The Cann Group Ltd (ASX: CAN) share price has tanked this morning after the cannabis grower announced a $24.3 million capital raising at a steep discount to yesterday’s closing price. Shares were trading down 16% at the open in response to the raising, which aims to provide working capital. Since then, the Cann Group share price has continued edging lower and is currently sitting at 66 cents at the time of writing.
What does Cann Group do?
Cann Group is a cannabis cultivator with a vision to be a leading developer and supplier of medicinal cannabis products. The company has established cultivation and R&D facilities in Australia and is pursuing a fully-integrated business model that will enable it to establish a leading position in plant genetics, breeding, cultivation, production and manufacture of medicinal cannabis products.
In January, the company announced a strategic reset in response to disruption in the global cannabis market. An excess supply of cannabis meant the company chose to focus on initially meeting Australian domestic demand while reducing operating expenses to transition to profitability. Plans for Cann Group’s new Mildura facility were revised to take a staged approach to construction given higher than expected supply of cannabis globally. To date, funding for construction has not been secured due to the impacts of COVID-19.
What are the details of the capital raising?
Cann Group is raising capital to support its near-term growth plans. The company is not yet profitable and reported an operating loss of $8.4 million for 1H FY20. At 31 December 2019, Cann Group reported cash and cash equivalents of $8 million, down from $43 million at 30 June 2019. In February this, year Cann Group completed the issue of $8 million in convertible notes to provide for working capital purposes.
Under the current capital raising, Cann Group has received firm commitments from sophisticated and institutional investors to raise $14.3 million at 40 cents per share. Up to $10 million will be raised under the share purchase plan with shares issued at 40 cents. The Cann group share price hit a high of $1.69 in January before dropping to a low of 61 cents in March. Shares were trading at 82 cents at close of market yesterday, meaning the capital raising is occurring at more than a 50% discount to yesterday’s share price.
What is the outlook for Cann Group?
Cann Group is predicting revenues of $15 million in FY21, underpinned by existing supply contracts. Commercial supply agreements for medicinal cannabis products and dried flower products have been secured for Australia and export markets, including the United Kingdom and Europe. While its major shareholder, Aurora Cannabis Inc, did not participate in the placement, Cann Group believes Aurora remains committed to the strategic relationship.