Neptune(NEPT) - 2024 Q2 - Quarterly Report

Front Matter Company Information 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] 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 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] - 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] - Actual results and developments may differ materially from expectations due to significant business, economic, and competitive risks, uncertainties, and contingencies[10][11] RISKS FACTORS SUMMARY 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] - 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] - 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] PART I. FINANCIAL INFORMATION Item 1. Financial Statements (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][55] - 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][59] - 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][52] Condensed Consolidated Interim Balance Sheets 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] - 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] Condensed Consolidated Interim Statements of Loss and Comprehensive Loss 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] - 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] - 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] Condensed Consolidated Interim Statements of Changes in Equity 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] - Share capital increased by $3,273,342 during the six months ended September 30, 2023, due to direct offerings and warrant exercises[34] Condensed Consolidated Interim Statements of Cash Flows 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] - 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] Notes to Condensed Consolidated Interim Financial Statements Note 1. Reporting entity 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][180] - 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][47] - 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] - 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][52] Note 2. Basis of preparation 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] - The reporting currency changed from Canadian dollars to U.S. dollars effective March 31, 2022, and was applied retrospectively[56] - The functional currency changed from Canadian dollars to U.S. dollars effective October 1, 2022, and was applied prospectively[59] Note 3. Significant accounting policies 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] - 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][66] - 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] Note 4. Business combination and disposal 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] - 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][72] - 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] Note 5. Inventories 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] - In the prior year, impairment losses for the six months ended September 30, 2022, were $3,079,997, primarily related to cannabis inventory[74] Note 6. Property, plant and equipment 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] - 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] Note 7. Goodwill and intangible assets 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] - Trademark intangible assets on Sprout's books were also impaired by $15,385,531 in the fourth quarter of fiscal year 2023[78] - 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] 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 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] - 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][86][172][173] - 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] Note 9. Provisions 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] - 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] - A $2,750,000 shareholder class action settlement was paid on October 10, 2023, through the issuance of 2,522,936 common shares[100][171] - Additional legal fee obligations totaled $1,656,861 as of September 30, 2023[100] Note 10. Liability related to warrants 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][96] - 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][99] - 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][101] - 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][111] Note 11. Capital and other components of equity 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] - 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][124] - 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][125] - 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][126] Note 12. Non-controlling interest 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] - Sprout's revenue decreased by 32% year-over-year for the three-month period and 15% for the six-month period[129] - Subsequent to the period, Neptune increased its ownership in Sprout from 50.1% to approximately 89.5% through a debt-to-equity conversion[173] Note 13. Share-based payment 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] - 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] - 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][149] Note 14. Loss per share 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] - 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] Note 15. Fair-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] - 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] Note 16. Commitments and contingencies 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] - 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] - 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] - 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][166] Note 17. Operating Segments The company measures its performance as a single consolidated segment - The company operates and measures its performance as a single consolidated segment[169][223] 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][244] - U.S. revenue decreased by 32% for the three-month period and 22% for the six-month period[230][244] Note 18. Subsequent events 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] - On October 13, 2023, Neptune repaid its senior secured notes with CCUR Holdings, Inc. and Symbolic Logic, Inc., totaling approximately $2.3 million[172] - 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] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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] - All amounts in MD&A tables are in millions of U.S. dollars, except for per share data[177] 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][179] - 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] BUSINESS STRATEGY 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] - 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] - 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] - 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] SALES AND DISTRIBUTION 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] - Nutraceuticals are also sold directly to U.S. retail stores through its website forestremedies.com and other e-commerce websites[185] - 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][187] OUR B2C BRAND PORTFOLIO STRATEGY 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] - MaxSimil is a patented Omega-3 fatty acid delivery technology with superior absorption, sold as a supplement and in combination with specialty ingredients[187] - 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] - 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] 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] - 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] - Neptune differentiates its products and marketing through product quality, customer service, marketing support, pricing, and innovation to effectively compete in the market[189] 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] - Quarterly results may fluctuate significantly due to the timing of nutraceutical contract manufacturing orders and customer ordering patterns[190] BUSINESS UPDATE 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] - 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][196] - Sprout's $13 million secured promissory note with MSEC had its maturity date extended to December 31, 2024, with increased interest rates[198] - An arbitrator awarded PMGSL approximately $4.0 million against Neptune, which the company strongly disputes and intends to challenge[202] - 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][204] RECENT CORPORATE DEVELOPMENTS Lisa Gainsborg was promoted to Interim Chief Financial Officer - Lisa Gainsborg was promoted to Interim Chief Financial Officer, succeeding Raymond Silcock[206] - Berkowitz Pollack Brant Advisors + CPAs was appointed as the new independent registered public accounting firm, replacing KPMG LLP[207] - The company received Nasdaq notices for non-compliance with minimum bid price ($1.00) and minimum shareholders' equity ($2.5 million) requirements[208][211] - 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] - Nasdaq granted extensions for minimum bid price compliance until December 26, 2023, and for shareholders' equity compliance until January 16, 2024[209][211] SELECTED CONSOLIDATED ANNUAL AND QUARTERLY INFORMATION 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][241] - Adjusted EBITDA loss decreased by 76.5% year-over-year for the three-month period and 48.9% for the six-month period[227][241] - Working capital remains negative, deteriorating from $(17.484 million) as of March 31, 2023, to $(26.314 million) as of September 30, 2023[214] CONSOLIDATED FINANCIAL ANALYSIS 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] - 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] - 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] 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 Neptune operates as a single consolidated segment - The company's management structure and performance are measured on a single consolidated segment basis[223] 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 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 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] - 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] - Impairment losses decreased by $24.6 million (100%), mainly because Sprout's intangible assets were fully written off in the prior year[236] Six-month period ended September 30, 2023 compared to September 30, 2022 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] - Gross profit improvement was due to a $11.5 million decrease in cost of sales, offsetting an $8.9 million decrease in revenue[246] - Net finance costs significantly increased by $3.7 million (283.9%), primarily due to higher interest expense on financing facilities[251] FINANCIAL AND CAPITAL MANAGEMENT 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 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] - 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][259] Loans and borrowings 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] - On October 13, 2023, the company repaid its senior secured notes of approximately $2.3 million early[263] - Sprout's $13 million secured promissory note with MSEC was extended to December 31, 2024, with increased interest rates[264] - Sprout obtained an accounts receivable factoring facility, later expanded to include inventory financing, with a maximum available amount of $7.5 million[268] CAPITAL RESOURCES 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] - The company's accounts payable and other payables exceed its total current assets, indicating a severe liquidity position[270] - The company requires immediate funding to continue operations; failure to obtain funding could lead to cessation of operations and asset liquidation[270] Liquidity and Capital Resources 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] - Operating activities used $0.8 million and $4.5 million in cash for the three and six months ended September 30, 2023, respectively[273] - Investing activities used a small amount of cash ($0.1 million) for both the three and six months ended September 30, 2023[274] - 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] - 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] ACCOUNTING POLICIES 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] - Management makes estimates and judgments when preparing financial statements in accordance with U.S. Generally Accepted Accounting Principles[295] CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS 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][302][304] - 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][301] - 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][303] - 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][312] - 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][316][318][320][321] - 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] CHANGES IN ACCOUNTING POLICIES AND FUTURE ACCOUNTING CHANGES Accounting policies and measurement bases remain consistent annually - Accounting policies and measurement bases remain consistent annually[322] - The functional currency changed from Canadian dollars to U.S. dollars effective October 1, 2022, and was applied prospectively[323] ISSUED AND OUTSTANDING SECURITIES 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][324] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] Item 4. Controls and Procedures 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 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] - As of September 30, 2023, internal control over financial reporting (ICFR) was also deemed ineffective due to material weaknesses[330] - 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][334] - Due to these weaknesses, material misstatements were identified and corrected in the consolidated financial statements for the year ended March 31, 2023[333] Remediation Plan 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] - Remediation efforts include establishing policies and procedures, designing comprehensive risk assessments, strengthening process-level and IT general controls, and recruiting skilled personnel[337][338][340] - Personnel turnover over the past twelve months has delayed the implementation of the remediation plan[338] - 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] PART II. OTHER INFORMATION Item 1. Legal Proceedings 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] - Resolution of legal proceedings could adversely affect the company due to legal costs and diversion of management time and resources[342] - 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] Item 1A. Risk Factors 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] - 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][350][351] - 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] - 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] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] Item 3. Defaults Upon Senior Securities This item is not applicable to the company's reporting period - This item is not applicable[355] Item 4. Mine Safety Disclosures This item is not applicable to the company's reporting period - This item is not applicable[356] Item 5. Other Information No other information is reported under this item - No other information is reported under this item[357] Item 6. Exhibits 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] SIGNATURES 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]