Cannabis stocks were mostly lower Monday, with Aurora Cannabis slumping after the company carried out a convertible debt swap that is highly dilutive for its shareholders.

Aurora stock ACB, -2.88% ACB, -1.88% fell 3.7% after it set the early conversion price for C$230 million ($173 million) of 5% convertible bonds due in March at C$3.28, a discount to the stock’s Friday close of C$3.50.

The Canadian cannabis company said 99% of the holders of the notes have opted for early conversion. Aurora surprised investors when it announced the plan to offer holders of the notes the option to voluntarily convert them into stock at a discount.

“Short term, it’s probably the best-case scenario for Aurora, because it would have been really difficult to raise the amount needed to repay that debt in March,” said Korey Bauer, portfolio manager at the Cannabis Growth Fund from Foothill Capital Management. “But it’s still shocking. Investors need to understand there is going to be more dilutive financing in this market.”

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Investors should brace for a cycle of defaults and bankruptcies as the slower-than-expected rollout of legal cannabis in Canada has left the market oversupplied with too little distribution, he said. For growers, the steady decline in pricing is a challenge, while retailers are still competing with a thriving black market that continues to offer cannabis at far lower prices than can be found in the legal market.

The black market remains a major obstacle in some U.S. states, notably California. The Golden State is planning to raise taxes on the legal cannabis industry, according to media reports, a blow to a sector that is struggling to make money. Cannabis stocks have fallen sharply in the past few months as companies continue to report big losses and less-than-stellar revenue.

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‘It’s a good time to do a deep dive through the sector and try to pick up high-quality names,” said Bauer.

Bruce Linton, former co-chief executive of market leader Canopy Growth CGC, -0.70% , WEED, -0.36% said one problem that has hampered the development of the Canadian market is that the early products “were boring.” When cannabis was first legalized last year, only flower and oils were allowed.

“In January, there’ll be a bunch of new products and we’ll see a ramp-up,” he said in an interview for MarketBrief, a new weekly show produced by MarketWatch and sister publication Barron’s. “Now, Canada is a small population, so what you want to look at is products that could be sold elsewhere.”

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Those new products will include cannabis-based drinks, with Canopy announcing early Monday that it has received a Health Canada license for a new beverage facility at its Smith Falls, Ontario-based headquarters. The company will start producing an initial batch of 11 cannabis-infused beverages and will add more later. The company was aided by its main shareholder, Corona beer brewer Constellation Brands STZ, -0.02% , which has invested $4 billion in Canopy. Shares were up 2.1%.

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Organigram shares OGI, -2.77% fell 4% after the company reported earnings for its fiscal fourth quarter, with both profit and revenue falling short of consensus estimates.

The company posted a loss of C$22.5 million ($16.9 million), or 14 cents a share, in its fiscal fourth quarter to Aug. 31, after a profit of C$18.2 million, or 12 cents a share, in the year-earlier period. Revenue net of excise taxes came to C$16.3 million, up from C$3.19 million a year ago. The FactSet consensus was for a loss of 1 cent and revenue of C$19.7 million.

Much like other Canadian weed companies, Organigram blamed the slow rollout of retail stores in Ontario and elsewhere for its poor sales. The company’s revenue was also hurt by a product return that included cannabis oil products, among other things. Organigram halted construction on phase 4C of its Moncton, New Brunswick, facility until there is more clarity around retail expansion in Canada.

Organigram had issued a revenue warning Nov. 11, telling investors to expect significantly lower sales than previously expected.

PI Financial analyst Jason Zandberg wrote in a note to clients Monday that Organigram’s fiscal fourth-quarter results reflect what other major cannabis companies in Canada such as Canopy Growth and Aurora have previously reported.

“Management estimates [Organigram’s] Canadian recreational market share to be 10% which makes the company a strong player in Canada. We estimate the market leaders — Aurora and Canopy Growth — have approximately +25% each (our estimate). If OGI can hold up this market share into 2020, we would expect significant growth with our anticipation of an aggressive retail expansion and the introduction of derivative products.”

Late Monday the company also filed a short-form prospectus that would allow it to raise up to C$175 million. In a telephone interview with MarketWatch, Organigram CEO Greg Engel said the potential capital raise was designed to give the company more “flexibility.” In a note to clients late Monday, Jefferies analyst Owen Bennett wrote that Organigram has an adequate amount of cash for current operations and expansion.

Shares of CBD products maker Charlotte’s Web CWBHF, +3.84% CWEB, +6.45% slid more than 6%, after that company raised C$66.3 million via a syndicated stock offering. Proceeds of the deal will be used to fund business development and for general corporate purposes.

After the closing bell, U.S. multi-state operator Green Growth Brands Inc. GGBXF, +17.67% GGB, +25.00% reported losses of $30 million, which amounts of 15 cents a share on revenue of $12.7 million. 48North Cannabis Corp. NRTH, +5.88% also reported earnings after the close, logging net income of C$2.2 million, or C$0.013 a share, and sales of C$1.5 million; the company completed its first outdoor harvest of 12 metric tons of pot, but said that the harvest volume was reduced because of delays related to the amount of available licensed drying space.

Elsewhere in the sector, Tilray TLRY, +0.84% was down 1%, Aphria Inc. APHA, +0.23% APHA, +0.71% declined 0.4% and Cronos CRON, -0.97% CRON, -0.73% fell 2%.

Aleafia Health ALEAF, +2.90% CA:ALEF was down 1.9%, Hexo HEXO, +2.10% HEXO, +1.16% rose 4% and MedMen MMNFF, -0.27% fell 9.7%.

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GW Pharma GWPH, +1.97% slid 4.4%.

The ETFMG Alternative Harvest ETF MJ, +0.48% was down 0.2%, while the Horizons Marijuana Life Sciences ETF HMMJ, +0.86% declined 0.6%

The S&P 500 SPX, +1.59% rose 0.6% and the Dow Jones Industrial Average DJIA, +1.33% was up 0.5%.

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