The marijuana industry had an incredible 2018, with the cannabis movement gaining validity like never before. The pinnacle of that legitimacy was the legalization of recreational weed in Canada this past October. As the first industrialized country in the world to green-light adult-use weed and only the second country overall to allow it (other than Uruguay), Canada has opened the door to billions of dollars in added annual sales in the years to come.
But it wasn’t such a jovial year for pot stocks — especially Ontario-based Aphria (NYSE:APHA). Although the company was expected to be one of Canada’s top producers by annual yield, Aphria’s share price declined by 61% last year. Some of this decline was tied to the air being let out of pot stocks during the fourth quarter, but a big portion was the result of a crisis of confidence with management.
Aphria’s crisis of confidence
In early December, Aphria’s stock was decimated after a short-side report was released alleging that Aphria had purchased three Latin American assets at a hyperinflated price. The report, which was co-authored by Quintessential Capital Management and forensics analysis firm Hindenburg Research, alleges that the three properties acquired for around 300 million Canadian dollars via Aphria’s common stock are “worthless.” As evidence, the report suggests that these properties had previously been owned by shell companies and purchased by Scythian Biosciences (now known as SOL Global Investments) for much less than they were sold for to Aphria.
Making matters worse, the report uncovers a connection between SOL Global Investments and Aphria’s advisors. Namely, it shows Andy DeFrancesco, the chairman of SOL Global Investments and an advisor to Aphria, as a vested party to all three assets. In essence, it suggests that lining the pockets of an Aphria advisor was more important than doing what’s in the best interests of shareholders (i.e., paying a fair price for these assets).
For what it’s worth, Aphria has vehemently denied these claims and is conducting an internal review of the acquisitions. That hasn’t, however, quelled the crisis of confidence from within.
As a refresher, this isn’t the first time that an Aphria deal has failed the sniff test. Following the company’s acquisition of Nuuvera at the end of March 2018 for CA$425 million, the company’s executives came under fire for disclosing equity investments in Nuuvera a day prior to the deal closing. While it’s not unheard of for management teams to have a vested interest in a company they’re acquiring, investors would certainly want to know about it well in advance to ensure that…
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