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Investors punished Hexo Corp. stock over the past two days after the Quebec-based cannabis producer announced plans for a discounted equity offering that experts say foreshadows a 2020 where pot companies will struggle to raise cash.

Hexo said on Thursday that it would raise US$25-million by issuing 15 million new shares priced roughly 14 per cent below the Tuesday closing price of its New York Stock Exchange-listed shares. In a note to clients published shortly after the announcement, Cantor Fitzgerald analyst Pablo Zuanic said the move “surprised the market” and the pricing represented a “massive” discount.

The cultivator’s NYSE-listed shares fell 21 per cent on Thursday, and when Canadian markets reopened Friday, Hexo’s Toronto Stock Exchange-listed shares fell 18 per cent to close the final trading week of the year at $2.10. The Canadian closing price represented the stock’s lowest trading value since 2017,

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Not only was the timing unusual, money managers say, but the double-digit discount on an offering that also dilutes the value of existing shares represents the latest challenge facing cash-strapped cannabis companies next year as other fundraising options become increasingly scarce.

“The equity markets are completely closed to [cannabis] stocks and you could argue that the debt markets are closed as well," said Greg Taylor, a portfolio manager at Purpose Investments in Toronto who handles the company’s marijuana holdings. "Everyone is just trying to find different deals and being forced to do more dilutive issues than they would have even imagined a few years ago.

"The fact that a Canadian company would do any sort of deal on a day when the Canadian markets are closed is really not great … and is not normally done from a position of strength.”

Hexo said it intends to use the US$25-million it expects to make from Thursday’s offering to advance “innovation strategies,” although Cantor’s Mr. Zuanic told clients “we wonder about the need” for that money after the company raised $70-million in October by issuing convertible debentures.

Convertible debentures are a popular fundraising method in the cannabis sector. They allow loans to be paid back with equity, provided the borrowing company’s stock-price rises past a certain threshold before the loan must be repaid. Since those debentures were issued, however, Hexo posted quarterly financial results on Dec. 16 that showed net losses were nearly five times larger than they were during the same period one year earlier.

Hexo is one of a number of Canadian cannabis producers to fall below investors’ profit expectations, including Canopy Growth Corp., Aurora Cannabis Inc. and Organigram Holdings. The company is also not the first Canadian cannabis producer to do an offering at a discount to attract financing.

In late October, shares of Zenabis Global Inc. plummeted 40 per cent in a single day after the B.C.-based licensed cannabis producer raised $20.8-million by offering new shares at just $0.15 apiece. The rights offering represented a whopping 73-per-cent discount to the company’s mid-October average trading price of $0.49 a share.

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“We had moved probably a big piece of our position prior to that rights offering, so in hindsight, we got lucky,” said Kevin Reed, chairman and chief executive of BlackShire Capital, a Toronto-based private-equity company. BlackShire was one of the earliest backers of Zenabis and among the company’s largest shareholders before reducing its position last summer. “We were still holding enough that it hurt, though.”

Mr. Reed is not planning on returning any capital to cannabis cultivators any time soon as “there is still a shortage of real, deep institutional money in the [cannabis] category, most of it is still retail and it has been a tough year for retail investors. I don’t see a lot of capital inflows coming in during the early part of 2020 [and all of 2020] is going to be a tough year for capital inflows into the cannabis space,” Mr. Reed said.

As a result, what happened to Hexo and Zenabis before that “is still just a preview of what we are going to have to go through in 2020,” Mr. Taylor at Purpose Investments said. “Deals like this are going to become more common than not in the cannabis space [and] I think 2020 is going to be the year of either mass consolidations or bankruptcies. It will be the survival-of-the-fittest year.”

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