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Here's What Investigators Just Said About Aphria

By Todd Campbell – Updated Apr 14, 2019 at 12:43AM

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An internal look into governance at this marijuana company answers some questions but raises others.

Marijuana stock Aphria (APHA) has been on the hot seat since December, when short-sellers levied allegations that insiders were self-dealing during recent acquisitions of marijuana assets in Latin America.

The accusations caused Aphria's shares to plummet. They also prompted an internal investigation from independent members of Aphria's board of directors.

This week came findings from that investigation that could help restore investor confidence. Here's what the board-hired independent investigators discovered.

No. 1: Some things weren't disclosed

The question at the heart of the investigation was whether insiders fully disclosed any conflicts to the board during negotiations to buy marijuana assets in Jamaica, Colombia, and Argentina.

A microphone on a stand in the foreground. A man in a suit in the background.


It appears executives weren't as open about their relationship with those assets as they should've been.

"As previously disclosed, the acquisition was approved by independent directors after obtaining a third-party fairness opinion, with the non-independent directors recusing themselves from the deliberations and voting," the report stated. "Based on further information available to the Special Committee, it appears that certain of the non-independent directors of the company had conflicting interests in the acquisition that were not fully disclosed to the board." (Emphasis mine.)

Aphria didn't explain what those undisclosed conflicts were, but short-sellers' argument was that CEO Vic Neufeld and longtime Aphria investor Andy DeFrancesco had ties to Scythian Biosciences, since renamed SOL Global Investments -- the company that sold the Latin American assets to Aphria. Neufeld was chairman of the board at Scythian at one point, and DeFrancesco is SOL Global's chairman.

No. 2: A fair price? Maybe.

The board hired forensic advisors from Deloitte and independent financial advisors Duff & Phelps Canada to dig into the details of the acquisitions and determine whether Aphria overpaid. After visiting the properties Aphria bought and analyzing the prices paid for similar assets, the investigators determined that the price paid was "within an acceptable range as compared to similar acquisitions by competitors," although "near the top of the range of observable valuation metrics."

The company paid $194 million Canadian in shares for 90% of Colombia-based Colcanna, 100% of Argentinian pharmacy company ABP, and 49% of Marigold, a Jamaica-based marijuana grower.

In accordance with International Financial Reporting Standards, Aphria will "assess the carrying value of the acquired assets" annually. That annual assessment could result in a writedown if plans for the assets fail to pan out or their value declines materially.

No. 3: The CEO is out

On Jan. 11, Neufeld and co-founder Cole Cacciavillani announced plans to step aside from day-to-day operations. Neufeld said the two would "begin the transition process immediately, and at the appropriate time, we will both step down from executive positions at Aphria." The company also indicated in January that the two will remain directors.

It seems that's no longer the case. Neufeld and Cacciavillani will retire "effective March 1, 2019," from both their executive roles and as directors. The two will, however, still serve as special advisors.

The board's lead independent director, Irwin Simon, will serve as interim CEO until the company finds a permanent chief executive. Simon founded organic natural-foods company Hain Celestial Group (HAIN 0.61%) in 1993.

A man looking through binoculars.


What now?

If this investigation is now behind the company, Aphria's shares could rebound as Canada's marijuana market matures and marijuana legalization spreads.

Interim CEO Simon spent 25 years running Hain Celestial. Over that period, he grew the company into a $3 billion global natural-foods player. His experience at Hain could be valuable as Aphria expands beyond Canada's cannabis market.

Check out the latest earnings call transcripts for companies we cover.

The company's also putting new practices in place to reduce the risk of future incidents such as those that triggered the investigation, and it's increasing the number of independent directors on its board.

Overall, Aphria's 255,000 kilograms in planned annual production capacity positions it to be the third largest legal marijuana grower. Since this is a $150 billion market worldwide, investors ought to keep an eye out to see whether this is the end of Aphria's troubles or if any new news materializes. 

Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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