Shares of Aurora Cannabis Inc., a former star of the Canada’s legal weed dreams, plummeted another 40 per cent on Friday morning after the company announced an unusual share sale.

Aurora sold US$125-million worth of shares priced at US$2.45 apiece, amounting to a 10-per-cent discount to where they had last traded. The company and its lead underwriters, Canaccord Genuity and BMO Nesbitt Burns, also added a warrant to the offering to entice buyers, and its inclusion made the discount even more extreme.

The warrant, which is similar to a stock option, allows someone who participates in the financing to purchase an additional Aurora share at some point over the next 36 months at an exercise price of US$3.20. After accounting for its value, the new shares were likely sold at a discount of 30 per cent or more.

At first blush, some investors seemed to like the deal terms, because the financing had excess demand and early Friday the underwriters increased the deal size by US$25-million to US$150-million.

Shortly after, however, Aurora’s shares opened for trading, and the stock plummeted 40 per cent. By midday the shares were down roughly 36 per cent.

Before the financing, Aurora’s shares had already fallen 97 per cent from their peak set in October, 2018, the same month Canada legalized recreational marijuana use.

A similar, albeit less severe, collapse was also seen in shares of Canopy Growth Corp. on Friday, after the company reported yet another round of disappointing earnings. Canopy’s stock dropped 14 per cent, bringing its total market collapse from its peak to 91 per cent.

One possible explanation for the disconnect between the investor demand for Aurora’s share sale and its ensuing share price collapse is the composition of buyers in the financing.

During the cannabis boom, many share sales were purchased by hedge funds that made short-term bets, the Globe has previously reported. In one strategy, hedge funds would short the stock of a cannabis company because they expected that a financing was coming at a discounted price. (Short sales make money when a share price falls). To cover the short, they would buy back the shares by purchasing stock through the financing at the lower new issue price.

With Aurora’s latest offering, it is possible hedge funds saw a lot of value in the accompanying warrant. Warrants and stock options derive a good portion of their worth from volatility, because the more volatile that a stock is, the more likely it is to hit the strike price.

In Aurora’s case, the company’s shares have been very volatile, with the stock trading near the strike price as recently as three weeks ago.

Aurora did not return a request for comment.

Aurora, like many Canadian cannabis companies, has been struggling for years because there is now an oversupply of recreational weed. Aurora has never made money, and analysts struggle to predict when it will start to do so.

Earlier this month, Aurora announced a severe cost-cutting plan in order to turn a profit in the near-term. The latest strategy included shutting a flagship production facility in Edmonton, known as Aurora Sky. The decision not only marked a major retreat for Aurora, killing the company’s once-lofty expansion plans.

When announcing the decision to close the facility, Aurora CEO Miguel Martin said the site was designed to produce mid-quality flower, but the product has been largely unsellable in the current environment because there is too much cheap product on the market. Many cannabis producers are now chasing premium flower in order to grab market share.

Aurora continues to have a strong market share in Canadian medical marijuana sales, but it has virtually disappeared from the recreational market. Analysts at Canaccord Genuity recently estimated that Aurora’s market share in the recreational market is now only two per cent, and its revenues from this segment last quarter of $10-million were down 80 per cent from its all-time high.

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