Another earnings season is just weeks away, where much of the focus will be on sales and profits and how they may change amid the coronavirus pandemic. However, for cannabis companies, there's something much more important -- liquidity. A big problem for many cannabis companies today is that they don't have access to a lot of it, and they aren't generating positive cash flow, either. A lack of liquidity makes for a potentially dire situation for the industry, and here's why.
Previously, if a cannabis company needed to raise cash to grow its business, it would just issue more shares. But that's no longer an attractive solution given that many pot stocks have lost more than 70% of their value in the past 12 months. The Horizons Marijuana Life Sciences Index ETF (OTC: HMLSF) is down more than 75%, and it holds some of the top pot stocks in North America. Smaller companies are in even worse shape as investors look for safer investments to hold on to.
If share prices are down, that means a company needs to issue more shares to raise the same level of cash than it would have had to if it issued the shares earlier. And a flood of shares onto the open market is a quick way to send the stock even further down in price, as the number of sellers will heavily outweigh the number of people looking to buy a stock.