Report triggers Aphria stock plunge
Cannabis producer slams short seller’s accusations as ‘false and defamatory’
Leamington’s outgoing mayor said Monday he doesn’t believe cannabis giant Aphria will collapse — and the town’s economy is not at risk — following a blockbuster report accusing Southwestern Ontario’s largest marijuana producer of being involved in a massive shell game. Aphria’s stock plummeted 29 per cent Monday after a short seller called the company a “black hole” that allegedly wasted hundreds of millions of dollars on worthless foreign acquisitions.
“It all depends on what comes from it if turns out to be true,” said outgoing Leamington mayor John Paterson, also an investment adviser. “I suspect it will be some sort of fines and penalties from the securities commission. But other than that, no, I think Aphria will just keeping moving forward.” Several Aphria insiders and executives, including CEO Vic Neufeld, did not respond Monday to the Star’s repeated requests for comment. “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.”
One of the largest cannabis companies in Canada, Aphria shares dropped as much as 29 per cent to $7.38 on the Toronto Stock Exchange Monday. Shares closed at $7.60 on the TSE, down 28 per cent from Friday’s closing price of $10.51.
The stock price turmoil followed an attack by Gabriel Grego, founder of Quintessential Capital Management. Grego told delegates at a conference in New York that Aphria had diverted funds into inflated investments held by insiders. In a report in conjunction with the forensic analysis firm Hindenburg Research, Grego said Aphria, which had a US$2-billion market capitalization last week, is essentially worthless. Both Quintessential and Hindenburg were reportedly short-selling Aphria stock. A short seller can profit if a security’s price declines.
“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,” Hindenburg stated in its online report. Hindenburg said Aphria’s recent $280-million acquisitions in Latin American “raise major red flags. “Our extensive on-the-ground research shows that the transactions appear to be largely worthless,” the firm stated. Hindenburg claims the official registered office of Aphria’s $145-million Jamaican acquisition “is an abandoned building that was sold off by the bank earlier this year.”
The forensic research firm also alleges that Aphria’s $50-million Argentine acquisition “publicly boasted sales of US$11M in 2017. A worker at the company, however, affirmed that 2017 revenue was only US$430K.” “Documents show that Aphria insiders were likely undisclosed beneficiaries of these deals,” Hindenburg alleges. “We noticed what appear to be systematic attempts to hide the true nature of these transactions.” None of these allegations have been addressed in the courts. The Leamington-based company has been in an aggressive expansion with several foreign investments.
Aphria has about 250 production workers at its Leamington facilities. Its local growth has been so fast that instead of waiting for Hydro One to keep up, the company built its own on-site power plant that can generate enough juice to power a small town.
Its $140-million Phase 4 expansion, including about 930,000 square feet of growing space and other infrastructure, began in August. The expansion is slated to be finished by January.
On top of that, the company is building a separate $120-million cannabis greenhouse at another Leamington location. A Phase 5 expansion is also underway, including an $8.5-million, 200,000-square-foot greenhouse on five acres.
On the day recreational marijuana was legalized in Canada, Neufeld said he expected that by next spring Aphria would be producing 20,000 kilograms of marijuana every month.
Aphria has deals to supply recreational marijuana in Ontario, Quebec, Manitoba, Alberta and British Columbia. Incoming Leamington Mayor Hilda MacDonald wouldn’t comment on the crisis facing Aphria Monday, saying she had not heard of what was happening. Paterson said he spent the day following developments on the situation.
“I think Aphria is coming out with their own statements to clarify the accusations levelled against them by this one analyst,” said Paterson.
“I don’t see it as being a negative effect on the municipality. If you follow stock markets at all, somebody says something and they sell or somebody says something and they buy. Aphria is saying it’s a false and defamatory statement against them. I’ll just have to wait and see.” Alfie Morgan, professor emeritus of business at the University of Windsor, said he believes the reports are part of a takeover attempt of a “very solid company.
“It sounds to me a deliberate attempt to underprice the shares to prepare for a takeover,” said Morgan. “It’s a typical takeover gimmick. What you do, you run down the company and the shares will go down. Then you move in for the kill and buy the shares as cheap as you can. And then you turn back and sell them higher because now supposedly the shares are going to go up after they take it over.” He suggested that shareholders try not to panic.
“And not to rush to sell,” said Morgan. “Just hold on tight because that crisis will be over. The takeover will succeed only if people panic and sell. If they don’t sell and they continue to keep the shares and show their loyalty to the management team, then the takeover attempt will fail and it will come back.”