Ascent shares could be an opportunity following scandal
When I spoke to the Canadian Cannabis Capital Markets Conference last month, my remarks were rather cautious. One of the issues I warned about was the possibility of a scandal in the industry. Little did I know that the source of a scandal was one of the other presenters at the conference – Ascent Industries (CSE: ASNT).
On the Canadian Stock Exchange following this news, Ascent became descent.
A few weeks ago, ASNT reported that “Health Canada informed Ascent Industries Corp.’s wholly owned subsidiary, Agrima Botanicals Corp., on September 26, that it did not meet all of its record keeping and other compliance requirements during a Health Canada inspection conducted between August 28 and August 30. As a result, Agrima’s licences have been partially suspended by Health Canada. Agrima has commenced the process of addressing the identified issues and has initiated discussions with Health Canada for the reinstatement of the licences.”
Prior to this announcement, I held ASNT in The Cannabis Report Model Portfolio that I publish for Investor’s Hub. The stock had performed very well as far as I was concerned. I purchased it at $.49 per share and within weeks it traded at a high of $.98 per share before settling back into the $.80 per share range. When the partial suspension of licenses was reported, it was downplayed by ASNT and the media as something that was expected to be resolved in a short period of time. But I had seen this before and what had followed in the earlier case was the requirement to destroy plants and recall product. So when the stock continued to trade above $.70 per share, I jumped at the chance to sell most of the holding at $.71 per share in late September. I purposely retained a small holding and reported at the time, “The company reported a problem of an accounting/administrative nature in its recent inspection by Health Canada and I think it is prudent to reduce the size of the holding. Resolution of these issues is always more difficult and time consuming than originally thought.”
This has proven to be the case. ASNT’s media sources said repeatedly they expected resolution of the Health Canada problem “next week.” Well as next week turned into next week turned into next week. I was reminded that good news comes early and bad news comes late. On November 9, 2018, I sold the balance of the holding at what now looks like a very attractive $.45 per share even though it was below my cost. I said at the time, “We have been waiting for this matter [the suspension of licenses by Health Canada] to be resolved shortly and the longer it goes on, the more nervous the market will be.” I said I would revisit ASNT when the licensing issue is resolved.
This week the Health Canada (HC) issue was resolved and it was as bad as it gets for a publicly traded Licensed Producer. Health Canada informed ASNT that the response to the suspension of the producer’s and dealer’s licenses was not satisfactory to lift the suspensions. In addition, they issued a separate letter to ASNT stating that it intends to revoke Agrima Botanical’s licenses. Agrima is the subsidiary that holds ASNT’s licenses. This is the first time a licensed producer and a publicly traded Licensed Producer has been threatened with the loss of their licenses. Health Canada went on to say the review is focused on the period during which the Company was privately held. Health Canada also said that unauthorized activities with cannabis took place under the Access to Cannabis for Medical Purposes Regulations (ACMPR) license. The Board of Directors accepted the resignations of Philip Campbell, Reid Parr and James Poelzer, as officers and directors of Ascent, who were the persons directing the Company at the time. ASNT said it will appeal the decision to revoke its license. I am using Ascent and Agrima interchangeably.
Here is the time line. ASNT was informed on November 16, 2018 that Health Canada intended to revoke its licenses. This notice gave ASNT ten days or until November 26, 2018 to respond. After that Health Canada will render a final decision although there is no indication when that decision might be forthcoming. My educated guess is the decision will be rendered quickly and it will probably be to revoke the licenses. I have been regulated and worked with regulators for much of the early part of my working life and I suspect by the time it reaches the point of threatening to revoke licenses, ASNT will really have to pull a rabbit out of the hat to avoid it. In this case, HC is the prosecutor, judge and jury so it’s a tough argument to win.
Ascent then has thirty days to file an application for a judicial review. In revoking their licenses, Health Canada will serve ASNT with a notice of rejection that includes the reasons for rejection. This will be part of the court record under the judicial review and that is the probably the first time we will know exactly what actually happened. Again the timeline for a judicial review is uncertain but the application takes us to Christmas so we are effectively into early 2019 before this legal process starts. I would not be optimistic about this outcome either but we are into totally uncharted waters as this has not happened before. My guess, and I warn it is exactly that - a guess - is the chances for success are a little better than the appeal to Health Canada. However, I suspect the odds clearly suggest Health Canada will prevail.
Here are my observations:
There is a lot of important information we don’t have yet. We know the transgression happened under ASNT’s Access to Cannabis for Medical Purposes (ACMPR) license which was received on November 10, 2017. Health Canada also says it happened while the company was still private but I’m not sure Health Canada is familiar with the legalities of public and private companies. A company can be public (a reporting issuer) before its shares trade on a stock market. My guess is that HC means before ASNT commenced trading on the Canadian Stock Exchange which was August 9, 2018. The exact date of the alleged transgression could be critical to a point I make below.
I conclude whatever happened, it was considered very serious by HC. I don’t believe HC has even threatened a Licensed Producer with having its license revoked and I know an LP license has never been revoked. I know of some very questionable develops involving LPs that have not provoked such a response. Also Philip Campbell, Chairman and Chief Executive Officer, Reid Parr, Chief Operating Officer and James Poelzer, President and Chief Business Development Officer all resigned. So if I had to guess, ASNT probably knowingly sold cannabis illegally in one way or another. For example, current information on the Internet from Health Canada indicates that Agrima is licensed to cultivate cannabis and produce cannabis oil but it is not licensed to sell either. It’s hard to think of any other transgression that rises to evoke this level of response from HC. Also I suspect HC has decided to make an example of ASNT. If it turns out the problem was illegal sales, such an action by HC will be a powerful deterrent to making illegal sales of any sort by any other LP.
As I said above, I believe Health Canada will revoke ASNT’s licenses after November 26, 2108. However, that’s not the end of the story as explained above. There is a judicial review process. And even if ASNT loses that review, they should still have the option to “clean up” the company to HC’s satisfaction and apply for a new license. The problem with this for investors is it will take a long time – possibly up to a year.
The best outcome would be for an existing Licensed Producer to acquire ASNT. This would resolve the management problem and the licensing problem. It would still take several months to complete a takeover as shareholder approvals from both sets of shareholders would be required but the acquisition could be completed within, say, six months. It could happen sooner if the proposed acquirer is a larger LP like Canopy Growth or Aurora Cannabis and longer if it is a smaller, less seasoned LP. In any case, it would only be prudent to seek the preapproval of HC before doing anything. Therefore I doubt anything will happen until the judicial review process is complete.
ASNT has important U.S. assets in Oregon and Nevada that are basically unaffected by these developments except in the sense that there is a big hole in the management team and the executives that are left will be distracted for the next few months. In addition, ASNT is likely to stop their capital spending until the outlook is clarified. But from a value perspective, assets are assets and the ones in the United States are not directly affected by the Canadian licensing problems.
In this environment and under these circumstances, I wouldn’t expect a takeover offer to be overly generous. But I have visited both the existing facility, the greenhouse and the new laboratory and shipping facilities under construction and they are very sound assets. The company also has a well thought out business plan they were proceeding on that can be continued. So there is every reason for someone to come in and want to take over the operation.
If your cost on ASNT shares is in the $.50 to $.90 per share range, don’t expect to be bailed out completely. The major markets are down, the cannabis stocks have been in a slump and the focus of the industry has shifted to international markets. But even if ASNT loses its appeal and the judicial review, being acquired by another LP means the road back to being fully licensed can be fast tracked. The price of ASNT on the stock market will probably gravitate to a small discount from such an offering price (assuming there is one).
Because I have an investment background, I am concerned about investors. Either those who own Ascent stock or can learn valuable lessons from what is going on. So although I am not a securities lawyer there are a few issues here that trouble me. A former associate of mine liked to say, “I’m not an expert but I know enough to be dangerous.” So here are some issues I think are possibly dangerous and need to be looked into:
We now know that HC informed ASNT on Friday, October 16, 2018 that they intended to revoke their licenses but the stock was not halted until Monday, October 19, 2018. I think it is critical to know when management was informed and did the stock trade after management received the news and when they might have reasonably requested a trading halt? The stock closed at $.51 per share on that Friday, up from $.50 on Thursday. If management allowed the stock to trade, do the buyers on that day have any recourse? From the $.51 close on Friday to the $.18 close on Wednesday (the stock was halted Monday and Tuesday) is a loss of 65%.
I would also want to know if management had any idea that there was something more under consideration than simply accounting and record keeping. I know the company line was the Health Canada matter was not particularly serious and would be handled in short order. I management knew there was a more serious problem potentially under consideration, If that was the case, there may be implications with securities regulators. Having said this, I do not believe the Investor Relations team is at fault. Especially in a situation like this, they are almost scripted the company line.
ASNT closed a brokered and non-brokered private placement at $.40 per unit in two parts on June 21, 2018 that raised a total of around $30 million. Depending on what happened and when, which we may not learn until evidence is made public as part of the judicial review I am sure will happen, do these investors have any recourse? I’m making some important assumptions but the “event” could have happened prior to June 21, 2018 based on the timeline and the information of wrongdoing was obviously material, that is, an investor may not have invested had they known. If it was withheld from investors and/or omitted in the offering documents, this could also be a problem.
Conclusion: From the perspective of The Cannabis Report Model Portfolio, we were nicely in and nicely out with a substantial profit. At this point I am less inclined to get involved in a situation with so many potential unknowns plus others I may not even have thought about. However, conditions like this can also produce opportunities and this is what I will be looking at moving forward. At the right time and price, ASNT shares could be a tremendous opportunity.
This is Ascent Industries’ scandal. There may still be others out there. Stay tuned.