Aphria shares plunge 28 per cent after short seller report

Newly transplanted cannabis cuttings grow in soilless media in pots, Thursday, July 12, 2018, at Sira Naturals medical marijuana cultivation facility, in Milford, Mass. The lack of any approved independent testing laboratories for recreational marijuana remains a key stumbling block to opening pot shops in Massachusetts. (AP Photo/Steven Senne)

TORONTO -- Shares of cannabis producer Aphria Inc. plummeted nearly 28 per cent after short-sellers called the Canadian company a "black hole" and alleged that its recent international acquisitions totalling roughly $280-million were "largely worthless."

Quintessential Capital Management and Hindenburg research alleged in a report published online Monday that the Leamington, Ont.-based pot grower had acquired foreign companies in countries including Jamaica, Argentina and Colombia at "vastly inflated" prices and in ways that it believes benefit a group of insiders.

"Aphria is part of a scheme orchestrated by a network of insiders to divert funds away from shareholders into their own pockets," the report said.

Aphria shares fell as much as 29 per cent to $7.38 in heavy trading on the Toronto Stock Exchange on Monday morning. The Leamington, Ont.-based cannabis producer's shares recovered slightly by Monday afternoon but then slipped again to close at $7.60 or roughly 27.7 per cent lower than its closing price of $10.51 on Friday. After Monday's price plunge, Aphria has a market value of $1.9 billion.

On the New York Stock Exchange, where Aphria listed its shares in November, its stock was down as much as 30 per cent to US$5.60. The stock closed at US$6.05 or 23.4 per cent lower than its previous closing price of US$7.90.

Quintessential and Hindenburg called the company a "black hole for shareholders' money" and said they are short on Aphria. By selling shares short, investors makes money when the price of a company's stock falls.

Aphria, one of the largest Canadian cannabis companies by market capitalization, on Monday called the short-sellers' allegations "false and defamatory."

The report is "a malicious and self-serving attempt to profit by manipulating Aphria's stock price at the expense of Aphria's shareholders," the company said in a later statement.

Many Canadian cannabis shares were on a tear in the lead up to Oct. 17, when Canada became the second country in the world to legalize pot for recreational use.

Amid soaring valuations, many sector players also used their shares to finance deals and acquisitions at home and abroad.

Meanwhile, Cannabis pot companies have also increasingly found themselves in the cross-hairs of short sellers. For example, Cannabis company Cronos Group Inc. saw its shares nosedive by nearly 27 per cent in August after U.S. short seller Citron Research raised concerns about its disclosures.

Hindenburg had taken aim at Aphria in a note published on March 21 this year, which raised questions about the pot producer's $425-million purchase of cannabis company Nuuvera Inc. that closed two days later. Hindenburg argued at the time that Nuuvera appeared to have "few substantive assets" and its acquisitions would "represent a near total destruction of Aphria value."

In its lengthy, scathing report published on Monday, Hindenburg and Quintessential said Aphria's recent Latin American acquisitions "raise major red flags" and "appear to be largely worthless."

Much of the short-sellers' allegations, which have not been independently verified, focus on Aphria's acquisition of entities in Argentina, Colombia and Jamaica. The transaction to acquire ABP in Argentina, Marigold Projects Jamaica Limited and Colcanna S.A.S. in Colombia was announced in July and completed in September.

For example, the short-sellers wrote, the official registered office of the $145-million Jamaican acquisition was a recently-sold abandoned building. Quintessential and Hindenburg also said Aphria's $50-million Argentine acquisition had publicly boasted sales of US$11-million in 2017 but allege that the annual revenue was only US$430,000, according to a worker.

Based on "extensive on-the-ground due diligence in Jamaica, Colombia, and Argentina" the short sellers allege that "asset values appear to be vastly inflated or outright fabrications."

Aphria said on Monday the cannabis grower's board of directors had "received financial advice and a fairness opinion from a reputable firm that the consideration to be offered by Aphria... was fair, from a financial point of view, to Aphria and its shareholders."

Aphria said investors should "exercise caution in relying on the misrepresentations and distortions contained in the report."

As well, the short-sellers allege that Aphria has diverted shareholder assets to insiders through a "systematic process." The report alleges that Aphria bought a stake in these companies from Scythian Biosciences, now called SOL Global Investments Corp., at a large markup after Scythian acquired them from Canadian shell companies. As well, the report alleges that these shell companies are linked to Andy DeFrancesco, who is chairman of SOL, through his private equity firm, the Delavaco Group.

Calls to DeFrancesco at Delavaco Group were not answered.

The report also alleges that efforts were made to conceal the link to Delavaco, changing names of these entities months before Scythian announced its plans to acquire them.