Namaste nosedive highlights pot investment risk

Short-seller reports and government licence suspensions can tank companies’ share prices

Namaste Technologies CEO Sean Dollinger speaks on the business news network Cheddar in January | Via @Namaste_Tech on Twitter

Shares in Namaste Technologies Inc. (TSX-V:N) plunged last week as much as 26.8%, before rebounding, after the online cannabis seller revealed that it fired CEO Sean Dollinger and removed him from its board of directors after an internal investigation found that Dollinger allegedly breached his fiduciary duty to the company and improperly enriched himself.

Dollinger filed a lawsuit against the company in Ontario Superior Court, according to Namaste, which has been operationally based in Vancouver even though its official headquarters is in Toronto, where there is also an office.

The 40-employee company’s new CEO, Meni Morim, lives in Stockholm but plans to work out of the company’s Toronto office, said spokesman Darren Seed.

Morim will seek what the company called “all value-maximizing alternatives,” including whether to put the company up for sale.

Short seller Citron Research prompted the company’s internal investigation, issuing a report in September alleging fraud and causing Namaste’s share price to wobble.

Most cannabis companies’ share prices have performed well of late, and the marijuana index of public companies briefly last week showed an overall share-price gain of more than 50% since the start of the year. There have been minefields for shareholders, however, and short sellers sometimes pose risks.

Aphria Inc. (TSX, NYSE:APHA), for example, saw its shares in December plunge 28% overnight, when short sellers alleged that the cannabis producer’s recent international acquisitions, worth about $280 million, were “largely worthless.”

The concerns raised by Hindenburg Research and Quintessential Capital Management prompted Aphria CEO Vic Neufeld and co-founder Cole Cacciavillani to, as the company put it in January, “transition out of their executive roles over the coming months.”

Aphria is also facing a hostile takeover attempt from Green Growth Brands Inc. (CSE:GGB) – something that has helped its stock price recover.

If it is not short sellers jettisoning cannabis-sector stocks, it could be the federal government.

Ascent Industries Corp. (CSE:ASNT) warned investors in September that Health Canada partially suspended its licence to operate after a government inspection found that the company was not keeping compliant records. Ascent's subsidiary, Agrima, had been planning to launch drinks laced with the psychoactive compound THC (tetrahydrocannabinol), once those drinks become legal in Canada. 

Ascent then warned investors in December that further action was possible. Ascent’s shares last week were trading down nearly 80% from 52-week highs, and, on February 7, the Vancouver-based company released a statement saying that should the company not be successful in its attempts to have its licences reinstated, its “ability to continue as a going concern may be in doubt.”

Health Canada last week also suspended the sales licence of the privately owned cannabis producer Bonify, signalling that it will take action when it finds irregularities.

The government found Winnipeg-based Bonify to be “possessing, distributing and selling product that was purchased from an illegal source,” Health Canada said.

Cannabis executives say honest mistakes can  be made because the industry is nascent, growing fast and regulated by rules that keep changing.

“There is so much misinformation – there are consultants who provide misinformation,” said Dan Sutton, CEO of the privately owned Tantalus Labs. “We’re still figuring this stuff out and drinking from a fire hose on how to make things work in this industry.”

Sutton said his company has no plans to go public because it would be an unnecessary distraction at a time when he and his staff are busy expanding the company. The company also does not need the capital, and he and Tantalus’ other investors do not want to sell their shares.

Sutton would not name names, but he said that the cannabis sector has companies with executives who intentionally wheel and deal in a way that benefits themselves at the expense of investors.

“Yes, the sector has attracted less-than-scrupulous characters,” he said. “You get a healthy, reasonable subset of people who want to build awesome companies that do interesting things and create shareholder value in a fundamental way. Then you get people who want to take advantage of other people’s greed and speculation to sell hopes and dreams.” •