Neptune Wellness (NASDAQ: NEPT, TSE: NEPT) has posted their earnings for Q3 2020.

Revenue was $9.175M which missed analysts’ estimates of $9.452M

EBITDA was -$7.0M which missed analysts’ estimates of -$3.1M

Like the cannabis industry as a whole, the stock has been absolutely hammered in the past year, currently trading under $3 per share, down from its highers of over $8 per share in July 2019.


Increasing Competition And Falling Margins

It remains to be seen whether the Canadian CBD industry will be a vertically integrated industry, meaning licensed producers make their own CBD with their own flower in-house, or become more segmented like the oil and gas industry where companies specialize in a small part of the value chain.

In the agriculture industry, there is no precedent for publicly traded processing companies. Processing of corn, wheat, and soybeans is done privately through cooperatives or by individual farmers, telling us profit margins are thin. So far in cannabis, large licensed growers have signed small extraction agreements with third-party firms while building their own in-house extraction capacity at the same time.


A Price War Might Be Inevitable

Per gram of capacity, it is much cheaper to buy extraction equipment than it is to build a greenhouse and start growing.

For example, it costs $1.50-$3.00 per gram to build a cannabis greenhouse compared to $0.10-$0.30 cents per gram for extraction equipment. It is very easy for new entrants to enter into the CBD extraction market.

Public Market Value Per Gram of Capacity

Source: Grizzle Estimates

Current high premiums on CBD will lead to a price war and a quick race to the bottom.


Reliance On Hemp For CBD Will Squeeze Profits Due To Lower Yields

Some will make the argument that exploding CBD demand requires fields of hemp to satisfy consumers and they are technically right.

Canada harvested 135,000 acres of hemp in 2018 or 43 million kg of raw hemp. This dwarfs the 500,000 kg of public extraction capacity.

However, a kg of hemp yields only 18 grams of CBD, while a kg of cannabis yields 170 grams of THC, 10x more.

Economics are worse too, with wholesale CBD extract selling for $6.50 per gram compared to THC extract at $40/gram.

If extractors process hemp instead of cannabis their revenue potential would be significantly lower and they would wildly miss consensus estimates.


Neptune’s Troubles Include A Lawsuit And The Love Of Burning Money

In May 2019, a prior CEO of Neptune sued the company for $8.5 million of unpaid wages and additional stock. Neptune ended up settling with the former CEO and agreed to issue 600,000 common shares from treasury and transfer 2,100,000 shares of Acasti Pharma Inc. held by the Corporation to the former CEO. In addition, Neptune also agreed to reimburse the nominal legal fees associated with this lawsuit.

This no doubt put a dent in Neptune’s financial health in a company that is already suffering from a cash crunch.

Currently, Neptune sits at a current ratio of just above 1. At its current burn rate, Neptune will run out of cash within the next 3 months unless it issues more shares at the cost of diluting the shareholder, or find some other method to raise more money.

Years of Cash Left at Current Burn Rate

At best these extraction stocks are likely dead money until investors get excited a month before next quarterly earnings, better to wait for the prize then (don’t tie up your capital now).

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