Message to the

Dear Shareholders:

As we complete one year and look forward to the next, we feel it is important to begin by briefly reflecting on the past fiscal year, ending February 28, 2013. For the first eight months Neptune had a model business, delivering strong operating and financial results.  The Company made solid strides extending its reach and client base. This, coupled with our plant expansion project, investments in research & development and intellectual property (IP), and a completed public offering of approximately US$34.1 million, was positioning Neptune for accelerated market share growth.  Unfortunately, things abruptly changed on November 8, 2012, when an accidental explosion and fire rendered Neptune’s production plant in Sherbrooke, Québec, Canada inoperable and resulted in the loss of life and injury to others. 

At that moment, our immediate and top priority was to ensure the safety and well-being of Neptune employees and families affected by this event.  With help from various government agencies, Neptune provided employees with counseling and support services.  To help those most closely touched by the incident we also established a Special Assistance Fund, which included contributions from Neptune and a number of our customers. The Special Assistance Fund has allowed us to allocate aid to several employees and families in need, including provisions for some employee salaries on an interim basis. The fund was very successful in helping to meet the immediate needs of victims and their families, and therefore we kept it in place and established a non-profit organization to assist in the collecting and redistributing of donations.

In parallel with taking care of our employees, we immediately assessed the situation to determine our most urgent priorities and mitigate the negative consequences. Through our quick response, the Neptune management team immediately established five committees composed of senior management and key personnel and an action plan focusing on aiding employees, stabilizing and re-starting production, maintaining customer relationships and brand image, and managing financial resources to ensure continued product development and patent defense. Our decisive approach enabled Neptune to effectively manage through a very difficult period and put in motion key initiatives to ensure our company is positioned for a strong recovery and continued market momentum.

As we close this difficult chapter in our company’s history, the Board of Directors, and Neptune’s leadership team want to again extend our heartfelt condolences to those touched by this tragic event. We would also like to acknowledge the incredible efforts of the Neptune team to quickly assess, control and handle the situation and help all those affected. Finally, we would like to thank our partners, customers and shareholders for their ongoing support as we navigate through these events and rebuild to emerge even stronger.

Action Plan Progress

Neptune’s rapid response has resulted in good progress to date. We have three key priorities for restoring and ramping up our long-term supply chain, including rebuilding our plant, establishing third party manufacturing partnerships and securing supply of raw materials.

The company is working hard to bring its production capacity back online before the end of this fiscal year.  We have received permits for our Sherbrooke plant—both environmental and municipal—necessary to begin rebuilding and we expect to begin during the second quarter of the current fiscal year.  The Sherbrooke facility could have the capacity to produce more than 150,000 kilograms of krill oil per year.

As we work to restoring our production capacity, we are also taking positive steps to secure and increase our long term supply chain through third party manufacturing agreements, thereby broadening, strengthening and safeguarding future operations. We are now evaluating three confirmed options and a decision should be taken by the end of the second quarter of this fiscal year. In addition, we are in the midst of exploring and undertaking partnerships that will allow us to ensure ongoing supply to our customers while production is being reestablished. Finally, we are also revisiting and renewing our raw material contracts with fisheries and suppliers, a vital step in maintaining the high quality for which Neptune is known. 

On the sales and marketing front, our quick reaction to the incident has enabled us to maintain the Neptune name and brand equity in the marketplace. And despite the obvious production disruptions, we have maintained a significant portion of our pre-incident client base through strong customer relationships, creative supply management and margin concessions.

We are making good progress, and we will continue to execute our action plan to strengthen Neptune’s foundation and reaffirm its market leadership as the premier krill oil manufacturer.

Financial and Company Highlights

Neptune’s financial results for the fiscal year ending February 28, 2013 were negatively impacted by the November 2012 incident that rendered its plant inoperable.  Despite this, the Company demonstrated strong revenue performance, with sales climbing to a high of $25.9 million. Almost all of the Company’s revenues came from the nutraceutical segment, which had annual revenues of $25.2 million, up from $19.1 million in the preceding year.  The nutraceutical segment suffered a net loss of $12.8 million, versus net profit of $2.4 million in the previous year. Neptune’s consolidated net loss was $20.0 million, compared to a net loss of $4.6 million in the prior year, mainly due to the loss of part of our production facilities caused by the November 2012 incident.  The Company’s losses were somewhat mitigated through strong financial controls, including a management reorganization and a 20% salary reduction by all employees during the implementation of Neptune’s plan to resume production.

In October 2012, Neptune completed a major financing for US$34.1 million.  This provides the Company with a sound financial foundation to help deal with the consequences of the November 2012 incident and support its strategic initiatives.  At the end of our 2012-2013 fiscal year, Neptune had consolidated working capital of $41.6 million.  A detailed financial and business review can be found in the accompanying Financial Statements and Management Discussion and Analysis.

Beyond our financial performance, we also added to the expertise of the leadership team by naming Dr. Harlan Waksal to the Neptune board of directors.  Dr. Waksal has broad experience within the pharmaceutical industry and currently serves as Executive Vice-President, Business and Scientific Affairs at Acasti Pharma Inc. (Acasti), a Neptune subsidiary.

Community engagement and environmental responsibility are important company initiatives that we actively support. In November 2012, we hosted our first annual charity event in Las Vegas, the proceeds of which benefit Vitamin Angels, a non-profit organization dedicated to reducing child mortality worldwide with micronutrients. In addition, after engaging in a rigorous process with “Friend of the Sea” (FOS), an internationally recognized organization that verifies the sustainable origin of marine products, we became the world’s only krill oil manufacturer at the time to receive a FOS certification.

Looking Forward

As we look ahead, our business milestones are clear.  We are committed to growing our customer base and presence in the market, while continuing to explore and clinically validate new product applications.  Acasti and NeuroBioPharm Inc., our two pharmaceutical subsidiaries focusing on the development of active pharmaceutical ingredients that target cardiovascular and neurological conditions respectively, are evidence of our commitment to researching and developing new products and both hold bright futures.  We will rebuild and strengthen our production capacity and create hedges against future supply disruptions by securing strategic relationships within the industry.  And we will continue our course of building and aggressively defending our unique IP portfolio, all while remaining focused on our overriding objective of maximizing shareholder wealth.

Enabling a Healthier World

Our new products continue to provide exciting breakthroughs for cardio, neurological and joint health. We will continue to develop new nutraceutical products that leverage and validate the strength of our family of Neptune Krill OilTM products.  

On the pharmaceutical side, Acasti received encouraging clinical data on CaPre®, its prescription drug candidate developed to address the prevention and treatment of cardiometabolic disorders including hypertriglyceridemia. To date, preliminary results from CaPre’s® open-label clinical trial demonstrated an important and statistically significant triglyceride reduction as compared to standard of care. Patient recruitment has now been completed and we are looking forward to our final report on our open label Phase II clinical trial in the summer of 2013. We anticipate the double blind Phase II clinical trial results to be available during the first half of 2014.

Acasti also continues to evolve its business and in 2012 announced its prepayment of all future royalties to Neptune – subject to shareholder approval. Being a royalty free corporation brings it more flexibility and value in negotiating deals with potential business partners. For Neptune, this agreement increases its equity participation in Acasti.

Our other subsidiary, NeuroBioPharm has also been busy leveraging Neptune’s strong omega-3 phospholipids patent portfolio. NeuroBioPharm is developing medical foods and over the counter (OTC) products that will benefit the treatment of cognitive decline, ADHD, memory, concentration and learning disorders. Currently these products are in development and validation and some are in early preclinical/clinical testing stages with commercial production of the first one expected to begin in 2014.

Patent Portfolio Strengthening Market Leadership

The exceptional strength of Netpune’s IP portfolio resides, in part, in its diversity. We not only have application and process patents, we also have vitally important composition patents which protect the exclusivity of our products.  And we continue to build on our patent portfolio, ensuring a very long life for our patent estate in both the nutraceutical and pharmaceutical segments of the business.

We also remain tenacious in the defense of our IP. A prime example is the U.S. International Trade Commission’s (ITC) investigation of alleged patent infringements by a number of companies regarding the importation into the United States and sale of certain omega-3 extracts and products that infringe certain Neptune and Acasti patents. Neptune and Acasti requested that the ITC issue an exclusion order and a cease and desist order to ban the importation and sale of infringing extracts and products. We believe we are very well positioned to prevail in this matter and are looking forward to further solidify the unique nature of our product offerings and our position in the marketplace.   The ITC decision will be rendered during 2014 and will be immediately enforced, even if there is an appeal.  Neptune hopes all industry members will recognize and respect a company’s intellectual property, hence maintaining strong ethical business standards in the industry.  

A Bright Future Ahead

In spite of the temporary setbacks, we are enthusiastic about the future.  Incredible opportunities await Neptune and its products in a multi-billion dollar, double-digit growth market—a market that should continue to grow as the well-established health benefits of phospholipid omega-3 become even more widely known.

Our past achievements and future goals could not be made possible without the ongoing commitment and support of our employees, management team, Board of Directors, shareholders and customers.  We would like to take this opportunity to thank them for the tremendous contributions they have provided and the confidence they have in our company.  Through all of this, we remain confident in our Company’s strategic direction and ability to execute in order to build greater shareholder value, and enable a better, healthier possible way of life for the world.

Dr. Ronald Denis

Henri Harland

    André Godin

Chairman of the Board

President and Chief Executive Officer

    Chief Financial Officer