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These items have serious implications for cannabis investors


I have noted two important items investors appear to have missed last week that have potentially serious implications. One has to do with Aphria and the other with the Altria transaction:

  • There is an entire section in the Hindenburg report, “Aphria – A Shell Game with a Cannabis Business on the Side,” that is critical of Aphria’s Canadian growing operations at Leamington. Here are some direct quotes taken from the report given by a former – admittedly unidentified – employee:

  • We spoke with a former worker at Aphria’s facility which described the Aphria approach in rather different terms:

  • The motto should be quality over quantity, but it’s probably the other way around. It’s more quantity over quality.

  • As far as management:

  • A lot of the people who are running the show are young, possibly not very experienced in what they are doing

  • This has led to issues such as audit failures, mold, and bug infestations:

  • We were constantly running into errors and not passing audits with Health Canada and having issues with bugs…it kind of became a bit of a circus.

  • We had a lot of issues with mold and right now the facility is infested with bugs.

  • Every single room that has product in it in that (Leamington) facility right now has bug problems.

  • What is troubling about these allegations is not that they were made. We all know of cases where a disgruntled former employee makes statements with revenge in mind. What is most bothersome, however, is that all of this is within Aphria’s immediate command and control. It would be very easy to deny or disprove these particular claims. I haven’t been able to find and read every comment made by Aphria management over the past few days but I have not seen anyone denying these statements. My question is simple: Why not?

  • With respect to the Altria/Cronos transaction, we have to ask why did Altria bypass Aurora Cannabis (NYSE: ACB) and Aphria? Of course, based on last week, maybe we have a clue about Aphria. Measured by sales, Altria is the largest tobacco company in the world and could have taken anyone. I’m also sure they did due diligence on several possible candidates before settling on Cronos. I’m less interested in why they chose Cronos and more interested in why they didn’t choose ACB or APHA.

Conclusion: last week sent shock waves through the cannabis industry. In the short run, it appears the naysayers will prevail. By short run I mean a few weeks, perhaps until year end. After that I think investors will overcome the unfortunate timing of the Altria/Cronos announcement and the market will move higher. To date, two major companies have taken steps to lock up cannabis partners. Constellation, an adult beverage company and Altria, the world’s largest tobacco company. But there are far more, large cap beverage, tobacco and pharmaceutical companies out there than there are reasonable cannabis companies to acquire, especially if ACB and APHA are not top picks. So there could be a spurt in acquisitions that bring smaller names such as Organigram ((TSXV: OGI) and CannTrust (TSX: TRST) into play. This would generate a lot of excitement and speculation in the group.

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