Aphria Inc., one of the biggest Canadian pot companies, fell as much 29 per cent in New York after a short seller said it was a “black hole.”
Gabriel Grego, founder of Quintessential Capital Management, told delegates at a conference in New York Monday that Aphria had diverted funds into inflated investments held by insiders. In a report he ran in conjunction with Hindenburg Research, a forensic analysis firm, Grego said the company, which had a US$2 billion market capitalization last week, is worthless. Both Quintessential and Hindenburg are shorting Aphria.
“Our target price for Aphria is zero,” Grego told attendees at the conference.
“Allegations that have been made by the short seller Quintessential Capital in the report that they published this morning are false and defamatory,” Tamara Macgregor, Aphria’s vice president of communications, said in an emailed statement. “The company is preparing a comprehensive response to provide shareholders with the facts and is also pursuing all available legal options against Quintessential Capital.”
Grego’s Quintessential gained notoriety among short-sellers after targeting Greek retailer Folli Follie in May and saying the company had overstated its store network and revenue. The company rebuffed the allegations but later confirmed that consultants it had hired found revenue at its key Asian unit was almost 90 per cent lower than the reported figures.
Aphria, based in Leamington, Ontario, is the fourth largest cannabis stock by market value and has raised about $700 million (US$531 million) over the past four years. Canada legalized recreational cannabis consumption in October and several other countries are moving towards some form of legalization.
If sustained, the decline in its market value would be the biggest one-day drop since Aphria went public in 2014. Aphria shares traded 19 per cent lower at $6.44 as of 11:39 a.m. in New York, cutting its market value to US$1.59 billion.
The broader cannabis sector slid on the news, with the Horizons Marijuana Life Sciences Index ETF falling 4.7 per cent in Toronto. Tilray Inc. fell 2.5 per cent, Canopy Growth Corp. lost 4.2 per cent and Aurora Cannabis Inc. retreated 3.6 perc ent.
Grego said Aphria engineered a mechanism to siphon off money to companies held by insiders in South America and the Caribbean to the detriment of shareholders, according to the report. The short seller said Aphria purchased companies in Argentina, Colombia, and Jamaica in September from Scythian Biosciences Inc., now named SOL Global Investments Corp., which had acquired them shortly before at a “significantly lower” price from three Canadian shell companies.
The shell companies are linked to Andy DeFrancesco, chairman of Scythian-SOL and adviser to Aphria, according to the report. All three units can be traced back to Delavaco Group, DeFrancesco’s private equity company, according to the report. Their names were changed months before the takeover by Scythian, according to the short-seller report.
Calls to DeFrancesco, Delavaco and SOL Global weren’t answered. DeFrancesco tweeted that he intended to respond to the allegations “shortly.”
In the presentation to the conference delegates, Grego posted pictures of his visits to dilapidated offices in Jamaica and a suburban pharmacy in Buenos Aires, which he said was evidence that the company’s assets are worthless.
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