With less than four weeks to go before the page turns on 2018, there's little doubt that this will go down as the most groundbreaking year in cannabis history.
To our north, Canada became the first industrialized country to legalize recreational marijuana, and in the U.S., the number of states to have given the green light to medical pot expanded by two to 32. We also witnessed two new states OK adult-use cannabis during the year (bringing the total number of recreationally legal states to 10) and saw the U.S. Food and Drug Administration approve its very first cannabis-derived drug.
Allegations rock marijuana stock Aphria
And yet, not everyone is seeing green. That's been particularly true for shareholders of Ontario-based Aphria (NASDAQ:APHA), which has lost more than half of its value over the trailing-four-week period. To be clear, there are very few pot stocks that have performed well in recent weeks, but Aphria has taken the cake, so to speak, for its underperformance.
The wheels really fell off the wagon on Monday, Dec. 3, when noted short-seller Gabriel Grego, the founder of Quintessential Capital Management, told members of a conference in New York that Aphria was a "black hole" and worth "zero." According to Bloomberg, which broke the story, Aphria made inflated acquisitions in Argentina, Colombia, and Jamaica in September. The all-share deal, which was announced in July at 193 million Canadian dollars, ballooned to nearly CA$300 million by its closing in September.
However, what really caught Grego's attention, and that of Hindenburg Research, a firm that's also shorting Aphria's commons stock, is that Aphria insiders have ties to these acquisitions.
Based on the report from Quintessential, the three acquisitions from Scythian Biosciences (now known as SOL Global Investments) had been acquired from three separate Canadian shell companies for a considerably lower cost than what Aphria paid for them. Furthermore, these shell companies can purportedly be linked back to the chairman of SOL Global Investments and advisor to Aphria, Andy DeFrancesco.
Following these allegations, Aphria shed nearly a quarter of its value.
For what it's worth, Aphria responded about an hour prior to market close on Monday, calling it a "malicious and self-serving attempt to profit by manipulating Aphria's stock price at the expense of Aphria's shareholders." Aphria's press release also notes that it received financial advice and a fairness opinion from a reputable firm prior to entering into the deal with SOL Global Investments.
This isn't the first time Aphria has been dragged over the coals for an acquisition
Aphria's primary suggestion to investors is to take Quintessential's and Hindenburg's report with a grain of salt, since both companies have a vested interest in seeing the share price of Aphria drop considerably.
Then again, Aphria sort of has a knack for getting itself into questionable situations when making acquisitions.
Back in March, Aphria completed its buyout of Nuuvera for what amounted to CA$425 million in cash and stock. The deal had been valued at well over CA$600 million when first announced, but being that Aphria's share price declined pretty significantly during the first quarter, the value of the deal dropped as well.
There were two oddities about this deal, though. First, with pot stocks in aggressive capacity expansion mode, the Nuuvera buyout didn't add any extra output. Rather, Aphria was merely buying the international infrastructure to move into eight new markets. It seems like a very steep price to pay in order to do so.
Perhaps even more damning is the fact that a few members of Aphria's management team disclosed stakes in Nuuvera just a day prior to the closing of the deal. This includes the CEO of Aphria, Vic Neufeld. Though it's not unheard of for the management team of one company to have a vested interest in the company that's being acquired, Wall Street and investors would sure as heck like to know about it more than a day in advance of the closing of the deal. It raises uncertainties that the Nuuvera deal may either not have been in the best interest of Aphria's long-term strategy, or that if it is a complementary business, Aphria grossly overpaid for it.
A compelling valuation with too many question marks
Should this latest report from Quintessential Capital Management be debunked, then there's little doubt that Aphria is a bargain.
Management has previously stated that the company has the potential to generate 255,000 kilograms of peak annual output, which would allow it to slide in as the third-largest grower by volume. It also has a nicely diversified product line, with a focus on high-margin cannabis oils and the ongoing construction of an extraction center that'll be geared at concentrate production. There's probably not a cheaper pot stock out there based on its annual production potential.
However, this is the second time in just over eight months that one of its deals has come under fire for potential insider ties. To boot, it's not as if Aphria is profitable on an operating basis at the moment, nor will it necessarily be profitable at any point in the near future.
As enticing as it might be from a value perspective, a wait-and-see approach is probably best for the time being.