Neptune(NEPT) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (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][38][39] 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] - 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] - 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][57][62] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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] - 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][204][205] - 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][145][148] 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] - 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] Item 4. Controls and Procedures 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][316] - 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][318] - 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] - A remediation plan is being developed to address the weaknesses, but its implementation has been delayed due to turnover in accounting personnel[322][323] PART II. OTHER INFORMATION Item 1. Legal Proceedings 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][328] Item 1A. Risk Factors 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] - 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][334][336] - 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][342] - 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][345] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] - 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] Item 3. Defaults Upon Senior Securities This item is not applicable to the company for the reporting period - Not applicable[349] Item 4. Mine Safety Disclosures This item is not applicable to the company for the reporting period - Not applicable[350] Item 5. Other Information This item is not applicable to the company for the reporting period - Not applicable[351] Item 6. Exhibits 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]