Neptune Wellness Solutions (NEPT) has been on a tear lately, soaring nearly 40% since July 9 to trade at $6.14 per share as I write. Taking into account the catalysts driving the share price, it suggests a strong growth narrative over the long term.
While that's true, there's something the market is neglecting because of the positive outlook investors have for Neptune at this time, and that is in the short term, it will be challenged by cash limitations if it isn't able to generate revenue in the near future.
Recent private placement of common stock and expansion
A recent catalyst was the announcement by the company it had completed a private placement of common stock that brought the company another $41.4 million in capital. That has helped alleviate concerns over the small $9.8 million in cash on hand the company had at the end of March.
Proceeds will be used in part to fund the $18 million acquisition of SugarLeaf Labs and Forest Remedies LLC. Terms of that deal were $12 million in cash and the $6 million in common stock. The remainder will be used for working capital and general corporate purposes.
The addition of SugarLeaf will help boost its extraction capacity from 200 metric tons to 1,500 metric tons. This follows up on the announcement a couple of weeks ago that Health Canada approved of permits for adding an expansion room using cold ethanol extraction. That is expected to increase input capacity for Neptune from 30,000 kilograms to 200,000 kilograms.
The company also received an amendment from Health Canada that allows it to expand an encapsulation room. That increases production capacity of cannabis oil capsules that use Licaps tech that the company has licensed from Lonza Group AG.
Neptune will have capacity to produce as much as 200 million capsules yearly.
The company has already started the process of bring commercial operations on line in the second fiscal quarter. This is important because the company could become squeezed in the short term even with the successful common stock placement.
Even though Neptune has been attracting a lot of investor interest, the reality is it has sold very little in the way of cannabis products. In the last reporting period it only sold $12,000 worth of cannabis extracts; the first time it competed in that market.
In the immediate future, the company guided for less than $1 million in sales for the cannabis segment in the first fiscal quarter of 2020. Part of that comes from the inept Health Canada that has been slow in approving licenses in general. The license Neptune is waiting for will cover all of its existing extraction capacity of 200 metric tons.
The good news is the company has sold out of existing capacity for fiscal 2020 and fiscal 2021. Expansion and acquiring Sugarleaf were the key way the company has chosen to reduce the short-term challenges associated with low sales.
For that reason, even with the additional capital, if it isn't able to grow sales significantly in the near term, it will struggle to perform in accordance with growing expectations. There's also the uncertainty surrounding Health Canada and how long it'll take in the approval process. That could mean the company may not be able to utilize the added capacity until some time in 2020.
With a net loss of $12 million in the last reporting period, it won't take long for Neptune to burn through the $41.4 million. It definitely needs to start generating more cannabis revenue before it becomes an albatross around its neck.
Over the long term Neptune Wellness Solutions has a lot of potential. But perhaps more than many of its competitors, it has short-term cash challenges that could rapidly become a major headwind if it can't find ways to generate more revenue from cannabis.
With its wholly owned subsidiary, 9354-7537 Quebec Inc. now being granted its license amendments from Health Canada, which boosts its extraction capacity to 200,000 kilograms, the long-term prognosis for Neptune looks good.
As with a number of its peers, it must find answers to short-term capital requirements as the growth process appears that it'll take longer than expected because of matters outside of its control, by which I mean a slow-moving Health Canada.
As for matters within its control, it does need to ramp up extraction capacity in the near term in order to meet the requirements of its customers, which are ready to buy up its capacity over the next couple of years.
Once the stock takes a breather, I believe investors are going to start looking closer at its short-term prospects and how its going to handle the sales challenges as it continues to burn cash.
The share price will probably take a hit once it's understood the value of the stock will remained locked in for some time.