What happened
Shares of Neptune Wellness Solutions (NEPT +0.00%) rose nearly 21% today after the company announced it had completed a private placement of common stock that provided $41.4 million in gross proceeds. That haul will pad a balance sheet that held just $9.8 million in cash at the end of March and comes at a critical time for the business, which specializes in extracting cannabinoids from raw cannabis plants for use in various products.
The funding will pay for the $18 million acquisition of SugarLeaf Labs, which comprises a $12 million cash payment and a $6 million payment in common stock. It should also help Neptune Wellness Solutions make progress on its stated goal of expanding its cannabinoid extraction capacity to 1,500 metric tons. It owns just 200 metric tons of extraction capacity today from a single Canadian facility.
As of 11:01 a.m. EDT, the stock had settled to a 18.6% gain.
Image source: Getty Images.
So what
Investors are excited about the niche opportunity in the cannabis market for Neptune Wellness Solutions, but the business has only just begun to sell cannabis products. It reported its first-ever sale of cannabis extracts, for $12,000, in the fiscal fourth quarter of 2019 (the three months ended March 31). Management cautioned that cannabis segment revenue won't top $1 million in the fiscal first quarter of 2020 because the company is awaiting an operating license from Health Canada for substantially all of its current 200-metric-ton extraction capacity.
Sales should ramp up considerably once the license is granted, but the business has sold out all its existing capacity for both fiscal 2020 and fiscal 2021. Management has scrambled to remove that bottleneck, approving a 1,300-metric-ton expansion of the Canadian facility (down from a previous plan to expand capacity to 6,000 metric tons) and agreeing to acquire SugarLeaf Labs, which would add extraction capacity in the United States.
Now what
The private placement appears to de-risk the financial aspect of near-term expansion efforts. Neptune Wellness Solutions previously stated that the 1,300-metric-ton expansion would be completed before the end of calendar 2019, at a cost of $4 million. Of course, the expansion would require Health Canada's stamp of approval, which could put the extra capacity off-limits until 2020. It's also worth noting that the business reported a net loss of $12.4 million in the most recent quarter. That suggests the $41.4 million in gross proceeds could be expended relatively quickly, which makes successful operations from existing assets all the more important for shareholders.
