Financial Position and Liquidity - Neptune reported a cash position of approximately $0.3 million as of February 15, 2024, indicating substantial doubt about its ability to continue as a going concern [184]. - The company has initiated a plan to spin out a majority of its equity interest in Sprout to shareholders, enhancing overall company value [171]. - The company is actively pursuing cash-generating transactions and expense reductions to ensure operational continuity amid financial challenges [184]. - As of December 31, 2023, the company's liquidity position was $1.2 million, a decrease of $2.2 million or 64% from $3.4 million on December 31, 2022 [274]. - The company is required to actively manage its liquidity, as trade and other payables exceed total current assets [273]. - The company has a maximum available inventory financing of $7.5 million to meet consumer demand and product line expansion [270]. - Total equity deficiency attributable to equity holders of the Company was $31.248 million as of December 31, 2023, compared to $11.940 million on March 31, 2023 [291]. - The Company has contractual obligations totaling $59.526 million as of December 31, 2023, with trade payables of $31.372 million and loans of $25.984 million [292]. Revenue and Financial Performance - For the three-month period ended December 31, 2023, total revenues were $7.600 million, a decrease from $12.209 million in the same period of 2022, representing a decline of approximately 37.3% [213]. - The net loss for the three-month period ended December 31, 2023, was $19.170 million, compared to a net income of $0.497 million in the same period of 2022 [213]. - Total consolidated revenues for the three-month period ended December 31, 2023 amounted to $7.6 million, representing a decrease of $4.6 million or 38% compared to $12.2 million for the same period in 2022 [227]. - Revenue from the United States for the three-month period ended December 31, 2023, was $6.700 million, down from $10.597 million in the same period of 2022, a decrease of approximately 36.0% [224]. - Total consolidated revenues for the nine-month period ended December 31, 2023 amounted to $27.0 million, representing a decrease of $13.5 million or 33% compared to $40.5 million for the same period in 2022 [242]. Strategic Initiatives and Acquisitions - Neptune's strategic review process has entered Phase II, focusing on maximizing shareholder value through potential asset monetization and strategic partnerships [170]. - Neptune has entered into a non-binding Letter of Intent to acquire Datasys Group, Inc., a data-marketing company, although the viability of the transaction is under review [172]. - The company announced a non-binding Letter of Intent to acquire Datasys Group, Inc. for a total potential consideration of $112 million [199]. - The proposed acquisition includes $20 million in cash at closing, $32 million in restricted equity, and a $31 million paid-in-kind seller note [201]. - The company appointed Stifel Nicolaus Canada Inc. as exclusive financial advisor for Sprout Foods Inc. to review divestiture alternatives [198]. Shareholder and Equity Matters - The company completed a registered direct offering on September 26, 2023, raising gross proceeds of approximately $4.5 million by selling 1,800,000 common shares at a price of $2.50 per share [187]. - The Company completed a share consolidation on September 8, 2023, reducing the number of outstanding common shares from approximately 24.1 million to approximately 0.6 million [209]. - The company plans to spin out a majority of its equity interest in Sprout to shareholders, retaining approximately 10-15% [197]. - The company increased its ownership in Sprout from 50.1% to 89.5% by converting a substantial portion of its debt into equity, significantly reducing Sprout's debt [264]. Internal Controls and Compliance - The Company concluded that its internal controls over financial reporting were not effective as of December 31, 2023, due to material weaknesses identified [336]. - Material misstatements were identified and corrected in the consolidated financial statements for the year ended March 31, 2023, indicating deficiencies in internal control [339]. - The company is developing a comprehensive remediation plan to address identified material weaknesses in internal controls, including hiring individuals with appropriate skills [344]. - The turnover in accounting personnel has delayed the implementation of the remediation plan, but the Company remains committed to addressing these weaknesses [345]. - The company lacks sufficient personnel with appropriate knowledge and experience to support effective internal controls [341]. Expenses and Losses - Selling, general and administrative (SG&A) expenses increased by $10 million or 115% to $18.7 million for the three-month period ended December 31, 2023, primarily due to a $13.5 million increase in legal fees and settlements [234]. - Net loss for the three-month period ended December 31, 2023 was $19.2 million, an increase of $18.7 million or 3754% compared to a net loss of $0.5 million for the same period in 2022 [240]. - Adjusted EBITDA loss for the three-month period ended December 31, 2023 increased by $18.9 million or 4125% to $18.5 million compared to a loss of $0.5 million for the same period in 2022 [239]. - The net loss for the nine-month period ended December 31, 2023, was $34.3 million, a decrease of $10 million or 23% from $44.3 million for the same period in 2022 [256]. Impairment and Valuation - An impairment charge of $18.0 million was allocated to the Sprout tradename and $19.5 million to goodwill in 2023, reflecting a significant decline in fair value [318]. - The fair value of the Sprout reporting unit was determined to be lower than its carrying value, leading to the impairment charges recorded in fiscal 2023 [318]. - Expected credit losses for the three and nine-month periods ended December 31, 2023 were $0.2 million, down from $0.5 million in 2022, indicating a reduction of 60% [306]. - As of December 31, 2023, 81% of trade receivables are past due, slightly down from 82% as of March 31, 2023, with 83% of past due receivables provided for [306].

[Front Matter](index=1&type=section&id=Front%20Matter) [Company Information](index=1&type=section&id=Company%20Information) Neptune Wellness Solutions Inc. is a non-accelerated filer and smaller reporting company, with common stock listed on Nasdaq Capital Market - Registrant is a non-accelerated filer and smaller reporting company[6](index=6&type=chunk) Company Stock Information (As of November 13, 2023) | Indicator | Value | |:---|:---| | Ticker | NEPT | | Exchange | Nasdaq Capital Market | | Market Value (Non-affiliates) | $3,037,372 | | Shares Outstanding | 4,532,038 | [DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS](index=2&type=section&id=DISCLOSURE%20REGARDING%20FORWARD-LOOKING%20STATEMENTS) This section outlines forward-looking statements in the 10-Q report, emphasizing they are based on management's current expectations and subject to significant risks, uncertainties, and assumptions - Forward-looking statements are identified by words such as "seek," "anticipate," "plan," "continue," "estimate," "expect," "may," "will," "project," "predict," "potential," "target," "intend," "could," "might," "should," "believe," "aim," "ongoing," "assume," "purpose," and their negative forms[9](index=9&type=chunk) - Key assumptions for forward-looking statements include ability to manage liquidity and expenses, expected proceeds from cannabis business divestiture, customer relationships, litigation impact, economic conditions, competitive environment, intellectual property protection, personnel retention, product development, financing, acquisition integration, and regulatory changes[12](index=12&type=chunk) - Actual results and developments may differ materially from expectations due to significant business, economic, and competitive risks, uncertainties, and contingencies[10](index=10&type=chunk)[11](index=11&type=chunk) [RISKS FACTORS SUMMARY](index=4&type=section&id=RISKS%20FACTORS%20SUMMARY) This section summarizes the company's main risks, including those related to business and industry, accounting and financial policies, liquidity, legal and regulatory, human resources, information technology, intellectual property, common stock ownership, and general risks - The company faces risks related to the divestiture of its cannabis business, supply chain disruptions, input cost inflation, supply of natural and organic ingredients, and achieving cost reduction efficiencies[20](index=20&type=chunk) - Significant liquidity risks include sustained losses, negative operating cash flow, substantial doubt about going concern, and potential difficulty in obtaining capital and banking services[20](index=20&type=chunk) - Legal and regulatory risks include compliance with the Food, Drug, and Cosmetic Act, anti-money laundering laws and regulations, and facing numerous lawsuits and investigations[20](index=20&type=chunk) [PART I. FINANCIAL INFORMATION](index=7&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements (Unaudited)](index=7&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) This section contains Neptune Wellness Solutions Inc.'s unaudited condensed consolidated interim financial statements for the three and six months ended September 30, 2023 and 2022, including balance sheets, statements of loss and comprehensive loss, statements of changes in equity, statements of cash flows, and detailed notes - Financial statements are unaudited and prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP)[28](index=28&type=chunk)[55](index=55&type=chunk) - The company's financial statements are presented in U.S. dollars, changed from Canadian dollars effective March 31, 2022, with the functional currency also changed to U.S. dollars effective October 1, 2022[56](index=56&type=chunk)[59](index=59&type=chunk) - Financial statements are prepared on a going concern basis, but the company has incurred significant operating losses and negative operating cash flows since inception, raising substantial doubt about its ability to continue as a going concern[50](index=50&type=chunk)[52](index=52&type=chunk) [Condensed Consolidated Interim Balance Sheets](index=9&type=section&id=Condensed%20Consolidated%20Interim%20Balance%20Sheets) Condensed Consolidated Interim Balance Sheets (USD) | Indicator | Sep 30, 2023 | Mar 31, 2023 | |:---|:---|:---| | Cash and cash equivalents | $4,750,564 | $1,993,257 | | Total current assets | $23,446,827 | $23,550,173 | | Total assets | $30,092,513 | $30,928,258 | | Total current liabilities | $49,760,797 | $41,034,144 | | Total liabilities | $68,352,045 | $58,488,927 | | Total shareholders' equity (deficit) | $(38,259,532) | $(27,560,669) | - Cash and cash equivalents significantly increased from **$1,993,257** as of March 31, 2023, to **$4,750,564** as of September 30, 2023[30](index=30&type=chunk) - Total current liabilities increased by **$8.7 million**, and total liabilities increased by **$9.8 million**, leading to a further expansion of the shareholders' equity (deficit)[30](index=30&type=chunk) [Condensed Consolidated Interim Statements of Loss and Comprehensive Loss](index=10&type=section&id=Condensed%20Consolidated%20Interim%20Statements%20of%20Loss%20and%20Comprehensive%20Loss) Condensed Consolidated Interim Statements of Loss and Comprehensive Loss (USD) | Indicator | Three months ended Sep 30, 2023 | Three months ended Sep 30, 2022 | Six months ended Sep 30, 2023 | Six months ended Sep 30, 2022 | |:---|:---|:---|:---|:---| | Total revenue | $8,739,888 | $11,986,842 | $19,367,705 | $28,259,070 | | Gross profit (loss) | $(567,735) | $1,107,868 | $774,383 | $(1,786,479) | | Loss from operations | $(4,504,230) | $(39,701,826) | $(15,156,385) | $(54,095,253) | | Net loss | $(5,336,518) | $(37,287,692) | $(15,137,000) | $(43,792,187) | | Basic loss per share | $(1.38) | $(151.17) | $(17.48) | $(178.15) | - Total revenue decreased by **27.1%** year-over-year for the three-month period and **31.5%** for the six-month period[32](index=32&type=chunk) - Gross profit turned into a **loss** for the three-month period but improved from a loss to a **profit** for the six-month period[32](index=32&type=chunk) - Net loss significantly decreased by **85.7%** for the three-month period and **65.4%** for the six-month period, primarily due to reduced write-down losses and gains from derivative revaluation[32](index=32&type=chunk) [Condensed Consolidated Interim Statements of Changes in Equity](index=11&type=section&id=Condensed%20Consolidated%20Interim%20Statements%20of%20Changes%20in%20Equity) Total Shareholders' Equity (Deficit) (USD) | Indicator | Sep 30, 2023 | Mar 31, 2023 | |:---|:---|:---| | Total shareholders' equity (deficit) | $(38,259,532) | $(27,560,669) | - Accumulated deficit increased from **$(383,641,363)** as of March 31, 2023, to **$(392,845,921)** as of September 30, 2023[34](index=34&type=chunk) - Share capital increased by **$3,273,342** during the six months ended September 30, 2023, due to direct offerings and warrant exercises[34](index=34&type=chunk) [Condensed Consolidated Interim Statements of Cash Flows](index=15&type=section&id=Condensed%20Consolidated%20Interim%20Statements%20of%20Cash%20Flows) Condensed Consolidated Interim Statements of Cash Flows (USD) | Indicator | Six months ended Sep 30, 2023 | Six months ended Sep 30, 2022 | |:---|:---|:---| | Net cash used in operating activities | $(4,538,156) | $(14,083,576) | | Net cash used in investing activities | $(79,208) | $(516,741) | | Net cash provided by financing activities | $7,884,598 | $7,524,822 | | Net increase (decrease) in cash and cash equivalents | $2,757,307 | $(7,331,738) | | Cash and cash equivalents, end of period | $4,750,564 | $1,394,603 | - Net cash used in operating activities significantly decreased from **$(14.1 million)** in 2022 to **$(4.5 million)** in 2023[41](index=41&type=chunk) - Financing activities provided **$7.9 million** in cash for the six months ended September 30, 2023, up from **$7.5 million** in the prior year, primarily from new loans and direct offerings[41](index=41&type=chunk) [Notes to Condensed Consolidated Interim Financial Statements](index=17&type=section&id=Notes%20to%20Condensed%20Consolidated%20Interim%20Financial%20Statements) [Note 1. Reporting entity](index=17&type=section&id=Note%201.%20Reporting%20entity) Neptune Wellness Solutions Inc. is a diversified health and wellness company focused on consumer packaged goods (CPG) through brands like Sprout® and Forest Remedies®, including nutraceuticals and organic baby food - Neptune is a diversified health and wellness company focused on natural, plant-based, sustainable CPG products, covering nutraceuticals and organic baby food, under brands including Sprout®, Forest Remedies®, Biodroga, and MaxSimil®[45](index=45&type=chunk)[180](index=180&type=chunk) - The company completed the sale of most of its Canadian cannabis assets to PurCann Pharma Inc. on November 9, 2022, as part of its strategic plan to refocus on the CPG business[46](index=46&type=chunk)[47](index=47&type=chunk) - Neptune completed two share consolidations: 1-for-35 on June 9, 2022, and 1-for-40 on September 7, 2023, significantly reducing the number of outstanding common shares[48](index=48&type=chunk) - The company's sustained losses and negative operating cash flow, with a net loss of **$15.1 million** and negative operating cash flow of **$4.5 million** for the six months ended September 30, 2023, raise substantial doubt about its ability to continue as a going concern[50](index=50&type=chunk)[52](index=52&type=chunk) [Note 2. Basis of preparation](index=18&type=section&id=Note%202.%20Basis%20of%20preparation) The condensed consolidated interim financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (US GAAP) - Financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP)[55](index=55&type=chunk) - The reporting currency changed from Canadian dollars to U.S. dollars effective March 31, 2022, and was applied retrospectively[56](index=56&type=chunk) - The functional currency changed from Canadian dollars to U.S. dollars effective October 1, 2022, and was applied prospectively[59](index=59&type=chunk) [Note 3. Significant accounting policies](index=19&type=section&id=Note%203.%20Significant%20accounting%20policies) The unaudited condensed consolidated interim financial statements follow consistent accounting principles with those disclosed in the annual consolidated financial statements as of March 31, 2023 - The company's accounting policies are consistent with those disclosed in the annual consolidated financial statements as of March 31, 2023[63](index=63&type=chunk) - The company adopted ASU 2021-08 (accounting for contract assets and liabilities from customers) and ASU 2016-13 (credit losses on financial instruments) for the fiscal year beginning April 1, 2023, with no significant impact on the condensed consolidated interim financial statements[65](index=65&type=chunk)[66](index=66&type=chunk) - Key estimates include inventory write-downs, expected credit losses on accounts receivable, determination and measurement of impairment losses for non-financial assets, lease contract terms, revenue from customer contracts with variable consideration, and litigation provisions[68](index=68&type=chunk) [Note 4. Business combination and disposal](index=20&type=section&id=Note%204.%20Business%20combination%20and%20disposal) Neptune completed the divestiture of its Canadian cannabis assets on November 9, 2022, resulting in a $15.3 million impairment loss recognized for the year ended March 31, 2023 - The divestiture of Canadian cannabis assets was completed on November 9, 2022, previously classified as assets held for sale, resulting in an impairment loss of **$15,346,119** recognized for the year ended March 31, 2023[69](index=69&type=chunk) - Neptune acquired a **50.1%** interest in Sprout Foods, Inc. on February 10, 2021, and held a call option for the remaining **49.9%**, which had a fair value of zero as of September 30, 2023[70](index=70&type=chunk)[72](index=72&type=chunk) - The Board of Directors approved a plan to spin off most of Sprout's equity to Neptune shareholders after a debt-to-equity conversion with Morgan Stanley, with Neptune expecting to retain approximately **10-15%** interest[73](index=73&type=chunk) [Note 5. Inventories](index=20&type=section&id=Note%205.%20Inventories) Inventories decreased from $13.0 million as of March 31, 2023, to $12.1 million as of September 30, 2023 Inventories (USD) | Category | Sep 30, 2023 | Mar 31, 2023 | |:---|:---|:---| | Raw materials | $4,979,067 | $5,314,450 | | Finished goods | $6,634,334 | $7,360,850 | | Spare parts | $350,970 | $330,774 | | Total inventories | $12,060,951 | $13,006,074 | - Inventory impairment losses were **$216,184** for both the three and six months ended September 30, 2023[74](index=74&type=chunk) - In the prior year, impairment losses for the six months ended September 30, 2022, were **$3,079,997**, primarily related to cannabis inventory[74](index=74&type=chunk) [Note 6. Property, plant and equipment](index=20&type=section&id=Note%206.%20Property,%20plant%20and%20equipment) Property, plant and equipment related to the Canadian cannabis asset group were classified as held for sale and subsequently written down, leading to significant impairment losses in the prior year - Property, plant and equipment related to the Canadian cannabis asset group were classified as held for sale as of September 30, 2022[75](index=75&type=chunk) - Impairment losses of **$14,530,458** and **$15,346,119** were recorded for the three and six months ended September 30, 2022, respectively, due to write-downs of cannabis-related assets[75](index=75&type=chunk) [Note 7. Goodwill and intangible assets](index=20&type=section&id=Note%207.%20Goodwill%20and%20intangible%20assets) The company recorded significant goodwill and intangible asset impairment losses related to the Sprout reporting unit in fiscal year 2023, primarily due to revised cash flow projections and sustained stock price decline - A goodwill impairment loss of **$11,971,965** was recorded for the Sprout reporting unit in the fourth quarter of the fiscal year ended March 31, 2023, resulting in no remaining goodwill for Sprout[77](index=77&type=chunk) - Trademark intangible assets on Sprout's books were also impaired by **$15,385,531** in the fourth quarter of fiscal year 2023[78](index=78&type=chunk) - In the second quarter of fiscal year 2023, goodwill impairment losses of **$7,570,471** and Sprout trademark impairment losses of **$2,593,529** were recorded due to unfavorable economic conditions and revised assumptions[80](index=80&type=chunk) Goodwill Allocated by Reporting Unit (USD) | Reporting Unit | Sep 30, 2023 | Mar 31, 2023 | |:---|:---|:---| | Biodroga | $2,428,718 | $2,426,385 | | Total goodwill | $2,428,718 | $2,426,385 | [Note 8. Loans and borrowings](index=23&type=section&id=Note%208.%20Loans%20and%20borrowings) The company has several promissory notes and factoring facilities, primarily for its Sprout subsidiary, with extended maturities and increased interest rates Loans and Borrowings (USD) | Loan Type | Sep 30, 2023 | Mar 31, 2023 | |:---|:---|:---| | Promissory note (Sprout to Morgan Stanley) | $17,400,626 | $15,622,508 | | Accounts receivable factoring facility | $6,008,635 | $2,762,110 | | Senior secured notes (Neptune) | $2,346,449 | $3,607,116 | | Total loans and borrowings | $26,893,437 | $22,951,264 | | Less: Current portion | $10,208,916 | $7,538,369 | | Loans and borrowings, net of current portion | $16,684,521 | $15,412,895 | - Sprout's **$13 million** secured promissory note with MSEC was extended from February 1, 2024, to December 31, 2024, with interest rates increasing to **15.0%** (paid-in-kind) until December 31, 2023, and thereafter **10.0%** (paid-in-kind) plus **5.0%** (cash)[89](index=89&type=chunk) - Subsequent to the period, Neptune repaid its senior secured notes of approximately **$2.3 million** on October 13, 2023. On November 8, 2023, Neptune converted most of Sprout's debt to equity, increasing its ownership to **89.5%** and releasing Neptune's guarantee[85](index=85&type=chunk)[86](index=86&type=chunk)[172](index=172&type=chunk)[173](index=173&type=chunk) - Interest expense on loans and borrowings increased to **$3,240,558** for the six months ended September 30, 2023, compared to **$474,632** in the prior year period[90](index=90&type=chunk) [Note 9. Provisions](index=24&type=section&id=Note%209.%20Provisions) The company has recognized provisions for various legal matters, including a royalty agreement with a former CEO ($1.2 million), an arbitration award against PMGSL ($4.0 million), and legal fee obligations ($1.7 million) - A provision of **$1,213,954** was recognized as of September 30, 2023, for royalties payable to a former CEO, with an increase of **$250,146** during the six-month period[91](index=91&type=chunk) - An arbitrator awarded PMGSL **$4.0 million** (including pre-award interest) against Neptune, with a provision of **$4,000,000** recognized as of September 30, 2023; Neptune intends to challenge the award[92](index=92&type=chunk) - A **$2,750,000** shareholder class action settlement was paid on October 10, 2023, through the issuance of **2,522,936** common shares[100](index=100&type=chunk)[171](index=171&type=chunk) - Additional legal fee obligations totaled **$1,656,861** as of September 30, 2023[100](index=100&type=chunk) [Note 10. Liability related to warrants](index=26&type=section&id=Note%2010.%20Liability%20related%20to%20warrants) The company's warrants are primarily classified as liabilities and revalued at fair value periodically Liability Related to Warrants (USD) | Indicator | Sep 30, 2023 | Mar 31, 2023 | |:---|:---|:---| | Total liability related to warrants | $2,508,691 | $3,156,254 | - A direct offering of **1,800,000** common shares and accompanying warrants in September 2023 generated gross proceeds of **$4.5 million**, with an initial warrant liability of **$1,972,101**[95](index=95&type=chunk)[96](index=96&type=chunk) - A direct offering of **303,032** common shares and accompanying warrants in May 2023 generated gross proceeds of **$4.0 million**, with an initial warrant liability of **$2,025,247**[98](index=98&type=chunk)[99](index=99&type=chunk) - Existing warrants (issued in October 2020, February 2021, March 2022, June 2022, October 2022, and May 2023) were amended in September 2023 to reduce the exercise price to **$2.50** per share, resulting in a revaluation loss of **$787,985** in Q1 FY2024[97](index=97&type=chunk)[101](index=101&type=chunk) - Warrants are revalued at fair value using a binomial model (Level 3 inputs) at each reporting period end, with changes recognized in the statement of loss and comprehensive loss[108](index=108&type=chunk)[111](index=111&type=chunk) [Note 11. Capital and other components of equity](index=32&type=section&id=Note%2011.%20Capital%20and%20other%20components%20of%20equity) The company's share capital increased due to direct offerings and warrant exercises Share Capital (USD) | Indicator | Sep 30, 2023 | Mar 31, 2023 | |:---|:---|:---| | Share capital | $325,219,444 | $321,946,102 | | Warrants (equity classified) | $6,582,033 | $6,155,323 | | Additional paid-in capital | $59,222,340 | $58,138,914 | - Issued and outstanding common shares were **2,009,102** as of September 30, 2023, up from **300,070** as of March 31, 2023[30](index=30&type=chunk) - The September 2023 direct offering resulted in the issuance of **250,000** common shares and **1,550,000** prepaid warrants, of which **1,156,000** prepaid warrants were exercised as of September 30, 2023[116](index=116&type=chunk)[124](index=124&type=chunk) - The May 2023 direct offering resulted in the issuance of **110,380** common shares and **192,652** prepaid warrants, all of which were exercised as of September 30, 2023[117](index=117&type=chunk)[125](index=125&type=chunk) - Certain 2020 and 2021 warrants, previously classified as liabilities, were reclassified to equity on October 1, 2022, due to a change in functional currency, and were amended in September 2023 to an exercise price of **$2.50**[119](index=119&type=chunk)[126](index=126&type=chunk) [Note 12. Non-controlling interest](index=36&type=section&id=Note%2012.%20Non-controlling%20interest) Non-controlling interest primarily relates to Sprout Foods, Inc., in which Neptune holds a 50.1% interest (increased to 89.5% subsequent to the period) Sprout Foods, Inc. Condensed Financial Information (USD) | Indicator | Three months ended Sep 30, 2023 | Three months ended Sep 30, 2022 | Six months ended Sep 30, 2023 | Six months ended Sep 30, 2022 | |:---|:---|:---|:---|:---| | Revenue from contracts with customers | $5,687,955 | $8,364,475 | $14,059,754 | $16,522,072 | | Net loss | $(8,910,477) | $(12,806,081) | $(11,888,662) | $(17,255,269) | | Loss attributable to non-controlling interest | $(4,446,328) | $(1,803,089) | $(5,932,442) | $(2,220,145) | | Indicator | Sep 30, 2023 | Mar 31, 2023 | |:---|:---|:---| | Total equity (deficit) | $(48,535,427) | $(36,335,727) | | Non-controlling interest | $6,789,635 | $(15,620,815) | - Neptune holds a **50.1%** interest in Sprout Foods, Inc., which is the primary source of non-controlling interest[44](index=44&type=chunk) - Sprout's revenue decreased by **32%** year-over-year for the three-month period and **15%** for the six-month period[129](index=129&type=chunk) - Subsequent to the period, Neptune increased its ownership in Sprout from **50.1%** to approximately **89.5%** through a debt-to-equity conversion[173](index=173&type=chunk) [Note 13. Share-based payment](index=37&type=section&id=Note%2013.%20Share-based%20payment) Equity share-based payment expenses were $467,269 and $1,083,426 for the three and six months ended September 30, 2023, respectively Share-based Payment Expense (USD) | Indicator | Three months ended Sep 30, 2023 | Six months ended Sep 30, 2023 | Three months ended Sep 30, 2022 | Six months ended Sep 30, 2022 | |:---|:---|:---|:---|:---| | Equity share-based payment | $467,269 | $1,083,426 | $639,883 | $1,826,983 | | Liability share-based payment | $0 | $0 | $1,750 | $3,152,578 | - As of September 30, 2023, total outstanding stock options were **8,416** with a weighted average exercise price of **$867.87**[133](index=133&type=chunk) - Market performance options granted to the CEO (**3,929** options, exercise price **$6,202.00**) resulted in **$915,502** of compensation recognized for the six months ended September 30, 2023[140](index=140&type=chunk) - A **$15 million** long-term incentive payable to the CEO if the company's U.S. market capitalization reaches **$1 billion** resulted in a **$19,000** liability recognized as of September 30, 2023[148](index=148&type=chunk)[149](index=149&type=chunk) [Note 14. Loss per share](index=40&type=section&id=Note%2014.%20Loss%20per%20share) Basic and diluted loss per share are the same due to the company incurring a net loss Loss Per Share (USD) | Indicator | Three months ended Sep 30, 2023 | Three months ended Sep 30, 2022 | Six months ended Sep 30, 2023 | Six months ended Sep 30, 2022 | |:---|:---|:---|:---|:---| | Net loss attributable to equity holders | $(890,190) | $(30,897,458) | $(9,204,558) | $(35,181,808) | | Basic and diluted loss per share | $(1.38) | $(151.17) | $(17.48) | $(178.15) | | Weighted average number of common shares outstanding | 646,813 | 204,388 | 526,623 | 197,489 | - Due to the company incurring a loss, the impact of options, DSUs, RSUs, and warrants is excluded from diluted loss per share calculations as they are anti-dilutive[150](index=150&type=chunk) - Multiple classes of warrants (Series A-E, 2020, 2021, January 2023, May 2023, September 2023, and prepaid warrants) are considered participating securities for dividend distributions[152](index=152&type=chunk) [Note 15. Fair-value](index=41&type=section&id=Note%2015.%20Fair-value) The company regularly measures financial assets and liabilities at fair value, primarily using Level 3 inputs for warrant liabilities and other liabilities Fair Value Hierarchy of Liabilities (USD) | Liability | Sep 30, 2023 (Level 3) | Mar 31, 2023 (Level 3) | |:---|:---|:---| | Liability related to warrants | $2,508,691 | $3,156,254 | | Other liabilities (CEO long-term incentive) | $19,000 | $24,000 | | Total | $2,527,691 | $3,180,254 | - Warrant liabilities are measured at fair value using a binomial pricing model and Level 3 inputs[157](index=157&type=chunk) - The call option to acquire the remaining **49.9%** interest in Sprout was measured at zero value as of March 31, 2022, and has not changed since[159](index=159&type=chunk) [Note 16. Commitments and contingencies](index=42&type=section&id=Note%2016.%20Commitments%20and%20contingencies) Neptune is involved in several legal claims and litigations, including royalty payments to a former CEO, an arbitration award against PMGSL, and several class action lawsuits against Sprout related to heavy metals in baby food - Commitments include minimum royalties of **$188,657** for specialty ingredient licenses and **$136,245** for Sprout's CoComelon intellectual property license[162](index=162&type=chunk) - A provision of **$1,213,954** has been recognized for royalties payable to a former CEO; the company terminated the royalty agreement, which the former CEO is disputing[162](index=162&type=chunk) - An arbitrator awarded PMGSL approximately **$4.0 million** against Neptune, for which a provision has been recognized; Neptune intends to challenge the validity of the award[162](index=162&type=chunk) - Sprout is a defendant in several lawsuits alleging personal injury due to heavy metals in its products and is cooperating with investigations by the Attorneys General of New Mexico and the District of Columbia[165](index=165&type=chunk)[166](index=166&type=chunk) [Note 17. Operating Segments](index=44&type=section&id=Note%2017.%20Operating%20Segments) The company measures its performance as a single consolidated segment - The company operates and measures its performance as a single consolidated segment[169](index=169&type=chunk)[223](index=223&type=chunk) Revenue by Geographic Area (USD) | Region | Three months ended Sep 30, 2023 | Three months ended Sep 30, 2022 | Six months ended Sep 30, 2023 | Six months ended Sep 30, 2022 | |:---|:---|:---|:---|:---| | Canada | $1,197,393 | $670,557 | $2,226,612 | $5,727,059 | | United States | $7,517,184 | $11,097,554 | $17,094,095 | $22,029,091 | | Other countries | $25,311 | $218,731 | $46,998 | $502,920 | | Total | $8,739,888 | $11,986,842 | $19,367,705 | $28,259,070 | Revenue by Product Type (USD) | Product Type | Six months ended Sep 30, 2023 | Six months ended Sep 30, 2022 | |:---|:---|:---| | Nutraceuticals | $5,241,977 | $8,303,527 | | Cannabis and hemp products | $0 | $2,717,327 | | Food and beverage products | $14,059,754 | $16,702,300 | | Total | $19,301,731 | $27,723,154 | - Canadian revenue increased by **79%** for the three-month period but decreased by **61%** for the six-month period, primarily due to the divestiture of the cannabis business[230](index=230&type=chunk)[244](index=244&type=chunk) - U.S. revenue decreased by **32%** for the three-month period and **22%** for the six-month period[230](index=230&type=chunk)[244](index=244&type=chunk) [Note 18. Subsequent events](index=45&type=section&id=Note%2018.%20Subsequent%20events) Subsequent to September 30, 2023, Neptune settled a shareholder class action lawsuit by issuing $2.75 million worth of common stock, repaid $2.3 million in senior secured notes, and completed a restructuring agreement with MSEC to convert most of Sprout's debt to equity - On October 10, 2023, the company settled a shareholder class action lawsuit by issuing **2,522,936** common shares valued at **$2,750,000**[171](index=171&type=chunk) - On October 13, 2023, Neptune repaid its senior secured notes with CCUR Holdings, Inc. and Symbolic Logic, Inc., totaling approximately **$2.3 million**[172](index=172&type=chunk) - On November 7, 2023, Neptune entered into a restructuring agreement with MSEC and Sprout, converting most of Sprout's debt to equity, increasing Neptune's ownership in Sprout from **50.1%** to approximately **89.5%**, and releasing Neptune's guarantee on Sprout's promissory note[173](index=173&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=46&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and operating results, highlighting its strategic shift to CPG, ongoing liquidity management efforts, and recent corporate developments - Management's Discussion and Analysis (MD&A) contains forward-looking statements subject to significant risks and uncertainties detailed in the "Risk Factors" section[176](index=176&type=chunk) - All amounts in MD&A tables are in **millions of U.S. dollars**, except for per share data[177](index=177&type=chunk) [OVERVIEW](index=47&type=section&id=OVERVIEW) Neptune Wellness Solutions Inc. is a modern consumer packaged goods (CPG) company focused on health and wellness, dedicated to building natural, plant-based, sustainable brands through a portfolio including nutraceuticals and organic baby food - Neptune is a modern CPG company dedicated to transforming everyday life for a healthier tomorrow through natural, plant-based, sustainable, and purpose-driven lifestyle brands, with a mission to redefine health and wellness to help humanity thrive[178](index=178&type=chunk)[179](index=179&type=chunk) - The company leverages a highly flexible and cost-efficient manufacturing and supply chain infrastructure, scalable or adaptable to consumer preferences and demands, and brings new products to market through mass retail partners and e-commerce channels[178](index=178&type=chunk) [BUSINESS STRATEGY](index=47&type=section&id=BUSINESS%20STRATEGY) Neptune's long-term strategy focuses on health and wellness, emphasizing CPG verticals like nutraceuticals and organic food and beverages, with a dual B2B and B2C approach for global distribution - Neptune's long-term strategy focuses on health and wellness, emphasizing CPG verticals such as nutraceuticals and organic food and beverages, employing a dual B2B and B2C approach to expand global distribution[180](index=180&type=chunk) - The company initiated Phase Two of its strategic review to unlock shareholder value through asset monetization, strategic partnerships, and potential acquisition of the remaining Sprout Organics equity[181](index=181&type=chunk) - Phase One of the strategic review focused on streamlining operations, maximizing resources, and divesting non-core assets, laying the groundwork for Neptune's transformation into a pure-play CPG company[181](index=181&type=chunk) - The Board of Directors approved a plan to spin off most of Sprout's equity to Neptune shareholders after a debt-to-equity conversion with Morgan Stanley, with Neptune expecting to retain approximately **10-15%** interest[182](index=182&type=chunk) [SALES AND DISTRIBUTION](index=48&type=section&id=SALES%20AND%20DISTRIBUTION) Neptune primarily sells nutraceuticals in bulk to distributors and directly through retail stores and e-commerce websites - Nutraceuticals are primarily sold in bulk softgel or liquid form to distributors and customers for private label, with sales concentrated among a few distributors and customers[184](index=184&type=chunk) - Nutraceuticals are also sold directly to U.S. retail stores through its website forestremedies.com and other e-commerce websites[185](index=185&type=chunk) - Sprout products are sold through mass retailers, grocery stores, and other retail stores, as well as online via its website sproutorganics.com, with distribution expanded to Target's U.S. stores and entry into the Canadian market through a partnership with Metro Inc[186](index=186&type=chunk)[187](index=187&type=chunk) [OUR B2C BRAND PORTFOLIO STRATEGY](index=48&type=section&id=OUR%20B2C%20BRAND%20PORTFOLIO%20STRATEGY) Neptune is accelerating brand equity building for its B2C brand portfolio, which includes Biodroga (one-stop solutions, MaxSimil, Omega-3s), MaxSimil (patented Omega-3 fatty acid delivery technology), Forest Remedies (vegan multi-Omega gummies/softgels), and Sprout (USDA organic certified baby food, expanding distribution) - Biodroga offers product development and one-stop solutions, including MaxSimil, Omega-3 fish oils, and other nutritional products[187](index=187&type=chunk) - MaxSimil is a patented Omega-3 fatty acid delivery technology with superior absorption, sold as a supplement and in combination with specialty ingredients[187](index=187&type=chunk) - Forest Remedies offers **100%** plastic-free packaged vegan multi-Omega gummies and softgels, marking a significant milestone in Neptune's transformation into a high-growth branded CPG company[187](index=187&type=chunk) - Sprout is a trusted organic baby food brand (USDA certified, non-GMO, no artificial ingredients), with products covering Stage 2, Stage 3, Toddler, and snacks, expanding distribution in the U.S. and Canada[187](index=187&type=chunk) [COMPETITION](index=48&type=section&id=COMPETITION) The nutraceutical and organic food and beverage industries are highly competitive, with many companies and research institutions developing similar products - The nutraceutical and organic food and beverage industries are highly competitive, with numerous companies, universities, and research institutions actively engaged in developing similar products[188](index=188&type=chunk) - Many existing or potential competitors possess greater financial, technical, and human resources than the company, potentially offering advantages in product development, manufacturing, and marketing[188](index=188&type=chunk) - Neptune differentiates its products and marketing through product quality, customer service, marketing support, pricing, and innovation to effectively compete in the market[189](index=189&type=chunk) [SEASONALITY](index=48&type=section&id=SEASONALITY) The company's consolidated operating results may be affected by seasonal factors and trends, such as significant cultural events, and quarterly results can fluctuate significantly due to the timing of nutraceutical contract manufacturing orders and customer ordering patterns - The company's performance is affected by seasonal factors and trends, such as significant cultural events[190](index=190&type=chunk) - Quarterly results may fluctuate significantly due to the timing of nutraceutical contract manufacturing orders and customer ordering patterns[190](index=190&type=chunk) [BUSINESS UPDATE](index=49&type=section&id=BUSINESS%20UPDATE) Neptune is actively managing its liquidity and expenses, with substantial doubt about its ability to continue as a going concern due to limited cash reserves - The company is actively managing liquidity and expenses, including extending accounts payable and reducing investments, but its ability to continue as a going concern is in substantial doubt, with cash of approximately **$0.7 million** as of November 14, 2023, sufficient for only about one month[191](index=191&type=chunk) - Neptune completed a **$4.5 million** registered direct offering in September 2023 and a **$4.0 million** offering in May 2023, with proceeds used for general corporate purposes and debt repayment[194](index=194&type=chunk)[196](index=196&type=chunk) - Sprout's **$13 million** secured promissory note with MSEC had its maturity date extended to December 31, 2024, with increased interest rates[198](index=198&type=chunk) - An arbitrator awarded PMGSL approximately **$4.0 million** against Neptune, which the company strongly disputes and intends to challenge[202](index=202&type=chunk) - Neptune entered into a restructuring agreement with MSEC and Sprout, converting Sprout's debt to equity, increasing its ownership to **89.5%**, and plans to spin off most of Sprout's equity to Neptune shareholders[203](index=203&type=chunk)[204](index=204&type=chunk) [RECENT CORPORATE DEVELOPMENTS](index=52&type=section&id=RECENT%20CORPORATE%20DEVELOPMENTS) Lisa Gainsborg was promoted to Interim Chief Financial Officer - Lisa Gainsborg was promoted to Interim Chief Financial Officer, succeeding Raymond Silcock[206](index=206&type=chunk) - Berkowitz Pollack Brant Advisors + CPAs was appointed as the new independent registered public accounting firm, replacing KPMG LLP[207](index=207&type=chunk) - The company received Nasdaq notices for non-compliance with minimum bid price (**$1.00**) and minimum shareholders' equity (**$2.5 million**) requirements[208](index=208&type=chunk)[211](index=211&type=chunk) - To address the bid price deficiency, Neptune completed a **1-for-40** share consolidation on September 8, 2023, reducing outstanding shares from **24.1 million** to **0.6 million**[210](index=210&type=chunk) - Nasdaq granted extensions for minimum bid price compliance until December 26, 2023, and for shareholders' equity compliance until January 16, 2024[209](index=209&type=chunk)[211](index=211&type=chunk) [SELECTED CONSOLIDATED ANNUAL AND QUARTERLY INFORMATION](index=53&type=section&id=SELECTED%20CONSOLIDATED%20ANNUAL%20AND%20QUARTERLY%20INFORMATION) This section provides selected consolidated financial information, highlighting that for the three and six months ended September 30, 2023, despite a decrease in total revenue, net loss and adjusted EBITDA loss significantly reduced compared to the prior year Selected Consolidated Financial Information (Millions of USD, except per share data) | Indicator | Three months ended Sep 30, 2023 | Three months ended Sep 30, 2022 | Six months ended Sep 30, 2023 | Six months ended Sep 30, 2022 | |:---|:---|:---|:---|:---| | Total revenue | $8.740 | $11.987 | $19.368 | $28.259 | | Adjusted EBITDA | $(3.220) | $(13.677) | $(13.888) | $(27.156) | | Net loss | $(5.337) | $(37.288) | $(15.137) | $(43.792) | | Basic and diluted loss per share | $(1.38) | $(151.17) | $(17.48) | $(178.15) | | Indicator | Sep 30, 2023 | Mar 31, 2023 | Mar 31, 2022 | |:---|:---|:---|:---| | Total assets | $30.093 | $30.928 | $104.955 | | Working capital | $(26.314) | $(17.484) | $7.071 | | Equity attributable to equity holders | $(16.706) | $(11.940) | $48.116 | - Total revenue decreased by **27.1%** year-over-year for the three-month period and **31.5%** for the six-month period[227](index=227&type=chunk)[241](index=241&type=chunk) - Adjusted EBITDA loss decreased by **76.5%** year-over-year for the three-month period and **48.9%** for the six-month period[227](index=227&type=chunk)[241](index=241&type=chunk) - Working capital remains negative, deteriorating from **$(17.484 million)** as of March 31, 2023, to **$(26.314 million)** as of September 30, 2023[214](index=214&type=chunk) [CONSOLIDATED FINANCIAL ANALYSIS](index=54&type=section&id=CONSOLIDATED%20FINANCIAL%20ANALYSIS) This section details the company's use of Adjusted EBITDA as a non-GAAP financial measure to assess operating performance, excluding non-operating and non-cash impacts like finance costs, depreciation, impairment losses, and derivative revaluation - Adjusted EBITDA is a non-GAAP financial measure used to assess operating performance, historical and future financial performance, and aid in planning and strategic decision-making[217](index=217&type=chunk) - Adjusted EBITDA is calculated by excluding net finance costs, depreciation and amortization, income tax expense, equity-classified share-based payments, non-employee compensation related to warrants, impairment losses on non-financial assets, derivative revaluation, and IFRS to US GAAP conversion costs from net loss[219](index=219&type=chunk) - The definition of Adjusted EBITDA was revised for the three months ended September 30, 2022, to exclude litigation provisions, business acquisition and integration costs, signing bonuses, severance and related costs, and inventory and deposit write-downs[220](index=220&type=chunk) Adjusted EBITDA Reconciliation (Millions of USD) | Indicator | Three months ended Sep 30, 2023 | Three months ended Sep 30, 2022 | Six months ended Sep 30, 2023 | Six months ended Sep 30, 2022 | |:---|:---|:---|:---|:---| | Net loss for the period | $(5.337) | $(37.288) | $(15.137) | $(43.792) | | Add (deduct): | | | | | | Depreciation and amortization | $0.373 | $0.691 | $0.713 | $1.729 | | Derivative revaluation | $(1.973) | $1.808 | $(5.590) | $(7.716) | | Net finance costs (income) | $3.175 | $(4.235) | $4.968 | $(4.727) | | Equity-classified share-based payments | $0.467 | $0.640 | $1.083 | $1.827 | | Impairment losses on long-lived assets | $0.075 | $24.694 | $0.075 | $25.510 | | Income tax expense | $0 | $0.013 | $0 | $0.013 | | Adjusted EBITDA | $(3.220) | $(13.677) | $(13.888) | $(27.156) | [OPERATING SEGMENTS](index=55&type=section&id=OPERATING%20SEGMENTS) Neptune operates as a single consolidated segment - The company's management structure and performance are measured on a single consolidated segment basis[223](index=223&type=chunk) Revenue by Geographic Area (Millions of USD) | Region | Three months ended Sep 30, 2023 | Three months ended Sep 30, 2022 | Six months ended Sep 30, 2023 | Six months ended Sep 30, 2022 | |:---|:---|:---|:---|:---| | Canada | $1.198 | $0.670 | $2.227 | $5.727 | | United States | $7.517 | $11.098 | $17.094 | $22.029 | | Other countries | $0.025 | $0.219 | $0.047 | $0.503 | | Total revenue | $8.740 | $11.987 | $19.368 | $28.259 | Long-Lived Assets by Geographic Location (Millions of USD) | Asset Type | Region | Sep 30, 2023 | Mar 31, 2023 | |:---|:---|:---|:---| | Property, plant and equipment | Canada | $0.198 | $0.251 | | | United States | $0.965 | $1.152 | | Goodwill | Canada | $2.429 | $2.426 | | Intangible assets | Canada | $1.390 | $1.607 | [RESULTS ANALYSIS](index=56&type=section&id=RESULTS%20ANALYSIS) This section provides a detailed comparison of the company's financial performance for the three and six months ended September 30, 2023, versus the same periods in 2022, focusing on changes in revenue, gross profit, expenses, and net loss [Three-month period ended September 30, 2023 compared to September 30, 2022](index=56&type=section&id=Three-month%20period%20ended%20September%2030,%202023%20compared%20to%20September%2030,%202022) For the three months ended September 30, 2023, total revenue decreased by 27.1% to $8.7 million, primarily due to declines in food and beverage, nutraceuticals, and the divested cannabis business Summary of Changes (Three months ended September 30, 2023 vs. 2022) | Indicator | Sep 30, 2023 | Sep 30, 2022 | Change (USD) | Change (%) | |:---|:---|:---|:---|:---| | Total revenue | $8.740 | $11.987 | $(3.247) | -27.1% | | Gross profit (loss) | $(0.568) | $1.108 | $(1.676) | -151.3% | | Research and development expenses | $(0.025) | $(0.208) | $0.183 | 88.0% | | Selling, general and administrative expenses | $(3.836) | $(15.908) | $12.072 | 75.9% | | Impairment losses | $(0.075) | $(24.694) | $24.619 | 99.7% | | Loss from operations | $(4.504) | $(39.702) | $35.198 | 88.7% | | Net finance costs | $(3.175) | $(0.379) | $(2.796) | -737.7% | | Foreign exchange gain | $0.526 | $4.614 | $(4.088) | -88.6% | | Gain (loss) on issuance and fair value changes of derivatives | $1.816 | $(1.808) | $3.624 | 200.4% | | Net loss | $(5.337) | $(37.288) | $31.951 | 85.7% | | Adjusted EBITDA | $(3.220) | $(13.677) | $10.457 | 76.5% | - Food and beverage revenue decreased by **$2.8 million (33%)**, nutraceuticals revenue decreased by **$0.2 million (5%)**, and cannabis business revenue decreased by **$0.1 million (100%)**[229](index=229&type=chunk) - Selling, general and administrative expenses decreased by **$12.1 million (76%)**, primarily due to reduced salaries and related expenses and other cost-cutting measures[235](index=235&type=chunk) - Impairment losses decreased by **$24.6 million (100%)**, mainly because Sprout's intangible assets were fully written off in the prior year[236](index=236&type=chunk) [Six-month period ended September 30, 2023 compared to September 30, 2022](index=58&type=section&id=Six-month%20period%20ended%20September%2030,%202023%20compared%20to%20September%2030,%202022) For the six months ended September 30, 2023, total revenue decreased by 31.5% to $19.4 million, primarily due to declines across all product categories and the cannabis business divestiture Summary of Changes (Six months ended September 30, 2023 vs. 2022) | Indicator | Sep 30, 2023 | Sep 30, 2022 | Change (USD) | Change (%) | |:---|:---|:---|:---|:---| | Total revenue | $19.368 | $28.259 | $(8.891) | -31.5% | | Gross profit (loss) | $0.775 | $(1.787) | $2.562 | 143.4% | | Research and development expenses | $(0.047) | $(0.422) | $0.375 | 88.9% | | Selling, general and administrative expenses | $(15.809) | $(26.461) | $10.652 | 40.3% | | Impairment losses | $(0.075) | $(25.510) | $25.435 | 99.7% | | Loss from operations | $(15.156) | $(54.095) | $38.939 | 72.0% | | Net finance costs | $(4.968) | $(1.294) | $(3.674) | -283.9% | | Foreign exchange gain | $0.342 | $6.021 | $(5.679) | -94.3% | | Gain on issuance and fair value changes of derivatives | $4.645 | $5.589 | $(0.944) | -16.9% | | Net loss | $(15.137) | $(43.792) | $28.655 | 65.4% | | Adjusted EBITDA | $(13.888) | $(27.156) | $13.268 | 48.9% | - Food and beverage revenue decreased by **$2.6 million (16%)**, nutraceuticals revenue decreased by **$3.1 million (37%)**, and cannabis business revenue decreased by **$2.7 million (100%)**[243](index=243&type=chunk) - Gross profit improvement was due to a **$11.5 million** decrease in cost of sales, offsetting an **$8.9 million** decrease in revenue[246](index=246&type=chunk) - Net finance costs significantly increased by **$3.7 million (283.9%)**, primarily due to higher interest expense on financing facilities[251](index=251&type=chunk) [FINANCIAL AND CAPITAL MANAGEMENT](index=60&type=section&id=FINANCIAL%20AND%20CAPITAL%20MANAGEMENT) This section discusses the company's sources and uses of funds, including proceeds from direct offerings and loans, and their allocation to operating activities and debt repayment [USE OF PROCEEDS](index=60&type=section&id=USE%20OF%20PROCEEDS) For the six months ended September 30, 2023, the company raised $30.0 million, primarily from direct offerings ($8.5 million) and increased loans ($21.5 million) Sources and Uses of Funds (Six months ended September 30, 2023 vs. 2022, Millions of USD) | Category | Six months ended Sep 30, 2023 | Six months ended Sep 30, 2022 | |:---|:---|:---| | Proceeds from direct offerings | $8.500 | $5.000 | | Increase in loans and borrowings | $21.507 | $3.250 | | Total sources of funds | $30.008 | $8.335 | | Repayment of loans and borrowings | $20.601 | $0 | | Cash outflow from operating activities | $4.538 | $14.084 | | Total uses of funds | $27.251 | $15.667 | | Net cash inflow (outflow) | $2.757 | $(7.332) | - Net proceeds from direct offerings for the six months ended September 30, 2023, were **$3.7 million**, contributing to a net cash inflow of **$2.8 million**[257](index=257&type=chunk) - The September 2023 direct offering generated gross proceeds of **$4.5 million**, and the May 2023 direct offering generated gross proceeds of **$4.0 million**[258](index=258&type=chunk)[259](index=259&type=chunk) [Loans and borrowings](index=62&type=section&id=Loans%20and%20borrowings) Neptune has secured multiple loans and borrowings, primarily for its Sprout subsidiary, including promissory notes and factoring facilities - On November 8, 2023, Neptune converted most of Sprout's debt into Sprout equity, increasing its ownership to **89.5%** and extending the maturity of the remaining promissory note to June 30, 2025, while releasing Neptune's guarantee[262](index=262&type=chunk) - On October 13, 2023, the company repaid its senior secured notes of approximately **$2.3 million** early[263](index=263&type=chunk) - Sprout's **$13 million** secured promissory note with MSEC was extended to December 31, 2024, with increased interest rates[264](index=264&type=chunk) - Sprout obtained an accounts receivable factoring facility, later expanded to include inventory financing, with a maximum available amount of **$7.5 million**[268](index=268&type=chunk) [CAPITAL RESOURCES](index=62&type=section&id=CAPITAL%20RESOURCES) As of September 30, 2023, the company had $4.8 million in cash and cash equivalents, but its accounts payable and other payables exceeded current assets, indicating a severe liquidity position - As of September 30, 2023, cash and cash equivalents totaled **$4.8 million**[270](index=270&type=chunk) - The company's accounts payable and other payables exceed its total current assets, indicating a severe liquidity position[270](index=270&type=chunk) - The company requires immediate funding to continue operations; failure to obtain funding could lead to cessation of operations and asset liquidation[270](index=270&type=chunk) [Liquidity and Capital Resources](index=62&type=section&id=Liquidity%20and%20Capital%20Resources) As of September 30, 2023, the company's cash and cash equivalents increased to $4.8 million, up from $1.4 million in the prior year, primarily due to financing activities - As of September 30, 2023, cash and cash equivalents totaled **$4.8 million**, a **241%** increase from **$1.4 million** as of September 30, 2022[272](index=272&type=chunk) - Operating activities used **$0.8 million** and **$4.5 million** in cash for the three and six months ended September 30, 2023, respectively[273](index=273&type=chunk) - Investing activities used a small amount of cash (**$0.1 million**) for both the three and six months ended September 30, 2023[274](index=274&type=chunk) - Financing activities, including direct offerings and debt financing, were crucial for liquidity, providing **$7.9 million** for the six months ended September 30, 2023[275](index=275&type=chunk) - The company's current cash position is sufficient for only about **one month**, necessitating further financing measures or actions such as cost reductions and subsidiary spin-offs[276](index=276&type=chunk) [ACCOUNTING POLICIES](index=67&type=section&id=ACCOUNTING%20POLICIES) The company's accounting policies and measurement bases are consistent with its annual consolidated financial statements - Accounting policies and measurement bases are consistent with the annual consolidated financial statements as of March 31, 2023[294](index=294&type=chunk) - Management makes estimates and judgments when preparing financial statements in accordance with U.S. Generally Accepted Accounting Principles[295](index=295&type=chunk) [CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS](index=67&type=section&id=CRITICAL%20ACCOUNTING%20ESTIMATES%20AND%20JUDGEMENTS) This section outlines critical accounting estimates and judgments, including expected credit losses on accounts receivable, inventory write-downs, impairment losses for non-financial assets (goodwill, intangibles, property and equipment), fair value estimates for various financings (warrants), and revenue recognition - Critical accounting estimates include expected credit losses on accounts receivable, inventory write-downs, and impairment losses for goodwill, intangible assets, and property, plant and equipment[297](index=297&type=chunk)[302](index=302&type=chunk)[304](index=304&type=chunk) - Expected credit losses on accounts receivable are based on current expected credit loss models, considering customer risk categories, collection history, and specific risks. As of September 30, 2023, **77%** of accounts receivable were past due, with **81%** provisioned for[297](index=297&type=chunk)[301](index=301&type=chunk) - Inventory write-downs are made for excess, slow-moving, and obsolete inventory, based on estimates of historical utilization, future product demand, and production requirements. **$0.2 million** was written down for the six months ended September 30, 2023[302](index=302&type=chunk)[303](index=303&type=chunk) - Impairment testing for non-financial assets involves significant judgment regarding projected cash flows and discount rates. Sprout's goodwill and trademarks were fully impaired in fiscal year 2023[306](index=306&type=chunk)[312](index=312&type=chunk) - Fair value for various financings, including warrants in direct offerings, is estimated using Black-Scholes or binomial models (Level 3 inputs). Recent offerings in May and September 2023 involved significant warrant issuances and revaluations[315](index=315&type=chunk)[316](index=316&type=chunk)[318](index=318&type=chunk)[320](index=320&type=chunk)[321](index=321&type=chunk) - The CEO's long-term cash bonus, contingent on a **$1 billion** market capitalization, is estimated using a risk-neutral Monte Carlo simulation (Level 3 inputs)[321](index=321&type=chunk) [CHANGES IN ACCOUNTING POLICIES AND FUTURE ACCOUNTING CHANGES](index=72&type=section&id=CHANGES%20IN%20ACCOUNTING%20POLICIES%20AND%20FUTURE%20ACCOUNTING%20CHANGES) Accounting policies and measurement bases remain consistent annually - Accounting policies and measurement bases remain consistent annually[322](index=322&type=chunk) - The functional currency changed from Canadian dollars to U.S. dollars effective October 1, 2022, and was applied prospectively[323](index=323&type=chunk) [ISSUED AND OUTSTANDING SECURITIES](index=72&type=section&id=ISSUED%20AND%20OUTSTANDING%20SECURITIES) As of the MD&A date, Neptune had 4,532,038 common shares outstanding, along with various other securities including stock options, DSUs, RSUs, and warrants Issued and Outstanding Securities (As of MD&A Date) | Security Type | Quantity | |:---|:---| | Common shares | 4,532,038 | | Stock options | 16,950 | | Deferred share units | 108 | | Restricted share units | 70 | | Warrants | 2,803,695 | | Total securities | 7,352,861 | - The company's common shares trade on the Nasdaq Capital Market under the symbol "NEPT" and were delisted from the Toronto Stock Exchange on August 15, 2022[49](index=49&type=chunk)[324](index=324&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=62&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a smaller reporting company, Neptune Wellness Solutions Inc. is not required to provide quantitative and qualitative disclosures about market risk - The company, as a smaller reporting company, is not required to provide quantitative and qualitative disclosures about market risk[326](index=326&type=chunk) [Item 4. Controls and Procedures](index=63&type=section&id=Item%204.%20Controls%20and%20Procedures) Management believes that as of September 30, 2023, the company's disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR) were ineffective due to identified material weaknesses [INTERNAL CONTROLS DISCLOSURE](index=63&type=section&id=INTERNAL%20CONTROLS%20DISCLOSURE) The CEO and CFO believe that as of September 30, 2023, disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR) were ineffective due to material weaknesses - The CEO and CFO believe that as of September 30, 2023, disclosure controls and procedures (DC&P) were ineffective due to material weaknesses[328](index=328&type=chunk) - As of September 30, 2023, internal control over financial reporting (ICFR) was also deemed ineffective due to material weaknesses[330](index=330&type=chunk) - Identified material weaknesses include ineffective process-level control activities (financial reporting, procure-to-pay, inventory, order-to-cash, equity), inadequate IT system user and privileged access controls, and a lack of personnel with appropriate knowledge and experience[331](index=331&type=chunk)[334](index=334&type=chunk) - Due to these weaknesses, material misstatements were identified and corrected in the consolidated financial statements for the year ended March 31, 2023[333](index=333&type=chunk) [Remediation Plan](index=65&type=section&id=Remediation%20Plan) The company is developing and implementing a comprehensive remediation plan to address identified material weaknesses in internal controls, focusing on strengthening the control environment, risk assessment, control activities, and staffing - The company is developing and implementing a comprehensive remediation plan to address identified material weaknesses, including strengthening the control environment, risk assessment, and monitoring[337](index=337&type=chunk) - Remediation efforts include establishing policies and procedures, designing comprehensive risk assessments, strengthening process-level and IT general controls, and recruiting skilled personnel[337](index=337&type=chunk)[338](index=338&type=chunk)[340](index=340&type=chunk) - Personnel turnover over the past twelve months has delayed the implementation of the remediation plan[338](index=338&type=chunk) - Material weaknesses will not be considered remediated until relevant controls have operated for a sufficient period and have been tested and proven effective, which has not yet been achieved[338](index=338&type=chunk) [PART II. OTHER INFORMATION](index=65&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=65&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in multiple legal proceedings and claims, with uncertain outcomes, which could adversely affect the business due to legal costs and diversion of management resources - The company is involved in multiple legal proceedings and claims, with uncertain outcomes[342](index=342&type=chunk) - Resolution of legal proceedings could adversely affect the company due to legal costs and diversion of management time and resources[342](index=342&type=chunk) - Further information on legal proceedings is available in Notes 9 "Provisions," 16 "Commitments and Contingencies," and 18 "Subsequent Events" to the condensed consolidated interim financial statements in Part I, Item 1 of this quarterly report[343](index=343&type=chunk) [Item 1A. Risk Factors](index=66&type=section&id=Item%201A.%20Risk%20Factors) This section highlights significant risks that could materially and adversely affect the company's business, financial condition, and results of operations - Investing in the company's common stock involves a high degree of risk, and investors should carefully consider all described risks[345](index=345&type=chunk) - Terms of the company's indebtedness, including the Note Purchase Agreement, impose significant operating and financial restrictions, and covenant breaches could lead to accelerated debt repayment and materially adverse effects on the business[347](index=347&type=chunk)[350](index=350&type=chunk)[351](index=351&type=chunk) - Warrants currently have no established public trading market, and the company does not intend to list them, which may affect their pricing, liquidity, and value[352](index=352&type=chunk) - A significant portion of outstanding common stock (approximately **51.74%**) is held by a class action settlement fund, whose sale or distribution could result in other shareholders acquiring significant ownership of the company's common stock, potentially influencing company affairs[353](index=353&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=67&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities or use of proceeds during the reporting period - No unregistered sales of equity securities or use of proceeds were reported[354](index=354&type=chunk) [Item 3. Defaults Upon Senior Securities](index=67&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This item is not applicable to the company's reporting period - This item is not applicable[355](index=355&type=chunk) [Item 4. Mine Safety Disclosures](index=67&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company's reporting period - This item is not applicable[356](index=356&type=chunk) [Item 5. Other Information](index=67&type=section&id=Item%205.%20Other%20Information) No other information is reported under this item - No other information is reported under this item[357](index=357&type=chunk) [Item 6. Exhibits](index=68&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed as part of the quarterly report on Form 10-Q, including a summary of restructuring terms, executive certifications, and XBRL-related documents - Exhibits include a summary of restructuring terms, CEO and CFO certifications under Sarbanes-Oxley, and Inline XBRL documents[360](index=360&type=chunk) [SIGNATURES](index=69&type=section&id=SIGNATURES) [SIGNATURES](index=69&type=section&id=SIGNATURES) This report was signed by Michael Cammarata, President, Chief Executive Officer, and Director of Neptune Wellness Solutions Inc., on November 14, 2023 - The report was signed by President, Chief Executive Officer, and Director Michael Cammarata on November 14, 2023[363](index=363&type=chunk)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2023 | Québec | Not Applicable | | --- | --- | | (State or other jurisdiction of | (I.R.S. Employer | | in Company or organization) | Identification No.) | | 545 Promenade du Centropolis, Suite 100 | | | Laval, Québec Canada | H7T 0A3 | | (Address of principal executive offices) | (Zip Co ...

Financial Performance - For the three-month period ended March 31, 2023, the consolidated gross profit margin improved to (21.14)% of net sales, up from (49.39)% for the same period last year[69]. - The gross profit margin for the twelve-month period ended March 31, 2023 was (4.70)%, an improvement from (15.44)% for the same period of the prior year[69]. Strategic Initiatives - The new CPG focused strategic plan aims to reduce costs and improve profitability, with a projected reduction of global headcount by approximately 50%[74]. - The company launched a new line of CoComelon co-branded organic snack bars for toddlers, featuring 4g of plant-based protein and 2g of dietary fiber[75]. - The company has successfully expanded Sprout baby foods and toddler snacks in major retailers like Target and Walmart since acquiring a majority stake in Sprout Organics[67]. - The co-branded product line with CoComelon is now available in 900 Walmart stores, capturing approximately 90% of the organic baby food market in the U.S.[68]. Capital Raising and Financing - The company has entered into agreements for the purchase and sale of shares and pre-funded warrants in October 2022, June 2022, and March 2022 to shore up cash reserves[65]. - An amendment to existing Secured Promissory Notes expanded the facility from $22.5 million to a maximum of $37.5 million, with an immediate commitment of an additional $3 million[84]. - Sprout entered into agreements to issue an additional $0.55 million of Secured Promissory Notes and issued 146,330 common shares valued at $0.1 million[85]. - On March 10, 2023, Sprout issued promissory notes for gross proceeds of $0.3 million and granted warrants to purchase 111,111 shares at $0.54 per share[86]. - Neptune closed a $6 million Registered Direct Offering and Private Placement, resulting in net proceeds of approximately $5.1 million[88]. - On January 13, 2023, Neptune closed on a senior secured notes financing for gross proceeds of $4 million, with an interest rate of 16.5% per annum[89]. - Neptune announced a maximum available accounts receivable factoring facility of $5 million, later increased to $7.5 million for inventory financing[91]. - The Company announced a public offering on May 11, 2023, resulting in gross proceeds of approximately $4 million, with plans to use proceeds for working capital and potential acquisitions[92]. Compliance and Regulatory Matters - The company received a Deficiency Notice from Nasdaq regarding non-compliance with the minimum bid price requirement, with a deadline to regain compliance by December 26, 2023[81]. - Neptune extended the maturity of its existing $13 million secured promissory note to December 31, 2024, with an interest rate of 15.0% per annum until the end of 2023[87]. Divestitures - The company divested its Canadian cannabis business for approximately $3.8 million ($5.15 million CAD), closing the sale on November 9, 2022[71].

PART I. FINANCIAL INFORMATION [Item 1. Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) The unaudited interim financial statements for periods ended December 31, 2022, reveal significant operating losses, negative cash flows, and a working capital deficit, raising substantial doubt about the company's ability to continue as a going concern - The company's financial statements, prepared on a going concern basis, show significant operating losses, negative cash flows, and a working capital deficit, casting substantial doubt on its ability to continue, with cash sufficient for only **one to two months** requiring immediate additional funding[36](index=36&type=chunk)[38](index=38&type=chunk)[39](index=39&type=chunk) Condensed Consolidated Balance Sheet Highlights (in thousands USD) | Account | Dec 31, 2022 | Mar 31, 2022 | Change (%) | | :--- | :--- | :--- | :--- | | **Total Current Assets** | $28,222 | $37,388 | -24.5% | | Cash and cash equivalents | $3,404 | $8,726 | -61.0% | | **Total Assets** | $63,968 | $104,955 | -39.1% | | **Total Current Liabilities** | $29,855 | $30,317 | -1.5% | | **Total Liabilities** | $48,044 | $44,117 | +8.9% | | **Total Shareholders' Equity** | $15,924 | $60,838 | -73.8% | Condensed Consolidated Statements of Loss Highlights (in thousands USD) | Metric | Three Months Ended Dec 31, 2022 | Three Months Ended Dec 31, 2021 | Nine Months Ended Dec 31, 2022 | Nine Months Ended Dec 31, 2021 | | :--- | :--- | :--- | :--- | :--- | | **Total Revenues** | $12,209 | $14,668 | $40,468 | $37,265 | | **Gross Profit (Loss)** | $1,881 | $1,654 | $94 | $(1,841) | | **Loss from Operating Activities** | $(7,062) | $(17,071) | $(61,157) | $(54,793) | | **Net Loss** | $(497) | $(16,805) | $(44,290) | $(47,763) | | **Net Loss Attributable to Equity Holders** | $1,288 | $(15,009) | $(33,894) | $(43,030) | | **Basic Loss Per Share** | $0.06 | $(3.14) | $(4.01) | $(9.03) | Condensed Consolidated Statements of Cash Flows Highlights (Nine Months Ended, in thousands USD) | Cash Flow Category | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | **Net cash used in operating activities** | $(20,670) | $(43,821) | | **Net cash provided by (used in) investing activities** | $2,690 | $(1,425) | | **Net cash provided by financing activities** | $12,896 | $(979) | | **Net decrease in cash and cash equivalents** | $(5,322) | $(46,678) | - On November 9, 2022, the company completed the sale of substantially all of its Canadian cannabis assets to PurCann Pharma Inc., which were classified as **'Assets Held For Sale'** as of September 30, 2022[33](index=33&type=chunk) - Effective October 1, 2022, the company prospectively changed its functional currency from Canadian dollars (CAD) to **U.S. dollars (USD)**, reflecting that a significant portion of its remaining business is USD-denominated after the cannabis divestiture[45](index=45&type=chunk) - For the nine months ended December 31, 2022, the company recorded significant impairment losses, including **$7.6 million on goodwill** for the Sprout reporting unit and **$15.3 million on assets held for sale** related to the Canadian cannabis business divestiture[48](index=48&type=chunk)[57](index=57&type=chunk)[62](index=62&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=36&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management's discussion reiterates significant going concern doubts due to recurring losses and limited cash, detailing the strategic shift to CPG brands, recent financing activities, and the impact of impairment charges and reduced SG&A on financial results - The company's cash balance is only sufficient to operate for the next **one to two months**, necessitating immediate funding to avoid potential cessation of operations and asset liquidation[141](index=141&type=chunk) - The company has shifted its strategy to focus on **Consumer Packaged Goods (CPG)** after divesting its Canadian cannabis business on November 9, 2022, with a core focus on the **Sprout Organics** and **Biodroga** brands[147](index=147&type=chunk)[204](index=204&type=chunk)[205](index=205&type=chunk) - To address liquidity issues, the company engaged in multiple financing activities, including a **$6.0 million registered direct offering** in October 2022, a **$4.0 million senior secured notes financing** in January 2023, and a **$5 million accounts receivable factoring facility** for its Sprout subsidiary in January 2023[144](index=144&type=chunk)[145](index=145&type=chunk)[148](index=148&type=chunk) Results of Operations Comparison (in millions USD) | Period | Metric | Dec 31, 2022 | Dec 31, 2021 | Change (%) | | :--- | :--- | :--- | :--- | :--- | | **Three Months** | Total Revenues | $12.2 | $14.7 | -16.8% | | | Gross Profit | $1.9 | $1.7 | +13.7% | | | Net Loss | $(0.5) | $(16.8) | +97.0% | | | Adjusted EBITDA | $(5.1) | $(14.2) | +64.4% | | **Nine Months** | Total Revenues | $40.5 | $37.3 | +8.6% | | | Gross Profit | $0.1 | $(1.8) | +105.1% | | | Net Loss | $(44.3) | $(47.8) | +7.3% | | | Adjusted EBITDA | $(30.1) | $(40.5) | +25.7% | - For the nine months ended Dec 31, 2022, the company recorded **$25.8 million in impairment losses**, primarily due to the divestiture of the cannabis business and the impairment of goodwill related to Sprout[251](index=251&type=chunk) - SG&A expenses for the nine-month period decreased by **$14.7 million (29.5%)** to **$35.2 million**, mainly due to cost reductions from restructuring and continued cost controls[250](index=250&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=62&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is classified as a smaller reporting company and is therefore not required to provide the information for this item - As a **smaller reporting company** defined by Rule 12b-2 of the Exchange Act, Neptune is not required to provide quantitative and qualitative disclosures about market risk[312](index=312&type=chunk) [Item 4. Controls and Procedures](index=63&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR) were ineffective as of December 31, 2022, due to identified material weaknesses, with remediation efforts delayed by accounting personnel turnover - Management concluded that both **Disclosure Controls and Procedures (DC&P)** and **Internal Control Over Financial Reporting (ICFR)** were not effective as of December 31, 2022[314](index=314&type=chunk)[316](index=316&type=chunk) - Material weaknesses were identified in key business processes, entity-level controls, and **information technology general controls (ITGCs)**, including inadequate controls over user access and segregation of duties[317](index=317&type=chunk)[318](index=318&type=chunk) - Additional material weaknesses identified include the inability to prepare financial statements and supporting records on a timely basis and a lack of sufficient personnel with appropriate knowledge and experience[320](index=320&type=chunk) - A remediation plan is being developed to address the weaknesses, but its implementation has been delayed due to **turnover in accounting personnel**[322](index=322&type=chunk)[323](index=323&type=chunk) PART II. OTHER INFORMATION [Item 1. Legal Proceedings](index=65&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in various legal proceedings and claims in the normal course of business, with uncertain outcomes that could adversely impact operations due to legal costs and diversion of management time - The company is engaged in various legal proceedings and claims, the outcomes of which are uncertain, with detailed information available in **Note 15, \"Commitments and Contingencies,\"** of the financial statements[327](index=327&type=chunk)[328](index=328&type=chunk) [Item 1A. Risk Factors](index=66&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks, including an immediate need for additional funding raising going concern issues, potential supply chain disruptions, input cost inflation, restrictive debt covenants, and the risk of Nasdaq delisting due to minimum bid price non-compliance - The company requires funding in the very near term to continue operations and may have to cease operations and liquidate assets if it is unable to obtain it[331](index=331&type=chunk) - The business is exposed to **supply chain risks**, including supplier performance issues, which could increase costs and decrease margins, alongside risks from input cost inflation and the availability of natural and organic ingredients[332](index=332&type=chunk)[334](index=334&type=chunk)[336](index=336&type=chunk) - The company's debt agreements contain restrictive covenants, with a recent default requiring a waiver that resulted in an **increased interest rate (to 24%)** and an exit fee, and a future breach could lead to debt acceleration[341](index=341&type=chunk)[342](index=342&type=chunk) - The company received a deficiency notice from Nasdaq on December 29, 2022, for failing to maintain a **minimum bid price of $1.00**, with a compliance deadline of June 27, 2023, to avoid potential delisting[344](index=344&type=chunk)[345](index=345&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=68&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During the quarter, the company issued **36,765 common shares** in a private placement related to a subsidiary loan and closed a registered direct offering and concurrent private placement on October 11, 2022, raising approximately **$6.0 million** in gross proceeds - On September 9, 2022, the company issued **36,765 common shares** to an accredited investor in connection with a loan made to its subsidiary, Sprout Foods, Inc[347](index=347&type=chunk) - On October 11, 2022, the company closed a registered direct offering and concurrent private placement, selling **3,208,557 common shares and warrants**, which generated gross proceeds of approximately **$6.0 million**[348](index=348&type=chunk) [Item 3. Defaults Upon Senior Securities](index=68&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This item is not applicable to the company for the reporting period - Not applicable[349](index=349&type=chunk) [Item 4. Mine Safety Disclosures](index=68&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company for the reporting period - Not applicable[350](index=350&type=chunk) [Item 5. Other Information](index=68&type=section&id=Item%205.%20Other%20Information) This item is not applicable to the company for the reporting period - Not applicable[351](index=351&type=chunk) [Item 6. Exhibits](index=69&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Quarterly Report, including certifications by the Principal Executive Officer and Principal Financial Officer as required by the Sarbanes-Oxley Act of 2002, and XBRL data files - The report includes required certifications from the **Principal Executive Officer** and **Principal Financial Officer** under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[354](index=354&type=chunk)

PART I. FINANCIAL INFORMATION [Item 1. Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) The company's unaudited statements show a significant net loss and negative cash flow, raising going concern doubts amid a strategic divestiture - The company has incurred significant operating losses and negative cash flows, and its **current liabilities exceed its current assets**, casting substantial doubt on its ability to continue as a going concern[36](index=36&type=chunk)[39](index=39&type=chunk) - On June 8, 2022, the company launched a new strategic plan to **divest its Canadian cannabis business** and focus on its Consumer Packaged Goods (CPG) business[32](index=32&type=chunk) - The company's Canadian cannabis assets were classified as 'Assets Held For Sale', resulting in an **impairment loss of $15.3 million** for the six-month period[33](index=33&type=chunk)[47](index=47&type=chunk) [Condensed Consolidated Interim Balance Sheets](index=6&type=section&id=Condensed%20Consolidated%20Interim%20Balance%20Sheets) Total assets decreased to $65.0 million and shareholders' equity fell to $15.6 million due to significant impairment losses and a large net loss Condensed Consolidated Balance Sheet Data (in U.S. dollars) | Balance Sheet Item | September 30, 2022 | March 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $1,394,603 | $8,726,341 | | Total current assets | $28,246,606 | $37,388,013 | | Total assets | $65,012,939 | $104,954,722 | | Total current liabilities | $32,357,077 | $30,316,694 | | Total liabilities | $49,416,544 | $44,117,123 | | Total shareholders' equity | $15,596,395 | $60,837,599 | - Assets held for sale, related to the Canadian cannabis business, were valued at **$3.2 million** as of September 30, 2022, after significant impairment[18](index=18&type=chunk)[47](index=47&type=chunk) [Condensed Consolidated Interim Statements of Loss and Comprehensive Loss](index=7&type=section&id=Condensed%20Consolidated%20Interim%20Statements%20of%20Loss%20and%20Comprehensive%20Loss) The company's quarterly net loss widened to $37.3 million from $12.1 million year-over-year, driven by significant asset impairment charges Statement of Loss Highlights (in U.S. dollars) | Metric | Q2 2022 (3-months) | Q2 2021 (3-months) | 6-months 2022 | 6-months 2021 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $11,986,842 | $12,518,631 | $28,259,070 | $22,597,140 | | Gross profit (loss) | $1,107,868 | $(1,172,348) | $(1,786,479) | $(3,494,882) | | Loss from operating activities | $(39,701,826) | $(18,596,110) | $(54,095,253) | $(37,722,676) | | Net loss | $(37,287,692) | $(12,102,072) | $(43,792,187) | $(30,957,782) | | Basic and diluted loss per share | $(4.75) | $(2.54) | $(6.26) | $(6.51) | - The company recorded significant impairment losses in Q2 2022, including **$14.5 million on assets held for sale**, **$7.6 million on goodwill**, and **$2.6 million on tradenames**[19](index=19&type=chunk) [Condensed Consolidated Interim Statements of Cash Flows](index=12&type=section&id=Condensed%20Consolidated%20Interim%20Statements%20of%20Cash%20Flows) Net cash used in operations improved to $14.1 million, while financing activities provided $7.6 million, resulting in a $7.3 million cash decrease Cash Flow Summary (in U.S. dollars) | Cash Flow Activity | Six-months ended Sep 30, 2022 | Six-months ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(14,083,576) | $(33,565,642) | | Net cash used in investing activities | $(601,743) | $(960,862) | | Net cash provided by (used in) financing activities | $7,609,824 | $(978,117) | | **Net decrease in cash and cash equivalents** | **$(7,331,738)** | **$(35,517,675)** | | Cash and cash equivalents, end of period | $1,394,603 | $24,319,214 | [Notes to Condensed Consolidated Interim Financial Statements](index=14&type=section&id=Notes%20to%20Condensed%20Consolidated%20Interim%20Financial%20Statements) Notes detail the company's dire financial state, asset impairments, financing activities, and legal provisions, raising going concern doubts - The company's cash balance is only expected to be sufficient for the next **two to three months**, and it requires funding in the very near term to continue operations[38](index=38&type=chunk) - An impairment test on the Sprout reporting unit resulted in a **$7.6 million goodwill impairment** and a **$2.6 million trademark impairment** in Q2 2022[57](index=57&type=chunk)[58](index=58&type=chunk)[62](index=62&type=chunk) - The company agreed to settle a shareholder class action lawsuit for a gross payment of $4.0 to $4.25 million, for which a **$4.0 million provision** was recorded[65](index=65&type=chunk) - Subsequent to the quarter end, the company closed a registered direct offering on October 11, 2022, for gross proceeds of approximately **$6.0 million**[121](index=121&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=36&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses severe liquidity issues, the strategic shift to CPG, and financial results impacted by large non-cash impairment charges [Going Concern and Recent Financings](index=37&type=section&id=Going%20Concern%20and%20Recent%20Financings) The company's ability to continue is in doubt, with only a few months of cash remaining, necessitating recent financing and strategic divestitures - The company's cash balance is only expected to be sufficient to operate for the next **two to three months**, requiring near-term funding to avoid ceasing operations[128](index=128&type=chunk) - The sale of the Canadian cannabis business for approximately **$3.7 million** is a key milestone in the strategy to become a leading CPG company[133](index=133&type=chunk)[190](index=190&type=chunk) - The company has completed several recent financings, including a **$6.0 million registered direct offering** in October 2022 and a **$5.0 million offering** in June 2022[134](index=134&type=chunk)[137](index=137&type=chunk) [Business Strategy and Operations](index=39&type=section&id=Business%20Strategy%20and%20Operations) Neptune is repositioning as a CPG company focused on health and wellness by divesting cannabis and expanding its core CPG brands - The company's long-term strategy is focused on the health and wellness sector, with an emphasis on **CPG verticals**: Nutraceuticals, Beauty & Personal Care, and Organic Foods & Beverages[146](index=146&type=chunk) - The divestiture of the Canadian cannabis business, including the Sherbrooke facility, was completed on November 9, 2022, marking the **company's exit from cannabis operations**[153](index=153&type=chunk) - Key growth drivers include expanding distribution for Sprout organic baby food, leveraging a multi-year licensing agreement with **CoComelon**, and launching new products[147](index=147&type=chunk)[148](index=148&type=chunk) [Results of Operations Analysis](index=48&type=section&id=Results%20of%20Operations%20Analysis) Quarterly revenue decreased 4% to $12.0 million, while the net loss widened to $37.3 million due to $24.7 million in asset impairment charges Revenue and Gross Profit (in millions of U.S. dollars) | Metric | Q2 2022 (3-months) | Q2 2021 (3-months) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $12.0 | $12.5 | $(0.5) | -4% | | Gross Profit (Loss) | $1.1 | $(1.2) | $2.3 | 194% | - The net loss for Q2 2022 increased by $25.2 million to $37.3 million, primarily due to **asset impairments of $24.7 million**[227](index=227&type=chunk) - **Adjusted EBITDA loss** for Q2 2022 worsened to **$13.7 million** from $12.2 million in the prior year, mainly due to a $4.0 million legal provision[229](index=229&type=chunk) [Liquidity and Capital Resources](index=53&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity is critically low with $1.4 million in cash, sufficient for only two to three months, making it reliant on external financing - As of September 30, 2022, the company's cash and cash equivalents stood at **$1.4 million**[238](index=238&type=chunk) - The company's current cash position is only sufficient to support its financial needs for **two to three months**, necessitating further financing initiatives[246](index=246&type=chunk) - During the six-month period, the company sourced **$5.0 million from a direct offering** and **$3.25 million from an increase in loans** to fund operating activities[230](index=230&type=chunk)[233](index=233&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=59&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a smaller reporting company, the company is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company defined by Rule 12b-2 of the Exchange Act, Neptune is **not required to provide** quantitative and qualitative disclosures about market risk[275](index=275&type=chunk) [Controls and Procedures](index=60&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that both Disclosure Controls and Procedures and Internal Control over Financial Reporting were not effective as of September 30, 2022 - Management concluded that **Disclosure Controls and Procedures were not effective** as of September 30, 2022, due to identified material weaknesses[277](index=277&type=chunk) - **Material weaknesses in ICFR** were identified, including ineffective control design, inadequate IT access controls, and lack of sufficient experienced personnel[280](index=280&type=chunk)[281](index=281&type=chunk)[283](index=283&type=chunk) - **Turnover in accounting personnel** during the quarter resulted in additional material weaknesses and delayed the implementation of the remediation plan[283](index=283&type=chunk)[285](index=285&type=chunk) PART II. OTHER INFORMATION [Legal Proceedings](index=62&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in various legal proceedings and claims, with further details available in Note 15 of the financial statements - The company is engaged in various legal proceedings and claims, with further details provided in **Note 15** of the condensed consolidated interim financial statements[289](index=289&type=chunk)[290](index=290&type=chunk) [Risk Factors](index=63&type=section&id=Item%201A.%20Risk%20Factors) The company faces material risks including the inability to fund operations, supply chain disruptions, and cost inflation - The company may not be able to maintain operations without additional funding due to **low cash reserves ($1.4 million)** and significant negative cash flows[293](index=293&type=chunk) - The business is exposed to **supply chain risks**, where disruptions could increase operating costs and decrease profit margins[294](index=294&type=chunk) - Future results may be adversely affected by **input cost inflation** for agricultural ingredients and fuel, and by the limited availability of organic ingredients[296](index=296&type=chunk)[297](index=297&type=chunk)[298](index=298&type=chunk) - The company may not be successful in achieving anticipated savings from its **cost reduction and strategic initiatives**[301](index=301&type=chunk)[302](index=302&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=65&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company issued 36,765 common shares in a private transaction and also closed a private placement of warrants in October 2022 - On September 9, 2022, the company issued **36,765 common shares** to one accredited investor in connection with a loan to its subsidiary, Sprout Foods, Inc[303](index=303&type=chunk) [Exhibits](index=66&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the report, including officer certifications and Inline XBRL data files - The exhibits filed with this report include **CEO and CFO certifications** (Exhibits 31.1, 31.2, 32) and Inline XBRL documents (Exhibits 101 and 104)[309](index=309&type=chunk)

Financial Performance - For the three-month period ended June 30, 2022, the Company incurred a net loss of $6.5 million and negative cash flows from operations of $7.2 million, with an accumulated deficit of $327.5 million as of June 30, 2022[119]. - Total revenues for the three-month period ended June 30, 2022, were $16.272 million, up from $10.079 million in the same period in 2021, representing a 61.5% increase[191]. - The net loss for the three-month period ended June 30, 2022, was $6.504 million, significantly improved from a net loss of $18.856 million in the same period in 2021[191]. - Adjusted EBITDA loss decreased by $3.1 million or 24% for the quarter ended June 30, 2022, resulting in an Adjusted EBITDA loss of $9.8 million compared to $12.9 million for the same period in 2021[217]. - Gross profit (loss) for the three-month period ended June 30, 2022, was $(2.9) million, a deterioration of $0.6 million or 25% compared to $(2.3) million for the same period in 2021[209]. - Total consolidated revenues for the three-month period ended June 30, 2022, amounted to $16.3 million, representing an increase of $6.2 million or 61% compared to $10.1 million for the same period in 2021[204]. - The net loss for the quarter ended June 30, 2022, was $6.5 million, a decrease of $12.4 million or 66% compared to a net loss of $18.9 million for the same period in 2021[218]. Business Strategy and Divestiture - The Company plans to divest its cannabis business, including the sale of the Mood Ring™ and PanHash™ brands, which is expected to result in a 50% reduction in workforce and over 30% reduction in total payroll costs[124]. - The planned exit from the Canadian cannabis business is expected to reduce the amount of financing the Company seeks and facilitate working with a broader set of financing sources[124]. - The company plans to divest its Canadian cannabis business, which is expected to decrease future revenues from cannabis products[206]. - The company announced a strategic plan focused on divesting its Canadian cannabis business, which is expected to result in a 50% reduction in workforce and an estimated annual cost savings of $4.5 million[181]. Funding and Liquidity - The Company has minimal available cash balances, with current liabilities exceeding cash on hand of $6.2 million, requiring immediate funding to continue operations[120]. - The Company aims to raise necessary funds through additional securities offerings and strategic alliances to support its growth trajectory and path to profitability[122]. - The company raised gross proceeds of $5.0 million from a direct offering on June 23, 2022, which were primarily used for operating activities[223]. - The current cash position is sufficient to support financial needs for two to three months, with potential financing initiatives including public issuances and private placements[230]. - As of June 30, 2022, the company's liquidity position was $6.2 million, a decrease of $2.5 million or 29% compared to $8.7 million as of June 30, 2021[225]. Product Development and Market Expansion - Neptune's long-term strategy focuses on the health and wellness sector, emphasizing select consumer packaged goods verticals, including Nutraceuticals, Beauty & Personal Care, and Organic Foods & Beverages[134]. - The Company launched new consumer products, including MaxSimil® with CoQ10 and MaxSimil® with Curcumin, as part of its expansion in the Nutraceuticals vertical[136]. - Neptune launched its Forest Remedies Multi Omega 3-6-9 line of supplements in over 340 Sprouts Farmers Market stores across the U.S. on March 10, 2022, marking a significant milestone in its transformation into a high-growth branded CPG company[145]. - Neptune launched a new line of CoComelon co-branded organic snack bars for toddlers, expanding its product offerings in the organic baby food market[186]. - Neptune is actively working on expanding its brand portfolio, including the Biodroga subsidiary, which offers product development and turnkey solutions across North America[151]. Workforce and Employment - As of June 30, 2022, Neptune employed 155 individuals, with 119 in Canada and 36 in the United States, indicating a stable workforce[168]. - The Company plans to divest its cannabis business, which is expected to result in a 50% reduction in workforce and over 30% reduction in total payroll costs[124]. Financial Obligations and Assets - The company has limited financial commitments and debt, with warrant liabilities dependent on share price and only payable if in the money[231]. - The Corporation has contractual obligations totaling $49.692 million as of June 30, 2022, with $21.969 million due within one year[236]. - Neptune's total assets decreased to $97.756 million as of June 30, 2022, down from $104.955 million as of March 31, 2022[191]. - Total equity attributable to equity holders decreased from $48.116 million on March 31, 2022, to $43.277 million on June 30, 2022[235]. Regulatory Compliance - Neptune's products are subject to regulations by authorities such as Health Canada and the FDA, ensuring compliance with good manufacturing practices[158].

Financing Activities - The company closed a registered direct offering on March 14, 2022, raising $8,000,000 by selling 528,572 common shares and 185,714 pre-funded warrants at a combined offering price of $11.20 per share[58]. - A second registered direct offering was completed on June 23, 2022, generating $5,000,000 from the sale of 1,945,526 common shares at an offering price of $2.57 per share[59]. - Neptune completed a registered direct offering, raising $8 million by selling 18,500,000 common shares at a price of $0.32 each[100]. - Neptune entered into a second registered direct offering, raising $5 million by selling 1,945,526 common shares at an offering price of $2.57 per share[102]. - Neptune's share consolidation reduced the number of common shares from approximately 198 million to about 5.7 million, effective June 13, 2022[95]. Business Strategy and Operations - The company reported positive gross margins for the first time in Q3 of fiscal year 2022, following a strategic transition to a consumer packaged goods model[63]. - The company plans to divest its Canadian cannabis business, which is expected to result in a 50% reduction in workforce and an estimated annual cost savings of $5.8 million CAD[66]. - The divestiture of the cannabis business is anticipated to lower the company's financing needs due to a reduced expense structure and expected cash inflows from the sale[67]. - The company has initiated a strategic plan focused on reducing costs and enhancing shareholder value, with a realignment towards its consumer products business[65]. Product Development and Partnerships - The company has expanded its Sprout Organics brand significantly since acquiring a majority stake in February 2021, launching products in major retailers like Target and Wal-Mart[61]. - A strategic partnership with Walmart for a co-branded product line with CoComelon is now available in 900 Walmart stores, capturing approximately 90% of the organic baby food market in the U.S.[62]. - Neptune announced a multi-year licensing agreement with CoComelon®, the leading children's entertainment brand, which has over 110 million subscribers and ranks 1 on YouTube with nearly 9 billion views[84]. - Neptune launched a new line of CoComelon co-branded organic snack bars for toddlers, containing 4g of plant-based protein and 2g of dietary fiber[85]. - Neptune introduced Forest Remedies' plant-based Multi Omega 3-6-9 supplements, using sustainable Ahiflower oil, which is a vegan alternative to fish oil[86]. - Neptune expanded its Sprout Organic Foods product line into Canada, initially launching toddler snacks in Metro grocery stores in Ontario[87]. - The company launched a new line of cannabis products under the Mood Ring brand, including vape products and pre-rolls, expanding its presence in the Canadian market[75]. - The company has patented a method for extracting compounds from cannabis using cold organic solvents, which it plans to leverage for licensing opportunities[74]. Management and Compliance - Neptune appointed Raymond Silcock as Chief Financial Officer, effective July 25, 2022, bringing extensive experience from previous roles in various companies[91]. - Neptune regained compliance with Nasdaq's minimum bid price requirement as of the date of the annual report[96]. - Neptune's loss of foreign private issuer status requires compliance with U.S. domestic reporting requirements, increasing legal and financial compliance costs[98].