It’s been a long month for those of us looking for financial statements. January is a relatively fallow period for reporting in legal cannabis, and aside from Canopy and Aurora, there hasn’t been much forthcoming.

The onslaught will come soon enough as earnings week month kicks off in a couple of weeks.

I did notice Neptune Wellness ($NEPT) dropped their latest quarter last Thursday (February 10th). I genuinely have zero interest in this outfit, but for it’s use as example of everything ‘bad’ about some public companies out there.

Their initial business model; subsequent pivot(s); a ridiculously high level of CEO compensation; cash grab during market hype (and being tossed into an incinerator); a previous CEO (somehow) acquiring a 1% royalty on sales in perpetuity……from an investor standpoint: its’ all bad.

One wouldn’t get that perspective from their press release announcing these financials, which was pretty upbeat all things considered. Let’s have a look at these latest financials, and look to see if there’s been any activity around the sale/merger (‘strategic partnership’) for Neptune we surfaced in our last Structure.

Their share price hasn’t been lifted much since these statments were released:

To the finanicals!

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• Cash dwindling rapidly, down to $16.6MM in this quarter. 9 months ago they were sitting on $75MM(!).
• Over this period, $NEPT has reported $46MM in sales, and a total gross margin of $1MM (excluding inventory impairments). Yikes.
• That’s set against $61MM in SG&A. Sales of cannabis are up $3MM QoQ (from $1.5MM to $4.4MM), they’ve some hard traction in the space, even if small.
• A closer reading though reveals that $1MM of those ‘revenue’ increases were due to provisions for returns being written down. A positive to be sure (if it bears out), but unless one digs for it, it’s hard to find.
• As is reported gross margin by segment. These financials are largely scattershot, and forces the reader to back into/impute/hunt for information. All in, they report 24% gross margin on weed.
• Which means, of the $2MM positive gross margin reported corporately this Q, $800k of it came from weed. Another way of saying it: 40% of all positive gross margin reported came from 24% of overall revenue. I can’t tell you what’s being attributed corporately to the subunit, it’s not disclosed.
• It’s in the ADJ EBITDA calculation we find out that they’d spent $6.5MM on D&O insurance for the CEO this Q(!). More below.
• A/P has ballooned to $30.7MM – up $11MM QoQ. More below.
• They’ve taken legal in-house, hiring a couple of people, and claiming significant savings on fees go forward. Indeed, it looks like they’ve poached a lawyer from a law firm who’d been working with them.
• And the lawyers are going to be busy, as $NEPT has legal actions arising on several fronts. Note 14 (Commitments and Contingencies is 2 1/2 pages long.

Ok. I could go on, but this is like walking waist deep in mud. I don’t mean looking at the business (it’s all of that btw), I mean in terms of getting anything out of these statements. It’s largely there (kinda sorta), but I think the underlying story is far removed from the presentation in their statements. We’ll come back to this in a moment.

Their asset array is hideously skewed to Canada, likely a hangover from being a (relatively) early entrant in legal cannabis. Their Sugarleaf saga is seeing a wind down in assets, as $NEPT cites cratering cannabis prices in the US leading them to shutter a facility in North Carolina, and all inventory being sold for $300k. I can’t back into any detail in this, one of the issues around poor overall disclosure. What this does tell me is that almost 50% of total revenue originates from the US, despite having no notional PP&E there. $NEPT could simply be very active shippers, but again, I can’t tell what comes from where:

One of the cutest lines is from their MD&A, where its’ pointed out that gross margin has improved 312% YoY. Well then…..:

$NEPT addresses their <ahem> near-term cash requirements in their conference call (you can find it around the 14 minute mark). Because as we’ve seen, that A/P number needs attention. The CFO acknowledges that debt is likely going to be the path forward – and they’re in discussions to secure some $20MM+- in short order.

A good chunk of the increase in A/P stems from an $7MM USD ‘bonus’ the CEO was granted to negotiate a ‘strategic partnership’ on behalf of $NEPT. Laughingly – as we covered in our previous Structure – whether a deal was successful or not, it was going to be paid. Again, I have no words.

If I was a shareholder, I’d be absolutely livid. Particularly when the CEO received $52MM in compensation over the year:

Which, brings us back to what I alluded to above: the story here.

$NEPT has burned $60MM in cash over 9 months on an unprofitable business that sports a total of ~=$60MM/yr run rate. They’re not only heading for a wall, the vehicle is picking up speed while doing it. A $20MM debt infusion – ostensibly a bridge loan – won’t span the river they’re trying to cross, and at best, looks simply a stopgap.

The recent surge in cannabis equity prices (if it can be called a surge) has passed them by. A $20MM sales run rate in Canadian cannabis is attracting little attention at the moment, and heading out now for a raise isn’t going to thrill anybody. And what does this outfit offer? Baby food, nutraceuticals, beverages (of some kind), wellness products, and weed.

It’s a coat made of patches, which underlies my reaction to the CEO pulling out $60MM+ over the past 18 months putting this Frankenstein together. That he was so well rewarded – for this thing to be in its’ current state? I mean, seriously.

Ultimately cannabis makes up some 24% of total revenue, which is $4.4MM this quarter. Yeah, whoopee ding. But, what catches my story eye is the intensity of interest and acceptance of their cannabis subunit and brand ‘Moodring’. The reviews for their weed are largely positive, and after sharing a few laughs with several reviewers about the quality of the actual company – they are uniform in saying how good the weed is. That’s uncommon (generally speaking) in the sector outside of a very few.

I’d temper that by contrasting that with actual total sales. I mean, Village Farms ($VFF) really moves product – and while there’s cachet and eminence in selling the ‘good stuff’ – the mass market hinges largely on a price/quality axis.

Could the cannabis unit to be spun off? Cash will need to be had, and this is about the only thing of value here that I can see. But that notion – even if the subunit is spun out, what remains?

We’ve looked recently at Canopy Growth ($WEED) and Aurora’s ($ACB) latest financials – not because we’re enamoured by them as investments (or trades). Quite the opposite. We put them (and $NEPT) forward because TheCannalysts believe often one can learn as much or more from a company that’s doing poorly than one that’s successful.

They can provide early warning signs, and how results are presented and discussed can be a great look into the mind of management. The conference call is in stark contrast to the press release, as it actually says something useful: $NEPT details that the share price is offside with NASDAQ, and they’re now on a 6 month clock; that securing financing is not guaranteed; and that disruption in obtaining capsules will keep cannabis sales flat next quarter.

Something’s gonna give here, sooner than later. Look for how expensive the debt will be if they get it, or for possible moves in being taken out/M&A.

The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in any of the companies mentioned.