Neptune(NEPT) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (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][39] - 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] - 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][47] Condensed Consolidated Interim Balance Sheets 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][47] Condensed Consolidated Interim Statements of Loss and Comprehensive Loss 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] Condensed Consolidated Interim Statements of Cash Flows 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 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] - 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][58][62] - 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] - 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] Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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] - 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][190] - 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][137] Business Strategy and Operations 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] - 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] - Key growth drivers include expanding distribution for Sprout organic baby food, leveraging a multi-year licensing agreement with CoComelon, and launching new products[147][148] Results of Operations Analysis 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] - 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] Liquidity and Capital Resources 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] - The company's current cash position is only sufficient to support its financial needs for two to three months, necessitating further financing initiatives[246] - 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][233] Quantitative and Qualitative Disclosures About Market Risk 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] Controls and Procedures 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] - Material weaknesses in ICFR were identified, including ineffective control design, inadequate IT access controls, and lack of sufficient experienced personnel[280][281][283] - Turnover in accounting personnel during the quarter resulted in additional material weaknesses and delayed the implementation of the remediation plan[283][285] PART II. OTHER INFORMATION Legal Proceedings 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][290] Risk Factors 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] - The business is exposed to supply chain risks, where disruptions could increase operating costs and decrease profit margins[294] - Future results may be adversely affected by input cost inflation for agricultural ingredients and fuel, and by the limited availability of organic ingredients[296][297][298] - The company may not be successful in achieving anticipated savings from its cost reduction and strategic initiatives[301][302] Unregistered Sales of Equity Securities and Use of Proceeds 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] Exhibits 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]