Shares of Canadian cannabis company Aphria (APHA) plunged after a short seller issued a report calling the company's Latin American takeovers "nearly worthless."
SHORT SELLER REPORT: In a report out Monday titled, "Aphria: A Shell Game with a Cannabis Business on the Side," Hinderburg Investment Research and Quintessential Capital Management called Aphria’s recent C$280M Latin American acquisitions "nearly worthless" and said they seemingly have signs of "insider self-dealing." The report noted that the official registered office of Aphria’s C$145M Jamaican acquisition is an abandoned building and its C$50M Argentine takeover reported sales of $11M in 2017, despite a worker affirming that revenue was only $430,000. The report also said the documents show that Aphria insiders were likely undisclosed beneficiaries of the deal. The firms said, "All told, the effect has been massive. We estimate that at least 50% of Aphria’s C$1.46B in net assets have been diverted to 'investments' that are, at best, grossly inflated. Our breakdown of these balance sheet assets is as follows: C$524M in goodwill which we believe is entirely worthless; C$246M in intangibles, which includes licenses, permits, and ‘brands’ acquired from these dealings, that we estimate are inflated by 80%+; and C$86M in equity investees and long-term investments which we believe are the product of related-party deals and are significantly impaired." In addition, the report said, "Aphria consistently generates negative cash, and its cannabis seems to be of low quality. Interviews with sources describe facilities infested with bugs, stricken with mold, and having failed audit inspections…We believe the conduct of Aphria’s executives and deal partners has been deeply unethical and possibly criminal. With a slew of highly questionable transactions, negative operating cash flow, and a low-quality product, we ultimately see no credible path forward for this company."
APHRIA CALLS REPORT "MALICIOUS": Aphria said the company was aware of a short seller report, "which Aphria believes 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 investors should "exercise caution in relying on the misrepresentations and distortions contained in the report and recognize that, by their own admission, Hindenburg Research '…stands to realize significant gains in the event that the price of any stock covered herein declines.' The report also states that, 'Hindenburg Research makes no representation, express or implied, as to the accuracy, timeliness, or completeness of [the information in report].'" The report referenced the company's LATAM acquisition which closed on September 27. In connection with this transaction, the Board of Directors of Aphria said that it received financial advice and a fairness opinion from a reputable firm that the consideration to be offered by Aphria in respect of the transaction was fair to Aphria and its shareholders.
APHRIA DEFENDS LATAM ASSETS: On Tuesday, Aphria provided an update on its Latin American operations, including its previously completed LATAM acquisition of LATAM Holdings. Vic Neufeld, Aphria's chief executive officer, said, "Since closing this important strategic acquisition in September, we have made considerable progress supporting and building out our operations on the ground in Latin America and the Caribbean. We have nearly 100 employees across the region dedicated to advancing the company's business interests, including cultivation, processing, research and development, partnerships and continued expansion. International operations are a core component to our proven growth strategy and we are working to integrate and enhance operations and product channels throughout Latin America to position them for sustainable, long-term shareholder value creation." The company said, Aphria is committed to good corporate governance and transparency. The LATAM acquisition was a transaction negotiated at arms' length between two publicly traded companies each of which retained professional financial advisors, one of which provided a formal valuation of the acquired assets. Aphria and SOL Global Investments are not ‘sister’ companies and were not ‘sister’ companies at the time the transaction was agreed to between the parties. "Yesterday, I, along with other members of our Executive Management team, stepped up to demonstrate our confidence in the company's business plan, growth strategy, integrity and value of the assets by personally investing more than $3.1M in Aphria's common shares," Neufeld said.
ALTRIA, CRONOS TALKS: On Monday, Reuters reported that Altria Group (MO) is in early talks to acquire Cronos Group (CRON) as it looks to diversify business beyond traditional smokers. The talks between Cronos and Altria are expected to last for several weeks and there is no certainty that the Canadian company will agree to a deal. Contacted by The Fly after the report, a Cronos Group spokesperson said the company does "not comment on market rumors." The Financial Times also reported Tuesday that Altria had also held discussions with Tilray (TLRY) and Aphria.
OTHER CANNABIS STOCKS: Other publicly traded companies in the space include Aurora Cannabis (ACB), CV Sciences (CVSI), CannTrust Holdings (CNTTF), Canopy Growth (CGC), General Cannabis (CANN), India Globalization Capital (IGC), ICC International Cannabis (KNHBF), MedMen Enterprises (MMNFF), Biome Grow (ORTFD), MediPharm Labs (MLCPF) and Indiva (NDVAF).
PRICE ACTION: Shares of Aphria are off earlier lows and are now down 17% to $4.76 in afternoon trading.
"Rising High" is The Fly's recurring series focused on cannabis stock news.
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