Canadian cannabis producer Aphria (APHA) is reviewing its Latin American acquisitions, after a short-seller report this week questioned whether they were rigged to surreptitiously enrich company insiders, gutting Aphria stock along the way. Marijuana stocks sold off hard Thursday.
Still, one of the firms behind that report published new allegations about the company later Thursday afternoon. That firm, Hindenburg Research, said it dug up “multiple irregularities” related to a company called Liberty Health Sciences, which the firm said was backed by Aprhia. Those findings, Hindenburg alleged, “raise more questions around believed undisclosed insider self-dealing.”
Earlier Thursday, Aphria, in a statement, said its board “reiterated its confidence” in the process leading up to the Latin American acquisitions. The statement said the board stood by Aphria’s Latin American operations as well.
“However,” Aphria said, “in the face of inaccurate and misleading accusations by certain short-sellers, whose sole interest is in profiting from a decline in the Company’s shares, it is undertaking a comprehensive review, led by a Special Committee of independent directors of these, and any other, allegations in the interest of protecting Aphria shareholders.”
Aphria said John M. Herhalt, an independent director, would chair the committee. Directors Shlomo Bibas and Tom Looney would also be on the committee. Aphria said each member was independent and joined the board after the Latin American acquisitions closed.
CEO Vic Neufeld added: “We are committed to protecting our shareholders and restoring market confidence by confirming all the facts through an independent process to rebut innuendo and deception.”
According to a BNN Bloomberg story on Wednesday, Neufeld said the company would soon provide a “line-by-line” response to the report. Quintessential Capital and Hindenburg Research released the report on Monday.
That report called Aphria a “shell game with a cannabis business on the side.” Aphria on Monday called the report “false and defamatory” and said it was pursuing legal options.
Aphria Stock, Marijuana Stocks Crash
However, Aphria stock was up 3% in the stock market today, after falling some 13% earlier.
Aphria stock listed on the New York Stock Exchange last month. Many marijuana stocks have trended lower since Canada’s recreational legalization in October.
The short-seller report claimed Andy DeFrancesco, a longtime backer of Aphria, would set up or acquire an international company. That company would then be bought by a Canadian shell controlled by DeFrancesco’s private equity firm, Delavaco Group, the report said.
The shell company would then be scooped up by Scythian Biosciences, the report said. Neufeld and DeFrancesco hold “key insider roles” in that company, the report further alleged. Scythian would then sell its interest to Aphria at an inflated price.
“As a result,” the report said, “DeFrancesco and unnamed associates get cash and/or Scythian shares, Scythian gets cash and/or Aphria shares, and Aphria’s shareholders get international assets that are essentially worthless.”
In total, the report said, Aphria has spend more than 280 million Canadian dollars on acquisitions that “appear to have clear signs of insider self-dealing” in Latin America and Jamaica.
The report alleged that three of the entities absorbed by Aphria in its acquisition drive — Marigold Acquisitions in Jamaica, MMJ Colombia Partners in Colombia, and MMJ International Partners in Argentina — once had “Delavaco” in their name. The names were then changed before their acquisitions were announced.
The report claimed, among other things, that Marigold’s registered office was an abandoned building. It also alleged that the address for an 800 square-meter “herb house” said to be run by Marigold didn’t exist.
In Argentina, the report alleged, ABP, a company Aphria acquired, had a single small pharmacy to its name. A visit to a location described as a distribution center resembled an unfinished warehouse, with a desk and some stacked boxes, the report claimed. Scythian said ABP’s sales last year came in above $11 million. But the report, citing an employee, said sales were actually only $430,000.
Hindenburg, earlier Thursday, said it would release more information on Aphria in the afternoon. In a tweet, Hindenburg called Aphria’s statement on Thursday “another nonresponse ‘response'” to its allegations.
“As we will show this afternoon, it’s not just LatAm that’s the problem,” the tweet continued. “This rot is totally pervasive.”
The firm’s new findings allege that Liberty Health Sciences, a cannabis company, bought a Florida property through a shell whose holders included Aphria, Scythian, DeFrancesco and others. That acquisition allowed the holders to reap a 5 million-Canadian-dollar gain on their investment within six days, Hindenburg alleged.
Hindenburg also alleged that “unnamed individuals” bought 242 million shares of Liberty for $0.001 a share in a private placement “mere days after Aphria announced its intention to purchase its shares at 208x the price.”
‘Unequivocal’ Support, As Aphria Stock Falls
In response to Monday’s report, Aphria on Tuesday said it “unequivocally stands behind” its Latin American operations. The company said the acquisitions were independently and thoroughly vetted and included site visits. Aphria also said it had nearly 100 employees in the region.
DeFrancesco, in an interview with the Financial Post, said “the majority” of the report was inaccurate. Of the photos of what appeared to be vacant or minimally-occupied buildings or offices in the report, he said: “I’m not sure when those pictures were even taken.”
He also said using shell companies to make an acquisition was relatively common practice.
Aphria, on Tuesday, said Marigold, in Jamaica, was fully operational, with licenses in cannabis cultivation and R&D. Marigold’s cultivation farm had harvested some 2,500 kilograms of cannabis to date, Aphria said.
Aphria also said the company in question in Colombia, Colcanna, “has received” licenses to cultivate, process and export cannabis. ABP, in Argentina, had delivered 1,500 bottles of Aphria’s Rideau CBD oil to a hospital for a clinical study, it said.
Quintessential said Aphria’s response failed to address its key findings about the acquisitions, their structure or questions about property addresses.
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