Is KushCo Holdings a buy at this level?

Big things are happening in the marijuana industry on a pretty regular basis. Thanks to Canada becoming the first industrialized country in the world to give the green light to recreational weed in October, we’re witnessing product innovation and capacity expansion galore to our north, as well as a pretty steady stream of legalization activity among select U.S. states and in international markets. Today, more than 40 countries worldwide have legalized medical marijuana, with 33 U.S. states doing so, too.

This rapid acceptance of cannabis and the lofty annual revenue figures attached to this broadening appeal are largely what’s pushed marijuana stocks into the stratosphere. Both direct and ancillary players have benefited, with Wall Street expecting to see green across the board.

Of course, things don’t always go as planned…

Just ask the shareholders of ancillary player KushCo Holdings (NASDAQOTH:KSHB).

KushCo drops an accounting bombshell

Last week, KushCo announced that it’d be reporting its second-quarter results on April 11. But this traditional ho-hum press release announcing an earnings date also came with a nugget of unwanted news: namely, that the company had uncovered accounting errors that would cause its 2018 and 2017 financial results to be restated.

According to the press release, the accounting errors regarded a “certain shared-settled contingent consideration relating to its acquisition of CMP Wellness in May 2017, Summit Innovations in May 2018, and Hybrid Creative in July 2018.” This contingent consideration wound up being recorded as equity by the company, but should have been accounted for as a liability, with changes in fair value recorded on respective income statements from the company.

As noted by KushCo, the restatements are expected to increase the company’s net loss in fiscal 2018 from $10.2 million to $24.3 million, while increasing its net income in 2017 from $0.1 million to $1.7 million.

Additionally, the company notes that it has engaged a national accounting advisory firm as of February 2019. This is certainly a smart strategic move, as it’s pretty apparent that sufficient financial controls weren’t in place during 2017 and 2018.

Accounting errors have been common among pot stocks

Obviously, this announcement has shaken faith in KushCo’s management team and its accounting practices. We’ve seen quite a few instances in recent months where internal controls weren’t up to par, and the companies in question suffered mightily.

For example, Namaste Technologies (NASDAQOTH:NXTTF) has been on a precipitous downtrend since October, following allegations of fraud from noted short-seller Citron Research. Although an independent committee found that most of the allegations were untrue, one proved accurate: Namaste Technologies’ former CEO, Sean Dollinger, had sold assets to a related party without disclosing this interest in the company’s quarterly or annual report. Namaste wound up terminating Dollinger with cause, but all faith has been seemingly lost in management for the time being.

The same was true, for a while at least, with Aphria (NYSE:APHA). In December, short-seller Quintessential Capital Management and forensic analysis company Hindenburg Research released a report claiming fraud at Aphria. In particular, they alleged that Aphria had grossly overpaid for three Latin American assets. Although an independent review didn’t find this to be fact, it did note that certain insiders had vested interests in these deals. Ultimately, CEO Vic Neufeld and two other execs…

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