It was a difficult day for Aphria Inc (TSE: APHA)(NYSE: APHA) as shares tumbled over 27% thanks to the remarks of one famous short seller deriding the company.
Despite being one of the largest cannabis companies in Canada with a market cap in the billions, Aphria found itself under the bus as the markets reacted negatively to the opinion of one major short seller who described the stock as a “black hole.”
Quintessential Capital Management Founder and short seller Gabriel Grego spoke at a conference in New York today, where he told attendees that the company had siphoned funds into inflated investments held by insiders. In a report he produced alongside Hindenburg Research – a forensic analysis firm – titled “Aphria: A Shell Game with a Cannabis Business on the Side,” Grego stated that the company was completely worthless. Both his firm Quintessential as well as Hindenburg are currently shorting Aphria shares, adding that“Our target price for Aphria is zero.”
“What would seem at the surface as a successful cannabis company, hides instead a more sinister reality,” read the report. “Based on a careful collection, analysis and interpretation of the facts, we are of the strong opinion that Aphria is part of a scheme orchestrated by a network of insiders to divert funds away from shareholders into their own pockets.”
Grego went on to say that Aphria engineered a system to divert money from companies held by insiders in South America and the Caribbean at the expense of shareholders.
Aphria had purchased companies in these regions back in September, according to the report, from Scythian Biosciences Inc., now called Sol Global Investments Corp., which had purchased them earlier at much lower prices from three Canadian shell companies. In turn, these shell companies are tied to Andy DeFrancesco, chairman of Scythian-SOL and also an adviser to Aphria. Furthermore, all three companies can be traced back to Delavaco Group, DeFrancesco’s private equity firm.
“In most instances, the entities acquired by Aphria exhibit little or no sales and operating activity, minimal assets and questionable corporate governance. Insiders seem to exaggerate the nature of these entities, for example quoting what we believe are grossly inflated revenue figures or trying to portray expensive donations as “purchase orders,” continued the report. “More worryingly, we noticed what appear to us as systematic attempts to hide the true nature of these transactions, for example changing the names of the shell companies involved in a way that makes it harder to link them to Aphria’s insiders. These M&A transactions are entirely financed by copious and dilutive share issues.”
In response, Aphria released a press released today in which it describes the report as being “malicious” and a “self-serving attempt to profit by manipulating Aphria’s stock price at the expense of Aphria’s shareholders,” according to PR Newswire.
Aphria also fell under scrutiny from Hindenburg back on March 21st when Aphria purchased a $425-million acquisition of cannabis firm Nuuvera Inc that closed two days later. Hindenburg argued back then that Nuuvera seemed to have “few substantive assets” and that such an acquisition would “represent a near total destruction of Aphria value.” Aphria would later admit that many executives and directors had undisclosed stakes in Nuuvera before the acquisition, including DeFrancesco.
Although these allegations have yet to be independently verified, these concerns have been enough to shake up the markets, as Aphria’s stock prices tumbled almost 30 percent today. Andy DeFrancesco at Delavaco Group did not respond to any calls from reporters.