This is a copy of the April 14th edition of our weekly Newsletter, which we have been publishing since October 2015.
Rapid growth and an increasing pace of consolidation in the market are drawing attention from investors and leading to appreciation in the prices of cannabis stocks, but this week we saw the beginning of what might develop into a near-term overhang on the market: Capital Raising.
While the equity and convertible debt offerings we tracked were not especially large in size, there were several announced this week, and some of them crushed the stocks involved. For example, Canadian LP Zenabis Global declined 28% on Friday after pricing a C$25 million Unit offering. Other companies raising capital in April included Canadian LPs Eve & Co (C$10 million) and Heritage Cannabis (C$15 million), Canadian Retailers High Tide (C$10 million) and Westleaf Cannabis (C$12 million), U.S. cannabis companies Cannsortium ($25 million) and Ionic Brands (C$20 million) and CBD companies Abacus Health Products (C$30 million) and Wildflower Brands (C$15 million). In aggregate, the amount being raised totaled about C$162 million, which is an amount that is not likely to have a major impact on the market unless it opens the floodgates to more deals. Greenlane is in the middle of an IPO that could add more than US$98 million.
When companies are raising capital, it can temporarily depress their own stock prices, but it can also weigh on the entire sector, as often investors will sell the stocks in other companies to fund new purchases. From our vantage, it seems as if money is continuing to flow into the sector, so fresh money should absorb most of the deals to date, minimizing the potential impact across the entire sector.
Over the past few years, clusters of capital-raising have resulted in sharp declines in the sector. Most recently, several MSOs raised capital in late Q3 and early Q4 ahead of going public and pressured stocks. Previously, there were two waves of capital raising by Canadian LPs that resulted in sharp pullbacks as well. While it’s too early to know how close we are to the point of too much near-term supply of stock pressuring the sector, we know that several companies could come to market given the recent filing of base shelf prospectuses by Aurora Cannabis, CannTrust, Charlotte’s Web, Emerald Health, HEXO Corp, MedMen, Neptune Wellness Solutions and Trulieve. So, for now, this is a trend to monitor and not yet a reason to fear a downturn.
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