March 31, 2022 | March 31, 2021 | |||||||
Cost of sales | $ | 582,096 | $ | 901,856 | ||||
Selling, general and administrative expenses | 2,774,632 | 14,198,861 | ||||||
$ | 3,356,728 | $ | 15,100,717 | |||||
| | | | | | |
|
| Years ended | ||||
| | March 31, | | March 31, | ||
| | 2023 |
| 2022 | ||
Cost of sales | | $ | 958 | | $ | 582,096 |
Selling, general and administrative expenses |
| | 1,658,365 |
| | 2,774,632 |
| | $ | 1,659,323 | | $ | 3,356,728 |
The estimated aggregate amortization expense related to intangible assets with finite useful life for each of the next five fiscal years is as follows:
2023 | 2024 | 2025 | 2026 | 2027 | ||||||||||||||||
Estimated aggregate amortization expense | $ | 2,514,571 | $ | 2,442,943 | $ | 2,442,943 | $ | 2,342,144 | $ | 2,032,939 |
| | | | | | | | | | | | | | | |
|
| 2024 |
| 2025 |
| 2026 |
| 2027 |
| 2028 | |||||
Estimated aggregate amortization expense | | $ | 405,646 | | $ | 405,646 | | $ | 405,646 | | $ | 350,020 | | $ | 40,131 |
Goodwill as of March 31, 20222023 and March 31, 20212022 was as follows:
Notes | Goodwill | |||||||
Balance as at March 31, 2020 | $ | 30,104,661 | ||||||
Business acquisition | 4 | 22,839,437 | ||||||
Impairment loss | (26,898,016 | ) | ||||||
Effect of movements in exchange rates | (592,710 | ) | ||||||
Balance as at March 31, 2021 | 25,453,372 | |||||||
Impairment loss | (3,288,847 | ) | ||||||
Effect of movements in exchange rates | 3,763 | |||||||
Balance as at March 31, 2022 | $ | 22,168,288 | ||||||
| | | | | |
| | Notes | | Goodwill | |
Balance as at March 31, 2021 | | | | $ | 25,453,372 |
Impairment loss | | | |
| (3,288,847) |
Effect of movements in exchange rates | | | |
| 3,763 |
Balance as at March 31, 2022 | | | | $ | 22,168,288 |
Impairment loss | | | |
| (19,542,436) |
Effect of movements in exchange rates | | | |
| (199,467) |
Balance as at March 31, 2023 | | | | $ | 2,426,385 |
An impairment test of goodwill is performed on an annual basis, or more frequently if an impairment indicator is triggered. Impairment is determined by assessing the recoverable amount of the reporting unit to which goodwill is allocated and comparing it to the reporting units’ carrying amount. For the purpose of impairment testing, this represents the lowest level within the CorporationCompany at which the goodwill is monitored for internal management purposes.
F-22
March 31, 2022 | March 31, 2021 | |||||||
Biodroga | $ | 2,617,698 | $ | 2,613,935 | ||||
Sprout | 19,550,590 | 22,839,437 | ||||||
$ | 22,168,288 | $ | 25,453,372 | |||||
| | | | | | |
|
| March 31, |
| March 31, | ||
| | 2023 | | 2022 | ||
Biodroga | | $ | 2,426,385 | | $ | 2,625,851 |
Sprout |
| | — |
| | 19,542,437 |
| | $ | 2,426,385 | | $ | 22,168,288 |
(a) | Annual impairment testing of Biodroga: |
The CorporationCompany performed its annual impairment testing of the Biodroga goodwill as at March 31, 20222023 and 2021.2022. The fair value of the Biodroga reporting unit’s operations was determined to be higher than the carrying value and resulted in no impairment of goodwill recorded in the year ended March 31, 20222023 and March 31, 2021.
The fair value of the reporting unit was estimated using discounted cash flow model with a WACC
Cash flows were projected based on past experience, actual operating results and the three-year business plan including a terminal growth rate of 2.5% (2021(2022 – 2.5%).
The most significant assumptions used to estimate the fair values using 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. Should these projections not be realized, an impairment loss may be needed in future periods. As at March 31, 2023 and 2022, the assumptions used in determining the fair value were not subject to a degree of uncertainty that would have caused impairment to be recorded as there was sufficient headroom between the fair value of the reporting unit and its carrying value.
The model is particularly sensitive to the future expected cash flows in the upcoming periods, should these not be realized, an impairment loss may be needed in future periods.
(b) | Impairment testing of Sprout: |
During the fourth quarter of year ended March 31, 2023, the Company performed an annual impairment testing of the Sprout goodwill. 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 $11,971,965 goodwill impairment loss was recorded in the fourth quarter of the year ended March 31, 2023, resulting in no goodwill remaining. The fair value of the reporting unit was estimated using a discounted cash flow model with a WACC pre-tax discount rate of 11.6%. The discount rate represents the WACC for comparable companies operating in similar industries as the reporting unit, based on publicly available information. Determination of the WACC requires separate analysis of the cost of equity and debt, and considers a risk premium based on an assessment of risks related to the projected cash flows of the reporting unit. During the fourth quarter of the year ended March 31, 2023, all of the trademark intangible assets on Sprouts books were also impaired, which resulted in an impairment of $15,385,531. These impairments were mostly due to revised expected cash inflows based on the Company's latest projections.
During the third quarter of the year ended March 31, 2023 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. Based on the results of the Company’s third quarter 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 year ended March 31, 2023, 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
F-23
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 at September 30, 2022. 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 loss was recorded in the quarter ended September 30, 2022. Due to the impairment losses recorded in this quarter, 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 Company also identified a trigger or impairment related to its intangible assets and recorded an impairment of $2,593,529 for the Sprout trademarks. The fair value was determined using a relief from royalty model.
As part of the impairment testing process, during the above periods in fiscal 2023, 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. For trademarks, the fair value was determined using a relief from royalty model, for which the rate used is a significant assumption.
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 ana higher impairment charge. Should these projections not be realized, an impairment loss may be needed in future periods. As at March 31, 2022, the
During the year ended March 31, 2022, negative industry and economic trends were identified in the second quarter. The fair value of the asset group was determined to be less than the carrying value, resulting in an impairment loss of $2,323,062 to other long-lived assets. The fair value of the asset group was determined using market multiple valuation approach with the significant assumption of market revenue multiple. The fair value of the individual assets of land, building and equipment was determined using market prices for comparable asset.
March 31, 2022 | March 31, 2021 | |||||||
Trade payables | $ | 10,667,780 | $ | 12,154,734 | ||||
Accrued liabilities and other payables | 11,211,335 | 5,841,675 | ||||||
Employee salaries and benefits payable | 576,826 | 1,750,375 | ||||||
Short-term portion of long-term payables | 244,908 | 135,211 | ||||||
$ | 22,700,849 | $ | 19,881,995 | |||||
10.Trade and other payables:
| | | | | | |
|
| March 31, |
| March 31, | ||
| | 2023 | | 2022 | ||
Trade payables | | $ | 20,525,617 | | $ | 10,667,780 |
Accrued liabilities and other payables | |
| 5,262,167 | |
| 11,211,335 |
Employee salaries and benefits payable | |
| 1,263,777 | |
| 576,826 |
Short-term portion of long-term payables | |
| — | |
| 244,908 |
| | $ | 27,051,561 | | $ | 22,700,849 |
11.Provisions:
(a) |
Warrants | Amount | |||||||
Outstanding as at March 31, 2020 | — | $ | — | |||||
Warrants issued during the year | 497,355 | 18,119,998 | ||||||
Revaluation | (7,869,253 | ) | ||||||
Movements in exchange rates | 211,392 | |||||||
Outstanding as at March 31, 2021 | 497,355 | 10,462,137 | ||||||
Warrants issued during the year | 1,428,574 | 7,585,314 | ||||||
Revaluation | (12,633,316 | ) | ||||||
Movements in exchange rates | 156,395 | |||||||
Outstanding as at March 31, 2022 | 1,925,929 | 5,570,530 | ||||||
Reference | Date of issuance | Number of warrants outstanding | Number of warrants exercisable | Exercise price | Expiry date | |||||||||||
2020 Warrants | October 22, 2020 | 300,926 | 300,926 | $78.75 | October 22, 2025 | |||||||||||
2021 Warrants | February 19, 2021 | 196,429 | 196,429 | $78.75 | August 19, 2026 | |||||||||||
Series A Warrants | March 14, 2022 | 714,287 | — | $11.20 | September 14, 2027 | |||||||||||
Series B Warrants | March 14, 2022 | 714,287 | — | $11.20 | March 14, 2028 | |||||||||||
1,925,929 | 497,355 | $28.64 | ||||||||||||||
2020 Warrants | 2021 Warrants | |||||||||||||||
March 31, 2022 | March 31, 2021 | March 31, 2022 | March 31, 2021 | |||||||||||||
Balance - beginning of year | $ | 6,174,137 | $ | — | $ | 4,288,000 | $ | — | ||||||||
Warrants issued during the year | — | 11,831,000 | — | 6,288,998 | ||||||||||||
Change in fair value | (5,877,802 | ) | (5,893,160 | ) | (3,990,948 | ) | (1,976,093 | ) | ||||||||
Translation effect | 13,434 | 236,297 | 9,652 | (24,905 | ) | |||||||||||
Balance - end of year | $ | 309,769 | $ | 6,174,137 | $ | 306,704 | $ | 4,288,000 | ||||||||
Series A Warrants | Series B Warrants | |||||||||||||||
March 31, 2022 | March 31, 2021 | March 31, 2022 | March 31, 2021 | |||||||||||||
Balance - beginning of year | $ | — | $ | — | $ | — | $ | — | ||||||||
Warrants issued during the year | 4,757,559 | — | 2,827,755 | — | ||||||||||||
Change in fair value | (1,572,299 | ) | — | (1,192,267 | ) | — | ||||||||||
Translation effect | 85,556 | — | 47,753 | — | ||||||||||||
Balance - end of year | $ | 3,270,816 | $ | — | $ | 1,683,241 | $ | — | ||||||||
2020 Warrants | 2021 Warrants | |||||||||||||||
March 31, 2022 | March 31, 2021 | March 31, 2022 | March 31, 2021 | |||||||||||||
Share price | $ | 7.70 | $ | 45.85 | $ | 7.70 | $ | 45.85 | ||||||||
Exercise price | $ | 78.75 | $ | 78.75 | $ | 78.75 | $ | 78.75 | ||||||||
Dividend yield | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||
Risk-free interest | 2.44 | % | 0.80 | % | 2.49 | % | 1.01 | % | ||||||||
Remaining contractual life (years) | 3.57 | 4.57 | 4.39 | 5.39 | ||||||||||||
Expected volatility | 83.2 | % | 76.1 | % | 83.5 | % | 72.0 | % | ||||||||
Series A Warrants | Series B Warrants | |||||||||||||||
March 31, 2022 | March 14, 2022 (Issue date) | March 31, 2022 | March 14, 2022 (Issue date) | |||||||||||||
Share price | $ | 7.70 | $ | 45.85 | $ | 7.70 | $ | 45.85 | ||||||||
Exercise price | $ | 11.20 | $ | 11.20 | $ | 11.20 | $ | 11.20 | ||||||||
Dividend yield | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||
Risk-free interest | 1.94 | % | 2.12 | % | 1.46 | % | 1.58 | % | ||||||||
Remaining contractual life (years) | 5.46 | 5.50 | 1.46 | 1.50 | ||||||||||||
Expected volatility | 77.5 | % | 76.1 | % | 87.0 | % | 83.3 | % | ||||||||
March 31, 2022 | March 31, 2021 | |||||||
Loans and borrowings: | ||||||||
Promissory note of $10,000,000 issued by Sprout, guaranteed by the Corporation and secured through a first-ranking mortgage on all movable assets of Sprout current and future, corporeal and incorporeal, and tangible and intangible. The outstanding principal balance bears interest at the rate of 10.0% per annum, payable quarterly in arrears on the last day of each fiscal quarter during the term, commencing March 31, 2021. The principal is payable on February 1, 2024. | $ | 11,648,320 | $ | 11,312,959 | ||||
11,648,320 | 11,312,959 | |||||||
Less current portion of loans and borrowings | — | — | ||||||
Loans and borrowings | $ | 11,648,320 | $ | 11,312,959 | ||||
March 31, 2022 | March 31, 2021 | |||||||||||||||
Weighted average exercise price | Number of warrants | Weighted average exercise price | Number of warrants | |||||||||||||
Warrants outstanding at April 1, 2021 and 2020 | $ | 325.34 | 176,429 | $ | 325.34 | 176,429 | ||||||||||
Issued | 0.0035 | 185,715 | — | — | ||||||||||||
Exercised | 0.0035 | (185,715 | ) | — | — | |||||||||||
Warrants outstanding at March 31, 2022 and 2021 | $ | 325.34 | 176,429 | $ | 325.34 | 176,429 | ||||||||||
Warrants exercisable at March 31, 2022 and 2021 | $ | 325.34 | 176,429 | $ | 325.34 | 147,858 | ||||||||||
March 31, 2022 | March 31, 2021 | |||||||||||||||||||||||
Number outstanding | Number exercisable | Amount | Number outstanding | Number exercisable | Amount | |||||||||||||||||||
Warrants IFF (i) | 57,143 | 57,143 | $ | 1,630,210 | 57,143 | 28,572 | $ | 1,451,293 | ||||||||||||||||
Warrants AMI (ii) | 119,286 | 119,286 | 4,449,680 | 119,286 | 119,286 | 4,449,680 | ||||||||||||||||||
176,429 | 176,429 | $ | 6,079,890 | 176,429 | 147,858 | $ | 5,900,973 | |||||||||||||||||
Year ended March 31, 2022 | February 10, 2021 to March 31, 2021 | |||||||
Revenue from contracts with customers | $ | 25,971,480 | $ | 2,403,074 | ||||
Cost of sales | (28,200,621 | ) | (3,192,259 | ) | ||||
Selling, general and administrative expenses | (9,459,448 | ) | (1,253,251 | ) | ||||
Impairment loss on intangible assets | (1,527,000 | ) | — | |||||
Impairment loss on goodwill | (3,288,847 | ) | — | |||||
Finance costs | (2,427,165 | ) | (140,218 | ) | ||||
Loss before tax | (18,931,601 | ) | (2,182,654 | ) | ||||
Income tax | (11,854 | ) | (1,398 | ) | ||||
Net loss | (18,943,455 | ) | (2,184,052 | ) | ||||
Total comprehensive loss | (18,948,855 | ) | (2,635,006 | ) | ||||
Loss attributable to the subsidiary’s non-controlling interest | (9,452,784 | ) | (1,094,210 | ) | ||||
Comprehensive loss attributable to the subsidiary’s non-controlling interest | $ | (9,455,479 | ) | $ | (1,320,138 | ) | ||
March 31, 2022 | March 31, 2021 | |||||||
Current assets | $ | 12,260,375 | 11,338,209 | |||||
Non-current assets | 39,000,367 | 51,263,341 | ||||||
Current liabilities | 5,991,483 | 6,125,690 | ||||||
Non-current liabilities | 25,362,259 | 12,031,860 | ||||||
Total equity | 19,907,000 | 44,444,000 | ||||||
Attributable to: | ||||||||
Equity holders to parent | $ | 7,184,923 | $ | 22,266,444 | ||||
Non-controlling interest | 12,722,077 | 22,177,556 | ||||||
Year ended March 31, 2022 | February 10, 2021 to March 31, 2021 | |||||||
Cash flow used in operating activities | $ | (10,214,243 | ) | $ | (2,225,032 | ) | ||
Cash flow used in investment activities | (122,136 | ) | — | |||||
Cash flow from (used in) financing activities (1) | 11,280,528 | (26,286 | ) | |||||
Net increase (decrease) in cash and cash equivalents | $ | 944,149 | $ | (2,251,318 | ) | |||
(1) Cash flow from financing activities is provided through intercompany advances. |
2022 | 2021 | |||||||||||||||||||
Notes | Weighted average exercise price | Number of options | Weighted average exercise price | Number of options | ||||||||||||||||
Options outstanding at April 1st, 2022 and 2021 | $ | 65.91 | 121,208 | $ | 65.76 | 229,784 | ||||||||||||||
Granted | 25.41 | 286,554 | 56.91 | 57,839 | ||||||||||||||||
Exercised | 14 | (b) | — | — | 51.88 | (142,193 | ) | |||||||||||||
Forfeited | 37.41 | (94,298 | ) | 127.32 | (24,222 | ) | ||||||||||||||
Expired | 89.90 | (7,143 | ) | — | — | |||||||||||||||
Options outstanding at March 31, 2022 and 2021 | $ | 37.41 | 306,321 | $ | 65.91 | 121,208 | ||||||||||||||
Options exercisable at March 31, 2022 and 2021 | $ | 56.68 | 102,883 | $ | 67.23 | 61,526 | ||||||||||||||
2022 | ||||||||||||||||
Options outstanding | Exercisable options | |||||||||||||||
Exercise price | Weighted remaining contractual life outstanding | Number of options outstanding | Weighted number of options exercisable | Weighted average exercise price | ||||||||||||
$43.40 - $66.85 | 4.87 | 67,858 | — | — | ||||||||||||
$66.86 - $71.75 | 4.35 | 135,071 | 29,665 | 69.30 | ||||||||||||
$71.76 - $82.60 | 5.18 | 86,294 | 60,131 | 74.55 | ||||||||||||
$82.61 - $181.65 | 2.61 | 10,350 | 7,102 | 149.45 | ||||||||||||
$181.66 - $232.75 | 6.50 | 6,748 | 5,985 | 210.00 | ||||||||||||
306,321 | 102,883 | |||||||||||||||
Year ended March 31, 2022 | Year ended March 31, 2021 | |||||||
Exercise price and share price | $ | 25.41 | $ | 56.91 | ||||
Dividend yield | — | — | ||||||
Risk-free interest | 0.94 | % | 0.46 | % | ||||
Estimated life (years) | 4.29 | 3.74 | ||||||
Expected volatility | 82.73 | % | 98.65 | % |
2022 | 2021 | |||||||||||||||||||
Notes | Weighted average exercise price | Number of options | Weighted average exercise price | Number of options | ||||||||||||||||
Options outstanding at April 1, 2021 and 2020 | $ | 155.05 | 157,142 | $ | 154.12 | 157,857 | ||||||||||||||
Exercised | 14 | (b) | — | — | 40.64 | (715 | ) | |||||||||||||
Options outstanding at March 31, 2022 and 2021 | $ | 155.05 | 157,142 | $ | 155.05 | 157,142 | ||||||||||||||
Options exercisable at March 31, 2022 and 2021 | $ | 155.05 | 21,429 | $ | 155.05 | 21,429 | ||||||||||||||
2022 | 2021 | |||||||||||||||||||
Notes | Weighted average share price | Number of DSUs | Weighted average share price | Number of DSUs | ||||||||||||||||
DSUs outstanding at April 1, 2022 and 2021 | $ | 63.00 | 3,362 | $ | 68.39 | 3,544 | ||||||||||||||
Granted | 19.26 | 3,106 | 63.00 | 1,199 | ||||||||||||||||
Released through the issuance of common shares | 14 | (c) | — | — | 68.82 | (1,381 | ) | |||||||||||||
DSUs outstanding at March 31, 2022 and 2021 | $ | 66.45 | 6,468 | $ | 63.00 | 3,362 | ||||||||||||||
DSUs exercisable at March 31, 2022 and 2021 | $ | 39.93 | 2,753 | $ | 58.50 | 809 | ||||||||||||||
2022 | 2021 | |||||||||||||||||||
Notes | Weighted average share price | Number of RSUs | Weighted average share price | Number of RSUs | ||||||||||||||||
RSUs outstanding at April 1st, 2022 and 2021 | $ | 92.08 | 95,845 | $ | 155.05 | 59,999 | ||||||||||||||
Granted | 16.19 | 111,915 | 58.50 | 62,514 | ||||||||||||||||
Forfeited | 51.65 | (10,538 | ) | — | — | |||||||||||||||
Released through the issuance of common shares | 14 | (d) | 50.53 | (108,079 | ) | 155.05 | (16,414 | ) | ||||||||||||
Withheld as payment of withholding taxes | 14 | (d) | 10.61 | (64,105 | ) | 155.05 | (10,254 | ) | ||||||||||||
RSUs outstanding at March 31, 2022 and 2021 | $ | 59.75 | 25,038 | $ | 92.08 | 95,845 | ||||||||||||||
2022 | 2021 | |||||||||||||||||||
Notes | Weighted average share price | Number of RSUs | Weighted average share price | Number of RSUs | ||||||||||||||||
Restricted shares outstanding at April 1st, 2022 and 2021 | $ | — | — | $ | — | — | ||||||||||||||
Granted | — | — | 146.65 | 1,004 | ||||||||||||||||
Forfeited | — | — | 146.65 | (154 | ) | |||||||||||||||
Released through the issuance of common shares | 14 | (e) | — | — | 146.65 | (850 | ) | |||||||||||||
Restricted shares outstanding at March 31, 2022 and 2021 | $ | — | — | $ | — | — | ||||||||||||||
Restricted shares exercisable at March 31, 2022 and 2021 | $ | — | — | $ | — | — | ||||||||||||||
Years ended | ||||||||
March 31, 2022 | March 31, 2021 | |||||||
Interest income | $ | 7,123 | $ | 38,327 | ||||
Other finance income | — | 787,418 | ||||||
Finance income | $ | 7,123 | $ | 825,745 | ||||
Years ended | ||||||||||||
Notes | March 31, 2022 | March 31, 2021 | ||||||||||
Interest charges and other finance costs | $ | 540,143 | $ | 622,841 | ||||||||
Interest expense on loans and borrowings | 13 | 1,000,000 | 293,250 | |||||||||
Warrants issuance costs | 12 | 603,835 | 870,690 | |||||||||
Finance costs | $ | 2,143,978 | $ | 1,786,781 | ||||||||
2022 | 2021 | |||||||
Current | $ | — | $ | — | ||||
Deferred taxes recovery | — | (3,477,711 | ) | |||||
Total tax recovery | $ | — | $ | (3,477,711 | ) | |||
2022 | 2021 | |||||||
Loss before income taxes | $ | (84,424,529 | ) | $ | (127,741,941 | ) | ||
Basic combined Canadian statutory income tax rate 1 | 26.50 | % | 26.50 | % | ||||
Income tax | $ | (22,372,500 | ) | $ | (33,851,614 | ) | ||
Increase (decrease) resulting from: | ||||||||
Change in valuation allowance | 18,982,099 | 26,696,339 | ||||||
Permanent difference on impairment on goodwill | 788,642 | 999,782 | ||||||
Permanent difference related to derivative | (1,656,038 | ) | (2,004,305 | ) | ||||
Non deductible and tax exempt items | 71,653 | (347,773 | ) | |||||
Non-deductible stock-based compensation | 2,050,909 | 2,660,390 | ||||||
Foreign exchange | 236,512 | (101,188 | ) | |||||
Difference in statutory tax rates of foreign subsidiaries | 1,121,068 | 2,778,258 | ||||||
Other permanent differences | 474,339 | (571,275 | ) | |||||
Adjustments in relation to prior years | 303,316 | 263,675 | ||||||
Total tax recovery | $ | — | $ | (3,477,711 | ) | |||
March 31, 2022 | March 31, 2021 | |||||||
Net operating losses (“NOL”) and tax credit carryforwards | $ | 76,346,005 | $ | 61,321,242 | ||||
Intangible assets and goodwill | 554,187 | 653,006 | ||||||
Reserves and accruals not currently deductible for tax purposes | 290,413 | 389,037 | ||||||
Financing fees not currently deductible for tax purposes | 1,446,462 | 22,651 | ||||||
Research and development costs | 3,098,560 | 533,372 | ||||||
Non-deductible interest | 3,349,307 | 3,985,157 | ||||||
Other | 1,693,301 | 1,723,027 | ||||||
Subtotal | 86,778,235 | 68,627,492 | ||||||
Less: valuation allowance | 83,934,321 | 64,418,752 | ||||||
Total net deferred tax assets | 2,843,914 | 4,208,740 | ||||||
Property, plant and equipment | — | (2,991,756 | ) | |||||
Intangible assets and goodwill | (1,921,815 | ) | — | |||||
Right-of-use | (767,164 | ) | (748,475 | ) | ||||
Other | (154,935 | ) | (468,509 | ) | ||||
Total deferred tax liabilities | (2,843,914 | ) | (4,208,740 | ) | ||||
Net deferred tax | $ | — | $ | — | ||||
Federal | Provincial/State | |||||||
2027 | 46,000 | |||||||
2028 | — | |||||||
2029 | — | |||||||
2030 | — | 149,000 | ||||||
2031 | 474,000 | 1,523,000 | ||||||
2032 | 4,249,000 | 741,000 | ||||||
2033 | 11,099,000 | 11,210,000 | ||||||
2034 | 16,244,000 | 15,247,000 | ||||||
2035 | 11,275,000 | 10,429,000 | ||||||
2036 | 18,956,000 | 18,399,000 | ||||||
2037 | 9,835,000 | 9,178,000 | ||||||
2038 | 22,000 | 18,000 | ||||||
2039 | 7,974,000 | 8,473,000 | ||||||
2040 | 32,672,000 | 39,443,000 | ||||||
2041 | 42,380,000 | 40,506,000 | ||||||
2042 | 38,544,000 | 38,149,000 | ||||||
$ | 193,770,000 | $ | 193,465,000 | |||||
2023 | $ | 174,000 | ||
2024 | 60,000 | |||
2025 | 43,000 | |||
2026 | 73,000 | |||
2027 | 116,000 | |||
2028 | 51,000 | |||
2029 | 113,000 | |||
2030 | 179,000 | |||
2031 | 216,000 | |||
2032 | 126,000 | |||
2033 | 104,000 | |||
2034 | 94,000 | |||
2035 | 234,000 | |||
2036 | 168,000 | |||
2037 | 127,000 | |||
2038 | 50,000 | |||
2039 | 58,000 | |||
$ | 1,986,000 | |||
March 31, 2022 | March 31, 2021 | |||||||
Trade and other receivables | $ | (163,066 | ) | $ | (8,518,941 | ) | ||
Prepaid expenses | (279,770 | ) | (994,471 | ) | ||||
Inventories | (2,674,208 | ) | (17,631,474 | ) | ||||
Trade and other payables | 2,654,024 | 11,965,278 | ||||||
Deferred revenues | (1,563,113 | ) | 634,393 | |||||
Provisions | (1,137,281 | ) | 733,755 | |||||
Changes in operating assets and liabilities | $ | (3,163,414 | ) | $ | (13,811,460 | ) | ||
March 31, 2022 | March 31, 2021 | |||||||
Acquired property, plant and equipment included in trade and other payables | $ | 155,352 | $ | 158,309 | ||||
Intangible assets included in trade and other payables | 109,971 | 72,043 |
March 31, 2022 | ||||||||||||||||||||
Notes | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Assets | ||||||||||||||||||||
Other financial assets - Sprout Call Option | 4 | $ | — | $ | — | $ | — | $ | — | |||||||||||
Total | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Liabilities | ||||||||||||||||||||
Liability related to warrants | 12 | $ | — | $ | — | $ | 5,570,530 | $ | 5,570,530 | |||||||||||
Total | $ | — | $ | — | $ | 5,570,530 | $ | 5,570,530 | ||||||||||||
March 31, 2021 | ||||||||||||||||||||
Notes | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Assets | ||||||||||||||||||||
Marketable securities - Acasti Shares | $ | 150,000 | $ | — | $ | — | $ | 150,000 | ||||||||||||
Other financial assets - Sprout Call Option | 4 | — | — | 5,615,167 | 5,615,167 | |||||||||||||||
Total | $ | 150,000 | $ | — | $ | 5,615,167 | $ | 5,765,167 | ||||||||||||
Liabilities | ||||||||||||||||||||
Liability related to warrants | 12 | $ | — | $ | — | $ | 10,462,137 | $ | 10,462,137 | |||||||||||
Total | $ | — | $ | — | $ | 10,462,137 | $ | 10,462,137 | ||||||||||||
Years ended | ||||||||||||
Notes | March 31, 2022 | March 31, 2021 | ||||||||||
Balance as at April 1st 2021 and 2020 | $ | 5,615,167 | $ | — | ||||||||
Increase arising from business combination | 4 | — | 5,523,255 | |||||||||
Change in fair value | (5,606,683 | ) | 83,428 | |||||||||
Effect of movements in exchange rate | (8,484 | ) | 8,484 | |||||||||
Balance as at March 31, 2022 and 2021 | $ | — | $ | 5,615,167 | ||||||||
Years ended | ||||||||
March 31, 2022 | March 31, 2021 | |||||||
Canada | $ | 12,447,125 | $ | 13,433,549 | ||||
United States | 35,330,138 | 20,857,092 | ||||||
Other countries | 1,019,861 | 1,109,678 | ||||||
$ | 48,797,124 | $ | 35,400,319 | |||||
Years ended | ||||||||
March 31, 2022 | March 31, 2021 | |||||||
Recognized at a point in time | ||||||||
Nutraceutical products | $ | 13,622,744 | $ | 12,183,362 | ||||
Cannabis and hemp products | 7,779,092 | 314,827 | ||||||
Food and beverages products | 26,220,519 | 2,403,075 | ||||||
Innovation products | 73,473 | 10,960,359 | ||||||
Recognized over time | ||||||||
Processing services | — | 8,400,024 | ||||||
$ | 47,695,828 | $ | 34,261,647 | |||||
March 31, 2022 | March 31, 2021 | |||||||
Canada | $ | 20,724,674 | $ | 35,644,781 | ||||
United States | 723,449 | 1,700,935 | ||||||
Total property, plant and equipment | $ | 21,448,123 | $ | 37,345,716 | ||||
March 31, 2022 | March 31, 2021 | |||||||
Canada | $ | 2,353,054 | $ | 3,792,982 | ||||
United States | 19,301,981 | 22,163,848 | ||||||
Total intangible assets | $ | 21,655,035 | $ | 25,956,830 | ||||
March 31, 2022 | March 31, 2021 | |||||||
Canada | $ | 2,625,851 | $ | 2,613,935 | ||||
United States | 19,542,437 | 22,839,437 | ||||||
Total goodwill | $ | 22,168,288 | $ | 25,453,372 | ||||
Notes | As at September 30, 2022 | As at March 31, 2022 | ||||||||
Assets | ||||||||||
Current assets: | ||||||||||
Cash and cash equivalents | $ | 1,394,603 | $ | 8,726,341 | ||||||
Short-term investment | 17,489 | 19,255 | ||||||||
Trade and other receivables | 4,946,406 | 7,599,584 | ||||||||
Prepaid expenses | 2,876,115 | 3,983,427 | ||||||||
Inventories | 4 | 15,808,436 | 17,059,406 | |||||||
Assets held for sale | 2(d) | 3,203,557 | — | |||||||
Total current assets | 28,246,606 | 37,388,013 | ||||||||
Property, plant and equipment | 5 | 2,145,027 | 21,448,123 | |||||||
Operating lease right-of-use | 2,474,370 | 2,295,263 | ||||||||
Intangible assets | 6 | 17,792,596 | 21,655,035 | |||||||
Goodwill | 6 | 14,354,340 | 22,168,288 | |||||||
Total assets | $ | 65,012,939 | $ | 104,954,722 | ||||||
Liabilities and Equity | ||||||||||
Current liabilities: | ||||||||||
Trade and other payables | $ | 22,960,348 | $ | 22,700,849 | ||||||
Current portion of operating lease liabilities | 585,536 | 641,698 | ||||||||
Deferred revenues | 130,464 | 285,004 | ||||||||
Provisions | 7 | 5,860,704 | 1,118,613 | |||||||
Liability related to warrants | 8 | 2,820,025 | 5,570,530 | |||||||
Total current liabilities | 32,357,077 | 30,316,694 | ||||||||
Operating lease liabilities | 2,343,311 | 2,063,421 | ||||||||
Loans and borrowings | 9 | 14,692,156 | 11,648,320 | |||||||
Other liability | 12(c) | 24,000 | 88,688 | |||||||
Total liabilities | 49,416,544 | 44,117,123 | ||||||||
Shareholders’ Equity: | ||||||||||
Share capital - without par value (8,516,894 shares issued and outstanding as of September 30, 2022; 5,560,829shares issued and outstanding as of March 31, 2022) | 10(a) | 321,769,905 | 317,051,125 | |||||||
Warrants | 10(f) | 6,079,890 | 6,079,890 | |||||||
Additional paid-in capital | 56,306,211 | 55,980,367 | ||||||||
Accumulated other comprehensive loss | (14,307,804 | ) | (7,814,163 | ) | ||||||
Deficit | (358,363,505 | ) | (323,181,697 | ) | ||||||
Total equity attributable to equity holders of the Company | 11,484,697 | 48,115,522 | ||||||||
Non-controlling interest | 11 | 4,111,698 | 12,722,077 | |||||||
Total shareholders’ equity | 15,596,395 | 60,837,599 | ||||||||
Commitments and contingencies | 15 | |||||||||
Subsequent event s | 2(d), | |||||||||
Total liabilities and shareholders’ equity | $ | 65,012,939 | $ | 104,954,722 | ||||||
Three-month periods ended | Six-month periods ended | |||||||||||||||||
Notes | September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | ||||||||||||||
Revenue from sales net of excise taxes of $1,600 and $643,476 (2021 - $240,080 and $380,699 ) | $ | 11,755,056 | $ | 12,309,755 | $ | 27,723,154 | $ | 22,131,395 | ||||||||||
Royalty revenues | 218,731 | 188,593 | 502,920 | 424,660 | ||||||||||||||
Other revenues | 13,055 | 20,283 | 32,996 | 41,085 | ||||||||||||||
Total revenues | 16 | 11,986,842 | 12,518,631 | 28,259,070 | 22,597,140 | |||||||||||||
Cost of sales other than impairment loss on inventories, net of subsidies of nil and nila nd $931,705 ) | (10,878,974 | ) | (10,681,881 | ) | (26,965,552 | ) | (23,082,924 | ) | ||||||||||
Impairment loss on inventories | 4 | — | (3,009,098 | ) | (3,079,997 | ) | (3,009,098 | ) | ||||||||||
Total Cost of sales | (10,878,974 | ) | (13,690,979 | ) | (30,045,549 | ) | (26,092,022 | ) | ||||||||||
Gross profit (loss) | 1,107,868 | (1,172,348 | ) | (1,786,479 | ) | (3,494,882 | ) | |||||||||||
Research and development expenses | (207,598 | ) | (91,110 | ) | (422,285 | ) | (350,776 | ) | ||||||||||
Selling, general and administrative expenses, net of subsidies of nil and nil(2021 - $36,306 and $100,605 ) | 12(c) | (15,907,638 | ) | (15,447,682 | ) | (26,461,372 | ) | (31,462,316 | ) | |||||||||
Impairment loss related to property, plant and equipment | 5 | — | (1,884,970 | ) | — | (2,414,702 | ) | |||||||||||
Impairment loss on assets held for sale | 2( d ) | (14,530,458 | ) | — | (15,346,119 | ) | — | |||||||||||
Impairment loss related to goodwill | 6 | (7,570,471 | ) | — | (7,570,471 | ) | — | |||||||||||
Impairment loss related to tradenames | 6 | (2,593,529 | ) | — | (2,593,529 | ) | — | |||||||||||
Net gain on sale of property, plant and equipment | — | — | 85,002 | — | ||||||||||||||
Loss from operating activities | (39,701,826 | ) | (18,596,110 | ) | (54,095,253 | ) | (37,722,676 | ) | ||||||||||
Finance income | 16 | 4 | 1,440 | 7,343 | ||||||||||||||
Finance costs | (379,007 | ) | (458,786 | ) | (1,295,529 | ) | (816,902 | ) | ||||||||||
Loss on issuance of derivatives | 8 | — | — | (2,126,955 | ) | — | ||||||||||||
Foreign exchange gains | 4,613,545 | 1,501,869 | 6,020,830 | 214,482 | ||||||||||||||
Change in revaluation of marketable securities | — | (77,712 | ) | — | (89,924 | ) | ||||||||||||
Gain (loss) on revaluation of derivatives | 8, 14 | (1,807,890 | ) | 5,528,509 | 7,715,810 | 7,461,839 | ||||||||||||
2,426,664 | 6,493,884 | 10,315,596 | 6,776,838 | |||||||||||||||
Loss before income taxes | (37,275,162 | ) | (12,102,226 | ) | (43,779,657 | ) | (30,945,838 | ) | ||||||||||
Income tax (recovery) expense | (12,530 | ) | 154 | (12,530 | ) | (11,944 | ) | |||||||||||
Net loss | (37,287,692 | ) | (12,102,072 | ) | (43,792,187 | ) | (30,957,782 | ) | ||||||||||
Other comprehensive loss | ||||||||||||||||||
Net change in unrealized foreign currency losses on translation of net investments in foreign operations (tax effect of nilfor all periods) | (3,702,162 | ) | (2,693,068 | ) | (6,493,641 | ) | (716,506 | ) | ||||||||||
Total other comprehensive loss | (3,702,162 | ) | (2,693,068 | ) | (6,493,641 | ) | (716,506 | ) | ||||||||||
Total comprehensive loss | $ | (40,989,854 | ) | $ | (14,795,140 | ) | $ | (50,285,828 | ) | $ | (31,674,288 | ) | ||||||
Net loss attributable to: | ||||||||||||||||||
Equity holders of the Company | $ | (30,897,458 | ) | $ | (11,112,863 | ) | $ | (35,181,808 | ) | $ | (28,020,491 | ) | ||||||
Non-controlling interest | 11 | (6,390,234 | ) | (989,209 | ) | (8,610,379 | ) | (2,937,291 | ) | |||||||||
Net loss | $ | (37,287,692 | ) | $ | (12,102,072 | ) | $ | (43,792,187 | ) | $ | (30,957,782 | ) | ||||||
Total comprehensive loss attributable to: | ||||||||||||||||||
Equity holders of the Company | $ | (34,599,620 | ) | $ | (13,805,931 | ) | $ | (41,675,449 | ) | $ | (28,736,997 | ) | ||||||
Non-controlling interest | (6,390,234 | ) | (989,209 | ) | (8,610,379 | ) | (2,937,291 | ) | ||||||||||
Total comprehensive loss | $ | (40,989,854 | ) | $ | (14,795,140 | ) | $ | (50,285,828 | ) | $ | (31,674,288 | ) | ||||||
Basic and diluted loss per share attributable to: | ||||||||||||||||||
Equity holders of the Company | $ | (3.94 | ) | $ | (2.33 | ) | $ | (5.03 | ) | $ | (5.89 | ) | ||||||
Non-controlling interest | $ | (0.81 | ) | $ | (0.21 | ) | $ | (1.23 | ) | $ | (0.62 | ) | ||||||
Total loss per share | 13 | $ | (4.75 | ) | $ | (2.54 | ) | $ | (6.26 | ) | $ | (6.51 | ) | |||||
Basic and diluted weighted average number of common shares | 7,842,731 | 4,776,381 | 6,996,916 | 4,760,620 | ||||||||||||||
Share Capital | Accumulated other comprehensive income (loss) | |||||||||||||||||||||||||||||||||||||
Notes | Number | Dollars | Warrants | Additional paid-in capital | Cumulative translation account | Deficit | Equity attributable to equity holders of the Company | Equity attributable to non-controlling interest | Total | |||||||||||||||||||||||||||||
Balance as at March 31, 2022 | 5,560,829 | $ | 317,051,125 | $ | 6,079,890 | $ | 55,980,367 | $ | (7,814,163 | ) | $ | (323,181,697 | ) | $ | 48,115,522 | $ | 12,722,077 | $ | 60,837,599 | |||||||||||||||||||
Net loss for the period | — | — | — | — | — | (35,181,808 | ) | (35,181,808 | ) | (8,610,379 | ) | (43,792,187 | ) | |||||||||||||||||||||||||
Other comprehensive loss for the period | — | — | — | — | (6,493,641 | ) | — | (6,493,641 | ) | — | (6,493,641 | ) | ||||||||||||||||||||||||||
Total comprehensive loss for the period | — | — | — | — | (6,493,641 | ) | (35,181,808 | ) | (41,675,449 | ) | (8,610,379 | ) | (50,285,828 | ) | ||||||||||||||||||||||||
Transaction with equity holders recorded directly in equity | ||||||||||||||||||||||||||||||||||||||
Contributions by and distribution to equity holders | ||||||||||||||||||||||||||||||||||||||
Share-based payment | 12 | — | — | — | 1,826,983 | — | — | 1,826,983 | — | 1,826,983 | ||||||||||||||||||||||||||||
Common shares issued in connection with debt financin g | 9, 10(g) | 409,435 | 645,921 | — | — | — | — | 645,921 | — | 645,921 | ||||||||||||||||||||||||||||
Warrants exercised | 8 | 384,446 | 1,769,000 | — | — | — | — | 1,769,000 | — | 1,769,000 | ||||||||||||||||||||||||||||
RSUs released, net of withholding taxes | 10(d), 12(b)(ii) | 216,658 | 2,303,859 | — | (1,501,139 | ) | — | — | 802,720 | — | 802,720 | |||||||||||||||||||||||||||
Direct Offering, net of issuance costs | 8 | 1,945,526 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
Total contributions by and distribution to equity holders | 2,956,065 | 4,718,780 | — | 325,844 | — | — | 5,044,624 | — | 5,044,624 | |||||||||||||||||||||||||||||
Balance as at September 30, 2022 | 8,516,894 | $ | 321,769,905 | $ | 6,079,890 | $ | 56,306,211 | $ | (14,307,804 | ) | $ | (358,363,505 | ) | $ | 11,484,697 | $ | 4,111,698 | $ | 15,596,395 | |||||||||||||||||||
Attributable to equity holders of the Company | ||||||||||||||||||||||||||||||||||||||
Share Capital | Accumulated other comprehensive income (loss) | |||||||||||||||||||||||||||||||||||||
Number | Dollars | Warrants | Additional paid-in capital | Cumulative translation account | Deficit | Equity attributable to equity holders of the Company | Equity attributable to non-controlling interest | Total | ||||||||||||||||||||||||||||||
Balance as at June 30, 2022 | 7,614,434 | $ | 318,921,917 | $ | 6,079,890 | $ | 56,346,589 | $ | (10,605,642 | ) | $ | (327,466,047 | ) | $ | 43,276,707 | $ | 10,501,932 | $ | 53,778,639 | |||||||||||||||||||
Net loss for the period | — | — | — | — | — | (30,897,458 | ) | (30,897,458 | ) | (6,390,234 | ) | (37,287,692 | ) | |||||||||||||||||||||||||
Other comprehensive loss for the period | — | — | — | — | (3,702,162 | ) | — | (3,702,162 | ) | — | (3,702,162 | ) | ||||||||||||||||||||||||||
Total comprehensive loss for the period | — | — | — | — | (3,702,162 | ) | (30,897,458 | ) | (34,599,620 | ) | (6,390,234 | ) | (40,989,854 | ) | ||||||||||||||||||||||||
Transaction with equity holders recorded directly in equity | ||||||||||||||||||||||||||||||||||||||
Contributions by and distribution to equity holders | ||||||||||||||||||||||||||||||||||||||
Share-based payment | 12 | —�� | — | — | 639,883 | — | — | 639,883 | — | 639,883 | ||||||||||||||||||||||||||||
Common shares issued in connection with debt financing | 9, 10(g) | 409,435 | 645,921 | — | — | — | — | 645,921 | — | 645,921 | ||||||||||||||||||||||||||||
Warrants exercised | 8 | 384,446 | 1,769,000 | — | — | — | — | 1,769,000 | — | 1,769,000 | ||||||||||||||||||||||||||||
RSUs released, net of withholding taxes | 10(d), 12(b)(ii) | 108,579 | 433,067 | — | (680,261 | ) | — | — | (247,194 | ) | — | (247,194 | ) | |||||||||||||||||||||||||
Total contributions by and distribution to equity holders | 902,460 | 2,847,988 | — | (40,378 | ) | — | — | 2,807,610 | — | 2,807,610 | ||||||||||||||||||||||||||||
Balance as at September 30, 2022 | 8,516,894 | $ | 321,769,905 | $ | 6,079,890 | $ | 56,306,211 | $ | (14,307,804 | ) | $ | (358,363,505 | ) | $ | 11,484,697 | $ | 4,111,698 | $ | 15,596,395 | |||||||||||||||||||
Share Capital | Accumulated other comprehensive income (loss) | |||||||||||||||||||||||||||||||||||||
Notes | Number | Dollars | Warrants | Additional paid-in capital | Cumulative translation account | Deficit | Equity attributable to equity holders of the Company | Equity attributable to non-controlling interest | Total | |||||||||||||||||||||||||||||
Balance as at March 31, 2021 | 4,732,090 | $ | 306,618,482 | $ | 5,900,973 | $ | 59,625,356 | $ | (8,567,106 | ) | $ | (248,209,952 | ) | $ | 115,367,753 | $ | 22,177,556 | $ | 137,545,309 | |||||||||||||||||||
Net loss for the period | — | — | — | — | — | (28,020,491 | ) | (28,020,491 | ) | (2,937,291 | ) | (30,957,782 | ) | |||||||||||||||||||||||||
Other comprehensive loss for the period | — | — | — | — | (716,506 | ) | — | (716,506 | ) | — | (716,506 | ) | ||||||||||||||||||||||||||
Total comprehensive loss for the period | — | — | — | — | (716,506 | ) | (28,020,491 | ) | (28,736,997 | ) | (2,937,291 | ) | (31,674,288 | ) | ||||||||||||||||||||||||
Transaction with equity holders recorded directly in equity | ||||||||||||||||||||||||||||||||||||||
Contributions by and distribution to equity holders | ||||||||||||||||||||||||||||||||||||||
Share-based payment | 12 | — | — | — | 5,237,918 | — | — | 5,237,918 | — | 5,237,918 | ||||||||||||||||||||||||||||
Warrants in exchange of services rendered by non-employees | 10(f)(i) | — | — | 153,650 | — | — | — | 153,650 | — | 153,650 | ||||||||||||||||||||||||||||
RSU s released, net of withholding taxes | 10(d), 12(b)(ii) | 47,051 | 5,568,679 | — | (6,546,796 | ) | — | — | (978,117 | ) | — | (978,117 | ) | |||||||||||||||||||||||||
Total contributions by and distribution to equity holders | 47,051 | 5,568,679 | 153,650 | (1,308,878 | ) | — | — | 4,413,451 | — | 4,413,451 | ||||||||||||||||||||||||||||
Balance as at September 30, 2021 | 4,779,141 | $ | 312,187,161 | $ | 6,054,623 | $ | 58,316,478 | $ | (9,283,612 | ) | $ | (276,230,443 | ) | $ | 91,044,207 | $ | 19,240,265 | $ | 110,284,472 | |||||||||||||||||||
Attributable to equity holders of the Company | ||||||||||||||||||||||||||||||||||||||
Share Capital | Accumulated other comprehensive income | |||||||||||||||||||||||||||||||||||||
Number | Dollars | Warrants | Additional paid-in capital | Cumulative translation account | Deficit | Equity attributable to equity holders of the Company | Equity attributable to non-controlling interest | Total | ||||||||||||||||||||||||||||||
Balance as at June 30, 2021 | 4,773,750 | $ | 310,780,282 | $ | 5,993,658 | $ | 57,565,128 | $ | (6,590,544 | ) | $ | (265,117,580 | ) | $ | 102,630,944 | $ | 20,229,474 | $ | 122,860,418 | |||||||||||||||||||
Net loss for the period | — | — | — | — | — | (11,112,863 | ) | (11,112,863 | ) | (989,209 | ) | (12,102,072 | ) | |||||||||||||||||||||||||
Other comprehensive loss for the period | — | — | — | — | (2,693,068 | ) | — | (2,693,068 | ) | — | (2,693,068 | ) | ||||||||||||||||||||||||||
Total comprehensive loss for the period | — | — | — | — | (2,693,068 | ) | (11,112,863 | ) | (13,805,931 | ) | (989,209 | ) | (14,795,140 | ) | ||||||||||||||||||||||||
Transaction with equity holders recorded directly in equity | ||||||||||||||||||||||||||||||||||||||
Contributions by and distribution to equity holders | ||||||||||||||||||||||||||||||||||||||
Share-based payment | 12 | — | — | — | 2,157,649 | — | — | 2,157,649 | — | 2,157,649 | ||||||||||||||||||||||||||||
Warrants in exchange of services rendered by non-employees | 10(f)(i) | — | — | 60,965 | — | — | — | 60,965 | — | 60,965 | ||||||||||||||||||||||||||||
RSUs released, net of withholding taxes | 10(d), 12(b)(ii) | 5,391 | 1,406,879 | — | (1,406,299 | ) | — | — | 580 | — | 580 | |||||||||||||||||||||||||||
Total contributions by and distribution to equity holders | 5,391 | 1,406,879 | 60,965 | 751,350 | — | — | 2,219,194 | — | 2,219,194 | |||||||||||||||||||||||||||||
Balanc e as at September 30,2021 | 4,779,141 | $ | 312,187,161 | $ | 6,054,623 | $ | 58,316,478 | $ | (9,283,612 | ) | $ | (276,230,443 | ) | $ | 91,044,207 | $ | 19,240,265 | $ | 110,284,472 | |||||||||||||||||||
Six-month periods ended | ||||||||||
Notes | September 30, 2022 | September 30, 2021 | ||||||||
Cash flows from operating activities: | ||||||||||
Net loss for the period | $ | (43,792,187 | ) | $ | (30,957,782 | ) | ||||
Adjustments: | ||||||||||
Depreciation of property, plant and equipment | 462,193 | 1,411,846 | ||||||||
Non-cash lease expense | 314,900 | 432,742 | ||||||||
Amortization of intangible assets | 952,057 | 1,775,889 | ||||||||
Impairment loss on goodwill | 6 | 7,570,471 | — | |||||||
Impairment loss on tradenames | 6 | 2,593,529 | — | |||||||
Share-based payment | 12 | 1,826,983 | 5,237,918 | |||||||
Impairment loss on inventories | 4 | 3,079,997 | 3,009,098 | |||||||
Expected credit losses | 133,685 | 1,987,134 | ||||||||
Non-employee compensation related to warrants | 10(f)(i) | — | 153,650 | |||||||
Loss on issuance of derivatives | 2,126,955 | — | ||||||||
Net finance expense | 1,294,089 | 809,559 | ||||||||
Unrealized foreign exchange (gain) loss | (6,020,830 | ) | 486,852 | |||||||
Change in revaluation of marketable securities | — | 89,924 | ||||||||
Interest received | 1,440 | 7,167 | ||||||||
Interest paid | (44,784 | ) | (391,022 | ) | ||||||
Revaluation of derivatives | (7,715,810 | ) | (7,461,839 | ) | ||||||
Impairment loss on property, plant and equipment | 5 | — | 2,414,702 | |||||||
Impairment loss on assets held for sale | 5 | 15,346,119 | — | |||||||
Payment of lease liabilities | (227,107 | ) | (145,138 | ) | ||||||
Income tax expense | 12,530 | 11,944 | ||||||||
Net gains from sale of property, plant and equipment | (85,002 | ) | — | |||||||
Changes in operating assets and liabilities | 8,087,556 | (12,426,342 | ) | |||||||
Income taxes paid | (360 | ) | (11,944 | ) | ||||||
Net cash used in operating activities | (14,083,576 | ) | (33,565,642 | ) | ||||||
Cash flows from investing activities: | ||||||||||
Acquisition of property, plant and equipment | (601,743 | ) | (524,844 | ) | ||||||
Acquisition of intangible assets | — | (436,018 | ) | |||||||
Net cash used in investing activities: | (601,743 | ) | (960,862 | ) | ||||||
Cash flows from financing activities: | ||||||||||
Increase in loans and borrowings, net of financing fees | 3,250,000 | — | ||||||||
Proceeds from sale of property, plant and equipment | 85,002 | — | ||||||||
Withholding taxes paid pursuant to the settlement of non-treasury RSUs | (260,034 | ) | (978,117 | ) | ||||||
Gross proceeds from the issuance of shares and warrants through a Direct Offering | 8 | 5,000,002 | — | |||||||
Issuance of shares and warrants costs | 8 | (465,211 | ) | — | ||||||
Proceeds from exercise of options and pre-funded warrants | 8 | 65 | — | |||||||
Net cash provided by (used in) financing activities: | 7,609,824 | (978,117 | ) | |||||||
Foreign exchange loss on cash and cash equivalents | (256,243 | ) | (13,054 | ) | ||||||
Net decrease in cash and cash equivalents | (7,331,738 | ) | (35,517,675 | ) | ||||||
Cash and cash equivalents, beginning of period | 8,726,341 | 59,836,889 | ||||||||
Cash and cash equivalents as at September 30, 2022 and 2021 | $ | 1,394,603 | $ | 24,319,214 | ||||||
Cash and cash equivalents is comprised of: | ||||||||||
Cash | $ | 1,394,603 | $ | 24,319,214 | ||||||
Six-month periods ended | ||||||||
September 30, 2022 | September 30, 2021 | |||||||
Trade and other receivables | $ | 2,519,493 | $ | (2,749,349 | ) | |||
Prepaid expenses | 1,107,312 | (465,022 | ) | |||||
Inventories | (1,829,027 | ) | (1,188,778 | ) | ||||
Trade and other payables | 1,766,915 | (7,067,094 | ) | |||||
Deferred revenues | (154,540 | ) | 452,621 | |||||
Provisions | 4,742,091 | (1,256,033 | ) | |||||
Other liabilities | (64,688 | ) | (152,687 | ) | ||||
Changes in operating assets and liabilities | $ | 8,087,556 | $ | (12,426,342 | ) | |||
September 30, 2022 | ||||
Land | $ | 165,878 | ||
Building and building components | 16,064,102 | |||
Laboratory and plant equipment | 2,816,144 | |||
Intangible assets | 90,335 | |||
Costs related to sale of assets | (586,783 | ) | ||
Impairment loss | (15,346,119 | ) | ||
Assets held for sale | $ | 3,203,557 | ||
September 30, 2022 | March 31, 2022 | |||||||
Raw materials | $ | 5,428,373 | $ | 7,920,190 | ||||
Work in progress | 414,356 | 1,016,916 | ||||||
Finished goods | 9,708,583 | 7,974,690 | ||||||
Supplies and spare parts | 257,124 | 147,610 | ||||||
$ | 15,808,436 | $ | 17,059,406 | |||||
September 30, 2022 | March 31, 2022 | |||||||
Biodroga | $ | 2,382,374 | $ | 2,625,851 | ||||
Sprout | 11,971,966 | 19,542,437 | ||||||
$ | 14,354,340 | $ | 22,168,288 | |||||
During the year ended March 31, 2019, the Company received a judgment from the Superior Court of Québec (the “Court”) in respect of certain royalty payments alleged to be owed and owing to a former chief executive officer of the Company (the “Former CEO”) pursuant to the terms of an agreement entered into on February 23, 2001 between Neptune and the Former CEO (the “Royalty Agreement”). The Company appealed the judgment which was dismissed by the Court of Appeal of Québec in February 2021. Under the terms of the Royalty Agreement and as maintained by the court, annual royalties of 1% of the sales and other revenue made by the Company on a consolidated basis are payable by the Company to the Former CEO biannually, but only to the extent that the cost of the royalty would not cause the Company to have a loss before interest, taxes and amortization (in which case, the payments would be deferred to the following fiscal year). |
As of September 30, 2022,March 31, 2023, a provision of $532,614
F-24
$626,914, recorded foreign currency translation adjustments of $(21,962) and $9,811 respectively,$4,122 and made no payments totaling $354,287 and $1,771,506 respectively to the Former CEO in relation to this
Effective as of September 20, 2022, the Company notified the Former CEO that it was exercising its legal rights to terminate the Royalty Agreement. In response to such termination, the Former CEO is seeking a declaratory judgment that the Company did not have the legal right to terminate the Royalty Agreement.
(b) |
Warrants | Amount | |||||||
Outstanding as at March 31, 2021 | 497,355 | $ | 10,462,137 | |||||
Revaluation | (7,231,224 | ) | ||||||
Movements in exchange rates | 39,349 | |||||||
Outstanding as at September 30, 2021 | 497,355 | 3,270,262 | ||||||
Outstanding as at March 31, 2022 | 1,925,929 | $ | 5,570,530 | |||||
Warrants issued during the period | 3,891,052 | 7,126,957 | ||||||
Warrants exercised during the period | (1,173,970 | ) | (1,769,000 | ) | ||||
Revaluation gain | (7,715,810 | ) | ||||||
Movements in exchange rates | (392,652 | ) | ||||||
Outstanding as at September 30, 2022 | 4,643,011 | 2,820,025 |
Reference | Date of issuance | Number of warrants outstanding | Number of warrants exercisable | Exercise price | Expiry date | |||||||||||||||
2020 Warrants | October 22, 2020 | 300,926 | 300,926 | $ | 78.75 | October 22, 2025 | ||||||||||||||
2021 Warrants | February 19, 2021 | 196,429 | 196,429 | $ | 78.75 | August 19, 2026 | ||||||||||||||
Series A Warrants | March 14, 2022 | 714,287 | 714,287 | $ | 11.20 | September 14, 2027 | ||||||||||||||
Series B Warrants | March 14, 2022 | 714,287 | 714,287 | $ | 11.20 | March 14, 2028 | ||||||||||||||
Series C Warrants | June 23, 2022 | 771,556 | 771,556 | $ | 2.32 | June 23, 2027 | ||||||||||||||
Series C Warrants | June 23, 2022 | 972,763 | 972,763 | $ | 2.32 | June 23, 2029 | ||||||||||||||
Series D Warrants | June 23, 2022 | 972,763 | 972,763 | $ | 2.32 | June 24, 2024 | ||||||||||||||
4,643,011 | 4,643,011 | $ | 13.24 | |||||||||||||||||
2020 Warrants | 2021 Warrants | |||||||||||||||
September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
Balance - beginning of period | $ | 309,769 | $ | 6,174,137 | $ | 306,704 | $ | 4,288,000 | ||||||||
Change in fair value | (279,056 | ) | (4,279,268 | ) | (276,527 | ) | (2,951,956 | ) | ||||||||
Translation effect | (11,655 | ) | 23,614 | (11,525 | ) | 15,735 | ||||||||||
Balance - end of period | $ | 19,058 | $ | 1,918,483 | $ | 18,652 | $ | 1,351,779 | ||||||||
Series A Warrants | Series B Warrants | |||||||||||||||
September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
Balance - beginning of period | $ | 3,270,816 | $ | — | $ | 1,683,241 | $ | — | ||||||||
Change in fair value | (2,728,178 | ) | — | (1,571,237 | ) | — | ||||||||||
Translation effect | (136,418 | ) | — | (59,975 | ) | — | ||||||||||
Balance - end of period | $ | 406,220 | $ | — | $ | 52,029 | $ | — |
Series C Warrants | Series D Warrants | |||||||||||||||
September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
Balance - beginning of period | $ | — | $ | — | $ | — | $ | — | ||||||||
Warrants issued during the period | 4,046,836 | — | 3,080,121 | — | ||||||||||||
Warrants exercised during the period | (365,224 | ) | — | (1,403,776 | ) | — | ||||||||||
Change in fair value | (1,881,806 | ) | — | (979,006 | ) | — | ||||||||||
Translation effect | (121,760 | ) | — | (51,319 | ) | — | ||||||||||
Balance - end of period | $ | 1,678,046 | $ | — | $ | 646,020 | $ | — |
2020 Warrants | 2021 Warrants | |||||||||||||||
September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
Share price | $ | 1.52 | $ | 21.00 | $ | 1.52 | $ | 21.00 | ||||||||
Exercise price | $ | 78.75 | $ | 78.75 | $ | 78.75 | $ | 78.75 | ||||||||
Dividend yield | — | — | — | — | ||||||||||||
Risk-free interest | 4.18 | % | 0.77 | % | 4.10 | % | 0.96 | % | ||||||||
Remaining contractual life (years) | 3.06 | 4.07 | 3.88 | 4.89 | ||||||||||||
Expected volatility | 99.0 | % | 81.6 | % | 93.1 | % | 76.1 | % | ||||||||
Series A Warrants | Series B Warrants | |||||||||||||||
September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
Share price | $ | 1.52 | $ | — | $ | 1.52 | $ | — | ||||||||
Exercise price | $ | 11.20 | $ | — | $ | 11.20 | $ | — | ||||||||
Dividend yield | — | — | — | — | ||||||||||||
Risk-free interest | 3.98 | % | — | 3.97 | % | — | ||||||||||
Remaining contractual life (years) | 4.96 | — | 0.96 | — | ||||||||||||
Expected volatility | 90.8 | % | — | 117.1 | % | — | ||||||||||
Series C Warrants | Series D Warrants | |||||||||||||||
September 30, 2022 | June 23, 2022 (Grant date) | September 30, 2022 | June 23, 2022 (Grant date) | |||||||||||||
Share price | $ | 1.52 | $ | 2.90 | $ | 1.52 | $ | 2.90 | ||||||||
Exercise price | $ | 2.32 | $ | 2.32 | $ | 2.32 | $ | 2.32 | ||||||||
Dividend yield | — | — | — | — | ||||||||||||
Risk-free interest | 4.01 | % | 3.38 | % | 4.11 | % | 3.21 | % | ||||||||
Remaining contractual life (years) | 4.73 | 5.00 | 1.73 | 2.00 | ||||||||||||
Expected volatility | 90.1 | % | 84.0 | % | 107.7 | % | 88.7 | % | ||||||||
September 30, 2022 | March 31, 2022 | |||||||
Loans and borrowings: | ||||||||
Promissory note originally of $10,000,000and increased to $13,000,000 on July 13, 2022, issued by Sprout, guaranteed by the Company and secured through a first-ranking mortgage on all movable current and future, corporeal and incorporeal, and tangible and intangible assets of Sprout. The outstanding principal balance bears interest at the rate of 10.0% per annum, increasing by 1.00% every three months commencing September 30, 2022. Interest is accrued and added to the principal amount of the loan and is presented net of borrowing costs. The principal and accrued interest may also be converted, in whole or in part, at any time before February 1, 2024, upon the mutual consent of Sprout, the Company and MSEC, into common shares of the Company. | $ | 14,481,024 | $ | 11,648,320 | ||||
Promissory note of $250,000 issued by Sprout on August 26, 2022, guaranteed by the Company and secured by the issued and outstanding capital stock of Sprout. The outstanding principal balance bears interest at the rate of 10.0% per annum, increasing by 1.00% every three months commencing September 30, 2022. Interest is accrued and added to the principal amount of the loan and is presented net of borrowing costs. The principal is payable on February 1, 2024 in cash, or, upon the prior consent of the holder, fully or partially in common shares of Neptune at the Company’s discretion . | $ | 211,132 | $ | — | ||||
14,692,156 | 11,648,320 | |||||||
Less current portion of loans and borrowings | — | — | ||||||
Loans and borrowings | $ | 14,692,156 | $ | 11,648,320 |
September 30, 2022 | September 30, 2021 | |||||||||||||||
Weighted average exercise price | Number of warrants | Weighted average exercise price | Number of warrants | |||||||||||||
Warrants outstanding at April 1, 2022 and 2021 | $ | 325.34 | 176,429 | $ | 325.34 | 176,429 | ||||||||||
Issued | 0.0001 | 645,526 | — | — | ||||||||||||
Exercised | 0.0001 | (645,526 | ) | — | — | |||||||||||
Warrants outstanding at September 30, 2022 and September 30, 202 1 | $ | 325.34 | 176,429 | $ | 325.34 | 176,429 | ||||||||||
Warrants exercisable at September 30, 2022 and September 30, 2021 | $ | 325.34 | 176,429 | $ | 317.00 | 162,144 | ||||||||||
September 30, 2022 | March 31 , 2022 | |||||||||||||||||||||||
Number outstanding | Number exercisable | Amount | Number outstanding | Number exercisable | Amount | |||||||||||||||||||
Warrants IFF (i) | 57,143 | 57,143 | $ | 1,630,210 | 57,143 | 57,143 | $ | 1,630,210 | ||||||||||||||||
Warrants AMI (ii) | 119,286 | 119,286 | 4,449,680 | 119,286 | 119,286 | 4,449,680 | ||||||||||||||||||
176,429 | 176,429 | $ | 6,079,890 | 176,429 | 176,429 | $ | 6,079,890 | |||||||||||||||||
Three-month period ended | Six-m o nthperiod ended | |||||||||||||||
September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
Revenue from contracts with customers | $ | 8,364,475 | $ | 7,016,918 | $ | 16,522,072 | $ | 12,664,345 | ||||||||
Cost of sales | (7,610,969 | ) | (7,324,782 | ) | (15,923,258 | ) | (12,894,061 | ) | ||||||||
Selling, general and administrative expenses | (2,472,272 | ) | (930,384 | ) | (6,227,801 | ) | (4,971,533 | ) | ||||||||
Impairment loss on goodwill and intangible assets | (10,164,000 | ) | — | (10,164,000 | ) | — | ||||||||||
Finance costs | (923,315 | ) | (744,289 | ) | (1,462,282 | ) | (673,161 | ) | ||||||||
Loss before tax | (12,806,081 | ) | (1,982,537 | ) | (17,255,269 | ) | (5,874,410 | ) | ||||||||
Income tax (expense) recovery | — | 154 | — | (11,944 | ) | |||||||||||
Net loss | (12,806,081 | ) | (1,982,383 | ) | (17,255,269 | ) | (5,886,354 | ) | ||||||||
Total comprehensive loss | (12,806,081 | ) | (1,982,383 | ) | (17,255,269 | ) | (5,886,354 | ) | ||||||||
Loss attributable to the subsidiary’s non-controlling interest | (6,390,234 | ) | (989,209 | ) | (8,610,379 | ) | (2,937,291 | ) | ||||||||
Comprehensive loss attributable to the subsidiary’s non-controlling interest | $ | (6,390,234 | ) | $ | (989,209 | ) | $ | (8,610,379 | ) | $ | (2,937,291 | ) | ||||
September 30, 2022 | March 31, 2022 | |||||||
Current assets | $ | 12,743,435 | 12,260,375 | |||||
Non-current assets | 28,610,930 | 39,000,367 | ||||||
Current liabilities | 7,292,715 | 5,991,483 | ||||||
Non-current liabilities | 31,409,919 | 25,362,259 | ||||||
Total equity | 2,651,731 | 19,907,000 | ||||||
Attributable to: | ||||||||
Equity holders of the Company | $ | (1,459,967 | ) | $ | 7,184,923 | |||
Non-controlling interest | 4,111,698 | 12,722,077 | ||||||
Three-month period ended | Six-month period ended | |||||||||||||||
September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
Cash flow from (used in) operating activities | $ | (2,490,182 | ) | $ | (4,324,098 | ) | $ | (3,925,100 | ) | $ | (8,073,510 | ) | ||||
Cash flow used in investment activities | — | (1,246 | ) | — | (1,246 | ) | ||||||||||
Cash flow from (used in) financing activities(1) | 3,250,000 | 4,309,030 | 3,250,000 | 7,972,635 | ||||||||||||
Net increase (decrease) in cash and cash equivalents | $ | 759,818 | $ | (16,314 | ) | $ | (675,100 | ) | $ | (102,121 | ) |
2022 | 2021 | |||||||||||||||||||
Notes | Weighted average exercise price | Number of options | Weighted average exercise price | Number of options | ||||||||||||||||
Options outstanding at April 1st, 2022 and 2021 | $ | 37.41 | 306,321 | $ | 65.91 | 121,208 | ||||||||||||||
Granted | 1.60 | 229,715 | 30.10 | 218,697 | ||||||||||||||||
Forfeited/Cancelled | 14.21 | (55,615 | ) | 41.36 | (2,897 | ) | ||||||||||||||
Expired | 34.54 | (1,094 | ) | 85.52 | (6,429 | ) | ||||||||||||||
Options outstanding at September 30, 2022 and 2021 | $ | 22.13 | 479,327 | $ | 43.61 | 330,579 | ||||||||||||||
Options exercisable at September 30, 2022 and 2021 | $ | 47.38 | 154,722 | $ | 57.67 | 95,572 | ||||||||||||||
September 30, 2022 | ||||||||||||||||
Options outstanding | Exercisable options | |||||||||||||||
Exercise price | Weighted remaining contractual life outstanding | Number of options outstanding | Weighted number of options exercisable | Weighted average exercise price | ||||||||||||
$1.55 - $22.60 | 4.88 | 252,574 | 477 | 13.97 | ||||||||||||
$22.61 - $27.68 | 3.87 | 85,715 | 57,143 | 25.64 | ||||||||||||
$27.69 - $40.12 | 3.81 | 37,637 | 14,474 | 29.71 | ||||||||||||
$40.13 - $55.10 | 0.17 | 39,203 | 39,203 | 50.41 | ||||||||||||
$55.11 - $154.65 | 6.66 | 64,198 | 43,425 | 79.42 | ||||||||||||
479,327 | 154,722 | |||||||||||||||
Three-month periods ended | Six-month periods ended | |||||||||||||||
Black Sholes assumptions used | September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | ||||||||||||
Share price | $ | 1.55-$1.64 | $ | 25.55-$31.53 | $ | 1.55-$1.64 | $ | 25.55-$31.53 | ||||||||
Exercise price | $ | 1.55-$1.64 | $ | 25.55-$31.53 | $ | 1.55-$1.64 | $ | 25.55-$31.53 | ||||||||
Dividend yield | — | — | — | — | ||||||||||||
Risk-free interest | 3.10% - 3.60% | 0.33% - .80% | 3.10% - 3.60% | 0.33% - .80% | ||||||||||||
Expected life (years) | 4.0 | 2.5 - 5.0 | 4.0 | 2.5 - 5.0 | ||||||||||||
Expected volatility | 94.38% - 106.70% | 83.4% - 86.04% | 94.38% - 106.70% | 83.4% - 86.04% | ||||||||||||
2022 | 2021 | |||||||||||||||||||
Notes | Weighted average exercise price | Number of options | Weighted average exercise price | Number of options | ||||||||||||||||
Options outstanding at April 1, 2022 and 2021 | $ | 155.05 | 157,142 | $ | 155.05 | 157,142 | ||||||||||||||
Options outstanding at September 30, 2022 and 2021 | $ | 155.05 | 157,142 | $ | 155.05 | 157,142 | ||||||||||||||
Options exercisable at September 30, 2022 and 2021 | $ | 155.05 | 21,429 | $ | 155.05 | 21,429 | ||||||||||||||
2022 | 2021 | |||||||||||||||||||
Notes | Weighted average share price | Number of DSUs | Weighted average share price | Number of DSUs | ||||||||||||||||
DSUs outstanding at April 1, 2022 and 2021 | $ | 66.45 | 4,308 | $ | 63.00 | 1,202 | ||||||||||||||
DSUs outstanding at September 30, 2022 and 2021 | $ | 66.45 | 4,308 | $ | 66.96 | 1,202 | ||||||||||||||
DSUs exercisable at September 30, 2022 and 2021 | $ | 66.45 | 4,308 | $ | 66.96 | 1,108 | ||||||||||||||
2022 | 2021 | |||||||||||||||||||
Notes | Weighted average share price | Number of RSUs | Weighted average share price | Number of RSUs | ||||||||||||||||
RSUs outstanding at April 1st, 2022 and 2021 | $ | 59.75 | 25,038 | $ | 92.08 | 95,845 | ||||||||||||||
Granted | 6.65 | 349,160 | 29.54 | 7,681 | ||||||||||||||||
Forfeited | 59.75 | (21 | ) | 29.54 | (7,681 | ) | ||||||||||||||
Released through the issuance of common shares | 10 | (d) | 11.96 | (216,658 | ) | 155.05 | (47,051 | ) | ||||||||||||
Withheld as payment of withholding taxes | 10 | (d) | 11.96 | (139,145 | ) | 155.05 | (24,511 | ) | ||||||||||||
RSUs outstanding at September 30, 2022 and 2021 | $ | 25.44 | 18,374 | $ | 148.49 | 24,283 | ||||||||||||||
September 30, 2022 | ||||||||||||||||||||
Notes | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Assets | ||||||||||||||||||||
Assets held for sale | 2 | (d) | $ | 3,203,557 | $ | — | $ | — | $ | 3,203,557 | ||||||||||
Total | $ | 3,203,557 | $ | — | $ | — | $ | 3,203,557 | ||||||||||||
Liabilities | ||||||||||||||||||||
Liability related to warrants | 8 | $ | — | $ | — | $ | 2,820,025 | $ | 2,820,025 | |||||||||||
Total | $ | — | $ | — | $ | 2,820,025 | $ | 2,820,025 | ||||||||||||
March 31, 2022 | ||||||||||||||||||||
Notes | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Liabilities | ||||||||||||||||||||
Liability related to warrants | 8 | $ | — | $ | — | $ | 5,570,530 | $ | 5,570,530 | |||||||||||
Total | $ | — | $ | — | $ | 5,570,530 | $ | 5,570,530 | ||||||||||||
products in nutraceutical products for a period of maintain exclusivity, Neptune must reach annual minimum volumes of sales for the duration of the agreement or make |
In September 2020, Neptune submitted a claim and demand for arbitration against Peter M. Galloway and PMGSL Holdings, LLC (collectively “PMGSL”) in accordance with the SugarLeaf Asset Purchase Agreement (“APA”) dated May 9, 2019 between Neptune, PMGSL, Peter M. Galloway and Neptune Holding USA, Inc. Separately, PMGSL submitted a claim and demand for arbitration against Neptune. The Neptune claims and PMGSL claims have been consolidated into a single arbitration and each are related to the purchase by Neptune of substantially all of the assets of the predecessor entities of PMGSL Holdings, LLC. Neptune is claiming, among other things, breach of contract and negligent misrepresentation by PMGSL in connection with the APA and is seeking, among other things, equitable restitution and any and all damages recoverable under law. PMGSL is claiming, among other things, breach of contract by Neptune and is seeking, among other things, payment of certain compensation contemplated by the APA. A merit hearing in the arbitration started in April 2022 with a further week of testimony from August one-day hearing took place on |
(c) | A supplier of cannabis initiated a lawsuit against the Company's subsidiary, 9354-7537 Quebec Inc., ("9354") for breach of a Wholesale Cannabis Supply Agreement (the “Supply Agreement”) for the purchase of cannabis trim. The purchased trim was rejected by 9354 due to quality concerns. The supplier refused to refund the purchase price and ultimately sued 9354 for breach of the Supply Agreement. The matter proceeded to trial in November 2021, and on March 23, 2022, an arbitrator entered an arbitration award against 9354 for the full purchase price of the trim. With fees and costs, the final arbitrator’s award entered against 9354 was $1,127,024, plus applicable interest. During the quarter ended June 30, 2022, the parties engaged into settlement negotiations which resulted in the execution of a settlement agreement dated July 13, 2022. As at June 30, 2022, the payable was revised to the settlement amount of $543,774 which resulted in the recognition of a settlement gain of $583,430 under Selling, general and administrative expenses for the three-month period ended June 30, 2022. During the year ended March 31, 2023, the Company made aggregate payments of $515,464 to the supplier, and recorded foreign currency translation adjustments of $(63,381). The Company made the final payment on October 12, 2022. This provision was included in trade and other payables. As at March 31, 2023, the balance of this payable was nil. |
(d) | On March 16, 2021, a purported shareholder class action was filed in United States District Court for the Eastern District of New York against the Company and certain of its current and former officers alleging violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934, with respect to the Company’s acquisition of SugarLeaf Labs, Inc. On October 21, 2022, the Company announced that it had agreed to settle and resolve the purported shareholder class action for a gross payment to the class of between $4 and $4.25 million, with the exact amount being within the Company’s control and dependent on the type of consideration used. The settlement was subject to court approval and certification by the court of the class. On March 16, 2023 the settlement offer was accepted and the first payment in the amount of $500,000 was paid on March 22, 2023. Two additional payments of $500,000 each were subsequently made, on April 21, 2023 and May 4, 2023. The court has set a final approval hearing on July 28, 2023. Neptune intends to pay the balance of the settlement in securities worth $2,750,000 within 31 days after the Final Approval Order is entered. As of March 31, 2023, an account payable and an accrual totaling $3,750,000 and an expense of $4,250,000 within selling, general administration have been recorded by the Company (nil) as at and for the year ended March 31, 2022). |
(e) | As at March 31, 2023, the Company has various additional other provisions for legal cases for an aggregate amount of $1,384,532 (March 31, 2022 – $155,804). |
F-25
12.Liability related to warrants:
The Company has issued common shares, pre-funded warrants and warrants as part of its financing arrangements. Common shares and pre-funded warrants are classified as equity. Warrants are classified as liabilities rather than equity when they are exercisable for a variable number of shares. As of October 1, 2022, as a result of the change in functional currency of Neptune, the 2020 Warrants and 2021 Warrants no longer met the criteria for liability classification and therefore were reclassified as equity prospectively (see note 14(f)).
On January 12, 2023, Neptune closed on a senior secured notes financing (such notes, the "Notes") for gross proceeds of $4,000,000 with CCUR Holdings, Inc. and Symbolic Logic, Inc. (collectively, the "Noteholders"). Pursuant to the terms of the Notes, the Company also issued to the Noteholders warrants ("January 2023 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. 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 related to warrants of $338,320 for a fair value of the senior notes of $3,661,680.
On October 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.
On June 23, 2022, Neptune issued a total of 645,526 pre-funded warrants (“Pre-Funded Warrants”), along with 1,300,000 common shares of the 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 of the June 2022 Common Warrant is exercisable for one common share. Each of the common share and Pre-Funded Warrants and the accompanying June 2022 Common Warrants were sold together at a combined offering price of $2.57, for aggregate gross proceeds of $5,000,002 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. On October 6, 2022, the Company agreed to extend the termination date of 972,763 Series C Warrants by two years.
Proceeds of the June 2022 Direct Offering were allocated between common shares and warrants first by allocating proceeds to the warrants classified as a liability based on their fair value and then allocating the residual to the equity instruments, which includes the Pre-Funded Warrants. The fair value of the liability-classified warrants was determined using the Black-Scholes model, resulting in an initial warrant liability of $4,046,836 for the Series C Warrants and $3,080,121 for the Series D Warrants. Because the fair value of the liability classified warrant exceeded the total proceeds, no consideration was allocated to the Common Shares and Pre-Funded Warrants and a loss $2,126,955 was immediately recognized in the net loss of the period as there were no additional rights or privileges identified. The Company is in need of financing to be able to continue its activities as described in note 1. The Pre-Funded Warrants were exercised in full on June 24, 2022 for gross proceeds of $65. Total issue costs related to this private placement of $465,211, were recorded under finance costs.
In addition to the issuance cost specific to the direct offering, the Company incurred legal fees in connection with all financing arrangements in the year ended March 31, 2023 which amounted to $170,739.
During the month of August 2022, a total of 201,207 Series C Warrants and 972,763 Series D Warrants were exercised at $2.32 each in cashless transactions, which resulted in an aggregate total of 384,446 shares being issued for an aggregate value of $1,769,000.
Warrants are revalued each period-end at fair value and accounted for in the Company's profit and loss statement under “gain on revaluation of derivatives”.
F-26
During the previous fiscal year, on March 14, 2022, Neptune issued a total of 185,715 pre-funded warrants (“Pre-Funded Warrants”), along with 528,572 common shares of the Company, as part of a registered direct offering (“Direct Offering”), and with each Pre-Funded Warrant, which qualified as equity, exercisable for one Common Share. The common shares and the Pre-Funded Warrants were sold together with 714,286 Series A Warrants (the “Series A Warrants”) to purchase up to an aggregate of 714,286 common shares, and with 714,286 Series B Warrants (the “Series B Warrants” and collectively with the Series A Warrants, the “Common Warrants”) to purchase up to another aggregate of 714,286 common shares. Each common share and Pre-Funded Warrants and the 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 estimated 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 and will terminate when such Pre-Funded Warrants are exercised in full. 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 a 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 date of issuance.
Proceeds of the Direct Offering were allocated between common shares and warrants first by allocating proceeds to the warrants classified as a liability and measured at fair value each period with changes in fair value recorded in the income statement 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 $4,757,559 for the Series A Warrants and $2,857,755 for the Series B Warrants. The residual amount of $1,820,087 and $107,818 was then allocated to the Common Share and Pre-Funded Warrants on a relative fair value basis. The Pre-Funded Warrants were exercised in full on March 30, 2022 for gross proceeds of $650.
During the fiscal year ended March 31, 2021, on February 19, 2021, the Company had issued 196,429 warrants (“2021 Warrants”) with an exercise price of $78.75 expiring on August 19, 2026. The warrants, issued as part of a Registered Direct Offering entered into on February 17, 2021, are exercisable beginning anytime on or after August 19, 2021 until August 19, 2026. Proceeds were allocated between common shares and first by allocating proceeds to the warrants classified as liability and measured at fair value with changes in fair value recorded in the income statement based on their fair value and then allocating the residual to the equity instruments. The fair value of the warrants was determined using the Black-Scholes model, resulting in an initial warrant liability of $6,288,998. The residual amount of $48,711,002 was then allocated to the Common Shares. Warrants are revalued each period-end at fair value through profit and loss. The change in fair value of this warrant liability for the twelve-month period ended March 31, 2023 was a decrease of $276,527 (2022 - 3,990,948). These warrants were prospectively reclassified as equity on October 1, 2022.
On October 22, 2020, Neptune had issued a total of 300,926 warrants (“2020 Warrants”) with an exercise price of $78.75 expiring on October 22, 2025. The warrants, issued as part of the Private Placement entered into on October 20, 2020, are exercisable beginning anytime on or after April 22, 2021 until October 22, 2025. Proceeds were allocated between common shares and warrants first by allocating proceeds to the warrants classified as liability and measured at fair value and then allocating the residual to the equity instruments. The fair value of the warrants was determined using the Black-Scholes model, resulting in an initial warrant liability of $11,831,000. The residual amount of $23,169,000 was then allocated to the Common Share. Warrants are revalued each period-end at fair value through profit and loss. The change in fair value of this warrant liability for the twelve-month period ended March 31, 2023 was a decrease of $279,056 (2022 - a decrease of $5,877,802). These warrants were prospectively reclassified as equity on October 1, 2022.
F-27
Changes in the value of the liability related to the warrants for the years ended March 31, 2023 and 2022 were as follows:
| | | | | |
|
| Warrants |
| Amount | |
Outstanding as at March 31, 2021 |
| 497,355 | | $ | 10,462,000 |
Warrants issued during the year |
| 1,428,574 | |
| 7,585,314 |
Revaluation |
| | |
| (12,633,316) |
Movements in exchange rates | | | | | 156,532 |
Outstanding as at March 31, 2022 |
| 1,925,929 | |
| 5,570,530 |
Outstanding as at March 31, 2022 |
| 1,925,929 | | $ | 5,570,530 |
Warrants issued during the year |
| 11,158,166 | |
| 14,494,891 |
Warrants exercised during the year | | (1,173,970) | | | (1,769,000) |
Warrants reclassified to equity during the year | | (497,355) | | | (37,710) |
Revaluation gain |
| | |
| (14,709,805) |
Movements in exchange rates |
| | |
| (392,652) |
Outstanding as at March 31, 2023 |
| 11,412,770 | | | 3,156,254 |
The following table provides the relevant information on the outstanding warrants as at March 31, 2023:
| | | | | | | | | | | |
|
| |
| Number of |
| Number of |
| | |
| |
| | | | warrants | | warrants | | Exercise | | | |
Reference | | Date of issuance | | outstanding | | exercisable | | price | | Expiry date | |
Series A Warrants | | March 14, 2022 |
| 714,287 |
| 714,287 | | $ | 11.20 | | September 14, 2027 |
Series B Warrants | | March 14, 2022 | | 714,287 | | 714,287 | | $ | 11.20 | | September 14, 2023 |
Series C Warrants | | June 23, 2022 | | 771,556 | | 771,556 | | $ | 2.32 | | June 23, 2027 |
Series C Warrants | | June 23, 2022 | | 972,763 | | 972,763 | | $ | 2.32 | | June 23, 2029 |
Series D Warrants | | June 23, 2022 | | 972,763 | | 972,763 | | $ | 2.32 | | June 24, 2024 |
Series E Warrants | | October 11, 2022 | | 6,417,114 | | 6,417,114 | | $ | 1.62 | | October 11, 2027 |
Series E Warrants | | October 11, 2022 | | — | | — | | $ | 1.62 | | May 15, 2028 |
January 2023 Warrants | | January 12, 2023 |
| 850,000 |
| 850,000 | | $ | 0.53 | | January 12, 2028 |
| | |
| 11,412,770 |
| 11,412,770 | | $ | 2.90 | | |
In connection with the offering closed on May 15, 2023, the Company has agreed that certain existing warrants to purchase up to an aggregate of 8,423,732 common shares that were previously issued in March 2022, June 2022, and October 2022, at exercise prices ranging from $1.62 to $11.20 per share and expiration dates ranging from September 14, 2023 to June 23, 2029, will be amended effective upon the closing of the offering, to reduce the exercise prices of the applicable warrants to $0.33, with expiration dates five years following the closing of the offering, with the exception of warrants to purchase up to 972,763 common shares which will expire on June 23, 2029 as currently contemplated. This amendment will result in a loss on remeasurement of warrant liabilities in the first quarter of fiscal 2024.
Consequently, the following table provides the updated information on the outstanding warrants as at March 31, 2023, updated to reflect the revisions from the May 15, 2023 offering:
| | | | | | | | | | | |
|
| |
| Number of |
| Number of |
| | |
| |
| | | | warrants | | warrants | | | | | |
Reference | | Date of issuance | | outstanding | | exercisable | | Exercise price | | Expiry date | |
Series A Warrants |
| March 14, 2022 |
| 714,287 |
| 714,287 | | $ | 0.33 |
| May 15, 2028 |
Series B Warrants | | March 14, 2022 |
| 714,287 |
| 714,287 | | $ | 0.33 | | May 15, 2028 |
Series C Warrants | | June 23, 2022 |
| 771,556 |
| 771,556 | | $ | 0.33 | | May 15, 2028 |
Series C Warrants | | June 23, 2022 |
| 972,763 |
| 972,763 | | $ | 0.33 | | June 23, 2029 |
Series D Warrants | | June 23, 2022 |
| 972,763 |
| 972,763 | | $ | 0.33 | | May 15, 2028 |
Series E Warrants | | October 11, 2022 |
| 2,139,038 |
| 2,139,038 | | $ | 1.62 | | October 11, 2027 |
Series E Warrants | | October 11, 2022 |
| 4,278,076 |
| 4,278,076 | | $ | 0.33 | | May 15, 2028 |
January 2023 Warrants | | January 12, 2023 |
| 850,000 |
| 850,000 | | $ | 0.53 | | January 12, 2028 |
| | |
| 11,412,770 |
| 11,412,770 | | $ | 0.46 | | |
F-28
The derivative warrant liabilities are measured at fair value at each reporting period and the reconciliation of changes in fair value is presented in the following tables:
| | | | | | | | | | | | |
|
| 2020 Warrants |
| 2021 Warrants | ||||||||
| | March 31, | | March 31, | | March 31, |
| March 31, | ||||
| | 2023 |
| 2022 | | 2023 | | 2022 | ||||
Balance - beginning of year | | $ | 309,769 | | $ | 6,174,000 | | $ | 306,704 | | $ | 4,288,000 |
Warrants reclassified to equity during the year | |
| (19,058) | |
| — | |
| (18,652) | |
| — |
Change in fair value to date of transfer to equity | |
| (279,056) | |
| (5,877,802) | |
| (276,527) | |
| (3,990,948) |
Translation effect | |
| (11,655) | |
| 13,571 | |
| (11,525) | |
| 9,652 |
Balance - end of year | | $ | — | | $ | 309,769 | | $ | — | | $ | 306,704 |
| | | | | | | | | | | | |
|
| Series A Warrants |
| Series B Warrants | ||||||||
| | March 31, |
| March 31, | | March 31, |
| March 31, | ||||
| | 2023 | | 2022 | | 2023 | | 2022 | ||||
Balance - beginning of year | | $ | 3,270,816 | | $ | — | | $ | 1,683,241 | | $ | — |
Warrants issued during the year | |
| — | |
| 4,757,559 | |
| — | |
| 2,827,755 |
Change in fair value | |
| (3,028,191) | |
| (1,572,299) | |
| (1,619,625) | |
| (1,192,267) |
Translation effect | |
| (136,418) | |
| 85,556 | |
| (59,975) | |
| 47,753 |
Balance - end of year | | $ | 106,207 | | $ | 3,270,816 | | $ | 3,641 | | $ | 1,683,241 |
| | | | | | | | | | | | |
| | Series C Warrants | | Series D Warrants | ||||||||
| | March 31, | | March 31, | | March 31, | | March 31, | ||||
| | 2023 | | 2022 | | 2023 | | 2022 | ||||
Balance - beginning of year |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| | | | | | | | | | | | |
Warrants issued during the year | |
| 4,046,836 | |
| — | |
| 3,080,121 | |
| — |
Warrants exercised during the year | |
| (365,224) | |
| — | |
| (1,403,776) | |
| — |
Change in fair value | |
| (3,065,563) | |
| — | |
| (1,471,428) | |
| — |
Translation effect | |
| (121,760) | |
| — | |
| (51,319) | |
| — |
| | | | | | | | | | | | |
Balance - end of year | | $ | 494,289 | | $ | — | | $ | 153,598 | | $ | — |
| | | | | | | | | | | | |
| | Series E Warrants | | January 2023 Warrants | ||||||||
| | March 31, | | March 31, | | March 31, | | March 31, | ||||
| | 2023 | | 2022 | | 2023 | | 2022 | ||||
Balance - beginning of year |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| | | | | | | | | | | | |
Warrants issued during the year | |
| 7,029,614 | |
| — | |
| 338,320 | |
| — |
Change in fair value | |
| (4,983,532) | |
| — | |
| 14,117 | |
| — |
Balance - end of year | | $ | 2,046,082 | | $ | — | | $ | 352,437 | | $ | — |
The fair value of the derivative warrant liabilities was estimated using the Black-Scholes option pricing model and based on the following assumptions:
| | | | | | | | | | | | | |
|
| 2020 Warrants |
| 2021 Warrants |
| ||||||||
| | March 31, |
| March 31, | | March 31, |
| March 31, |
| ||||
| | 2023 | | 2022 | | 2023 | | 2022 | | ||||
Share price | | | N/A | | $ | 7.70 | | | N/A | | $ | 7.70 | |
Exercise price | | | N/A | | $ | 78.75 | | | N/A | | $ | 78.75 | |
Dividend yield | |
| N/A | |
| — | |
| N/A | |
| — | |
Risk-free interest | |
| N/A | |
| 2.44 | % |
| N/A | |
| 2.49 | % |
Remaining contractual life (years) | |
| N/A | |
| 3.57 | |
| N/A | |
| 4.39 | |
Expected volatility | |
| N/A | |
| 83.2 | % |
| N/A | |
| 83.5 | % |
F-29
| | | | | | | | | | | | | |
|
| Series A Warrants |
| Series B Warrants |
| ||||||||
| | March 31, |
| March 31, | | March 31, |
| March 31, |
| ||||
| | 2023 | | 2022 | | 2023 | | 2022 | | ||||
Share price | | $ | 0.54 | | $ | 7.70 | | $ | 0.54 | | $ | 7.70 | |
Exercise price | | $ | 11.20 | | $ | 11.20 | | $ | 11.20 | | $ | 11.20 | |
Dividend yield | |
| — | |
| — |
|
| — | |
| — | |
Risk-free interest | |
| 3.66 | % |
| 1.94 | % |
| 4.92 | % |
| 1.46 | % |
Remaining contractual life (years) | |
| 4.46 | |
| 5.46 | |
| 0.46 | |
| 1.46 | |
Expected volatility | |
| 104.1 | % |
| 77.5 | % |
| 178.2 | % |
| 87.0 | % |
| | | | | | | | | | | | | |
| | Series C Warrants | | Series D Warrants |
| ||||||||
| | March 31, | | June 23, 2022 | | March 31, | | June 23, 2022 | | ||||
| | 2023 | | (Grant date) | | 2023 | | (Grant date) |
| ||||
Share price |
| $ | 0.54 |
| $ | 2.90 |
| $ | 0.54 |
| $ | 2.90 |
|
Exercise price | | $ | 2.32 | | $ | 2.32 | | $ | 2.32 | | $ | 2.32 | |
Dividend yield | |
| — | |
| — | |
| — | |
| — | |
Risk-free interest | |
| 3.68 | % |
| 3.38 | % |
| 4.51 | % |
| 3.21 | % |
Remaining contractual life (years) | |
| 4.23 | |
| 5.00 | |
| 1.23 | |
| 2.00 | |
Expected volatility | |
| 106.6 | % |
| 84.0 | % |
| 147.0 | % |
| 88.7 | % |
| | | | | | | | | | | | | |
| | Series E Warrants | | January 2023 Warrants |
| ||||||||
| | March 31, | | October 11, 2022 | | March 31, | | January 12, 2023 | | ||||
| | 2023 | | (Grant date) | | 2023 | | (Grant date) |
| ||||
Share price |
| $ | 0.54 |
| $ | 1.54 |
| $ | 0.54 |
| $ | 0.53 |
|
Exercise price | | $ | 1.62 | | $ | 1.62 | | $ | 0.53 | | $ | 0.53 | |
Dividend yield | |
| — | |
| — | |
| — | |
| — | |
Risk-free interest | |
| 3.65 | % |
| 4.14 | % |
| 3.62 | % |
| 3.53 | % |
Remaining contractual life (years) | |
| 4.53 | |
| 5.00 | |
| 4.79 | |
| 5.00 | |
Expected volatility | |
| 103.7 | % |
| 90.4 | % |
| 103.9 | % |
| 98.2 | % |
The Company measured its derivative warrant liabilities at fair value on a recurring basis. These financial liabilities were measured using level 3 inputs. The Company uses the historical volatility of the underlying share to establish the expected volatility of the warrants. An increase or decrease in this assumption to estimate the fair values using the Black-Scholes option pricing model would result in a decrease or an increase in the fair value of the instruments, respectively.
F-30
13.Loans and borrowings:
| | | | | | |
|
| March 31, |
| March 31, | ||
|
| 2023 |
| 2022 | ||
Promissory note originally of $10,000,000 and increased to $13,000,000 on July 13, 2022, issued by Sprout, to Morgan Stanley Expansion Capital ("Morgan Stanley" or "MSEC"), guaranteed by the Company and secured through a first-ranking mortgage on all movable current and future, corporeal and incorporeal, and tangible and intangible assets of Sprout. The outstanding principal balance bears interest at the rate of 10.0% per annum, increasing by 1.00% every three months commencing September 30, 2022. Interest is compounded and is accrued and added to the principal amount of the loan and is presented net of borrowing costs. The principal and accrued interest may also be converted, in whole or in part, at any time before February 1, 2024, upon the mutual consent of Sprout, the Company and MSEC, into common shares of the Company. In connection with the increase of $3,000,000 of the promissory note, MSEC was issued 372,670 common shares of Neptune of a value of $570,185. On April 27, 2023, the note maturity has been extended from February 1, 2024 to December 31, 2024, which will bear interest at the rate of 15.0% per annum to December 31, 2023, payable in kind, and 10.0% per annum, payable in kind, and 5.0% per annum payable in cash, from and after January 1, 2024. | | $ | 15,622,508 | | $ | 11,648,320 |
| | | | | | |
Promissory note of $250,000 issued by Sprout on August 26, 2022, guaranteed by the Company and secured by the issued and outstanding capital stock of Sprout. The outstanding principal balance bears interest at the rate of 10.0% per annum, increasing by 1.00% every three months commencing September 30, 2022. Interest is accrued and added to the principal amount of the loan and is presented net of borrowing costs. The principal is payable on February 1, 2024 in cash, or, upon the prior consent of the holder, fully or partially in common shares of Neptune at the Company's discretion. Neptune issued 36,765 common shares for a value of $75,736 in connection with this promissory note. | | | 218,517 | | | — |
| | | | | | |
Promissory notes totaling $550,000 issued by Sprout on November 8, 2022, guaranteed by the Company and secured by the issued and outstanding capital stock of Sprout. The outstanding principal balance bears interest at the rate of 10.0% per annum, increasing by 1.00% every three months commencing December 31, 2022. Interest is accrued and added to the principal amount of the loan and is presented net of borrowing costs. The principal is payable on February 1, 2024 in cash, or, upon the prior consent of the holder, fully or partially in common shares of Neptune at the Company's discretion. Neptune issued 146,330 common shares for a value of $96,578 in connection with these promissory notes. | |
| 496,061 | |
| — |
| | | | | | |
Senior secured notes (the "Notes") issued by the Company on January 12, 2023 for gross proceeds of $4,000,000 pursuant to the Note Purchase Agreement with CCUR Holdings, Inc. ("Collateral Agent") and the purchasers named therein. 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. The lender has the right to demand immediate repayment in the event of default of certain covenants. The Company defaulted on certain conditions of the Notes and entered into Waiver and First Amendment to the Notes (the "Waiver Agreement") on March 9, 2023. The Waiver Agreement waived certain administrative, regulatory and financial statement related covenants and the Notes were amended to provide that the Purchasers shall be paid an exit fee in the aggregate amount of $200,000, payable as follows: (i) on or prior to May 15, 2023, $100,000 and (ii) on the Maturity Date (as defined in the Note Purchase Agreement), $100,000. The interest rate was also increased to 24% for a period extending until the Company meets specified criteria in the Waiver Agreement which occurred on March 21, 2023. Amongst other covenants, the Notes require timely filling of financial statements. Debt issuance costs totaling $713,320 were capitalized to this loan, including the issuance by Neptune of 850,000 January 2023 Warrants of a value of $338,320. | | | 3,607,116 | | | — |
| | | | | | |
Accounts receivable factoring facility contracted by Sprout on January 25, 2023. 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. The lender was granted a security interest in Sprout's accounts receivable. The agreement will remain in effect for a 12-month period, effective January 23, 2023, and will be eligible for renewal. Neptune guaranteed the obligations of Sprout in connection with this agreement. | | | 2,762,110 | | | — |
| | | | | | |
Promissory note of $300,000 issued by Sprout on March 11, 2023, guaranteed by the Company and secured by the issued and outstanding capital stock of Sprout. The outstanding principal balance bears interest at the rate of 10.0% per annum, increasing by 1.00% every three months commencing March 31, 2023. Interest is accrued and added to the principal amount of the loan and is presented net of borrowing costs. The principal is payable on February 1, 2024 in cash, or, upon the prior consent of the holder, fully or partially in common shares of Neptune at the Company's discretion. Neptune issued 111,111 warrants exercisable at a price of $0.54 in connection with this promissory note. The fair value of these warrants was $37,723 (refer to note 14(f)). | | | 244,952 | | | — |
| | | | | | |
| | | 22,951,264 | | | 11,648,320 |
| |
| 7,538,369 | |
| — |
| | $ | 15,412,895 | | $ | 11,648,320 |
During the years ended March 31, 2023 and 2022, interest expense of $1,999,889 and $1,000,000 respectively were recognized on loans and borrowings.
Refer to Note 25 - Subsequent Events for additional developments.
F-31
14. | Capital and other components of equity: |
(a) | Share capital: |
Authorized capital stock:
Unlimited number of shares without par value:
● | Common shares |
Preferred shares, issuable in series, rights, privileges and restrictions determined at time of issuance:
● | Series A preferred shares, non-voting, non-participating, fixed, preferential, and non-cumulative dividend of 5% of paid-up capital, exchangeable at the holder’s option under certain conditions into common shares (none issued and outstanding). |
All issued shares are fully paid.
(b) | Share options exercised: |
During the years ended March 31, 2023 and 2022, Neptune issued no common shares of the Company upon exercise of stock options.
(c) | DSUs released: |
During the years ended March 31, 2023 and 2022, Neptune issued no common shares of the Company to former and current members of the Board of Directors.
(d) | RSUs released: |
During the year ended March 31, 2023, Neptune issued 262,495 common shares of the Company to the CEO as part of his employment agreement at a weighted average price of $5.60 per common share. Withholding taxes of $815,954 were paid by the Company pursuant to the issuance of these RSUs resulting in the Company not issuing an additional 173,493 RSUs.
During the year ended March 31, 2022, Neptune issued 108,079 common shares of the Company to the CEO as part of his employment agreement at a weighted average price of $39.74 per common share. Withholding taxes of $1,411,515 were paid by the Company pursuant to the issuance of these RSUs resulting in the Company not issuing an additional 64,105 RSUs.
(e) | Restricted shares: |
During the years ended March 31, 2023 and 2022, Neptune issued no restricted common shares of the Company to employees.
(f) | Warrants: |
As of October 1, 2022, as a result of the change in functional currency of Neptune, the 2020 Warrants and 2021 Warrants no longer met the criteria for liability classification and therefore were reclassified as equity prospectively. The reclassification did not impact the net earnings for the period.
On March 10, 2023, Sprout issued promissory notes for gross proceeds of $300,000 to various investors as described in note 13. Pursuant to the terms of those promissory notes, the Company also issued to these investors warrants ("March 2023 Warrants") to purchase an aggregate of 111,111 shares of Neptune common stock, with each warrant exercisable for 5 years following the initial issuance at a price of $0.54 per common share. The aggregate fair value on issuance of the March 2023 Warrants was $37,723.
On June 23, 2022, as part of the June 2022 Direct Offering described under note 14(h), Neptune issued a total of 645,526 pre-funded warrants (“Pre-Funded Warrants”), with each Pre-Funded Warrant exercisable for one Common Share. The Pre-Funded Warrants were funded in full at closing except for a nominal exercise price of $0.0001 and were exercisable commencing on the Closing Date, and were to terminate when such Pre-Funded Warrants would be exercised in full. The Pre-funded warrants were fully exercised on June 24, 2022 for $65.
F-32
On March 14, 2022, as part of the Direct Offering described under note 14(h), Neptune issued a total of 185,715 pre-funded warrants (“Pre-Funded Warrants”), with each Pre-Funded Warrant exercisable for one Common Share. The Pre-Funded Warrants are funded in full at closing except for a nominal exercise price of $0.0035 and are exercisable commencing on the Closing Date, and will terminate when such Pre-Funded Warrants are exercised in full. The Pre-Funded Warrants were exercised in full on March 30, 2022 for gross proceeds of $650.
Changes in the value of equity related to the warrants for the years ended March 31, 2023 and 2022 were as follows:
| | | | | | | | | | | | |
|
| March 31, 2023 |
| March 31, 2022 | ||||||||
| | Weighted average | | Number of | | Weighted average | | Number of | ||||
|
| exercise price |
| warrants |
| exercise price |
| warrants | ||||
Warrants outstanding at April 1, 2022 and 2021 | | $ | 325.34 |
| | 176,429 | | $ | 325.34 |
| | 176,429 |
Issued | |
| 0.08 |
| | 756,637 | |
| 0.0035 |
| | 185,715 |
Reclassification from liability related to warrants | | | 78.75 | | | 497,355 | | | — | | | — |
Exercised | |
| 0.0001 |
| | (645,526) | |
| 0.0035 |
| | (185,715) |
Warrants outstanding at March 31, 2023 and 2022 | | $ | 123.11 |
| | 784,895 | | $ | 325.34 |
| | 176,429 |
Warrants exercisable at March 31, 2023 and 2022 | | $ | 123.11 |
| | 784,895 | | $ | 325.34 |
| | 176,429 |
Warrants of the Company classified as equity are composed of the following as at March 31, 2023 and March 31, 2022:
| | | | | | | | | | | | | | |
| | | | | | March 31, 2023 | | | | | | March 31, 2022 | ||
|
| Number |
| Number |
| |
| Number |
| Number |
| | ||
| | outstanding | | exercisable | | Amount | | outstanding | | exercisable | | Amount | ||
Warrants IFF (i) | | 57,143 | | 57,143 | | | 1,630,210 | | 57,143 | | 57,143 | | | 1,630,210 |
Warrants AMI (ii) | | 119,286 | | 119,286 | | | 4,449,680 | | 119,286 | | 119,286 | | | 4,449,680 |
2020 Warrants (iii) | | 300,926 | | 300,926 | | | 19,058 | | — | | — | | | — |
2021 Warrants (iv) | | 196,429 | | 196,429 | | | 18,652 | | — | | — | | | — |
March 2023 Warrants |
| 111,111 |
| 111,111 |
| | 37,723 |
| — |
| — |
| | — |
|
| 784,895 |
| 784,895 | | $ | 6,155,323 |
| 176,429 |
| 176,429 | | $ | 6,079,890 |
(i) | During the year ended March 31, 2020, Neptune granted 57,143 warrants (“Warrants IFF”) with an exercise price of $420.00 expiring on November 7, 2024. The warrants, granted in exchange for services to be rendered by non-employees, vest proportionally to the services rendered. No expense was recognized during the twelve-month period ended March 31, 2023 (2022 - $178,917) under the research and development expenses. |
(ii) | During the year ended March 31, 2020, Neptune granted 119,286 warrants (“Warrants AMI”) with an exercise price of $280.00 with 85,715 expiring on October 3, 2024 and 33,572 expiring on February 5, 2025. The warrants, granted in exchange for services to be rendered by non-employees, vest proportionally to the services rendered. The warrants fully vested in fiscal year ended March 31, 2021 and as such no expense was recognized in relation to those instruments since then. |
(iii) | During the year ended March 31, 2021, Neptune issued a total of 300,926 warrants (“2020 Warrants”) with an exercise price of $78.75 expiring on October 22, 2025. The warrants, issued as part of the Private Placement entered into on October 20, 2020, are exercisable beginning anytime on or after April 22, 2021 until October 22, 2025. Initially classified as liability, the 2020 Warrants which had a fair value of $19,058 were reclassified as equity on October 1, 2022 as a result of the change in functional currency. The holders of these warrants will be entitled to participate in dividends and other distributions of assets by the Company to its holders of common shares as though the holder then held common shares. |
(iv) | On February 19, 2021, the Company issued 196,429 warrants (“2021 Warrants”) with an exercise price of $78.75 expiring on August 19, 2026. The warrants, issued as part of a Registered Direct Offering entered into on February 17, 2021, are exercisable beginning anytime on or after August 19, 2021 until August 19, 2026. Initially classified as liability, the 2021 Warrants which had a fair value of $18,652 were reclassified as equity on October 1, 2022 as a result of the change in functional currency. The holders of these warrants will be entitled to participate in dividends and other distributions of assets by the Company to its holders of common shares as though the holder then held common shares. |
F-33
(g) | Common shares issued in connection with debt financing: |
On February 15, 2023, Neptune issued 146,330 common shares for a value of $96,578 in connection with an aggregate $550,000 Secured Promissory Notes that were issued by Sprout on November 8, 2022, for the payment of borrowing costs.
On July 13, 2022, Neptune issued 372,670 common shares for a value of $570,185 in connection with the amendment of the Secured Promissory Notes that were issued by Sprout for the payment of borrowing costs. In connection with this amendment, investment funds managed by MSEC have provided an additional $3 million in Secured Promissory Notes to Sprout.
On September 9, 2022, Neptune issued 36,765 common shares for a value of $75,736 in connection with a new $250,000 Secured Promissory Notes that were issued by Sprout, for the payment of borrowing costs.
(h) | Direct Offerings: |
On June 23, 2022, Neptune issued a total of 645,526 pre-funded warrants (“Pre-Funded Warrants”), along with 1,300,000 common shares of the 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 of the June 2022 Common Warrant is exercisable for one common share. Each of the common share and Pre-Funded Warrants and the accompanying June 2022 Common Warrants were sold together at a combined offering price of $2.57, for aggregate gross proceeds of $5,000,002 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. On October 6, 2022, the Company agreed to extend the termination date of 972,763 Series C Warrants by two years. Proceeds of the June 2022 Direct Offering were allocated between common shares and warrants first by allocating proceeds to the warrants classified as a liability based on their fair value and then allocating the residual to the equity instruments, which includes the Pre-Funded Warrants. The fair value of the liability-classified warrants was determined using the Black-Scholes model, resulting in an initial warrant liability of $4,046,836 for the Series C Warrants and $3,080,121 for the Series D Warrants. Because the fair value of the liability classified warrant exceeded the total proceeds, no consideration was allocated to the Common Shares and Pre-Funded Warrants and a loss $2,126,955 was immediately recognized in the net loss of the period as there were no additional rights or privileges identified. The Company is in need of financing to be able to continue its activities as described in note 1. The Pre-Funded Warrants were exercised in full on June 24, 2022 for gross proceeds of $65. Total issue costs related to this private placement of $465,211, were recorded under finance costs. During the month of August 2022, a total of 201,207 Series C Warrants and 972,763 Series D Warrants were exercised at $2.32 each in cashless transactions, which resulted in an aggregate total of 384,446 shares being issued for an aggregate value of $1,769,000.
On March 14, 2022, Neptune issued a total of 528,572 common shares of the Company, along with 185,715 pre-funded warrants (“Pre-Funded Warrants”), as part of a registered direct offering (“Direct Offering”), with each Pre-Funded Warrant exercisable for one Common Share. The common shares and the Pre-Funded Warrants were sold together with 714,287 Series A Warrants (the “Series A Warrants”) and 714,287 Series B Warrants (the “Series B Warrants” and collectively with the Series A Warrants, the “Common Warrants”) to purchase up to an aggregate of 1,428,572 common shares. Each common share and Pre Funded Warrants and the 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 estimated offering expenses. The Pre-Funded Warrants are funded in full at closing except for a nominal exercise price of $0.0035 and are exercisable commencing on the Closing Date, and will terminate when such Pre-Funded Warrants are exercised in full. 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 date of issuance. Common Warrants were recognized as liabilities. The proceeds were allocated amongst common shares and Pre Funded Warrants using the relative fair value approach after allocating proceeds to the Common Warrants corresponding to their fair value. The residual amount of $306,868 and $107,818 was then allocated to the Common Share and Pre-Funded Warrants. Total issue costs related to this private placement amounted to $636,847, of which $33,012 were recorded against share capital and the portion related to the warrants, in the amount of $603,835, was recorded under finance costs.
F-34
(i) | Registered Direct Offering Priced At-The-Market: |
On October 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.
(j) | Common shares issued in exchange of services rendered by non-employees: |
On January 10, 2023, Neptune issued 71,665 common shares to non-employees for consulting services of a value of $117,443 rendered on different matters, including but not limited to the divestiture of the Cannabis assets.
On June 15, 2022, Neptune issued 7,104 common shares to non-employees for consulting services of a value of $39,532 rendered in connection with the divestiture of the Cannabis assets.
F-35
15.Non-controlling interest:
The summarized financial information of Sprout is provided below. This information is based on amounts before inter-company eliminations and include the effects of the Company’s purchase price adjustments.
Summarized statement of loss and comprehensive loss:
| | | | | | |
|
| Year ended | ||||
| | March 31, 2023 |
| March 31, 2022 | ||
Revenue from contracts with customers | | $ | 33,904,708 | | $ | 25,971,480 |
Cost of sales | |
| (36,097,282) | |
| (28,200,621) |
Selling, general and administrative expenses | |
| (10,946,955) | |
| (9,459,448) |
Impairment loss on goodwill and intangible assets | |
| (37,662,430) | |
| (3,288,847) |
Gain on settlement of liability | |
| (194,867) | |
| — |
Finance costs | |
| (5,802,556) | |
| (2,427,165) |
Loss before tax | |
| (56,799,382) | |
| (18,931,601) |
Income tax expense | |
| — | |
| (11,854) |
Net loss | |
| (56,799,382) | |
| (18,943,455) |
Total comprehensive loss | |
| (56,799,382) | |
| (18,948,855) |
Loss attributable to the subsidiary's non-controlling interest | |
| (28,342,892) | |
| (4,752,152) |
Comprehensive loss attributable to the subsidiary's non-controlling interest | | $ | (28,342,892) | | $ | (14,196,703) |
Summarized statement of balance sheets:
| | | | | | |
|
| March 31, |
| March 31, | ||
| | 2023 | | 2022 | ||
Current assets | | $ | 12,382,450 |
| | 12,260,375 |
Non-current assets | |
| 9,788 |
| | 39,000,367 |
Current liabilities | |
| 12,938,219 |
| | 5,991,483 |
Non-current liabilities | |
| 35,789,746 |
| | 25,362,259 |
Total equity (deficiency) | |
| (36,335,727) |
| | 19,907,000 |
Attributable to: | |
| |
| |
|
Equity holders of the Company | | $ | (20,714,912) | | $ | 7,184,923 |
Non-controlling interest | |
| (15,620,815) | |
| 12,722,077 |
Summarized statement of cash flow:
| | | | | | |
|
| Year ended | ||||
| | March 31, 2023 |
| March 31, 2022 | ||
Cash flow used in operating activities | | $ | (28,565,729) | | $ | (10,214,243) |
Cash flow provided by (used in) investing activities | |
| 2,360,671 | |
| (122,136) |
Cash flow provided by financing activities | |
| 19,291,733 | |
| 11,280,528 |
Net increase (decrease) in cash and cash equivalents | | $ | (6,913,325) | | $ | 944,149 |
(1) | Cash flow from financing activities is partially provided through intercompany advances. |
F-36
16.Share-based payment:
Under the Company’s share-based payment arrangements, stock-based compensation expenses of $3,503,582 were recognized on equity share based awards and expenses of $1,769,805 on liability-based awards in the consolidated statement of loss and comprehensive loss for the twelve-month period ended March 31, 2023 (2022 - $7,816,845 for equity-based awards and $3,263,437 for liability-based awards).
As at March 31, 2023, the Company had the following share-based payment arrangements:
(a) | Company stock option plan: |
(i) | Stock option plan: |
The Company has established a stock option plan for directors, officers, employees and consultants. The exercise price of the stock options granted under the plan is not lower than the closing price of the common shares listed on the Nasdaq on the eve of the grant. The terms and conditions for acquiring and exercising options are set by the Board of Directors, subject to, among others, the following limitations: the term of the options cannot exceed ten years and every stock option granted under the stock option plan will be subject to conditions no less restrictive than a minimum vesting period of 18 months and a gradual and equal acquisition of vesting rights at least on a quarterly basis. The Company’s stock-option plan allows the Company to issue a number of stock options not exceeding 25% of the number of common shares issued and outstanding at the time of any grant. The total number of stock options issuable to a single holder cannot exceed 20% of the Company’s total issued and outstanding common shares at the time of the grant, provided that the maximum number of stock options issuable to a single consultant cannot exceed 2% of the Company's total issued and outstanding common shares at the time of the grant.
The number and weighted average exercise prices of stock options are as follows:
| | | | | | | | | | |
|
| 2023 |
| 2022 | ||||||
| | Weighted |
| | | Weighted |
| | ||
| | average | | | | average | | | ||
| | exercise | | Number of | | exercise | | Number of | ||
| | price | | options | | price | | options | ||
Options outstanding at April 1st, 2023 and 2022 | | $ | 37.41 |
| 306,321 |
| $ | 65.91 |
| 121,208 |
Granted | | | 1.59 |
| 229,715 |
| | 25.41 |
| 286,554 |
Forfeited/Cancelled |
| | 18.04 |
| (68,385) |
| | 37.41 |
| (94,298) |
Expired | | | 50.79 |
| (50,318) |
| | 89.90 |
| (7,143) |
Options outstanding at March 31, 2023 and 2022 | | $ | 18.23 |
| 417,333 |
| $ | 37.41 |
| 306,321 |
Options exercisable at March 31, 2023 and 2022 | | $ | 20.79 |
| 260,801 |
| $ | 56.68 |
| 102,883 |
| | | | | | | | | | |
|
| March 31, 2023 |
| |||||||
| | Options outstanding | | Exercisable options |
| |||||
| | Weighted |
| |
| |
| | | |
| | remaining | | | | Weighted | | Weighted |
| |
| | contractual | | Number of | | number of | | average |
| |
Exercise | | life | | options | | options | | exercise |
| |
price | | outstanding | | outstanding | | exercisable | | price |
| |
$1.55 - $1.60 |
| 4.38 |
| 115,715 |
| 28,572 |
| $ | 1.55 | |
$1.61 - $6.07 |
| 4.49 |
| 114,000 |
| 114,000 |
| | 1.64 | |
$6.08 - $22.40 |
| 3.86 |
| 20,716 |
| 6,908 |
| | 11.10 | |
$22.41 - $27.92 |
| 3.37 |
| 85,715 |
| 57,144 |
| | 25.55 | |
$27.93 - $157.62 |
| 5.99 |
| 81,187 |
| 54,177 |
| | 66.42 | |
|
| 4.49 |
| 417,333 | | 260,801 | | $ | 20.58 | |
F-37
The weighted average fair value of the options granted to employees during the twelve-month period ended March 31, 2023 was 1.59 (2022 - $13.68). The Company granted 114,000 options to non-employees during the twelve-month period ended March 31, 2023 (none for the twelve-month period ended March 31, 2022) resulting in a $137,267 and a nil stock-based compensation expense, respectively for the twelve-month periods ended March 31, 2023 and 2022. The fair value of options granted has been estimated using the Black-Scholes option pricing model and based on the weighted average of the following assumptions for options granted during the twelve-month period ended March 31, 2023 and 2022 as at the date of grant:
| | | | | | | |
|
| Year ended |
| ||||
Black Sholes assumptions used | | March 31, 2023 |
| March 31, 2022 |
| ||
Share price | | $ | 1.55-$1.64 | | $ | 25.41 | |
Exercise price | | $ | 1.55-$1.64 | | $ | 25.41 | |
Dividend yield | |
| nil | |
| nil | |
Risk-free interest | |
| 3.10% - 3.60% | |
| 0.94 | % |
Expected life (years) | |
| 3.61 | |
| 4.29 | |
Expected volatility | |
| 94.38% - 106.70% | |
| 82.73 | % |
Stock-based compensation recognized under this plan amounted to $870,432 for the twelve-month period ended March 31, 2023 (2022 - $2,101,474). Unrecognized compensation cost of $259,890 as at March 31, 2023 with a weighted average period remaining of 1.21 years. Unrecognized compensation cost of $1,422,800 as at March 31, 2022 with a weighted average period remaining of 1.16 years.
(ii) | Non-market performance options: |
On July 8, 2019, the Company granted 100,000 non-market performance options under the Company stock option plan at an exercise price of $155.05 per share to the CEO, expiring on July 8, 2029. These options vest after the attainment of non-market performance conditions within the following ten years. These non-market performance options required the approval of amendments to the stock option plan and therefore the fair value of these options was revalued up to the date of approval of the amendments (grant date). None of these non-market performance options have vested as at March 31, 2023. These options were not exercisable as at March 31, 2023 and 2022.
No stock-based compensation expense was recognized for the year ended March 31, 2023. During twelve-month period ended March 31, 2022, changes in estimated probability of achievement of the non-market performance conditions or the expected number of years to achieve the performance conditions resulted in a recovery of stock-based compensation recognized under this plan which amounted to $689,464.
(iii) | Market performance options: |
On July 8, 2019, the Company granted 157,142 market performance options under the Company stock option plan at an exercise price of $155.05 per share to the CEO, expiring on July 8, 2029. These options vest after the attainment of market performance conditions within the following ten years. Some of these market performance options required the approval of amendments to the stock option plan and therefore the fair value of these options was revaluated up to the date of approval of the amendments (grant date).
The number and weighted average exercise prices of market performance options are as follows:
| | | | | | | | | | | | |
| | | | 2023 | | 2022 | ||||||
| | | | Weighted | | | | Weighted | | | ||
| | | | average | | | | average | | | ||
| | | | exercise | | Number of | | exercise | | Number of | ||
|
| Notes |
| price |
| options |
| price |
| options | ||
Options outstanding at April 1, 2023 and 2022 | | |
| $ | 155.05 |
| 157,142 |
| $ | 155.05 |
| 157,142 |
Options outstanding at March 31, 2023 and 2022 | | | | $ | 155.05 |
| 157,142 |
| $ | 155.05 |
| 157,142 |
Options exercisable at March 31, 2023 and 2022 | | | | $ | 155.05 |
| 21,429 |
| $ | 155.05 |
| 21,429 |
F-38
Stock-based compensation recognized under this plan amounted to $2,351,970 and $2,465,163 respectively for the years ended March 31, 2023 and 2022. Unrecognized compensation cost at March 31, 2023 is $9,066,730 with a weighted average period remaining of 6.51 years (2022 - $12,134,126 with a weighted average period remaining of 7.51 years).
(b) | Deferred Share Units and Restricted Share Units: |
The Company has established an equity incentive plan for employees, directors and consultants of the Company. The plan provides for the issuance of restricted share units, performance share units, restricted shares, deferred share units and other share-based awards, subject to restricted conditions as may be determined by the Board of Directors. Upon fulfillment of the restricted conditions, as the case may be, the plan provides for settlement of the awards outstanding through shares.
(i) | Deferred Share Units (“DSUs”) |
The number and weighted average share prices of DSUs are as follows:
| | | | | | | | | | | | |
| | | | 2023 | | 2022 | ||||||
|
| |
| Weighted |
| |
| Weighted |
| | ||
| | | | average | | | | average | | | ||
| | | | share | | Number of | | share | | Number of | ||
| | Notes | | price | | DSUs | | price | | DSUs | ||
DSUs outstanding at April 1, 2023 and 2022 |
|
|
| $ | 66.45 |
| 4,308 | | $ | 63.00 |
| 1,202 |
Granted |
|
|
|
| — |
| — | |
| 19.26 |
| 3,106 |
DSUs outstanding at March 31, 2023 and 2022 |
|
|
| $ | 66.45 |
| 4,308 | | $ | 66.45 |
| 4,308 |
DSUs exercisable at March 31, 2023 and 2022 |
|
|
| $ | 66.45 |
| 4,308 | | $ | 39.93 |
| 2,753 |
Of the 4,308 DSUs outstanding as at March 31, 2023 (2022 – 4,308), 1,555 DSUs vested upon services to be rendered during a period of twelve months from date of grant (2022 – 1,108). The fair value of the DSUs is determined to be the share price at the date of grant and is recognized as stock-based compensation, through additional paid-in capital, over the vesting period.
Stock-based compensation recognized under this plan amounted to $13,025 and $49,826 respectively for the years ended March 31, 2023 and 2022. Unrecognized compensation cost of nil as at March 31, 2023 ($11,873 unrecognized compensation cost as at March 31, 2022 with a weighted average period remaining of 0.31 years).
(ii) | Restricted Share Units (‘‘RSUs’’) |
During the year ended March 31, 2020, as part of the employment agreement of the CEO, the Company granted RSUs which vest over three years in 36 equal installments. During the year ended March 31, 2021, Neptune granted additional RSUs to the CEO and to executives of the Company, which vest over periods ranging from 6 months to 3 years. The fair value of the RSUs is determined to be the share price at the date of grant and is recognized as stock-based compensation, through additional paid-in capital, over the vesting period. The fair value of the RSUs granted during the twelve-month period ended March 31, 2023 was $3.31 per unit (2022 - $16.19).
| | | | | | | | | | | | |
| | | | 2023 | | 2022 | ||||||
|
| |
| Weighted |
| |
| Weighted |
| | ||
| | | | average | | | | average | | | ||
| | | | share | | Number of | | share | | Number of | ||
|
| Notes |
| price |
| RSUs |
| price |
| RSUs | ||
RSUs outstanding at April 1st, 2023 and 2022 |
|
|
| $ | 59.75 |
| 25,038 | | $ | 92.08 |
| 95,845 |
Granted |
|
|
|
| 3.31 |
| 436,449 | |
| 16.19 |
| 111,915 |
Forfeited |
|
|
|
| 19.25 |
| (22,710) | |
| 51.65 |
| (10,538) |
Released through the issuance of common shares |
| 14(d) |
|
| 5.60 |
| (262,495) | |
| 50.53 |
| (108,079) |
Withheld as payment of withholding taxes |
| 14(d) |
|
| 5.60 |
| (173,493) | |
| 10.61 |
| (64,105) |
RSUs outstanding at March 31, 2023 and 2022 |
|
|
| $ | 60.04 |
| 2,789 | | $ | 59.75 |
| 25,038 |
Stock-based compensation recognized under this plan amounted to $268,155 and $3,889,846 respectively for the years ended March 31, 2023 and 2022. Unrecognized compensation cost at March 31, 2023 is nil (2022 - $235,075 unrecognized compensation cost with a weighted average remaining life of 1.30 years).
F-39
On November 14, 2021, the Company and its CEO entered into an agreement pursuant to which the CEO’s existing employment agreement was amended to waive the Company’s obligation to procure directors and officers insurance coverage of up to $15 million for the period covering July 1, 2021 to July 31, 2022. The parties agreed that if the Company had successfully completed a strategic partnership prior to December 31, 2021, the CEO would have been entitled to approximately $6.9 million in cash and would have been granted fully vested options to purchase 8.5 million shares of the Company’s common stock. As the strategic partnership was not consummated by December 31, 2021, the CEO was entitled to monthly cash payments for an aggregate value of approximately $6.9 million or the issuance over time of a fixed amount of fully vested RSUs, at the option of the Company.
The balance of the liability accrual to the CEO is $8,587 (including withholding taxes) as at March 31, 2023, in trade and other payables. The revaluation of the liability amounted to gain of $3,152,578 for the year ended March 31, 2023 and was recorded into selling, general and administrative expenses (2022 – a loss of $4,708,163). During the year ended March 31, 2023, settlements in RSUs were $1,555,585 (2022 - nil). The compensation 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.
(c) | Long term cash bonus: |
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.
As at March 31, 2023, the liability related to this long-term incentive of $24,000 ($88,688 as at March 31, 2022) is presented in Other liability in the consolidated balance sheets. During the twelve-month period ended March 31, 2023, a recovery of $64,688 (2022 - a recovery of $304,467) was recorded in connection with the long-term incentive under selling, general and administrative expenses in the consolidated statement of loss.
17.Finance income and finance costs:
(a) | Finance income: |
| | | | | | |
| | Years ended | ||||
|
| March 31, |
| March 31, | ||
| | 2023 | | 2022 | ||
Interest income | | $ | 1,445 | | $ | 7,123 |
Finance income | | $ | 1,445 | | $ | 7,123 |
(b) | Finance costs: |
| | | | | | | | |
| | | | Years ended | ||||
|
| |
| March 31, |
| March 31, | ||
| | Notes | | 2023 | | 2022 | ||
Interest charges and other finance costs | | |
| $ | 34,783 |
| $ | 540,143 |
Interest expense on loans and borrowings |
| 13 | | | 1,999,889 | | | 1,000,000 |
Interest on lease liabilities | | 8 | | | 168,065 | | | — |
Warrants issuance costs |
| 12 | | | 1,500,950 | | | 603,835 |
Factoring fees | | | | | 120,343 | | | — |
Finance costs | | |
| $ | 3,824,030 |
| $ | 2,143,978 |
18.Income taxes:
The breakdown of the income tax provision is as follows:
| | | | | | |
|
| 2023 |
| 2022 | ||
Current | | $ | — | | $ | — |
Deferred tax recovery | |
| — | |
| — |
Total tax recovery | | $ | — | | $ | — |
F-40
Reconciliation of effective tax rate:
| | | | | | | |
|
| 2023 |
| 2022 |
| ||
Loss before income taxes | | $ | (88,802,558) | | $ | (84,424,529) | |
Basic combined Canadian statutory income tax rate 1 | |
| 26.50 | % |
| 26.50 | % |
Income tax | | $ | (23,532,678) | | $ | (22,372,500) | |
Increase (decrease) resulting from: | |
| | |
| | |
Change in valuation allowance | |
| 19,104,611 | |
| 18,982,099 | |
Permanent difference on impairment on goodwill | |
| 4,578,508 | |
| 788,642 | |
Permanent difference related to derivative | |
| (3,061,605) | |
| (1,656,038) | |
Non-deductible and tax exempt items | |
| 7,211 | |
| 71,653 | |
Non-deductible stock-based compensation | |
| 1,237,745 | |
| 2,050,909 | |
Foreign exchange | |
| 490,146 | |
| 236,512 | |
Difference in statutory tax rates of foreign subsidiaries | |
| 1,810,518 | |
| 1,121,068 | |
Other permanent differences | |
| 220,551 | |
| 474,339 | |
Adjustments in relation to prior years | |
| (855,007) | |
| 303,316 | |
Total tax expense | | $ | — | | $ | — | |
1 | The Canadian combined statutory income tax rate. |
Components of the net deferred tax asset (liability):
| | | | | | |
|
| March 31, |
| March 31, | ||
| | 2023 | | 2022 | ||
Net operating losses ("NOL") and tax credit carryforwards | | $ | 87,316,628 | | $ | 76,346,005 |
Intangible assets and goodwill | |
| 3,486,240 | |
| — |
Property, plant and equipment | |
| 159,149 | |
| 554,187 |
Reserves and accruals not currently deductible for tax purposes | |
| 1,184,407 | |
| 290,413 |
Financing fees not currently deductible for tax purposes | |
| 1,311,442 | |
| 1,446,462 |
Research and development costs | |
| 2,863,053 | |
| 3,098,560 |
Non-deductible interest | |
| 4,295,656 | |
| 3,349,307 |
Other | |
| 1,251,163 | |
| 1,693,301 |
Subtotal | |
| 101,867,738 | |
| 86,778,235 |
Less: valuation allowance | |
| 101,380,008 | |
| 83,934,321 |
Total net deferred tax assets | |
| 487,730 | |
| 2,843,914 |
Intangible assets and goodwill | |
| — | |
| (1,921,815) |
Right-of-use assets | |
| (487,730) | |
| (767,164) |
Other | |
| — | |
| (154,935) |
Total deferred tax liabilities | |
| (487,730) | |
| (2,843,914) |
Net deferred tax | | $ | — | | $ | — |
Management assesses the available positive and negative evidence to determine the valuation allowance required with respect to the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the years. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth.
On the basis of this evaluation, as of March 31, 2023, a valuation allowance of $101,380,008 has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized (2022 - $83,934,321).
F-41
Tax losses carried forward
We have income tax NOL carryforwards in both Canada and in the United States, which will expire on various dates in the next 20 years as follows:
| | | | | | | | | | | | |
|
| Federal US |
| States |
| Federal Canada |
| Provincial | ||||
2027 |
| | — | | | — | | | 42,000 |
| | — |
2030 |
| | — | | | 149,000 | | | — |
| | — |
2031 |
| | — | | | 1,524,000 | | | 438,000 |
| | — |
2032 |
| | 1,659,000 | | | — | | | 2,394,000 |
| | 684,000 |
2033 |
| | 2,002,000 | | | 2,114,000 | | | 8,930,000 |
| | 8,929,000 |
2034 |
| | 4,423,000 | | | 3,726,000 | | | 10,925,000 |
| | 10,648,000 |
2035 |
| | 8,277,000 | | | 7,431,000 | | | 2,775,000 |
| | 2,775,000 |
2036 |
| | 11,727,000 | | | 10,011,000 | | | 6,687,000 |
| | 7,757,000 |
2037 |
| | 9,842,000 | | | 9,184,000 | | | — |
| | — |
2038 |
| | — | | | — | | | 20,000 |
| | 16,000 |
2039 |
| | — | | | — | | | 7,368,000 |
| | 7,829,000 |
2040 |
| | — | | | — | | | 30,188,000 |
| | 36,445,000 |
2041 |
| | — | | | — | | | 39,446,000 |
| | 37,427,000 |
2042 |
| | — | | | — | | | 29,634,000 |
| | 29,067,000 |
2043 |
| | — | | | — | | | 31,818,000 |
| | 29,891,000 |
| | $ | 37,930,000 | | $ | 34,139,000 | | $ | 170,665,000 | | $ | 171,468,000 |
As at March 31, 2023, the Company had NOL that can be carried forward indefinitely of $131,012,000 for federal purposes and $127,024,000 for State and Provincial purposes (2022 - $ 101,174,000 and $96,884,000 respectively).
As at March 31, 2023, the Company had realized and unrealized capital losses of $1,807,774 ($2,060,000 in 2022) that can be carried forward indefinitely.
Tax credits receivable and recoverable
Unused Canadian federal Investment tax credits may be used to reduce federal income tax payable and expire as follows:
| | | |
2024 |
| $ | 55,418 |
2025 | |
| 39,901 |
2026 | |
| 67,240 |
2027 | |
| 107,141 |
2028 | |
| 47,290 |
2029 | |
| 104,185 |
2030 | |
| 165,514 |
2031 | |
| 199,503 |
2032 | |
| 116,007 |
2033 | |
| 96,057 |
2034 | |
| 87,190 |
2035 | |
| 216,498 |
2036 | |
| 155,169 |
2037 | |
| 117,485 |
2038 | |
| 46,551 |
2039 | |
| 53,940 |
| | $ | 1,675,089 |
The amounts recorded as tax credits receivable or recoverable are subject to a government tax audit and the final amount received may differ from those recorded.
F-42
19.Loss per share:
When the Company has a net loss, the effects of options, DSUs, RSUs and warrants are excluded from the calculation of diluted loss per share for periods in which a company sustains a loss. Accordingly, diluted loss per share was the same as basic loss per share because the Company has incurred losses in the periods presented. All outstanding options, DSUs, RSUs and warrants could potentially be dilutive in the future.
When the Company has net income, basic net income per share using the two-class method is presented. The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to equity holders and that determines basic net income per share for each class of stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings that would have been available to equity holders. A participating security is defined as a security that may participate in undistributed earnings with shares.
The Company’s capital structure includes securities that participate with shares on a one-for-one basis for distribution of dividends. The following classes of warrants are considered participating securities as they are entitled to participate in dividend distributions alongside equity holders for which the two-class method is applied in computing earnings per share: Series A Warrants, Series B Warrants, Series C Warrants, Series D Warrants, Series E Warrants, 2020 Warrants, 2021 Warrants and January 2023 Warrants. The Company determines the diluted net income per share by using the more dilutive of the two class-method or the treasury stock method. The issued and unexercised liability and equity classified warrants do not participate in losses of the Company, thus an allocation of losses is not performed when the Company is in a loss position.
More specifically, the breakdown between participating and non-participating warrants is as follows:
| | | | | | |
| | Number of warrants | | Number of participating | | Number of non- |
Reference |
| outstanding |
| warrants |
| participating warrants |
Series A Warrants | | 714,287 | | 714,287 | | — |
Series B Warrants |
| 714,287 |
| 714,287 |
| — |
Series C Warrants |
| 1,744,319 |
| 1,744,319 |
| — |
Series D Warrants |
| 972,763 |
| 972,763 |
| — |
Series E Warrants |
| 6,417,114 |
| 6,417,114 |
| — |
January 2023 Warrants |
| 850,000 |
| 850,000 |
| — |
Warrants classified as liability |
| 11,412,770 |
| 11,412,770 |
| — |
Warrants IFF |
| 57,143 |
| — |
| 57,143 |
Warrants AMI |
| 119,286 |
| — |
| 119,286 |
2020 Warrants |
| 300,926 |
| 300,926 |
| — |
2021 Warrants |
| 196,429 |
| 196,429 |
| — |
March 2023 Warrants |
| 111,111 |
| — |
| 111,111 |
Warrants classified as equity |
| 784,895 |
| 497,355 |
| 287,540 |
|
| 12,197,665 |
| 11,910,125 |
| 287,540 |
For the years ended March 31, 2023 and 2022, the Company has a net loss, and therefore, the basic and dilutive loss per share is calculated as follows:
| | | | | | |
| | Twelve-month periods ended | ||||
| | March 31, | | March 31, | ||
|
| 2023 |
| 2022 | ||
Net loss attributed to equity holders | | $ | (60,459,666) | | $ | (74,971,745) |
Basic and dilutive loss attributed to common shareholders | | $ | (60,459,666) | | $ | (74,971,745) |
Basic and dilutive weighted-average number of common shares outstanding | |
| 11,812,337 | |
| 5,958,266 |
Net loss per share attributable to common shareholders of the Company: | |
| | |
| |
Basic and dilutive loss per share | | $ | (5.12) | | $ | (15.54) |
F-43
The following table summarizes outstanding securities not included in the computation of diluted net income (loss) per share as the effect would have been anti-dilutive for each respective period.
| | | | |
| | Twelve-month periods ended | ||
| | March 31, | | March 31, |
Securities |
| 2023 |
| 2022 |
Options, RSU's, DSU's | | 681,572 | | 592,809 |
Warrants |
| 12,197,665 |
| 2,102,358 |
20.Additional cash flow disclosure:
(a) | Changes in operating assets and liabilities: |
| | | | | | |
| | Twelve-month periods ended | ||||
|
| March 31, |
| March 31, | ||
| | 2023 | | 2022 | ||
Trade and other receivables | | $ | (1,613,797) | | $ | (163,066) |
Prepaid expenses | |
| 2,458,170 | |
| (279,770) |
Inventories | |
| (2,018,463) | |
| (2,674,208) |
Trade and other payables | |
| 7,349,432 | |
| 2,654,024 |
Deferred revenues | |
| (285,004) | |
| (1,563,113) |
Provisions | |
| 1,932,084 | |
| (1,137,281) |
Other liabilities | | | (64,688) | | | — |
Changes in operating assets and liabilities | | $ | 7,757,734 | | $ | (3,163,414) |
(b) | Non-cash transactions: |
| | | | | | |
| | Twelve-month periods ended | ||||
|
| March 31, |
| March 31, | ||
| | 2023 | | 2022 | ||
Acquired property, plant and equipment included in trade and other payables | | $ | — | | $ | 155,352 |
Intangible assets included in trade and other payables | | | — | | | 109,971 |
Common shares and warrants issued in connection with debt financing | | | 845,736 | | | — |
Common shares issued in exchange of services rendered by non-employees | |
| 156,975 | |
| — |
21.Fair-value:
The Company uses various methods to estimate the fair value recognized in the consolidated financial statements. The fair value, hierarchy reflects the significance of inputs used in determining the fair values:
● | Level 1 ‒ Unadjusted quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date; |
● | Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); |
● | Level 3 – Fair value based on valuation techniques which includes inputs related to the asset or liability that are not based on observable market data (unobservable inputs). |
Financial assets and liabilities measured at fair value on a recurring basis are the call option granted to Neptune by Sprout’s non-controlling interest owners of equity, the liability to CEO for long-term incentive, and liability related to warrants.
F-44
The following table presents the Company’s hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2023 and 2022:
| | | | | | | | | | | | | | |
| | | | March 31, 2023 | ||||||||||
|
| Notes |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Assets |
|
|
| |
|
| |
|
| |
|
| |
|
Other financial assets - Sprout Call Option |
| 4 | | | — | | | — | | | — | | | — |
Total |
|
| | $ | — | | $ | — | | $ | — | | $ | — |
Liabilities |
|
| |
|
| |
|
| |
|
| |
|
|
Liability related to warrants |
| 12 | | $ | — | | $ | — | | $ | 3,156,254 | | $ | 3,156,254 |
Other liability | | 16 | (c) | | — | | | — | | | 24,000 | | | 24,000 |
Total |
|
| | $ | — | | $ | — | | $ | 3,180,254 | | $ | 3,180,254 |
| | | | | | | | | | | | | | |
| | | | March 31, 2022 | ||||||||||
|
| Notes |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Assets | | |
| |
|
| |
|
| |
|
| |
|
Other financial assets - Sprout Call Option |
| 4 | |
| — | |
| — | |
| — | |
| — |
Total | | | | $ | — | | $ | — | | $ | — | | $ | — |
Liabilities | | | |
|
| |
|
| |
|
| |
|
|
Liability related to warrants |
| 12 | | $ | — | | $ | — | | $ | 5,570,530 | | $ | 5,570,530 |
Other liability | | 16 | (c) | | — | | | — | | | 88,688 | | | 88,688 |
Total |
|
| | $ | — | | $ | — | | $ | 5,659,218 | | $ | 5,659,218 |
The liabilities related to warrants were recorded at their fair value using a Black-Scholes pricing model. Warrants are revalued each period-end at fair value through profit and loss using level 3 inputs (note 12).
The Company has determined that the carrying values of its short-term financial assets and liabilities approximate their fair values given the short-term nature of these instruments. The carrying value of the short-term investment also approximates its fair value given the short-term maturity of the reinvested funds. For variable rate loans and borrowings, the fair value is considered to approximate the carrying amount.
Sprout’s other equity interest owners granted Neptune a call option (the "Call Option") to purchase the remaining 49.9% outstanding equity interests of Sprout, at any time beginning on January 1, 2023 and ending on December 31, 2023. The total consideration payable for the additional shares (“Call Shares”) upon the exercise of the Call Option and the closing of Neptune's acquisition of the Call Shares would be based on multiples per the contract of 3.0x for revenues and 15.0x for EBITDA, weighted at 50% each. On March 31, 2023, the Call option was measured to a nil value (2022 – nil) resulting in a loss on revaluation of derivatives of nil (2022 – loss of $5,598,198). The measurement is based on level 3 inputs.
22.Commitments and contingencies:
(a) | Commitments: |
(i) | On January 31, 2020, Neptune entered into an exclusive license agreement for a specialty ingredient in combination with fish oil products in nutraceutical products for a period of 8 years. Neptune is required to pay royalties on sales for these products. To maintain exclusivity, Neptune must reach annual minimum volumes of sales for the duration of the agreement or make corresponding minimum royalty payments. The total remaining amount of minimum royalties under the license agreement is $1,149,498. Failure to make the minimum royalty payments will solely result in the license granted thereunder becoming non-exclusive. |
(ii) | On March 21, 2019, the Company received a judgment from the Court regarding certain previously disclosed claims made by a corporation controlled by the former CEO against the Company in respect to certain royalty payments alleged to be owed and owing to the former CEO pursuant to the terms of an agreement entered into on February 23, 2001 between Neptune and the former CEO (the “Agreement”). The Court declared that under the terms of the agreement, the Company is required to pay royalties of 1% of its revenues in semi-annual installments, for an unlimited period. Based on currently available information, a provision of $963,808 for royalty payments has been recognized as of March 31, 2023 ($362,809 as at March 31, 2022). Refer to note 7. |
F-45
(iii) | On May 28, 2021, Sprout entered into a license agreement with Moonbug Entertainment Limited (“Moonbug”), pursuant to which it would license certain intellectual property, relating to characters from the children’s entertainment property CoComelon, for use on certain Sprout products through December 31, 2023 in exchange for a royalty on net sales. Sprout is required to make minimum guaranteed annual payments to Moonbug of $200,000 over the term of the agreement. The agreement may be extended for an additional three years in exchange for an additional minimum guaranteed annual payment to Moonbug of $200,000 over the extended term of the agreement. Royalties payable under the agreement are set off against minimum guaranteed payments made. |
(iv) | On March 16, 2021, a purported class action, captioned Marvin Gong v. Neptune Wellness Solutions, et al., was filed in the United States District Court for the Eastern District of New York against the Company and certain of its current and former officers. On October 21, 2022, the Company announced that it had agreed to settle and resolve the lawsuit for a gross payment to the class of between $4 and $4.25 million, with the exact amount being within the Company’s control and dependent on the type of consideration used. The settlement was subject to court approval and certification by the court of the class. On March 16, 2023, the settlement offer was accepted and the first payment in the amount of $500,000 was paid on March 22, 2023. Two additional payments of $500,000 each were subsequently made. The court has set a final approval hearing on July 28, 2023. Neptune intends to pay the balance of the settlement in securities worth $2,750,000 within 31 days after the Final Approval Order is entered. |
(b) | Contingencies: |
In the normal course of business, the Company is involved in various claims and legal proceedings, for which the outcomes, inflow or outflow of economic benefits, are uncertain. The most significant of which are ongoing are as follows:
(i) | In September 2020, Neptune submitted a claim and demand for arbitration against Peter M. Galloway and PMGSL Holdings, LLC (collectively “PMGSL”) in accordance with the SugarLeaf Asset Purchase Agreement (“APA”) dated May 9, 2019 between Neptune, PMGSL, Peter M. Galloway and Neptune Holding USA, Inc. Separately, PMGSL submitted a claim and demand for arbitration against Neptune. The Neptune claims and PMGSL claims have been consolidated into a single arbitration and each are related to the purchase by Neptune of substantially all of the assets of the predecessor entities of PMGSL Holdings, LLC. Neptune is claiming, among other things, breach of contract and negligent misrepresentation by PMGSL in connection with the APA and is seeking, among other things, equitable restitution and any and all damages recoverable under law. PMGSL is claiming, among other things, breach of contract by Neptune and is seeking, among other things, payment of certain compensation contemplated by the APA. A merit hearing in the arbitration started in April 2022 with a further week of testimony from August 1-5, 2022. On June 15, 2022, a one-day hearing took place on Neptune's motion to enforce a settlement agreement reached on April 2021 (which was repudiated by PMGSL in June 2021). Following oral argument on July 7, 2022, that motion was denied and a fee award of approximately $68,000 was entered against Neptune. On April 13, 2023, PMGSL filed a lawsuit in Florida Superior Court to collect that fee award. Neptune disputes the Florida Court’s jurisdiction in over that action. While Neptune believes there is no merit to the claims brought by PMGSL, a judgment in favor of PMGSL may have a material adverse effect on our business and Neptune intends to continue vigorously defending itself. Based on currently available information, a provision of $600,000 has been recognized for this case as at March 31, 2023 ($600,000 as at March 31, 2022). |
(ii) | On October 11, 2022, a warehousing company called Carolina Rework Solutions, LLC filed a lawsuit against Neptune Health & Wellness Innovation, Inc. for breach of a warehousing contract with damages of $175,534 plus additional unspecified damages estimated to be in excess of $1,000,000 for disposal of hand sanitizer product housed at its warehouse. On May 30, 2023, Carolina Rework Solution, LLC received leave of court to add Neptune Holding USA, Inc. and Neptune Wellness Solutions, Inc. as additional defendants to the claim on a veil-piercing theory. Neptune Holding USA, Inc. and Neptune Wellness Solutions, Inc. intend to deny that the court has jurisdiction over them and deny that veil piercing is appropriate. |
(iii) | On February 28, 2023, a warehousing company called Freight Connections filed a lawsuit against Neptune Health & Wellness Innovation, Inc. for breach of a warehousing contract, breach of duty of good faith and fair dealing, quantum meruit and fraud with damages of $328,168 plus punitive and consequential damages related to hand sanitizer product at plaintiff’s facility. |
(iv) | On October 22, 2020, Iron Lab, S.A. de C.V. submitted a claim and demand for arbitration against Neptune Wellness Solutions Inc., Neptune Health & Wellness Innovation, Inc. and Biodroga Nutraceuticals Inc., claiming that Neptune and |
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its subsidiaries breached their obligations under a purported agreement with Iron Lab regarding the purchase of hand sanitizer. Neptune and the other respondents dispute the existence of any binding agreements or jurisdiction to hear the arbitration, and have asserted counterclaims based on Iron Lab's delivery of non-conforming product based on Neptune's purchase orders. The parties are currently awaiting an award from the arbitration panel. Based on currently available information, no provision has been recognized for this case as at March 31, 2023. |
(v) | On February 4, 2021, the United States House of Representatives Subcommittee on Economic and Consumer Policy, Committee on Oversight and Reform (the “Subcommittee”), published a report, “Baby Foods Are Tainted with Dangerous Levels of Arsenic, Lead, Cadmium, and Mercury” (the “Report”), which stated that, with respect to Sprout, “independent testing of Sprout Organic Foods” has confirmed that their baby foods contain concerning levels of toxic heavy metals.” The Report further stated that after receiving reports alleging high levels of toxic metals in baby foods, the Subcommittee requested information from Sprout but did not receive a response. On February 11, 2021, following the acquisition of a 50.1% stake in Sprout by Neptune, the Subcommittee contacted Sprout, reiterating its requests for documents and information about toxic heavy metals in Sprout’s baby foods. Sprout provided an initial response to the Subcommittee on February 25, 2021 and is cooperating with the Subcommittee requests. |
Further, on February 24, 2021, the Office of the Attorney General of the State of New Mexico (“NMAG”) delivered to Sprout a civil investigative demand requesting similar documents and information with regards to the Report and the NMAG’s investigation into possible violations of the False Advertising Act of New Mexico. Sprout is responding to the requests of the NMAG.
Since February 2021, several putative consumer class action lawsuits have been brought against Sprout alleging that its products (the “Products”) contain unsafe and undisclosed levels of various naturally occurring heavy metals, namely lead, arsenic, cadmium and mercury. Sprout has denied the allegations in these lawsuits and contends that its baby foods are safe and properly labeled. The claims raised in these lawsuits were brought in the wake of the highly publicized Report. All such putative class actions have since been dismissed. No provision has been recorded in the financial statements for these cases.
In addition to the consumer class actions discussed above, Sprout is currently named in one lawsuit filedthree lawsuits (filed in California State Court on June 16, 2021, filed in California state courtHawaii State Court on January 9, 2023 and filed in Nevada Federal Court on March 3, 2023, respectively) alleging some form of personal injury from the ingestion of Sprout’s Products, purportedly due to unsafe and undisclosed levels of various naturally occurring heavy metals. This lawsuitThese lawsuits generally allegesallege injuries related to neurological development disorders such as autism spectrum disorder and attention deficit hyperactivity disorder. Sprout denies that its Products contributed to any of these injuries and will defend the case vigorously.injuries. In addition, the Office of the Attorney General for the District of Columbia (“OAG”) sent a letter to Sprout dated October 1, 2021, similar to letters sent to other baby food manufacturers, alleging potential labeling and marketing misrepresentations and omissions regarding the health and safety of its baby food products, constituting an unlawful trade practice. Sprout has agreed to meet with the OAG and will vigorously defend against the allegations. No provision has been recorded in the financial statements for this matter.
These matters may have a material adverse effect on Sprout’sSprout's, financial condition, or results of operations.
The outcome of these claims and legal proceedings against the Company cannot be determined with certainty and is subject to future resolution, including the uncertainties of litigation.
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a) | Geographical information: |
Revenue is attributed to geographical locations based on the origin of customers’ location:
Three-month periods ended | Six-month periods ended | |||||||||||||||
September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
Canada | $ | 670,557 | $ | 2,077,052 | $ | 5,727,059 | $ | 4,360,276 | ||||||||
United States | 11,097,554 | 10,252,986 | 22,029,091 | 17,812,204 | ||||||||||||
Other countries | 218,731 | 188,593 | 502,920 | 424,660 | ||||||||||||
$ | 11,986,842 | $ | 12,518,631 | $ | 28,259,070 | $ | 22,597,140 | |||||||||
| | | | | | |
| | Years ended | ||||
|
| March 31, |
| March 31, | ||
| | 2023 | | 2022 | ||
Canada | | $ | 8,418,058 | | $ | 12,447,125 |
United States | |
| 43,378,696 | |
| 35,330,138 |
Other countries | |
| 818,584 | |
| 1,019,861 |
| | $ | 52,615,338 | | $ | 48,797,124 |
b) | Information about major customers: |
During the Unaudited Condensed Consolidated Interim Financial Statements
September 30, 2022 | March 31, 2022 | |||||||
Canada | $ | 1,055,778 | $ | 20,724,674 | ||||
United States | 1,089,249 | 723,449 | ||||||
Total property, plant and equipment | $ | 2,145,027 | $ | 21,448,123 | ||||
September 30, 2022 | March 31 , 2022 | |||||||
Canada | $ | 1,792,595 | $ | 2,353,054 | ||||
United States | 16,000,001 | 19,301,981 | ||||||
Total intangible assets | $ | 17,792,596 | $ | 21,655,035 | ||||
September 30, 2022 | March 31 , 2022 | |||||||
Canada | $ | 2,382,374 | $ | 2,625,851 | ||||
United States | 11,971,966 | 19,542,437 | ||||||
Total goodwill | $ | 14,354,340 | $ | 22,168,288 | ||||
September 30, 2022 | March 31, 2022 | |||||||
Canada | $ | 3,203,557 | $ | — | ||||
Total assets held for sale | $ | 3,203,557 | $ | — | ||||
c) | Revenues |
The Company derives revenue from the sales of goods which are recognized at a point in time and the processing services which are recognized over time as follows:
| | | | | | |
| | Years ended | ||||
|
| March 31, |
| March 31, | ||
| | 2023 | | 2022 | ||
Nutraceutical products | | $ | 15,107,412 | | $ | 13,622,744 |
Cannabis and hemp products | |
| 2,741,052 | |
| 7,779,092 |
Food and beverages products | |
| 33,896,353 | |
| 26,220,519 |
Innovation products | |
| — | |
| 73,473 |
| | $ | 51,744,817 | | $ | 47,695,828 |
d) | Geographical information on long-lived assets: |
Long-lived assets of the Company are located in the following geographical location:
| | | | | | |
|
| March 31, |
| March 31, | ||
| | 2023 | | 2022 | ||
Canada | | $ | 250,921 | | $ | 20,724,674 |
United States | |
| 1,152,343 | |
| 723,449 |
Total property, plant and equipment | | $ | 1,403,264 | | $ | 21,448,123 |
| | | | | | |
|
| March 31, |
| March 31, | ||
| | 2023 | | 2022 | ||
Canada | | $ | 1,607,089 | | $ | 2,353,054 |
United States | |
| — | |
| 19,301,981 |
Total intangible assets | | $ | 1,607,089 | | $ | 21,655,035 |
| | | | | | |
|
| March 31, |
| March 31, | ||
| | 2023 | | 2022 | ||
Canada | | $ | 2,426,385 | | $ | 2,625,851 |
United States | |
| — | |
| 19,542,437 |
Total goodwill | | $ | 2,426,385 | | $ | 22,168,288 |
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Three-month periods ended | Six-month periods ended | |||||||||||||||
September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
Nutraceutical products | $ | 3,177,413 | $ | 4,040,553 | $ | 8,303,527 | $ | 7,241,221 | ||||||||
Cannabis and hemp products | 17,357 | 1,203,486 | 2,717,327 | 2,142,551 | ||||||||||||
Food and beverages products | 8,560,286 | 7,031,337 | 16,702,300 | 12,678,764 | ||||||||||||
Innovation products | — | 34,379 | — | 68,859 | ||||||||||||
$ | 11,755,056 | $ | 12,309,755 | $ | 27,723,154 | $ | 22,131,395 | |||||||||
24.Related parties:
Related party transactions and balances not disclosed elsewhere in these notes of the financial statements are as follows:
On November 11, 2019, Neptune announced that the Company entered into a collaboration agreement with International Flavors & Fragrances Inc. (“IFF”) to
Neptune will be responsible for the marketing and the sales of the products and will receive the amounts from the product sales. Neptune will in turn pay a royalty to IFF and App Connect associated with the sales of the
25.Subsequent events:
On October 11, 2022,April 17, 2023, the Company entered into an agreement that fixed the purchase price for the exercise of the Call Option to acquire the remaining 49.9% minority share of Sprout, pursuant to the Call Option agreement entered into with the minority stockholders of Sprout. If the Call Option had been exercised prior to June 15, 2023, the purchase price would have been $13.0 million, consisting of at least $10.5 million in cash with the remainder payable in Common Shares. No acquisition was completed by June 15, 2023. The original Call Option remains outstanding until December 31, 2023.
On April 27, 2023, the Company announced that Sprout extended the closing of a registered direct offering
On May 10, 2023, Neptune announced that Sprout has secured inventory financing through an Invoice Purchase and Security Agreement partnership with Alterna Capital Solutions LLC, effective April 21, 2023. The inventory line will provide Sprout with working capital. The maximum available has been amended to $7.5 million, from $5.0 million previously announced on January 25, 2023 (see note 13), adding a line of inventory to the accounts receivable factoring facility that is already in place.
On May 11, 2023, the Company announced its public offering of 12,121,212 of its common shares (or common share equivalents in lieu thereof) and accompanying warrants to purchase up to
In connection with this financing, Neptune will issueoffering, the Company has agreed that certain existing warrants to purchase up to an aggregate of 8,423,733 common shares that were previously issued in March 2022, June 2022, and October 2022, at exercise prices ranging from $1.62 to $11.20 per share and expiration dates ranging from September 14, 2023 to June 23, 2029, were amended to reduce the holdersexercise prices of these Secured Promissory Notes for a valuethe applicable warrants to $0.33, with expiration dates five years following the closing of $105,000.
On January 12,May 22, 2023, the Company entered into a Waiver and Second Amendment to Note Purchase Agreement among(the "Waiver Agreement"), with CCUR Holdings, Inc. and the purchasers named therein, and the Company, pursuantrelated to which the Company issued and sold $4 million in aggregate principal amount of senior secured promissory notes. The Company may also issue and sell, and the purchasers have agreed to purchase, up to an additional $1 million in aggregate principal amount of senior secured promissory notes to occur not later than February 28, 2023. The second closing will occur only in the event that the Company completes an incremental equity issuance by February 28, 2023, and the aggregate principal amount of the second closing will not exceed the lesser of $1 million or 25% of the proceeds actually received from any such incremental equity issuance. The notes may be prepaid or redeemed in whole or in part by the Company, subject to the payment of a premium in an amount equal to ten percent (10%) of the principal amount of notes being repaid (other than principal in respect of PIK interest), less the aggregate amount of cash interest paid on the Notes being repaid on or before the date of such prepayment.
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15, 2023, is waived, in part, until July 31, 2023, or for an additional thirty days thereafter if the Company has filed a Registration on Form S-1 with the Securities and Exchange Commission by July 31, 2023. Pursuant to the Waiver Agreement, the Company was required to pay, and has paid, $1.0 million of the Mandatory Prepayment. For the period beginning on March 31, 2023, through and including the date that the entire Mandatory Prepayment, including interest accruingand fees is paid, interest on the sum of the outstanding principal amounts will accrue at athe rate of 16.5%twenty four percent (24%) per annum from the date of issuance and payable on the last business day of each calendar month in which the notes are outstanding. For the first six interest payment dates following the initial closing,annum. Thereafter, interest will be paid in kind and thereafter payments shall be made in cash onrevert to the interest payment date in arrears. Under the terms ofrate otherwise provided under the Note Purchase Agreement, theAgreement. The Company issuedalso agreed to pay an extension fee in an aggregate amount of $138,606, which was added to the purchasers of the initial notes warrants to purchase a total of 850,000 common shares of the Company exercisable at an exercise price of $0.53 per share at any time until January 12, 2028.
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Up to [●] Common Shares
[Up to [●] Pre-Funded Warrants to Purchase up to [●] Common Shares]
Up to [●] Common Warrants to Purchase up to [●] Common Shares
[Up to [●] Common Shares Underlying the Common Warrants and Pre-Funded Warrants]
PRELIMINARY PROSPECTUS
Sole [Placement Agent]
[●]
The date of this prospectus is , 2023.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following is a statement of estimated expenses payable by the registrant in connection with the offering described in this registration statement. All amounts are estimates except the SEC registration fee.
SEC registration fee |
| $ | 771 |
FINRA filing fee | [●] | ||
Accounting fees and expenses | 75,000 | ||
Legal fees and expenses | 75,000 | ||
Miscellaneous | 20,000 | ||
Total | $ | [●] |
SEC expenses | $ | 1,195 | ||
Accounting fees and expenses | $ | 150,000 | ||
Legal fees and expenses | $ | 30,000 | ||
Miscellaneous | 10,000 | |||
|
| |||
Total(1) | $ | 191,195 | ||
|
|
|
Item 14. Indemnification of Directors and Officers
Under the Business Corporations Act (Québec) (the “QBCA”“QBCA”), a corporation must indemnify a director or officer of the corporation, a former director or officer of the corporation or any other person who acts or acted at the corporation’s request as a director or officer of another group, against all costs, charges and expenses reasonably incurred in the exercise of their functions, including an amount paid to settle an action or satisfy a judgment, or arising from any investigative or other proceeding in which the person is involved if (1) the person acted with honesty and loyalty in the interest of the corporation or, as the case may be, in the interest of the other group for which the person acted as director or officer or in a similar capacity at the corporation’s request; and (2) in the case of a proceeding that is enforced by a monetary penalty, the person had reasonable grounds for believing that his or her conduct was lawful. The corporation must also advance moneys to such a person for the costs, charges and expenses of a proceeding referred to above. In the event that a court or any other competent authority judges that the conditions set out in (1) and (2) are not fulfilled, the corporation may not indemnify the person and the person must repay to the corporation any moneys advanced for such purposes. Furthermore, the corporation may not indemnify such person if the court determines that the person has committed an intentional or gross fault. In such a case, the person must repay to the corporation any moneys advanced. A corporation may also, with the approval of the court, in respect of an action by or on behalf of the corporation or other group as referred to above, against such a person, advance the necessary moneys to the person or indemnify the person against all costs, charges and expenses reasonably incurred by the person in connection with the action, if the person fulfills the conditions set out in this paragraph.
In accordance with and subject to the QBCA, the by-laws of the Registrant provide that the Registrant shall indemnify a director or officer of the Registrant, a former director or officer of the Registrant, or a person who acts or acted at the Registrant’s request as a director or officer of a body corporate of which the Registrant is or was a shareholder or creditor, and his or her heirs and legal representatives, to the extent permitted by the QBCA, as set forth above.
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The Registrant maintains directors’ and officers’ liability insurance which insures the directors and officers of the Registrant and its subsidiaries against certain losses resulting from any wrongful act committed in their official capacities for which they become obligated to pay, to the extent permitted by applicable law.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed that, in the opinion of the U.S. Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Item 15. Recent Sales of Unregistered Securities.
Note Purchase Agreement
On January 12, 2023, the Company entered into a Note Purchase Agreement with certain purchasers pursuant to which it issued and sold $4 million in aggregate principal amount of senior secured promissory notes. Under the terms of the Note Purchase Agreement, the Company issued to the Purchasers warrants to purchase thepurchasers 850,000 January 2023 Warrants being registered in this Registration Statement.a registration statement on Form S-1 (File No. 333-268196) filed with the SEC on November 7, 2022, as amended on November 9, 2022 and January 30, 2023 and declared
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effective on February 1, 2023. The January 2023 Warrants and the Common Shares underlying the January 2023 Warrants were issued in a private placement under Section 4(a)(2) of the Securities Act, and Rule 506(b) of Regulation D promulgated thereunder. Each January 2023 Warrant is exercisable for one Common Share at an exercise price of $0.53 per share. The January 2023 Warrants are immediately exercisable and expire five years from the issuance date.
A holder (together with its affiliates) may not exercise any portion of the January 2023 Warrants to the extent that the holder would own more than 4.99% (or, at the holder’s option upon issuance, 9.99%) of the Company’s outstanding Common Shares immediately after exercise, as such percentage ownership is determined in accordance with the terms of the January 2023 Warrant. The January 2023 Warrants are subject to full ratchet anti-dilution protection with respect to the first offering, if any, of securities registered under the Securities Act of 1934, as amended, with net proceeds of at least $5,000,000 consummated by the Company subsequent to the Initial Closing,initial closing, as well as customary adjustments for the term of the Warrants.warrants.
In January 2023, the Company issued 71,665 common shares to the Company’s financial advisor in connection with its strategic review. The common shares were issued in a private placement under Section 4(a)(2) under the Securities Act as consideration for the services provided by the financial advisor.
Registered Direct Offering and Concurrent Private Placement
On October 6, 2022, the Company entered into the Purchase Agreementa purchase agreement with certain institutional investors, pursuant to which the Company agreed to issue and sell, in a registered direct offering (the “Offering”),the October 2022 RDO 3,208,557 of its common shares (the “Common Shares”),Common Shares and 6,417,114 Series E Warrants through the 6,417,114Warrants being registered in this Registration Statement/prospectus in theOctober 2022 Private Placement. The combined purchase price of each Common Share and accompanying Warrants was $1.87. The Purchase Agreement contains customary representations, warranties, covenants and indemnification rights and obligations of the Company and each of the purchasers. The OfferingOctober 2022 Offerings closed on October 11, 2022. A.G.P./Alliance Global Partners served as exclusive placement agentPlacement Agent in connection with the Offering.October 2022 Offerings.
On October 11, 2022, the Company closed the October 2022 RDO of 3,208,557 of its Common Shares and Series E Warrants to purchase up to 6,417,114 Common Shares in the October 2022 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 from the October 2022 Offerings 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.
The Company received gross proceeds of approximately $6.0 million in connection with the Offering,October 2022 Offerings, before deducting placement agent fees and related offering expenses. The net proceeds to the Company from the Offering,October 2022 Offerings, after deducting the placement agent fees and expenses, and the Company’s estimated offering expenses, were approximately $5.15 million.
The Common Shares were offered by the Company pursuant to a registration statement on Form S-3S 3 (File No. 333-267070)333 267070) filed with the SEC and declared effective by the SEC on September 23, 2022, (the “Registration Statement”), and a prospectus supplement thereto dated October 11, 2022.
The Series E Warrants and the Common Shares underlying the Series E Warrants sold in the October 2022 Private Placement were issued in a private placement under Section 4(a)(2) of the Securities Act, and Rule 506(b) of Regulation D promulgated thereunder Each Series E Warrant is exercisable for one Common Share at an exercise price of $1.62 per share. The Series E Warrants are immediately exercisable and expire five years from the issuance date. A holder (together with its affiliates) may not exercise any portion of the Series E Warrant or Pre-Funded Warrant, as applicable, to the extent that the holder would own more than 4.99% (or, at the holder’s option upon issuance, 9.99%) of the Company’s outstanding Common Shares immediately after exercise, as such percentage ownership is determined in accordance with the terms of the Series E Warrant.
In lieu of making the cash payment otherwise contemplated to be made to the Company upon exercise of a Series E Warrant in payment of the aggregate exercise price, the holder may elect instead to receive upon such exercise (either in whole or in part) the net number of Common Shares determined according to a formula set forth in the Series E Warrants, provided that such cashless exercise shall only be permitted if a registration statement registering the issuance of the Common Shares underlying the Series E Warrants is not effective at the time of such exercise or if the prospectus to which the registration statement is a part is not available for the issuance of Common Shares to the Series E Warrant holder.
In July and September 2022, the Company issued to two accredited investors an aggregate of 409,435 common shares in connection with loans to Sprout Foods, Inc. Additionally, on March 10, 2023, the Company issued to one accredited investor warrants to purchase
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up to an aggregate of 111,111 common shares in connection with a loan to Sprout Foods, Inc. On July 13, 2022, the Company issued an amended and restated secured promissory note in favor of NH Expansion Credit Fund Holdings LP, an investment fund managed by Morgan Stanley Expansion Capital, in the principal amount of $13,000,000. The amended note amended and restated the prior promissory note in the principal amount of $10,000,00 in connection with a loan of an additional $3,000,000 to Sprout from Morgan Stanley Expansion Capital. The common shares and warrants were issued in a private placementplacements under Section 4(a)(2) under the Securities Act.
In June 2022, the Company issued 7,104 common shares to the Company’s financial advisor in connection with its then proposed divestiture of our Canadian cannabis business. The common shares were issued in a private placement under Section 4(a)(2) under the Securities Act as consideration for the services provided by the financial advisor.
In October 2020, the Company issued 462,963 common shares and 300,926 warrants to purchase common shares at an offering of $75.60 per share to institutional investors for gross proceeds of $35 million. The warrants and the common shares underlying the warrants were issued in a private placement under Section 4(a)(2) of the Securities Act, and Rule 506(b) of Regulation D promulgated thereunder.
The Company’s use of proceeds from the above referenced offerings is for general corporate purposes.
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II-7 Item 17. Undertakings. The undersigned registrant hereby undertakes:
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SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this amended registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the United States, on
POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned constitutes and appoints each of Michael Cammarata, Raymond Silcock, and John S. Wirt, or any of them, each acting alone, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for such person and in his name, place and stead, in any and all capacities, to sign this Registration Statement on Form S-1 (including all pre-effective and post-effective amendments and registration statements filed pursuant to Rule 462(b) under the Securities Act of 1933), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the SEC, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that any such attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this
AUTHORIZED REPRESENTATIVE Pursuant to the requirements of Section 6(a) of the Securities Act of 1933, the undersigned has signed this amended Registration Statement, in the capacity of the duly authorized representative of the Registrant in the United States, on
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