Languishing pot stock Cann Group Ltd [ASX:CAN] is being punished by investors today.
The CAN share price is down 14.47% at time of writing, falling substantially as management revealed a decent quarterly result and plans for a fresh capital raise.
As you’d expect, the market didn’t respond too kindly to this news. Especially given the size of the requested capital.
Let’s dig into the details…
Decent sales, big operational costs
First, the good news.
Cann has managed to achieve just over $2.7 million in sales for the quarter. Which is a substantial portion of their unaudited $4.29 million total for the financial year.
A good sign that the cannabis producer is starting to gain some traction. Particularly from international buyers, with 21,000 of their 30,000 units sold to overseas markets.
However, this was offset by rising manufacturing costs and spending on new facilities/infrastructure — an ongoing concern that has dragged down an otherwise decent quarterly result.
But management apparently has a plan to combat these issues.
With a proposed initiative that could net Cann up to a 60% reduction in these manufacturing costs. Saving up to $23 million per year when their extraction process is at full capacity.
The catch, however, is that they need more money to put this plan into practice…
With management proposing a $20 million capital raise to realise these cost-saving measures, as well as provide some working capital for marketing and distribution efforts to accelerate growth opportunities.
As CEO Peter Cook explains:
‘We expect that the funding we are seeking via this capital raising will be sufficient to support our operations and expansion as we build our revenue base and move towards sustainable profitability.
‘While the past 12 months presented significant challenges in terms of COVID-related delays — particularly on the regulatory front — the Company has generated in excess of $4.2 million in revenues and has established key supply partnerships here in Australia and overseas.’
What’s next for the Cann Group share price?
For investors, the key takeaway is to decide whether they want to be a part of this capital raise or not.
Cann has already secured half ($10 million) of the funds from institutional investors. Raising the funds at a 27.5-cent price, with some of Cann’s own directions also joining in.
Now, that same offer price is being extended to retail investors — giving them the chance to also pick up some discounted stock up to a certain limit.
So whether investors like it or not, their stock has already been diluted.
As for whether these funds will lead to a net positive result in the future, no one knows. But that is clearly what Cann’s management is hoping to do. Banking on the small, but growing, sales to continue climbing higher.
Does that mean you should buy Cann shares right now, though?
Tough to say, as it depends on your risk tolerance and appetite for volatility. What I can tell you, though, is that there are potentially better sectors and stocks to look out for. With companies that have far better fundamentals or growth prospects to be found in the small-cap space right now.
In fact, you can read all about it in our latest report. Including four small-cap picks that you can’t afford to ignore, right now.
For Money Morning
PS: Our publication Money Morning is a fantastic place to start on your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here