Quebec | 2836 | Not Applicable | ||
(State or Other Jurisdiction of Incorporation or Organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification No.) |
François Paradis | John S. Wirt | Thomas M. Rose | ||
Osler, Hoskin & Harcourt LLP | Christopher | Nicole Edmonds | ||
1000 De La Gauchetiére Street West | c/o Neptune Wellness Solutions Inc. | Troutman Pepper Hamilton Sanders LLP | ||
Suite 2100 | 545 Promenade du Centropolis, Suite 100 | 401 9th Street, NW, Suite 1000 | ||
Montréal, Québec, H3B 4W5 | Laval, Quebec, H7T 0A3 | Washington, DC 20004 | ||
Canada | Canada | United States | ||
(514) 904-8100 | (450) 687-2262 | (757) 687-7715 |
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |||
Emerging Growth Company | ☐ |
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, 2023.
PRELIMINARY PROSPECTUS
Neptune Wellness Solutions Inc.
Up to 7,267,114 Common Shares Underlying Warrants
This prospectus relates to the issuance by us and the resale by the selling security holders named in this prospectus (the “Selling Shareholders”) of up to an aggregate of 7,267,114 of our common shares, no par value (“Common Shares”), upon the exercise of warrants to purchase our common shares of which (i) 6,417,114 Warrants (the “October 2022 Warrants”) were issued to Selling Shareholders in 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 to issue and sell, in a registered direct offering, 3,208,557 of its Common Shares and the Warrants 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 pursuant to that certain Note Purchase Agreement, dated as of January 12, 2023 (the “Loan”).
Our registration of the securities covered by this prospectus does not mean that either we or the Selling Shareholders will issue, offer or sell, as applicable, any of the securities hereby registered. The Selling Shareholders may offer, sell, or distribute all or a portion of 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.
You should read this prospectus and any prospectus supplement or amendment carefully before you invest in our securities.
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.
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.
The date of this prospectus is January 30, 2023.
TABLE OF CONTENTS
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 55 | |||
CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS, AND DIRECTOR INDEPENDENCE | 86 | |||
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT | 100 | |||
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F-1 |
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 Factors-Risks Relating to our Business and 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” or the “SEC”) using the “shelf” registration process. Under this shelf registration process, the Selling Shareholders may, from time to time, sell the securities offered by them described in this prospectus. We will not receive any proceeds from the sale by such Selling Shareholders 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.
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, 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 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 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.
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, 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 Market 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; |
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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 this industry 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 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. 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; |
• | 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. |
• | 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 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 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. |
• | 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. |
• | The Company may have difficulty accessing public and private capital and banking services, which could negatively impact its ability to finance its operations. |
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. |
• | 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 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. |
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. |
• | 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. |
• | Our failure to meet the continued listing requirements of Nasdaq could result in a de-listing of our Common Shares. |
• | 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. |
• | 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. |
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 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”) and business-to-consumer (“B2C”) model in the consumer-packaged goods (“CPG”) market. Neptune has a dual go-to market B2B and B2C strategy focused on expanding its global distribution reach. The strategy sets Neptune apart from its competition and has started to yield consistent, long-term revenue opportunities for the Company.
The Company’s long-term strategy is focused on the health and wellness sector with an emphasis on select CPG verticals, including Nutraceuticals, Beauty & Personal Care, and Organic Foods & Beverages. Neptune’s current brand portfolio across these verticals include Sprout®, Neptune Wellness™, Forest Remedies®, and MaxSimil®.
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. 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.
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Nutraceuticals
Neptune offers a variety of specialty ingredients, including our licensed specialty ingredient MaxSimil®, a technology that helps increase digestion and absorption of fat-soluble and nutritional ingredients. Additionally, the Company sources a variety of other marine oils, seed oils and specialty ingredients that are available for sale as raw material or transformed into finished products. The Company has recently launched a new line of Vitamin Sprays and Pumps for both children and adults. Neptune is focused on expanding its exclusive Omega-3 delivery technology MaxSimil® while improving growth and profitability in its Nutraceuticals vertical through its brand Biodroga.
Neptune’s core strength is product innovation with a focus on specialty ingredients offered in bulk soft gels and liquid delivery systems. The Company continues to expand its delivery system capabilities with projects for pumps, sprays, roll-ons and CBD enhancements. All of Neptune’s Nutraceutical products are available under distributors’ private labels, primarily sold in the Canadian and U.S. nutraceutical markets. Neptune, through its nutraceuticals products business, also formulates, develops and provides customers with turnkey nutrition solutions.
Beauty & Personal Care
The Company sells wellness products to the Beauty & Personal Care market through its Forest Remedies brand. Forest Remedies offers plant-based supplements, including first-of-its kind multi-omega gummies and soft gels with packaging that is 100% plastic-free.
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.
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.
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, 2023, we had approximately $6.3 million in cash and cash equivalents. We believe our current cash position will be sufficient to operate our business for three to six months 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.
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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.
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 $3.7 million ($5,15 million CAD). The ASPA closed on November 9, 2022. Some assets were excluded from the ASPA and were written down accordingly. 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, 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.
On October 11, 2022, the Company announced the closing of a registered direct offering of 3,208,557 of its Common Shares and the Warrants in the concurrent Private Placement. The Company received gross proceeds of approximately $6.0 million in connection with the offering, before deducting placement agent fees 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.
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) pending in the United States District Court for the Eastern District of New York, 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. 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 850,000 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 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, 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.
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
Issuer: | Neptune Wellness Solutions Inc. |
Common shares offered by the Selling Shareholders: | 7,267,114 common shares that are issuable or potentially issuable upon the exercise of all the Warrants (after giving effect to certain potential anti-dilution adjustments) |
Shares of common shares outstanding prior to this offering: | 11,850,057 shares (as of January 27, 2023) |
Exercise price of Warrants: | $1.62 per share (Series E Warrants) $0.53 per share (January 2023 Warrants) |
Terms of the offering | The Selling Shareholders will determine when and how they will dispose of the Common Shares registered under this prospectus for resale. |
Use of proceeds | The Selling Shareholders will receive the proceeds from the sale of shares of common shares offered hereby. We will not receive any proceeds from the sale of Common Shares by the Selling Shareholders. |
Risk factors | See “Risk Factors” on page 15 and other information included in this prospectus for a discussion of factors you should consider before investing in our securities. |
Ticker symbols | Our Common Shares are listed on the Nasdaq under the symbol “NEPT”. |
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MARKET AND INDUSTRY DATA AND FORECASTS
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 available 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 this prospectus is reliable 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 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. (“Purchaser”), pursuant to which Purchaser 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.
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,
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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 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 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
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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 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 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 seizures and related publicity requirements, injunctions, total or partial suspension of production, civil penalties, warning or untitled letters, import or export bans or restrictions and criminal prosecution and penalties. Any of these penalties could delay or prevent the promotion, marketing, or sale of the Company’s products. If the safety of any products supplied to the Company is compromised due to a third-party manufacturer’s failure to adhere to applicable laws or for other reasons, the Company may not be able to successfully sell its products and our business, financial condition and operations may be 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
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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.
Our consolidated financial statements for the twelve-month period ended March 31, 2022 and three and six-month periods ended September 30, 2022 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, the Company incurred a net loss of $84.4 million and $43.8 million, respectively, negative cash flows from operations of $54.3 million and $14.1 million, respectively, and had an accumulated deficit of $323.2 million and $358.4 million as at March 31, 2022 and September 30, 2022, respectively. 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 or 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.
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, our goodwill balance was $14.4 million and our intangible asset balance was $17.8 million, which represented 22.1% and 27.4% respectively of total consolidated assets. The Company recorded an impairment loss of $7.6 million for goodwill and $2.6 million for intangibles in the six months ended September 30, 2022. 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-months ended September 30, 2022.
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.
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. As of the date of this prospectus, we have approximately $6.3 million in cash and cash equivalents, which is expected to be sufficient to operate the business for the next three to six months under the current business plan. 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, 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”). 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, 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 Company may have difficulty accessing public and private capital and banking services, which could negatively impact its ability to finance its operations.
The Company anticipates 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 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. The Company’s inability to raise financing to fund 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.
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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.
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, 2022 and these material weaknesses have not been remediated to date. The Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that our internal control over financial reporting was not effective as of March 31, 2022 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 would 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 for U.S. federal income tax purposes, which is referred to as an inversion, if each of the following three conditions are met: (i) the non-United States corporation acquires, directly or indirectly, or 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. corporation for U.S. federal income tax purposes and are subject to U.S. federal income tax on our worldwide income. Regardless of any application of Section 7874, however, we expect to be treated as a Canadian resident company for purposes of the Canadian Income Tax Act, as amended. As a result, we are subject to taxation both in Canada and the U.S., 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 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, consumer protection, labor, intellectual property ownership and infringement, import and export requirements, and environmental, health and safety.
The successful execution of our business objectives is contingent upon compliance with all applicable laws and regulatory requirements and obtaining all other required regulatory approvals, which may be onerous and expensive. Any such costs, which may rise in the future as a result of changes in these laws and regulations or in their interpretation and the expansion of the Company’s business, could individually or in the aggregate make the Company’s products and services less attractive to our customers, delay the introduction of new products, or cause the Company to implement policies and procedures designed to ensure compliance with applicable laws and regulations. There can be no assurance that the Company’s employees, contractors, or agents will not violate such laws and regulations or our policies and procedures.
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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” to violate U.S. law, which represents a low evidentiary standard for the FDA. Future changes in U.S. requirements and interpretations of those requirements, coupled with the “appears” to violate the law standard for refusing entry of imported products, increases the possibility that our products may not have full access to the U.S. market and poses additional risks to our business.
We are subject to 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 has no current intention to declare or pay dividends on its Common Shares in the foreseeable future, the Company may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.
Our inability to maintain our regulatory approvals and permits could adversely affect our business and financial results.
The Company is required to obtain and maintain certain federal and state permits, licenses and approvals in the jurisdictions where its products are manufactured and/or sold. There can be no assurance that the Company will be able to obtain or maintain necessary licenses, permits or approvals. Any material delay or inability to receive these items is likely to delay and/or inhibit the Company’s ability to conduct its business, and would have an adverse effect on its business, financial condition and results of operations.
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; 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 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”), 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 is subject to court approval and certification by the court of the class, and the Company has a right to terminate the agreement within 30 days under certain circumstances.
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 employees, contractors, consultants and agents, which may subject us to investigations and actions.
We are exposed to the risk that any of our 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 and local 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 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 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 all 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 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.
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.
U.S. investors may be unable to enforce certain judgments against us in Canada.
Neptune is a corporation existing under the Business Corporations Act (Québec). A number of our directors and officers are residents of Canada or other jurisdictions outside of the United States, and substantially all of our assets are located outside the United States. As a result, it may be difficult to effect service within the United States upon the Company or upon its directors and officers. Execution by United States courts of any judgment obtained against the Company or any of the Company’s directors or officers in United States courts may be limited to the assets of such companies or such persons, as the case may be, located in the United States. It may also be difficult for holders of securities who reside in the United States to realize in the United States upon judgments of courts of the United States predicated upon civil liability and the civil liability of the Company’s directors and executive officers under the United States federal securities laws. The Company has been advised that a judgment of a U.S. court predicated solely upon civil liability under U.S. federal securities laws or the securities or “blue sky” laws of any state within the United States, would likely be enforceable in Canada if the United States court in which the judgment was obtained has a basis for jurisdiction in the matter that would be recognized by a Canadian court for the same purposes. However, there may be doubt as to the enforceability in Canada against these non-U.S. entities or their controlling persons, directors and officers who are not residents of the United States, in original actions or in actions for enforcement of judgments of courts of the United States, of liabilities predicated solely upon U.S. federal or state securities laws.
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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 a 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.
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). If at any time before June 27, 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.
Our common shares may be de-listed if we do not regain compliance with Rule 5550(a)(2) by June 27, 2023 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 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-emptive rights in connection with such further issuances. Our board of directors has the discretion to determine if an issuance of our capital stock is warranted, the price at which such issuance is to be affected and the other terms of any future issuance of capital stock. In addition, additional common 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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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 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. Such a 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.
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.
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 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 trading of the Company’s common shares on Nasdaq. The Second Deficiency Notice indicated that the Company could regain compliance with Rule 5250(c)(1) 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 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).
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. 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 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 prospectus 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 million and $14.1 million for the fiscal years ended March 31, 2022 and March 31, 2021 and the six-month period ended September 30, 2022, respectively. 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.
The Company may also be unable to obtain borrowings in an amount sufficient to enable them to pay debt or to fund other liquidity needs. If sufficient liquidity is not obtained, the Company may need to refinance or restructure all or a portion of its debt on or before maturity, sell assets or borrow money or issue equity, which may not be possible on terms satisfactory to the Company, or at all. If the Company continues to report negative cash flows from operating activities, or any failure to obtain any required additional financing on 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 may not be able to maintain our operations without additional funding.
As of January 22, 2023, Neptune had $6.3 million of cash and cash equivalents. We had negative cash flows from operating activities of $54.3 million during the twelve-month period ended March 31, 2022 and $14.1 million during the six-month period ended September 30, 2022. 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. 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, approximately 70% 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.
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 will not receive any of the proceeds from the sale of our Common Shares in this offering. We will receive proceeds from the exercise of the Warrants but not on the sale of the Common Shares underlying the Warrants. The Selling Shareholders will receive all of the proceeds from this offering. We will, however, receive the net proceeds of any Warrants exercised for cash. Proceeds, if any, received from the exercise of such Warrants will be used for working capital for general corporate purposes. No assurances can be given that any of such Warrants will be exercised. The Selling Shareholders will pay any underwriting discounts and commissions and expenses incurred by them for brokerage, accounting, tax or legal services or any other expenses incurred by the Selling Shareholders in disposing of the Common Shares. We will bear all other costs, fees and expenses incurred 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 $0.53 per share for the January 2023 Warrants.
We cannot currently determine the price or prices at which shares of Common Shares may be sold by the Selling Shareholders under this prospectus.
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MARKET INFORMATION FOR SECURITIES AND DIVIDEND POLICY
Our common shares trade under the symbol “NEPT” on Nasdaq.
The following table sets forth the high and low intraday sales prices per Common Share as reported on Nasdaq beginning on April 1, 2020 and taking into account the Share Consolidation that took effect on June 13, 2022:
Period | Low Trading Price | High Trading Price | ||||||||
($) | ($) | |||||||||
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 |
As of January 27, 2023, we had 39 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 January 27, 2020, we have not sold any securities that were not registered under the Securities Act.
(1) | 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 permit the investors to purchase an aggregate of 850,000 of our common shares at an exercise price of $0.53 per common share. |
(2) | 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. |
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(3) | 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. |
(4) | In June 2022 we issued 7,104 common shares to our financial advisor in connection with our then proposed divestiture of our Canadian cannabis business. |
(5) | 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, 2022 and 2021 or the interim period ended September 30, 2022.
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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 and fully integrated health and wellness company with multiple brand units. With a mission to redefine health and wellness, Neptune is focused on building a broad portfolio of high quality, affordable consumer products in response to long-term secular trends and market demand for natural, plant-based, sustainable and purpose-driven lifestyle brands. The Company utilizes a highly flexible, cost efficient manufacturing and supply chain infrastructure that can be scaled up and down or into adjacent product categories to identify new innovation opportunities, quickly adapt to consumer preferences and demand, and bring new products to market through its mass retail partners and e-commerce channels. Leveraging decades of expertise in extraction and product formulation, Neptune is a provider of turnkey product development and supply chain solutions to business customers across several health and wellness verticals, including nutraceuticals and white label consumer packaged goods. Neptune has expanded its operations since June 2020 into several brand units in order to better address its markets. The main brand units are the following: Nutraceuticals, Beauty & Personal Care, and Organic Foods & Beverages. All amounts in this 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 & Bioressources Inc. Since its incorporation, Neptune has amended its articles of incorporation on numerous occasions. The Company first amended its articles on May 30, 2000 to convert its then issued and outstanding shares into newly-created classes of shares. The Company’s articles were also amended on May 31, 2000 to create Series A Preferred Shares. On August 29, 2000, the Company converted all its issued and outstanding Class A shares into Class B subordinate shares. On September 25, 2000, the Company further amended its share capital to eliminate its Class A shares and converted its Class B subordinate shares into Common Shares. On November 1, 2013, the Company amended its articles of incorporation to reflect certain changes to items relating to board matters. The Company’s Common Shares are listed and posted for trading on the NASDAQ Stock Market LLC (“NASDAQ”) under the symbol, “NEPT”.
On June 9, 2022, we effected a one for thirty five (1-for-35) reverse split of our common shares, which we refer to as the “Share Consolidation,” as approved by our Board of Directors. Trading of our common shares on both the Toronto Stock Exchange and NASDAQ 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 were voluntarily delisted from the TSX but are still traded on the NASDAQ.
OUR PROPERTIES AND OPERATIONS
Our headquarters is located in leased offices in Laval, Québec, where our general and administrative departments primarily operate. We also lease laboratory space in Laval, Quebec where testing and development of many of our products takes place. We lease offices in Jupiter, Florida which will serve as the U.S. headquarters once leasehold improvements are completed.
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.
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We also have leased offices in Vaudreuil, Province of Québec, Canada. The Vaudreuil offices were previously used for the Company’s Biodroga business. The Company intends to sub-lease the Vaudreuil offices.
BUSINESS STRATEGY
Neptune’s vision is to change consumer habits through the creation and distribution of environmentally friendly, ethical and innovative consumer product goods. Our mission is to redefine health and wellness and help humanity thrive by providing sustainable consumer focused solutions. Despite the decline in global economic activity since the outbreak of the COVID-19 virus, Neptune has taken transformative, and successful, actions to increase its sales, distribution and reach in both the business-to-business (“B2B”) and business-to-consumer (“B2C”) model in the consumer-packaged goods (“CPG”) market. Neptune has a dual go-to market B2B and B2C strategy focused on expanding its global distribution reach. The strategy sets Neptune apart from its competition and has started to yield consistent, long-term revenue opportunities for the Company.
The Company’s long-term strategy is focused on the health and wellness sector with an emphasis on select CPG verticals, including Nutraceuticals, Beauty & Personal Care, and Organic Foods & Beverages. Neptune’s current brand portfolio across these verticals include Sprout®, Neptune Wellness™, Forest Remedies®, and MaxSimil®.
On June 9, 2021, Neptune announced a multi-year licensing agreement between Sprout and CoComelon, the world’s leading children’s entertainment brand, owned and operated by Moonbug Entertainment. In addition, on July 27, 2021, an initial launch was announced for Sprout products into Canada, in Metro grocery stores in the province of Ontario. 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, 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 the third party manufacturers based on our specifications. The largest Sprout co-manufacturer makes about 40% of our annual requirements. We believe that we are not dependent on any single contract manufacturer and that, if necessary, our current selected contract manufacturers could be replaced with minimal disruption to our operations.
Our quality control staff requires full disclosure on the part of our suppliers and we periodically conduct on-site audits of their facilities. For strategic reasons, certain of our key raw materials are sourced from single suppliers. However, in the event that we were unable to source an ingredient from a current supplier, we believe that we could generally obtain the same ingredient or an equivalent from an alternative supplier, with minimal disruption to our operations.
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Canadian Cannabis Products—Extracts and Formulations
We retrofitted our existing production facility located in Sherbrooke, Province of Québec, Canada to comply with Health Canada requirements under the Cannabis Act, in order to produce our cannabis extracts and formulations at our existing site. Our GMP (Good Manufacturing Practices, mandated by the Natural Health Products Directorate of Health Canada) production facility features robust safety measures and equipment, which allows for enhanced manufacturing practices. We also operate a laboratory at our facility, which allows us to conduct research, new product development and quality control analysis in-house.
As a condition for obtaining our license to produce cannabis oil under the Cannabis Act, Health Canada required multiple compliance measures to be taken, including the addition of physical barriers, visual monitoring, recording devices, intrusion detection, as well as other important controls around access to the Company’s existing Sherbrooke facility.
On October 17, 2022, we announced that we had entered into a binding agreement for the sale of our cannabis business, including the Sherbrooke facility, following the planned divestiture of this business announced 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 divestment of the cannabis assets will allow us to realize significant cost savings and operational streamlining from redirected resources towards our simplified corporate structure. 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.
MARKETS
Nutraceuticals
Neptune offers a variety of specialty ingredients, including our licensed specialty ingredient MaxSimil®, a technology that helps increase digestion and absorption of fat-soluble and nutritional ingredients. Additionally, the Company sources a variety of other marine oils, seed oils and specialty ingredients that are available for sale as raw material or transformed into finished products. The Company has recently launched a new line of Vitamin Sprays and Pumps for both children and adults. Neptune is focused on expanding its exclusive Omega-3 delivery technology MaxSimil® while improving growth and profitability in its Nutraceuticals vertical through its brand Biodroga.
Neptune’s core strength is product innovation with a focus on specialty ingredients offered in bulk soft gels and liquid delivery systems. The Company continues to expand its delivery system capabilities with projects for pumps, sprays, roll-ons and CBD enhancements. All of Neptune’s Nutraceutical products are available under distributors’ private labels, primarily sold in the Canadian and U.S. nutraceutical markets. Neptune, through its nutraceuticals products business, also formulates, develops and provides customers with turnkey nutrition solutions.
Beauty & Personal Care
The Company sells wellness products to the Beauty & Personal Care market through its Forest Remedies brand. Forest Remedies offers plant-based supplements, including first-of-its kind multi-omega gummies and soft gels with packaging that is 100% plastic-free. Neptune announced, on March 10, 2022, the launch of its Forest Remedies Multi Omega 3-6-9 line of supplements into more than 340 Sprouts Farmers Market stores across the U.S. This distribution agreement marks another important milestone in our efforts to transform Neptune into a high-growth branded CPG company.
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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
The Company sells its nutraceutical products mainly in bulk softgels or liquids to multiple distributors and customers, who commercialize these products under their private label. While the Company may have orders in place with approximately 100 different distributors and customers at any one time, the majority of the Company’s sales are concentrated with a small group of distributors and customers. Agreements with these distribution partners may be terminated or altered by them unilaterally in certain circumstances.
Beauty & Personal Care
The Company sells its Beauty and Personal Care products through distributors and directly to retail outlets in the United States. It also sells its products online through its own website forestremedies.com as well as e-commerce sites.
Organic Foods and Beverages
The Company, though its Sprout subsidiary, sells its products to mass retailers, grocery stores and other retail outlets, as well as online through e-commerce sites and its own website sproutorganics.com.
OUR B2C BRAND PORTFOLIO STRATEGY
We are currently working on accelerating brand equity for our brand portfolio:
Biodroga™. Neptune, through its Biodroga subsidiary, provides product development and turnkey solutions (4PL) to its customers throughout North America. Biodroga offers a full range of services, whether it is leveraging our global network of suppliers to find the best ingredients or developing unique formulations that set our customer apart from their competition. Biodroga’s core products are MaxSimil, various Omega-3 fish oils and other nutritional products, as well as softgel solutions. | ||
MaxSimil. Neptune’s patented MaxSimil is an omega-3 fatty acid delivery technology that uses enzymes that mimic the natural human digestive system to predigest omega-3 fatty acids. The Journal of Nutrition by the |
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Oxford University Press, recently released the results of a clinical study that evidences MaxSimil’s superior absorption as compared with standard fish oil supplements. MaxSimil was first introduced to the market in 2018, and is sold as a straight omega-3 supplement with standard and unique concentration of EPA/DHA. MaxSimil is also starting to be presented in combination with specialty ingredients such as Curcumin, Vitamin K2. | ||
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, beauty & personal care and organic foods and beverages industries are highly competitive. There are many companies, public and private universities, and research organizations actively engaged in the research and development of products that may be similar to our products. It is probable that the number of companies seeking to develop products similar to our products will increase. Many of these and other existing or potential competitors have substantially greater financial, technical and human resources than we do and may be better equipped to develop, manufacture and market products.
We seek to differentiate our products and marketing from our competitors based on product quality, customer service, marketing support, pricing and innovation, and believe that our strategy enables us to effectively compete in the marketplace. For additional information regarding the competitive nature of our businesses, see “Risks Related to Our Business” under the heading “Risk Factors” of this prospectus.
REGULATORY
Our Nutraceutical, Beauty, Personal Care and Organic Food and Beverage businesses are subject to varying degrees of regulation by a number of government authorities in Canada and the U.S., including Health Canada, the FDA, the Federal Trade Commission (FTC), the Consumer Product Safety Commission, the U.S. Department of Agriculture, and the Environmental Protection Agency. Various provincial, state and local agencies in areas where we operate and in which our products are sold also regulate our business. The areas of our business regulated by both these and other authorities include, among others:
• | 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. |
We are also subject to a variety of other regulations in Canada and the U.S., including those relating to health, safety, bioterrorism, taxes, labor, employment, import and export, the environment and intellectual property. All of these regulations require significant financial and operational resources to ensure compliance, and we cannot assure you we will always be in compliance despite our best efforts to do so or that being in compliance will not become prohibitively costly to our business.
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. 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, Neptune entered into an exclusive, worldwide, and royalty-bearing licensing agreement for the use of the MaxSimil® technology, in combination with cannabis-derived products. This new agreement allows Neptune to research, manufacture, formulate, distribute, and sell monoglyceride omega-3-rich ingredients in combination with cannabis and/or cannabinoid-rich or hemp derived ingredients for medical and adult use applications. The Company believes the MaxSimil® technology has the ability to enhance absorption of lipidbased and lipid soluble ingredients such as cannabinoids, essential fatty acids including EPA and DHA omega-3s, vitamins A, D, K and E, CoQ10 and others. This could be especially beneficial in increasing the absorption of ingredients which are not easily absorbed, such as CBD.
On June 9, 2021, Sprout Foods entered into a multi-year licensing agreement with Moonbug, providing Sprout with an exclusive license to utilize certain properties relating to CoComelon®, the world’s leading children’s entertainment brand, owned and operated by Moonbug, with Sprout products.
EMPLOYEES
As of September 30, 2022, we had 71 employees working at our business offices in Laval, at our facility in Sherbrooke or remotely down from 155 employees at June 30, 2022. Our employees possess specialized skills and knowledge, which we believe are valuable assets of the Company. As of September 30, 2022, 37 of our employees were in Canada while 34 were in the United States. We also had 8 temporary personnel. One of our employees was represented by a union. We consider our relations with our employees to be good and our operations have never been interrupted as the result of a labor dispute.
SEASONALITY
In addition to general economic factors, we are impacted by seasonal factors and trends such as major cultural events and other unpredictable matters. Although we believe the impact or seasonality on our consolidated results of operations is minimal, our quarterly results may vary significantly in the future due to the timing of nutraceutical contract manufacturing orders as well promotions and ordering patterns of our other customers. We cannot provide assurance future revenues will follow historical patterns. The market price of our common shares may be adversely affected by these factors.
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
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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. 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. 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 Wal-Mart. Earlier in March 2022, we announced the launch of our Forest Remedies Multi Omega 3-6-9 line of supplements into more than 340 Sprouts Farmers Market stores across the U.S. This distribution agreement marks another important milestone in our efforts to transform Neptune into a high-growth branded CPG company.
Strategic Partnerships
In February 2022, we brought Walmart a first-of-its-kind collaboration between Sprout Organics and popular kids’ entertainment platform CoComelon. This co-branded product line is now available on Walmart.com and in 900 Walmart stores, and has been very well-received. With this launch, Sprout Organics now sells into the top organic baby food retailers in the U.S., accounting for approximately 90 percent of the overall market.
Investing in Our Prospects
On November 15, 2021 we initiated a strategic review and made some big changes to get on track to becoming a profitable diversified CPG company. These actions have taken effect, and we are starting to see the results. The third quarter of fiscal year 2022 was the first quarter where we posted a positive gross margins since transitioning to a CPG-focused model. We also had a positive gross margin in 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 year ended March 31, 2022 as well as a decrease in the second quarter of 2023. However, there can be no assurances that revenue 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 Consumer Packaged Goods (“CPG”) focused strategic plan to reduce costs, improve the Company’s path to profitability and enhance current shareholder value. This plan focuses on two primary actions: (1) 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
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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 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 six-month period ended September 30, 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 $3.7 million ($5.15 million CAD). The ASPA closed on November 9, 2022. Some assets were excluded from the ASPA, and were written-down accordingly, 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. The strategic plan is expected to lower costs and reduce global headcount by approximately 50%.
Neptune Announces New Line of CoComelon® Co-Branded Products
Neptune announced on May 26, 2022 a new line up of CoComelon co-branded organic snack bars for toddlers. The snack bars are the latest innovation in the Sprout Organics x CoComelon product line launched earlier this year, which features a range of organic baby and toddler food pouches and toddler snacks. New snack bars will be available online and at select retailers nationwide. Sprout Organics CoComelon Snack Bars are available in two flavor combinations: Banana and Banana with Peas and Carrots. Each snack bar contains a blend of unsweetened fruits, veggies and gluten-free oats and packs an impressive 4g of plant-based protein and 2g of dietary fiber to help fuel growing bodies.
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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 for Sprout, including Walmart and Target, and leading the highly successful CoComelon partnership. She brings deep sales experience and business acumen, including previous roles at Newell Brands and Unilever, and will continue to drive the Sprout business forward.
On June 14, 2022, Neptune announced the appointment of Raymond Silcock as Chief Financial Officer, effective July 25, 2022. Mr. Silcock, who is based out of Neptune’s Jupiter, Florida office, previously served as Executive Vice President and Chief Financial Officer at Perrigo Plc, as well as CFO at Diamond Foods, The Great Atlantic and Pacific Tea Company, 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 Notification
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 notice (the “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 Capital Market. 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 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 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, 2022 and, thereby, regained compliance with the Listing Rule.
Previously, on August 31, 2021, Neptune announced that that the Company had received a written notification (the “Notification Letter”) from Nasdaq on August 30, 2021, notifying the Company that it is not in compliance with the minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2), which requires that the closing bid price for the Company’s common shares listed on Nasdaq be maintained at a minimum 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.
The Notification Letter had no immediate effect on the listing of the Company’s common shares on Nasdaq.
In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company was provided 180 calendar days, or until February 28, 2022, to regain compliance with the minimum bid price requirement, during which time the Company’s common shares continued to trade on the Nasdaq Capital Market. To regain compliance, the Company’s common shares must have had a closing bid price of at least US$1.00 for a minimum of 10 consecutive trading days. The Company requested and received an additional 180-day period to regain compliance, and had until August 27, 2022 to comply.
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On June 9, 2022, Neptune announced the completion 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 outstanding 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.
Change in Auditor
On November 4, 2021, the Company announced the appointment of KPMG LLP (“KPMG”) as its independent registered public accounting firm, effective October 22, 2021, following the resignation of Ernst & Young LLP (“EY”) on September 23, 2021. The appointment of KPMG was made after a thorough evaluation process and has been approved by Neptune’s Board of Directors and its 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, and accompanying two series of warrants to purchase up to an aggregate of 3,891,052 common shares per series of warrants, at an offering price of $2.57 per share and accompanying warrants in a registered direct offering priced at-the-market under Nasdaq rules. Each series of warrants have an exercise price of $2.32 per share and are immediately exercisable upon issuance. One series of warrants will expire two years following the date of issuance and one series of warrants will expire five years following the date of issuance. The gross proceeds from the offering are $5 million, prior to deducting placement agent’s fees and other offering expenses payable by Neptune and assuming none of the warrants issued in the offering are exercised for cash. Neptune intends to use the net proceeds from the offering for working capital and other general corporate purposes. The offering closed on June 23, 2022. The 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
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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 million under the expanded Secured Promissory Notes to Sprout. This amount was received July 13, 2022. The maturity date of the note facility of February 1, 2024, is consistent with the maturity date of the existing Secured Promissory Notes with MSEC and Neptune. The funds from the expanded facility are intended to be used for the general working capital needs of Sprout and the repayment of certain existing Sprout debt payable to Neptune. The existing and new Notes will bear interest at 10% per annum, increasing by 1.00% every three months during the term of the Secured Promissory Notes. MSEC was issued 372,670 common shares of Neptune, of an approximate value of $0.6 million in connection with this expansion. On 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 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 direct offering priced at-the-market under Nasdaq rules (the “Offering”) and warrants to purchase up to 6,417,114 Common Shares (the “Warrants”) in a concurrent private placement (the “Private Placement”). The combined purchase price for one Common Share and one Warrant is $1.87. The Warrants will have an exercise price of $1.62 per Common Share, will be exercisable immediately following the date of issuance and will expire five years from the date of issuance. The aggregate gross proceeds from the Offering and the concurrent Private Placement were approximately $6.0 million, before deducting fees and other estimated expenses, for net proceeds of approximately $5.7 million. The Offering and concurrent Private Placement closed 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 part of this or 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.
Properties
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 own a production facility in Sherbrooke, Québec, where we also conduct 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. On June 8, 2022, we announced the planned accelerated divestiture of our cannabis business which would include the sale of our cannabis brands and the Sherbrooke building in one or more transactions.
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. 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 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 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. 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 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 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, 2022 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 obtain funding in the near-term, it may have to cease operations and liquidate its assets.
These conditions cast substantial doubt about the Company’s ability to continue as a going concern.
Going forward, the Company will seek additional financing in various forms. To achieve the objectives of its business plan, Neptune plans to raise the necessary funds through additional securities offerings and the establishment of strategic alliances. 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.
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 $3.7 million ($5,15 million CAD). The ASPA closed on November 9, 2022. Some assets were excluded from the ASPA and were written down accordingly. 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, 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.
On October 11, 2022, the Company announced the closing of a registered direct offering of 3,208,557 of its Common Shares and the Warrants in the concurrent Private Placement. The Company received gross proceeds of approximately $6.0 million in connection with the offering, before deducting placement agent fees 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.
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) pending in the United States District Court for the Eastern District of New York, 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. 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
56
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 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.
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 | — |
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. In the quarter ended September 30, 2022, the Company recast comparative Adjusted EBITDA to conform to its current |
57
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. |
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, 2022, 2021 and 2020 were $37.388, $89.528 and $27.589 respectively, and current liabilities as at March 31, 2022, 2021 and 2020 were $30.317, $34.809 and $12.243 respectively. |
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 |
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. In the quarter ended September 30, 2022, the Company recast 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, D&O insurance 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 September 30, 2022, March 31, 2022 and March 31, 2021 were $28.247, $37.388 and $89.528 respectively, and current liabilities as at September 30, 2022, March 31, 2022 and March 31, 2021 were $32.357, $30.317 and $34.809 respectively. |
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CONSOLIDATED FINANCIAL ANALYSIS
NON-GAAP FINANCIAL PERFORMANCE MEASURES
The Company uses one adjusted financial measure, Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) to assess its operating performance. This non-GAAP financial measure is presented in a consistent manner, unless otherwise disclosed. The Company uses this measure for the purposes of evaluating its historical and prospective financial performance, as well as its performance relative to competitors. The measure also helps the Company to plan and forecast for future periods as well as to make operational and strategic decisions. The Company believes that providing this information to investors, in addition to GAAP measures, allows them to see the Company’s results through the eyes of Management, and to better understand its historical and future financial performance. Neptune’s method for calculating Adjusted EBITDA may differ from that used by other corporations.
A reconciliation of net loss to Adjusted EBITDA is presented below.
ADJUSTED EBITDA
Although the concept of Adjusted EBITDA is not a financial or accounting measure defined under US GAAP and it may not be comparable to other issuers, it is widely used by companies. Neptune obtains its Adjusted EBITDA measurement by excluding from its net loss the following items: net finance costs (income), depreciation and amortization, and income tax expense (recovery). Other items such as equity classified stock-based compensation, non-employee compensation related to warrants, impairment losses on non-financial assets, revaluations of derivatives, costs related to conversion from IFRS to US GAAP and other changes in fair values are also added back to Neptune’s net loss. The exclusion of net finance costs (income) eliminates the impact on earnings derived from non-operational activities. The exclusion of depreciation and amortization, stock-based compensation, non-employee compensation related to warrants, impairment losses, revaluations of derivatives and other changes in fair values eliminates the non-cash impact of such items, and the exclusion of costs related to conversion from IFRS to US GAAP, together with the other exclusions discussed above, present the results of the on-going business. From time to time, the Company may exclude additional items if it believes doing so would result in a more effective analysis of underlying operating performance. Adjusting for these items does not imply they are non-recurring. For purposes of this analysis, the Net finance costs (income) caption in the reconciliation below includes the impact of the revaluation of foreign exchange rates.
In Q4 2022, the Company added the costs related to the conversion from IFRS to US GAAP as an adjustment to the definition of Adjusted EBITDA.
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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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1 | The Adjusted EBITDA is not a standard measure endorsed by US GAAP requirements. |
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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1 | The Adjusted EBITDA is not a standard measure endorsed by US GAAP requirements. |
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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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As at March 31, 2022 | ||||||||||||||||
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 increase of $6.9 million or 147% compared to $4.7 million for the three-month period ended March 31, 2021.
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 for 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 sales 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)% 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 the prior year, a decrease of $1 million or 54% mainly due to the recognition of the warrants issued to non-employees for co-development recognized over the services rendered.
Selling, General and Administrative (“SG&A”) Expenses
Three-month period ended March 31, 2022 compared to March 31, 2021
Consolidated SG&A expenses net of subsidies for the quarter ended March 31, 2022 amounted to $10.6 million compared to $18.3 million for the same period the prior year, a decrease of $7.7 million or 42% primarily due to the benefits of the strategic review and continued cost controls.
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Twelve-month period ended March 31, 2022 compared to March 31, 2021
Regarding 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 million or 5% primarily from cost reduction measures related to the previously announced strategic review partially offset by higher legal and other costs.
Finance costs
Three-month period ended March 31, 2022 compared to March 31, 2021
Net finance costs, foreign exchange 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 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.
Twelve-month period ended March 31, 2022 compared to March 31, 2021
As for the twelve-month period ended March 31, 2022, the net finance costs, foreign exchange and derivatives revaluations amounted to a gain 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 gains 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”). 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 compared 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 expenses for the quarter ended September 30, 2022, amounted to $15.9 million compared to $15.4 million for the same period 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 million for the quarter ended September 30, 2022, compared 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 million for the quarter ended September 30, 2022 to an Adjusted EBITDA loss of $13.7 million compared to $12.2 million loss for the same quarter last year. The increase in Adjusted EBITDA loss for the quarter is due 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 million for the six-month period ended September 30, 2022 to an Adjusted EBITDA loss of $25.0 million compared to a $26.3 million loss for the same period last year. The decrease in Adjusted EBITDA loss for the six-month period is due to a reduction in gross loss and a reduction in costs, partially offset by $4.0 million legal provision.
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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Uses: | ||||||||||||||||
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
The use of proceeds for the three and six-month periods ended September 30, 2022 and 2021, in millions of dollars, was as follows:
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-month period ended September 30, 2022 compared to September 30, 2021
For the three-month period ended September 30, 2022, increase in loans and borrowings was $3.25 million and were used for operating activities, primarily inventory procurement, salaries and professional fees.
For the three-month period ended September 30, 2021, there were no significant sources of funds. In the same period, funds were used for operating activities, primarily inventory procurement, payments for legacy Health and Wellness COVID-19 related products, salaries and professional fees, as well as acquisition and integration costs.
six-month period ended September 30, 2022 compared 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 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 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 Notes
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 September 9, 2022, Neptune’s Sprout subsidiary entered in an 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.
CAPITAL RESOURCES FOR THE FISCAL YEAR ENDED MARCH 31, 2022
Liquidity position
As at March 31, 2022, the Company’s liquidity position, consisting of cash and cash equivalents, was $8.7 million. The Company also has a short-term investment of $0.02 million.
Liquidity and Capital Resources
Cash flows and financial condition between the three-month periods ended March 31, 2022 and 2021
Summary
As at March 31, 2022, cash and cash equivalent totaled $8.7 million, a decrease of $51.1 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% compared to cash and cash equivalents totaling $8.7 million as of September 30, 2021.
Operating activities
For the three-month period ended September 30, 2022, increase in loans and borrowings was $3.25 million and the proceeds were used for operating activities, primarily inventory procurement, salaries and professional fees.
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For the three-month period ended September 30, 2021, there were no significant sources of funds. In the same period, funds were used for operating activities, primarily inventory procurement, payments for legacy Health and Wellness COVID-19 related products, salaries and professional fees, as well as acquisition and integration costs. For 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.
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”) future investments. For the quarter ended September 30, 2022, $0.6 million was used in investing activities. In the same period the prior year, $0.4 million was also used for investing activities. As for the six-month period ended September 30, 2022, $0.6 million was used in investing activities, compared to $1.0 million for the same period the prior year.
Financing activities
The Company has been successful in obtaining financing from public issuances and private placements. The Company also previously had a term facility for one of its subsidiaries, which was repaid in its entirety during the last quarter of fiscal year 2021 and since then, it has not incurred financing until the 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 secured promissory notes issued by Sprout, the Company has limited debt.
The Company’s current cash position will be sufficient to support its financial needs for only two to three months. Should the Company’s various financing initiatives such as potential public issuances, private placements, preferred shares issuances, or debt financings not materialize, further actions such as further cost reduction initiatives and Company spinoffs of subsidiaries remain as viable options. See the Going Concern section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Furthermore, certain liabilities, such as the warrant liabilities, are dependent on Neptune’s share price and would only become payable if they are in the money. The warrants, if exercised, settle in common shares of the Company and therefore do impact on the Company’s cash. Unless exercised on a cashless basis (where permitted), warrant holders are required to pay the cash strike price to exercise the warrant and thus the exercise of warrants could result in a cash infusion to the Company.
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, the Company and MSEC, into common shares of the Company. MSEC was issued 372,670 common shares of Neptune, of an approximate value of $500,000, in connection with this commitment.
On September 9, 2022, Sprout entered in a new $250,000 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 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 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 of Secured Promissory Notes, on the same terms as the Secured Promissory Note entered into with MSEC. In connection with this financing, Neptune will issue common shares to the holders of these Secured Promissory Notes for a value of $105,000.
Form S-3 Limitations
As a result of our inability to timely file this Quarterly Report 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 be 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.
Equity
Equity consists of the following items (in millions):
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, 2022
The following are the contractual maturities of financial liabilities and other contracts as at March 31, 2022:
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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(1) | Includes interest payments to be made on lease liabilities corresponding to discounted effect. |
(2) | Includes interest payments to be made on loans and borrowings. |
(3) | According to the employment agreement with the CEO, a long-term incentive is payable if the Company reaches a level of market capitalization. |
Liabilities related to warrants are excluded from the table above, as they are to settled 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. 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”) with a value of approximately $4.7 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 million as at March 31, 2022. The related charge for the three-month and twelve-month periods ended March 31, 2022 is nil and $4.7 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, for an unlimited period to the former CEO. A provision of $0.4 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, 2022 and 2021.
The Company has no significant off-balance sheet arrangements as at March 31, 2022, other than those mentioned above and the commitments disclosed in note 22 of the consolidated financial statements for the years ended March 31, 2022 and 2021.
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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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(1) | Includes interest payments to be made on lease liabilities corresponding to discounted effect. |
(2) | Includes interest payments to be made on loans and borrowings. |
(3) | According to the employment agreement with the CEO, a long-term incentive is payable if the Company reaches a level of market capitalization. |
Liabilities related to warrants are excluded from the table above, as they are to settle in shares.
Under the terms of its financing agreements, the Company is not required to meet financial covenants.
On November 14, 2021, the Company and its CEO entered into an agreement pursuant to which the CEO’s existing employment agreement was amended to waive the Company’s obligation to procure directors and officers insurance coverage of up to $15 million for the period covering July 1, 2021 to July 31, 2022. The parties agreed that if the Company had successfully completed a strategic partnership prior to December 31, 2021, the CEO would have been entitled to approximately $6.9 million in cash and would have been granted fully vested options to purchase 8.5 million shares of the Company’s common stock. As the strategic partnership was not consummated by December 31, 2021, the CEO 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 POLICIES
Please refer to Note 3 of the annual consolidated financial statements as at March 31, 2022 for more information about significant accounting policies used to prepare the financial statements.
When preparing the financial statements in accordance with US GAAP, the management of Neptune must make estimates and judgements that affect the amounts reported in the financial statements and the notes thereto. Such estimates are based on Management’s knowledge of current events and actions that the Company may take in the future.
CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
The consolidated financial statements are prepared in accordance with US GAAP. In preparing the consolidated financial statements for the years ended March 31, 2022 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, 2022 for more information about the Company’s most significant accounting policies and the items for which critical estimates were made in the financial statements and should be read in conjunction with the notes to the consolidated financial statements for the years ended March 31, 2022 and 2021.
Estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
Critical accounting estimates are:
• | Estimating the write down of inventories |
Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. As necessary, the Corporation records write-downs for excess, slow moving and obsolete inventory. To determine these amounts, the Corporation regularly reviews inventory quantities on hand and compares them to estimates of historical utilization, future product demand, and production requirements. Write-downs of inventories to net realizable value are recorded in cost of sales in the consolidated financial statements.
In the 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’s customers vary significantly. Adverse changes in a customer’s financial position could cause the Corporation to limit or discontinue conducting business with that customer, require the Corporation to assume more credit risk relating to that customer’s future purchases or result in uncollectible accounts receivable from that customer. Such changes could have a material adverse effect on business, consolidated results of operations, financial condition and cash flows.
The 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 Corporation will temporarily transact with customers on a prepayment basis where circumstances warrant. The Corporation’s credit controls and processes cannot eliminate credit risk.
During the year ended March 31, 2022, the Corporation transacted with a few new customers for which financial positions deteriorated during the year. The Corporation has recorded specific provisions related to these customers.
The expected credit loss for the year ended March 31, 2022 was $1.7 million and for March 31, 2021 was $7.0 million. As at March 31, 2022, 69% of our trade receivables are past due (March 31, 2021 – 83%). We have provided for 58% of past due receivables as at March 31, 2022 (March 31, 2021—68%). 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.
The expected credit loss for the quarters ended September 30, 2022 and 2021 were $0.02 million and $0.04 million, respectively. Expected credit loss is subject to estimation risk and measurement uncertainty because the financial health of certain customers is difficult to predict.
• | Estimating the recoverable amount of non-financial assets, to determine and measure impairment losses on goodwill, intangibles, and property, plant and equipment. |
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 at March 31, 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.
Sprout – In 2022, 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 million was allocated to the Sprout tradename and an impairment charge of $3.3 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 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.
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 assets 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 expected 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 recognition in determining whether the Company is the principal or the agent for the arrangements with suppliers of products the Corporation does not manufacture. |
The Corporation may be involved with other parties, including suppliers of products, in providing goods or services to a customer when it enters into revenue transactions for the sale of products that it does not manufacture. In these instances, the Corporation must determine whether it is a principal in these transactions by evaluating the nature of its promise to the customer. The Corporation is a principal and records revenue on a gross basis if it controls a promised good before transferring that good to the customer. On the other hand, the Corporation records revenue as the net amount when it does not meet the criteria to be considered a principal.
• | Estimating the fair value of bonus based on market conditions (note 16 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.
• | Judgment related to the recognition period to be used in recording stock-based compensation that is based on market and non-market conditions and measurement of warrants issued in securities offerings (notes 14 and 16 of the consolidated financial statements) |
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 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. Changes in these assumptions would impact the timing of which the expense is recognized. These options were not exercisable as at September 30, 2022 and March 31, 2022.
On June 23, 2022, Neptune issued a total of 645,526 pre-funded warrants (“Pre-Funded Warrants”), along with 1,300,000 common shares of the Corporation, as part of a registered direct offering (“June 2022 Direct Offering”). Each Pre-Funded Warrant was exercisable for one Common Share. The common shares and the Pre-Funded Warrants were sold together with 1,945,526 Series C Warrants (the “Series C Warrants”), and 1,945,526 Series D Warrants (the “Series D Warrants”) and collectively, the “June 2022 Common Warrants”. Each common share and Pre-Funded Warrants and the accompanying June 2022 Common Warrants were sold together at a combined offering price of $2.57, for aggregate gross proceeds of $5.0 million before deducting fees and other estimated offering expenses. The Pre-Funded Warrants are funded in full at closing except for a nominal exercise price of $0.0001 and are exercisable commencing on the closing date and will terminate when such Pre-Funded Warrants are exercised in full. The Series C Warrants and the Series D Warrants have an exercise price of $2.32 per share and can be exercised for a period of 5 years and 2 years respectively from the date of issuance.
Proceeds of the June 2022 Direct Offering were allocated between common shares and warrants first by allocating proceeds to the warrants classified as a liability based on their fair value and then allocating the residual to the equity instruments, which includes the Pre-Funded Warrants. The fair value of the liability-classified warrants was determined using the Black-Scholes model, resulting in an initial warrant liability of $4,046,836 for the Series C Warrants and $3,080,121 for the Series D Warrants. Because the fair value of the liability classified warrant exceeds the total proceeds, no consideration was allocated to the Common Shares and Pre-Funded Warrants and a loss of $2,126,955 was immediately recognized in the net loss of the period as there were no additional rights or privileges identified. Total issue costs related to this private placement of $465,211, was recorded under finance costs.
• | 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”) (note 4 of the consolidated financial statements). |
The allocation of the purchase price was based on management’s estimate of 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 net cash flows expected to be generated by the intangible assets, and excluding cash flows related to contributory assets.
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, 2022 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.
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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 | 11,850,057 | |||
Share options | 717,850 | |||
Deferred share units | 4,308 | |||
Restricted share units | 2,790 | |||
Warrants | 12,086,559 | |||
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Total number of securities | 24,661,564 | |||
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The Company’s common shares are being traded on NASDAQ Capital Market under the symbol “NEPT”. Effective August 15, 2022, the Company’s common shares no longer trade on the TSX. Each option, restricted share, restricted share unit, deferred share unit and warrant is exercisable into one common share to be issued from the treasury of the Company.
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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, 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 aggregate of 528,572 common shares and equivalents and 1,428,572 warrants to purchase common shares, at a price equal to $11.20 per share and accompanying warrants. Armistice Capital Master Fund Ltd., a beneficial owner of more than 5% of our voting securities, was the sole investor in the March Offering.
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.
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: | ||||
Michael Cammarata | 37 | President and Chief Executive Officer, Director | ||
Raymond Silcock | 71 | 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 De Geus | 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.
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 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 NASDAQ 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 them 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://ir.checkmatepharma.com/corporate-governance/documents-and-charters.
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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, 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, 2022 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, 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**. |
* | Mr. Weaver left the Company on July 25, 2022. |
** | Dr. Rinow left the Company on November 15, 2021. |
2022 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 |
(1) | The amounts in these columns represent the aggregate grant date fair value of the awards computed in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“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 named executive officer upon the vesting of the awards or the sale of the common shares underlying such awards. |
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(2) | Represents compensation in lieu of additional directors and officers’ insurance required by Mr. Cammarata’s employment agreement. |
(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. Weaver was appointed Interim Chief Financial Officer on September 27, 2021 and was replaced by Mr. Raymond Silcock on July 25, 2022. |
(5) | Dr. Rinow ceased serving as Chief Financial Officer of the Company on September 27, 2021 but remained in her position as Chief Operating Officer until her separation on November 15, 2021. |
(6) | Includes $178,353 for severance pay in connection with Dr. Rinow’s separation. |
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:
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, 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 Employment Agreement”). The Cammarata Employment Agreement 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’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”). 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, 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.
Randy Weaver
The Company entered into an interim services agreement with CSuite Financial Partners (“CSuite”) on September 23, 2021 (the “Weaver Services 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.
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 | — | — |
(1) | Represents the market value of the unvested shares underlying the share awards as of March 31, 2022, based on the closing price of our common shares on such date, as reported on the Nasdaq Capital Market, which was $7.70 per share. These amounts do not reflect the actual economic value that will be realized by the named executive officer upon the vesting of the share awards or the sale of the common stock underlying such share awards. |
(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 (i) as to 14,286 common share options, in three equal annual installments over three years, and (ii) as to the remaining 28,572 common share options, following the achievement of certain performance criteria, each subject to the terms, conditions and restrictions of the award agreement governing the grants. The grant was canceled following Mr. Weaver’s separation from the Company. |
(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. |
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, 2022 (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$10,000 per year to each member of a committee (per committee).
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The following table sets forth summary information concerning compensation paid or accrued to the members of our Board of Directors for services rendered to us for the fiscal year ended March 31, 2022.
Name(1) | Fees Earned or Paid in Cash ($) | 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 |
(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. Philip Sanford joined our board of directors on May 19, 2022 and is therefore excluded from this table as he did not serve on our board of directors during fiscal 2022. |
(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) | Represents grants of deferred share units awarded on November 26, 2021 that vest in four equal tranches until August 26, 2022. |
(4) | Mr. Moretz resigned from our board of directors on February 10, 2022. |
(5) | Ms. Pemberton and Mr. Rochon ceased to be directors as of the 2021 annual shareholder meeting. |
(6) | Mr. Schottenfeld resigned from our board of directors on May 17, 2021. |
(7) | Ms. Phillips was elected to our board of directors at the 2021 annual shareholder meeting and was named Chair of the board of directors on February 10, 2022. |
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 SHARES
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 7,267,114 Common Shares, which underly the Warrants.
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.
Listing of Securities
Our Common Shares are listed on the Nasdaq under the symbol “NEPT.”
Transfer Agent and Warrant Agent
The transfer agent for our Common Shares is Computershare Investor Services Inc.
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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. |
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 shares subject to options that are currently exercisable or exercisable within 60 days of January 24, 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 stock 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) | 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). The amounts presented exclude 5,608,375 common shares issuable upon exercise of warrants (the “Armistice Warrants”) that are currently exercisable (based upon information available to the Company as of October 31, 2022). The Armistice Warrants provide that the holder may not exercise the warrants to the extent such exercise would cause the holder, together with its affiliates, to beneficially own a number of common shares which would exceed 4.99% of the then-outstanding common shares following such exercise, excluding for purposes of such determination common shares issuable upon exercise |
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of the Armistice Warrants which have not been exercised. The address of this entity is c/o Armistice Capital, LLC, 510 Madison Avenue, 7th Floor New York, NY 10022. Steven Boyd has voting and dispositive power over the securities held by Armistice Capital Master Fund Ltd. |
(2) | Comprised of 1,095,913 common shares held directly (based upon information available to the Company as of January 9, 2023). The amounts presented exclude 2,910,594 common shares issuable upon exercise of warrants (the “Sabby Warrants”) that are currently exercisable (based upon information available to the Company as of January 9, 2023). The Sabby Warrants provide that the holder may not exercise the warrants to the extent such exercise would cause the holder, together with its affiliates, to beneficially own a number of common shares which would exceed 4.99% of the then-outstanding common shares following such exercise, excluding for purposes of such determination shares of common stock issuable upon exercise of the Sabby Warrants which have not been exercised. Hal Mintz has voting and dispositive power over the securities held by Sabby Volatility Warrant Master Fund, Ltd. |
(3) | Based upon information available to the Company as of October 31, 2022, comprised of (i) 624,158 common shares held by Empery Asset Master Ltd., (ii) 154,207 common shares held by Empery Tax Efficient, LP, and (iii) 211,447 common shares held by Empery Tax Efficient III, LP. The amounts presented exclude all common shares issuable upon exercise of warrants held by Empery Asset Master Ltd., Empery Tax Efficient, LP and Empery Tax Efficient III, LP, which warrants provide that the holder may not exercise the warrants to the extent such exercise would cause the holder, together with its affiliates, to beneficially own a number of common shares which would exceed 4.99% of the then-outstanding common shares following such exercise, excluding for purposes of such determination shares of common stock issuable upon exercise of the warrants which have not been exercised. The address of these entities is c/o Empery Asset Management, LP, One Rockefeller Plaza, Suite 1205, New York City, NY 10020. Based upon information available to the Company as of October 31, 2022, Empery Asset Management LP is the authorized agent of each of Empery Asset Master Ltd., Empery Tax Efficient, LP and Empery Tax Efficient III, LP, has discretionary authority to vote and dispose of the securities held by each of these entities and may be deemed to be the beneficial owner of these securities. Martin Hoe and Ryan Lane, in their capacity as investment managers of Empery Asset Management LP, may also be deemed to have investment discretion and voting power over the securities held by each of Empery Asset Master Ltd., Empery Tax Efficient, LP and Empery Tax Efficient III, LP. Each of Empery Asset Master Ltd., Empery Tax Efficient, LP and Empery Tax Efficient III, LP, Martin Hoe and Ryan Lane disclaim any beneficial ownership of these securities. |
(4) | Based upon information contained in a Schedule 13D filed with the SEC on December 27, 2022 by Mr. Shohaib Kassam Sumar. The principal business address of the investor is 13100 Rock Canyon Road, Oklahoma City, OK 73142. |
(5) | Mr. Cammarata’s holdings consist of (i) 462,510 common shares held directly, and (ii) 62,463 common shares issuable pursuant to common share options that are exercisable within 60 days after January 24, 2023. |
(6) | Mr. Silcock’s holdings consist of 19,048 common shares issuable pursuant to common share options that are exercisable within 60 days after January 24, 2023. |
(7) | Mr. Wirt’s holdings consist of (i) 956 common shares owned by John S. Wirt IRA and (ii) 57,143 common shares issuable pursuant to common share options that are exercisable within 60 days after January 24, 2023. |
(8) | 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 January 24, 2023 and (ii) 791 common shares issuable pursuant to common share options that are exercisable within 60 days after January 24, 2023. |
(9) | 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 January 24, 2023 and (iii) 791 common shares issuable pursuant to common share options that are exercisable within 60 days after January 24, 2023. |
(10) | 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 January 24, 2023 and (iii) 2,620 common shares issuable pursuant to common share options that are exercisable within 60 days after January 24, 2023. |
(11) | Mr. Sanford’s holdings consist of 5,618 common shares held directly. |
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SELLING SHAREHOLDERS
This prospectus relates to the resale by the Selling Shareholders from time to time of up to 7,267,114 of our common shares. The Selling Shareholders may from time to time offer and sell any or all 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 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 being offered by the Selling Shareholders. The applicable percentage ownership of common shares is based on approximately 11,850,057 common shares outstanding as of January 24, 2023. Information with respect to common shares owned beneficially after the offering assumes the sale of all of the common shares registered hereby. The Selling Shareholders may offer and sell some, all or none of their common shares.
Except 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 | — | — |
* | Represents less than 1%. |
(1) | Comprised of (i) 624,158 common shares held by Empery Asset Master Ltd. directly and (ii) 1,348,846 common shares issuable upon exercise of warrants held by Empery Asset Master, Ltd. (based upon information available to the Company as of October 31, 2022). The address of this entity is c/o Empery Asset Management, LP, One Rockefeller Plaza, Suite 1205, New York City, NY 10020. Based upon information available to the Company as of October 31, 2022, Empery Asset Management LP is the authorized agent of Empery Asset Master Ltd., has discretionary authority to vote and dispose of the securities held by this entity and may be deemed to be the beneficial owner of these securities. Martin Hoe and Ryan Lane, in their capacity as investment managers of Empery Asset Management LP, may also be deemed to have investment discretion and voting power over the securities held by Empery Asset Master Ltd. Empery Asset Master Ltd., Martin Hoe and Ryan Lane disclaim any beneficial ownership of these securities. |
(2) | Comprised of (i) 154,207 common shares held by Empery Tax Efficient, LP directly and (ii) 333,240 common shares issuable upon exercise of warrants held by Empery Tax Efficient, LP (based upon information available to the Company as of October 31, 2022). The address of this entity is c/o Empery Asset Management, LP, One Rockefeller Plaza, Suite 1205, New York City, NY 10020. Based upon information available to the Company as of October 31, 2022, Empery Asset Management LP is the authorized agent of Empery Tax Efficient, LP, has discretionary authority to vote and dispose of the securities held by this entity and may be deemed to be the beneficial owner of these securities. Martin Hoe and Ryan Lane, in their capacity as investment managers of Empery Tax Efficient, LP, may also be deemed to have investment discretion and voting power over the securities held by Empery Tax Efficient, LP. Empery Tax Efficient, LP, Martin Hoe and Ryan Lane disclaim any beneficial ownership of these securities. |
(3) | Comprised of (i) 211,447 common shares held by Empery Tax Efficient III, LP directly and (ii) 456,952 common shares issuable upon exercise of warrants held by Empery Tax Efficient III, LP (based upon information available to the Company as of October 31, 2022). The address of this entity is c/o Empery Asset Management, LP, One Rockefeller Plaza, Suite 1205, New York City, NY 10020. Based upon information available to the Company as of October 31, 2022, Empery Asset Management LP is the authorized agent of Empery Tax Efficient III, LP, has discretionary authority to vote and dispose of the securities held by this entity and may be deemed to be the beneficial owner of these securities. Martin Hoe and Ryan Lane, in their capacity as investment managers of Empery Tax Efficient III, LP, may also be deemed to have investment discretion and voting power over the securities held by Empery Tax Efficient III, LP. Empery Tax Efficient III, LP, Martin Hoe and Ryan Lane disclaim any beneficial ownership of these securities. |
(4) | Comprised of 910,278 common shares held directly (based upon information available to the Company as of January 9, 2023). The amounts presented exclude 3,111,802 common shares issuable upon exercise of |
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warrants (the “Sabby Warrants”) that are currently exercisable (based upon information available to the Company as of January 9, 2023). The Sabby Warrants provide that the holder may not exercise the warrants to the extent such exercise would cause the holder, together with its affiliates, to beneficially own a number of common shares which would exceed 4.99% of the then-outstanding common shares following such exercise, excluding for purposes of such determination shares of common stock issuable upon exercise of the Sabby Warrants which have not been exercised. Hal Mintz has voting and dispositive power over the securities held by Sabby Volatility Warrant Master Fund, Ltd. Includes 2,910,594 common shares underlying currently exercisable warrants. |
(5) | Comprised of 910,278 common shares held directly (based upon information available to the Company as of January 9, 2023). The amounts presented exclude 3,111,802 common shares issuable upon exercise of the Sabby Warrants that are currently exercisable (based upon information available to the Company as of January 9, 2023). |
(6) | Comprised of 975,295 common shares held directly (based upon information available to the Company as of October 31, 2022). The amounts presented exclude 5,608,375 common shares issuable upon exercise of warrants (the “Armistice Warrants”) that are currently exercisable (based upon information available to the Company as of October 31, 2022). The Armistice Warrants provide that the holder may not exercise the warrants to the extent such exercise would cause the holder, together with its affiliates, to beneficially own a number of common shares which would exceed 4.99% of the then-outstanding common shares following such exercise, excluding for purposes of such determination shares of common stock issuable upon exercise of the Armistice Warrants which have not been exercised. Steven Boyd has voting and dispositive power over the securities held by Armistice Capital Master Fund Ltd. |
(7) | Comprised of 975,295 common shares held directly (based upon information available to the Company as of October 31, 2022). The amounts presented exclude 3,469,337 common shares issuable upon exercise of Armistice Warrants that are currently exercisable (based upon information available to the Company as of October 31, 2022). |
(8) | Comprised of 484,500 common shares underlying January 2023 Warrants (based upon information available to the Company as of January 12, 2023). The January 2023 Warrants held by CCUR Holdings, Inc. provide that the holder may not exercise the warrants to the extent such exercise would cause the holder, together with its affiliates, to beneficially own a number of common shares which would exceed 4.99% of the then-outstanding common shares following such exercise, excluding for purposes of such determination common shares issuable upon exercise of the January 2023 Warrants which have not been exercised. Igor Volshteyn has voting and dispositive power over the securities held by CCUR Holdings, Inc. |
(9) | Comprised of 365,500 common shares underlying January 2023 Warrants (based upon information available to the Company as of January 12, 2023). The January 2023 Warrants held by Symbolic Logic, Inc. provide that the holder may not exercise the warrants to the extent such exercise would cause the holder, together with its affiliates, to beneficially own a number of common shares which would exceed 4.99% of the then-outstanding common shares following such exercise, excluding for purposes of such determination common shares issuable upon exercise of the January 2023 Warrants which have not been exercised. Igor Volshteyn has voting and dispositive power over the securities held by Symbolic Logic, Inc. |
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PLAN OF DISTRIBUTION
We are registering 7,267,114 Common 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 the 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; |
• | in the over-the-counter market; |
• | in transactions otherwise than on these exchanges or systems or in the over-the-counter market; |
• | 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 may be deemed to be “underwriters” within the meaning of the Securities Act, and any commission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act. At the time a particular offering 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 offered and the terms of the offering, 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 arising under the Securities Act.
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 the 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 any of the Common Shares by the Selling Shareholders and any other participating person. Regulation M may also restrict the ability of any person engaged in the distribution of the Common Shares to engage in market-making activities with respect to the Common Shares. All of the foregoing may affect the marketability 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 which 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, in accordance 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.
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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LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for us by Osler, Hoskin & Harcourt LLP. Any underwriters or agents will be advised about other issues relating to the offering by counsel to be named in the applicable prospectus supplement.
EXPERTS
KPMG, an independent registered public accounting firm, audited the consolidated financial statements of Neptune as of March 31, 2022 and for the year ended 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, it may have to liquidate its assets. 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. The audit report also refers to the adoption of U.S. generally accepted accounting principles and change in its reporting currency from Canadian dollars to U.S. dollars.
The consolidated financial statements of Neptune as of March 31, 2021 and for the year ended March 31, 2021 appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, predecessor independent registered public accounting firm, 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 as described in Note 1 to the consolidated financial statements), included therein. Such consolidated financial statements are included herein in reliance upon such report given on the authority of such firm as experts in auditing and accounting.
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. 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.
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F-2 | ||||
F-5 | ||||
F-6 | ||||
F-7 | ||||
F-8 | ||||
F-10 | ||||
F-11 |
F-62 | ||||
F-63 | ||||
F-64 | ||||
F-68 | ||||
F-70 |
• | assessing the appropriateness of the valuation models used by the Corporation; |
• | comparing the discount rate used by the Corporation 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 Corporation to economic growth forecast; |
• | assessing the appropriateness of the revenue market multiples used in the valuation model by comparing to multiples of publicly traded comparable companies. |
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 | ||||||||
On behalf of the Board: | ||
/s/ Julie Philips | /s/ Michael Cammarata | |
Julie Philips | Michael Cammarata | |
Chairman of the Board | President and CEO |
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 | ||||||||
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 | |||||||||||||||||||
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 | |||||||||||||||||||
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 | ||||||||
1. | Reporting entity: |
2. | Basis of preparation: |
(a) | Adoption of U.S. GAAP: |
(b) | Functional and reporting currency: |
(c) | Use of estimates: |
• | Estimating the write down of inventory; |
• | Estimating expected credit losses for receivables; |
• | Estimating the recoverable amount of non-financial assets, to determine and measure impairment losses on goodwill, intangibles, and property, plant and equipment; |
• | Estimating the lease term of contracts with extension options and termination options; |
• | Estimating the revenue from contracts with customers subject to variable consideration. For the year ended March 31, 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; |
• | Estimating the fair value of bonus, options and warrants that are based on market and non-market conditions (note 16); |
• | Estimating the fair value of the identifiable assets acquired, liabilities assumed, and consideration transferred of the acquired business, including the related contingent consideration and call option (note 4); and |
• | Estimating the litigation provision as it depends upon the outcome of proceedings (note 22). |
3. | Significant accounting policies: |
(a) | Basis of consolidation: |
(b) | Business combinations and related goodwill: |
(c) | Derivative over its own equity: |
(d) | Cash and cash equivalents: |
(e) | Investments: |
(f) | Trade accounts receivable: |
(g) | Inventories: |
(h) | Property, plant and equipment, net: |
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 30% | ||
Computer equipment | Straight-line | 2 to 5 years |
(i) | Goodwill and other Intangible assets: |
(i) | Initial recognition: |
Asset | Method | Period/Rate | ||
Customer relationships (1) | Straight-line | 10 years | ||
Farmer relationships (1) | Straight-line | 3 years | ||
License agreements | Straight-line | 31 months to 12 years | ||
Website and trademarks | Straight-line | 4 years | ||
Tradenames | Straight-line | 15 years | ||
Computer software | Straight-line | 3 to 5 years |
(1) | During the year ended March 31, 2021, the amortization of customer relationships and farmer relationships, both related to SugarLeaf, was accelerated and those assets were then fully amortized. |
(ii) | Subsequent expenditure: |
(j) | Research and development: |
(k) | Impairment: |
(i) | Long-lived assets: |
(ii) | Goodwill: |
(l) | Revenue: |
(m) | Cost of revenue: |
(n) | Selling, general and administrative expenses: |
(o) | Government grants: |
(p) | Leases: |
(q) | Share-based payment: |
(r) | Income tax: |
(s) | Net earnings or loss per share: |
(t) | New standards and interpretations not yet adopted: |
4. | Business combination: |
(a) | Acquisition of a controlling interest in Sprout Foods: |
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 | ||
Note: | As part of the acquisition of Sprout, net deferred tax assets of $15,251,439 were acquired for which a full valuation allowance was recognized. |
(unaudited) | March 31, 2021 | |||
Total revenues | 53,823,888 | |||
Net loss | (150,267,710 | ) |
5. | Trade and other receivables: |
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 | |||||
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, 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 | ||||
6. | Inventories: |
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 | |||||
7. | Property, plant and equipment: |
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, 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 | |||||
8. | Leases: |
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 | ||||
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 |
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 | % |
(a) | Maturity analysis – contractual undiscounted cash flows: |
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 | ||
9. | Intangible assets and goodwill: |
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 | ||||||||||
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 | |||||
2023 | 2024 | 2025 | 2026 | 2027 | ||||||||||||||||
Estimated aggregate amortization expense | $ | 2,514,571 | $ | 2,442,943 | $ | 2,442,943 | $ | 2,342,144 | $ | 2,032,939 |
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 | ||||||
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 | |||||
(a) | Annual impairment testing of Biodroga: |
(b) | Accelerated amortization and impairment of SugarLeaf Labs: |
(c) | Impairment testing of Sprout: |
10. | Trade and other payables: |
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 | |||||
11. | Provisions |
(a) | During the year ended March 31, 2019, the Corporation 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 Corporation (the “Former CEO”) pursuant to the terms of an agreement entered into on February 23, 2001 between Neptune and the Former CEO (the “Royalty Agreement”). The Corporation appealed the judgment which was dismissed by the Court of Appeal of Québec in February 2021. Under the terms of the Royalty Agreement and as maintained by the court, annual royalties of 1 % of the sales and other revenue made by the Corporation on a consolidated basis are payable by the Corporation to the Former CEO biannually, but only to the extent that the cost of the |
royalty would not cause the Corporation to have a loss before interest, taxes and amortization (in which case, the payments would be deferred to the following fiscal year). |
(b) | 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 starting August 1, 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). Final oral argument is scheduled for July $600,000 has been recognized for this case as at March 31, 2022 ($600,000 as at March 31, 2021).7, 2022, after which the arbitrator will issue a decision on whether the settlement is enforceable. 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 |
(c) | A supplier of cannabis initiated a lawsuit against 9354-7537 Quebec Inc. (operating as Neptune Wellness Solutions, Inc.) (“Neptune”) for breach of a Wholesale Cannabis Supply Agreement (the “Supply Agreement”) for the purchase of cannabis trim. The purchased trim was rejected by Neptune due to quality concerns. The supplier refused to refund the purchase price and ultimately sued Neptune 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 Neptune for the full purchase price of the trim. With fees and costs, the final arbitrator’s award entered against Neptune is of $1,127,024, plus applicable interest. A provision of $1,127,024 has been recognized in trade and other payables. |
(d) | On November 15, 2021, the Corporation announced restructuring initiatives. These initiatives resulted in immediate reductions in personnel and a severance charge of $850,799 and was paid before year-end. |
(e) | As at March 31, 2022, the Corporation has various additional other provisions for legal obligations for an aggregate amount of $155,804 (March 31, 2021 – $155,804). |
12. | Liability related to warrants: |
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 | % | ||||||||
13. | Loans and borrowings: |
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 | ||||
14. | Capital and other components of equity: |
(a) | Share capital: |
• | Common shares |
• | Series A preferred shares, non-voting, non-participating, fixed, preferential, andnon-cumulative dividend of 5% ofpaid-up capital, exchangeable at the holder’s option under certain conditions into common shares (none issued and outstanding). |
(b) | Share options exercised: |
(c) | DSUs released: |
(d) | RSUs released: |
(e) | Restricted shares: |
(f) | Warrants: |
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 | |||||||||||||||||
(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. An expense of $178,917 was recognized during the twelve-month period ended March 31, 2022 (2021 - $822,316) 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 in the year ended March 31, 2022. During the twelve-month period ended March 31, 2021, expenses of $1,113,884 were recognized in selling, general and administrative expenses. |
(g) | At-The-Market |
(h) | Direct Offerings: |
(i) | Private placement: |
(j) | Business combination: |
(k) | Registered Direct Offering Priced At-The-Market |
15. | Non-controlling interest: |
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. |
16. | Share-based payment: |
(a) | Corporation stock option plan: |
(i) | Stock option plan: |
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 | % |
(ii) | Non-market performance options: |
(iii) | Market performance options: |
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 | ||||||||||||||
(b) | Deferred Share Units, Restricted Share Units and Restricted Shares: |
(i) | Deferred Share Units (“DSUs”) |
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 | ||||||||||||||
(ii) | Restricted Share Units (‘’RSUs’’) |
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 | ||||||||||||||
(iii) | Restricted Shares |
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 | $ | — | — | $ | — | — | ||||||||||||||
(c) | Long term cash bonus: |
17. | Finance income and finance costs: |
(a) | Finance income: |
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 | ||||
(b) | Finance costs: |
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 | ||||||||
18. | Income taxes: |
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 | ) | |||
1 | The Canadian combined statutory income tax rate. |
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 | |||
19. | Loss per share: |
20. | Supplemental cash flow disclosure: |
(a) | Changes in operating assets and liabilities: |
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 | ) | ||
(b) | Non-cash transactions: |
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 |
21. | Fair-value: |
• | 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). |
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 | ||||||||
22. | Commitments and contingencies: |
(a) | Commitments: |
(i) | On November 2, 2017, Neptune entered into an exclusive commercial agreement for a specialty ingredient in combination with cannabinoids coming from cannabis or hemp for a period of 11 |
years with minimum annual volumes of sales starting in 2019. On January 31, 2020, Neptune entered into other commercial agreements for the same specialty ingredient in combination with fish oil products for a period of 8 years in replacement of a previous terminated agreement. According to these agreements signed with the same third-party’s beneficial owner, Neptune will pay royalties on sales. To maintain the exclusivity, Neptune must reach minimum annual volumes of sales for the duration of the agreements for which minimum volumes are being reached. The corresponding total remaining amount of minimum royalties is $3,878,449. |
(ii) | On April 14, 2020, the Corporation signed a two-year agreement with the Jane Goodall Institute (“JGI”) in which Neptune agreed to donate 5% of the net sales of products branded as Forest Remedies with the JGI identification to support continued research, conservation and education efforts. For the year ended March 31, 2022 and 2021, the donations on sales were negligeable. |
(iii) | On March 21, 2019, the Corporation received a judgment from the Court regarding certain previously disclosed claims made by a corporation controlled by the former CEO against the Corporation 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 Corporation is required to pay royalties of 1% of its revenues in semi-annual instalments, for an unlimited period. Based on currently available information, a provision of $362,809 for royalty payments has been recognized as of March 31, 2022 ($1,489,854 as at March 31, 2021). Refer to note 11. |
(iv) | 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. |
(b) | Contingencies: |
(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 starting August 1, 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). Final oral argument is scheduled for July 7, 2022, after which the arbitrator will issue a decision on whether the settlement is enforceable. 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, 2022 ($600,000 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. |
(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 Corporation and certain of its current and former officers alleging violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 with respect to the Corporation’s acquisition of SugarLeaf Labs, Inc. The Corporation believes these claims are without merit and intends to vigorously defend itself. No provision has been recorded in the financial statements for this matter. |
(iv) | A supplier of cannabis initiated a lawsuit against 9354-7537 Quebec Inc. (operating as Neptune Wellness Solutions, Inc.) (“Neptune”) for breach of a Wholesale Cannabis Supply Agreement (the “Supply Agreement”) for the purchase of cannabis trim. The purchased trim was rejected by Neptune due to quality concerns. The supplier refused to refund the purchase price and ultimately sued Neptune 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 Neptune for the full purchase price of the trim. With fees and costs, the final arbitrator’s award entered against Neptune is of $1,127,024, plus applicable interest. A provision of $1,127,024 has been recognized in trade and other payables. |
23. | Operating Segments: |
a) | Geographical information: |
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 | |||||
b) | Information about major customers: |
c) | Revenues |
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 | |||||
d) | Geographical information on long-lived assets: |
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 | ||||
24. | Related parties: |
25. | Subsequent events: |
(b) | (Unaudited) |
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 | ||||||
On behalf of the Board: | ||
/s/ Julie Philips | /s/ Michael Cammarata | |
Julie Philips | Michael Cammarata | |
Chair of the Board | President and CEO |
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 | ) | |||
1. | Reporting entity: |
2. | Basis of preparation: |
(a) | Adoption of U.S. GAAP: |
(b) | Functional and reporting currency: |
(c) | Use of estimates: |
• | Estimating the write down of inventory. |
• | Estimating expected credit losses for receivables. |
• | Estimating the recoverable amount of non-financial assets, to determine and measure impairment losses on goodwill, intangibles, and property, plant and equipment. |
• | Estimating the lease term of contracts with extension options and termination options. |
• | 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 identifiable assets acquired, liabilities assumed, and consideration transferred of the acquired business, including the related contingent consideration and call option. |
• | Estimating the litigation provision as it depends upon the outcome of proceedings (note 7) and |
• | Estimating fair value less costs to sell off assets held for sale (note 2 (d)). |
(d) | Assets held for sale: |
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 | ||
3. | Significant accounting policies: |
(a) | Basis of consolidation: |
(b) | New standards and interpretations not yet adopted: |
(c) | Assets held for sale: |
4. | Inventories: |
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 | |||||
5. | Property, plant and equipment: |
6. | Goodwill and intangible assets: |
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 | |||||
7. | Provisions |
(a) | 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). |
(b) | 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 $600,000has been recognized for this case as at September 30 , 2022 ($600,000as at March 31, 2022). |
(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 three-month period ended September 30, 2022, the Company made a payment of $328,439 to the supplier, and recorded foreign currency translation adjustments of $(15,814 ). As at September 30, 2022, the balance of this payable was $199,521 ($1,127,024 as at March 31, 2022) and it was paid on October 12, 2022. This provision was included in trade and other payables as at March 31, 2022 and September 30, 2022. |
(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 is subject to court approval and certification by the court of the class. An installment of $500,000 will be made seven days after the approval date, with two additional payments to be made 30 days and 60 days after the first payment. The rest is payable either in cash ($2,500,000) or in shares ($2,750,000) at Neptune’s election. As of September 30, 2022, a provision and an expense within selling, general administration of $4,000,000 (March 31, 2022 - nil) has been recorded by the Company. |
(e) | As at September 30, 2022, the Company has various additional other provisions for legal fees obligations for an aggregate amount of $728,090 (March 31, 2022 – $155,804). |
8. | Liability related to warrants: |
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 | % | ||||||||
9. | Loans and borrowings: |
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 |
10. | Capital and other components of equity: |
(a) | Share capital: |
• | Common shares |
• | Series A preferred shares, non-voting, non-participating, fixed, preferential, andnon-cumulative dividend of 5% of paid-up capital, exchangeable at the holder’s option under certain conditions into common shares (noneissued and outstanding). |
(b) | Share options exercised: |
(c) | DSUs released: |
(d) | RSUs released: |
(e) | Restricted shares: |
(f) | Warrants: |
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 | |||||||||||||||||
(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 three and six-month periods ended September 30, 2022 (2021 - $60,965and $153,650 respectively) 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 wit h 85,715 e xpiring on October 3, 2024and 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. |
(g) | Common shares issued in connection with debt financing: |
11. | Non-controlling interest: |
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 | ) |
(1) | Cash flow from financing activities is partially provided through intercompany advances. |
12 . | Share-based payment: |
(a) | Company stock option plan: |
(i) | Stock option plan: |
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% | ||||||||||||
(ii) | Non-market performance options: |
(iii) | Market performance options: |
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 | ||||||||||||||
(b) | Deferred Share Units and Restricted Share Units: |
(i) | Deferred Share Units (“DSUs”) |
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 | ||||||||||||||
(ii) | Restricted Share Units (‘’RSUs’’) |
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 | ||||||||||||||
(c) | Long term cash bonus: |
13. | Loss per share: |
14. | Fair-value: |
• | 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). |
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 | ||||||||||||
15. | 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 8products in nutraceutical products for a period of 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 $1,269,680. 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 theCompany 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, theCompany is required to pay royalties of 1% of its revenues in semi-annual instalments, for an unlimited period. Based on currently available information, a provision of $ 532,614 for royalty |
payments has been recognized as of September 30, 2022 ($362,809 as at March 31, 2022). Refer to note 7. |
(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. |
(b) | Contingencies: |
(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, aone-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. 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 September 30, 2022 ($600,000 as at March 31, 2022). |
(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. |
16 . | Operating Segments: |
a) | Geographical information: |
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 | |||||||||
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 | $ | — | ||||
b) | Revenues |
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 | |||||||||
17 . | Related parties: |
18 . | Subsequent events : |
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 expenses | $ | 1,195 | ||
Accounting fees and expenses | $ | 150,000 | ||
Legal fees and expenses | $ | 30,000 | ||
Miscellaneous | 10,000 | |||
|
| |||
Total(1) | $ | 191,195 | ||
|
|
(1) | Discounts, concessions, commissions and similar selling expenses attributable to the sale of common shares covered by this prospectus will be borne by the Selling Shareholders. We will pay all expenses (other than discounts, concessions, commissions and similar selling expenses) relating to the registration of the shares with the Securities and Exchange Commission, as estimated in the table above. |
Item 14. Indemnification of Directors and Officers
Under the Business Corporations Act (Québec) (the “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 the 850,000 January 2023 Warrants being registered in this Registration Statement. 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 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, as well as customary adjustments for the term of the 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 Agreement with certain institutional investors, pursuant to which the Company agreed to issue and sell, in a registered direct offering (the “Offering”), 3,208,557 of its common shares (the “Common Shares”), and the 6,417,114 Warrants being registered in this Registration Statement/prospectus in the 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 Offering closed on October 11, 2022. A.G.P./Alliance Global Partners served as exclusive placement agent in connection with the Offering.
The Company received gross proceeds of approximately $6.0 million in connection with the Offering, before deducting placement agent fees 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.
The Common Shares were offered by the Company pursuant to a registration statement on Form S-3 (File No. 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 Warrants and the Common Shares underlying the Warrants sold in the 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 Warrant is exercisable for one Common Share at an exercise price of $1.62 per share. The 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 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 Warrant.
In lieu of making the cash payment otherwise contemplated to be made to the Company upon exercise of a 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 Warrants, provided that such cashless exercise shall only be permitted if a registration statement registering the issuance of the Common Shares underlying the 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 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. 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 were issued in a private placement 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.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits.
The exhibits listed below are filed as part of this registration statement.
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23.3* | Consent of Osler, Hoskin & Harcourt LLP (included in Exhibit 5.1) | |
24.1** | Power of Attorney (included on the signature page to the initial filing of the Registration Statement) | |
101.INS* | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |
101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
107* | Filing Fee Table |
# | Indicates a management contract or compensatory plan or arrangement. |
† | Certain identified information has been excluded from the exhibit pursuant to Item 601(a) (6) and/or Item 601(b) (10) (iv) of Regulation S-K |
* | Filed herewith |
** | Previously filed. |
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) | To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement (notwithstanding the foregoing, any increase or decrease in the volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement); and (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. |
(2) | That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
(3) | To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. |
(4) | That, for the purpose of determining liability of the registrant under the Securities Act to any purchaser in the initial distribution of securities, in a primary offering of securities of the registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: (i) any preliminary prospectus or prospectus of the registrant relating to the offering required to be filed pursuant to Rule 424; (ii) any free writing prospectus relating to the offering prepared by or on behalf of the registrant or used or referred to by the registrant; (iii) the portion of any other free writing prospectus relating to the offering containing material information about the registrant or its securities provided by or on behalf of the registrant; and (iv) any other communication that is an offer in the offering made by the registrant to the purchaser. |
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(5) | That, for the purpose of determining liability under the Securities Act to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. |
(6) | That, prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the registrant undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. |
(8) | That every prospectus (i) that is filed pursuant to the immediately preceding paragraph, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Securities Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment has become effective, and that for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
(9) | Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. |
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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 January 30, 2023.
NEPTUNE WELLNESS SOLUTIONS INC. | ||
By: | /s/ Raymond Silcock | |
Raymond Silcock | ||
Chief Financial Officer |
Pursuant to the requirements of the Securities Act of 1933, as amended, this amended registration statement has been signed below by the following persons in the capacities indicated on November 7, 2022.
NAME | POSITION | DATE | ||
* Michael Cammarata | President, Chief Executive Officer and Director | January 30, 2023 | ||
/s/ Raymond Silcock Raymond Silcock | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | January 30, 2023 | ||
* Julie Phillips | Director | January 30, 2023 | ||
* Joseph Buaron | Director | January 30, 2023 | ||
* Michael de Geus | Director | January 30, 2023 | ||
* Dr. Ronald Denis | Director | January 30, 2023 | ||
* Philip Sanford | Director | January 30, 2023 |
* Pursuant to Power of Attorney | ||
By: | /s/ Raymond Silcock | |
Raymond Silcock | ||
As Attorney-in-Fact |
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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 January 30, 2023.
NEPTUNE WELLNESS SOLUTIONS INC. | ||
By: | /s/ Raymond Silcock | |
Name: Raymond Silcock | ||
Title: Chief Financial Officer |
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