Timing is always important. Sometimes it is even a significant sign.
In the cannabis sector, these can be both. If you want to convince, look no further than what happened at Hexo (NYSE :), (TSX 🙂 in the past week.
The cannabis grower in Quebec issued a press release on December 26, Boxing Day announcing a registered direct offer of US $ 25 million (C $ 32.6 million). At first it seemed a strange timing, because Boxing Day is an official holiday in Canada.
That raises the question: why did the company take this step on holiday?
Although it was closed that day, one could argue that December 26 was not necessarily a strange time to make the announcement. After all, it wasn't a vacation in the US, where the company's shares are also traded on the. But the exact day of the announcement was not all that was strange about the timing of Hexo's move.
But before we go into that, we look at the announcement itself. The company announced that it would issue slightly less than 15 million new shares to reach the target US $ 25 million that Hexo was looking for.
As the statement stated, the company reached a deal with institutional investors "for the purchase and sale of 14,970,062 common shares at an offer price of US $ 1.67 per share for gross proceeds of US $ 25.0 million "
The money will be used as working capital to "fund research and development to further promote the company's innovation strategies."
Although that goal seems rather vague, one thing is clear, the supply devalues ??the existing stock. At a price of US $ 1.67 per share, the offer was also a generous discount on the company's closing price on December 24 from US $ 1.96 (C $ 2.57).
The effect on the shares of the company was immediate. On December 26, the shares fell to a two-year low, ending at US $ 1.53, with a loss of 21.9% on that day. On December 27, when the markets in Canada reopened after the Christmas break, the stock caught up – it lost 18.29% and closed at C $ 2.10 on the TSX.
Another day to think about what the move meant, nothing changed. The stock was hit again yesterday and lost another 4.7% to end the day at US $ 1.53 (C $ 2.00), a new all-time low.
So let's talk about the timing again.
A week earlier, the company unveiled its final quarter for the three-month period ending October 31. Then it showed a loss of US $ 47.4 million (C $ 62.4 million), a substantial increase over the same period of the year. before it recorded a loss of US $ 9.8 million (C $ 12.8 million)
The company continues to burn out its money while shrinking its activities. Nevertheless, it continues to hold on to its expectation to become profitable in 2020. Investors may feel the weight of too much reality to hold onto that expectation.
How expectations did not fully meet reality
Investors who have bet on Canada-based cannabis companies in the past year have experienced the disadvantage that reality does not meet expectations. They can quantify it in the loss of equity value that the major players in the sector have placed since weed was legalized in the fall of 2018.
Another view of the decoupling of the sector between expectations and reality: a recent report from Statistics Canada earlier this month revealed the following: the amount of legal cannabis sold between October 17, 2018, when marijuana was legalized and September 2019 was C $ 907.8 million (US $ 695.6 million), was far below what some analysts had predicted in the run-up to legalization.
Pending legalization, Deloitte predicted that the market would reach C $ 4.34 billion (US $ 3.32 billion) in the first year, while another estimate from Brightfield Group predicted that the market would be C $ 1.56 billion (US $ 1.2 billion).
As we enter 2020, there are fewer positive predictions about the cannabis industry making the news. It is not surprising.
