Cannabis Company Craters After Shortseller Calls It a ‘Black Hole’

(Bloomberg) -- Aphria Inc., one of the biggest Canadian pot companies, fell 23 percent 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 $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.”

The company said in a later statement that the report was a “malicious and self-serving attempt to profit by manipulating Aphria’s stock price at the expense of Aphria’s shareholders.” It also said it received financial advice and a fairness opinion from a “reputable firm” for its recent acquisition of LATAM Holdings Inc. Cormark Securities Inc. advised on the deal, according to a July statement.

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 percent lower than the reported figures.

Aphria, based in Leamington, Ontario, is the fourth largest cannabis stock by market value and has raised about C$700 million ($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.

Aphria shares dropped 23 percent to $6.05 in New York, the biggest decline since it went public in 2014, and reducing its market value to $1.51 billion.

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.

To contact the reporters on this story: Luca Casiraghi in London at lcasiraghi@bloomberg.net;Kristine Owram in Toronto at kowram@bloomberg.net;Joshua Fineman in New York at jfineman@bloomberg.net;Matt Robinson in New York at mrobinson55@bloomberg.net

To contact the editors responsible for this story: Shelley Robinson at ssmith118@bloomberg.net, David Scanlan

©2018 Bloomberg L.P.