More smoking guns will be revealed about Aphria, says short-seller

Recently emerged fraud allegations concerning marijuana company Aphria Inc (Aphria Stock Quote, Chart TSX, NYSE: APHA) may have already trashed the stock, but the worst could still be forthcoming, says short-seller Gabriel Grego, who claims there’s likely a lot more damning evidence to be revealed in the company’s documents.

A report released on Monday and co-authored by Hindenburg Research and Grego’s Quintessential Capital Management alleges that Aphria paid “vastly inflated” prices for essentially worthless assets in Latin America, in particular the $193-million purchase of LATAM Holdings, a subsidiary of Scythian Biosciences which has assets in Jamaica, Colombia and Argentina.

Announced this past July, the LATAM Holdings purchase was said to involve Columbian operations which included licenses to cultivate and manufacture cannabis extracts, an Argentinian company said to distribute cannabis products to pharmacies and hospitals in Argentina and a Jamaican company which also has a number of licenses to cultivate and sell cannabis.

Yet the short report alleges that the LATAM Holdings assets are “virtually worthless,” and, more damningly, charges that through shell companies, Aphria insiders had acquired stakes in LATAM Holdings’ assets before the Aphria deal, thereby benefitting greatly from it.

“We noticed what appear to us as systematic attempts to hide the true nature of these transactions, for example changing the names of the shell companies involved in a way that makes it harder to link them to Aphria’s insiders. These M&A transactions are entirely financed by copious and dilutive share issues,” reads the report.

Aphria has come forward to deny the allegations, saying that a complete rebuttal will soon be published, along with legal action against the report’s authors.

For his part, Grego says he’d welcome a legal suit, as it would open Aphria records to further scrutiny.

“Our work is challenging in that a lot of the information which end up being called the smoking guns are not accessible to us because they are confidential, but all that information is readily accessible to us in discovery,” says Grego, in conversation with BNN Bloomberg on Wednesday. “So, in the event that any company that we target attempts a legal action against us, we have a long list of documents which we already know we are going to request to review, and we believe those documents contain smoking guns, in addition to the many smoking guns we’ve already uncovered.”

Grego says that his delving into Aphria’s LATAM Holding began with what looked to be an unusual acquisition structure, which involved private equity firm the Delavaco Group, owned by Aphria insider Andy DeFrancesco.

“Typically, a company acquires another company directly, but in these cases there were always these shell companies in the middle between the initial acquirer and the company that was acquired,” he says. “When we looked into it we noticed that these companies had recently changed names from what they were using before into a neutral name and we saw that the initial name in all three cases had the name Delavaco in it. We thought that the fact that they were changing the name might suggest some foul play.”

Aphria’s share price fell from a high of $10.78 this past Friday to $5.99 by the close of trading on Wednesday.

At the announcement in July of the LATAM Holdings purchase, Aphria CEO Vic Neufeld said, “We have spent a considerable amount of time and resources evaluating opportunities in Latin America and the Caribbean and we are confident in the long-term strategic opportunity and the value it will bring to our shareholders. The transaction, once completed, will firmly place Aphria at the centre of the medical cannabis industry in the region, and will provide the strong foundation, relationships and infrastructure to capture significant future growth.”