Marijuana Stocks Mostly Lower as Pot Stock Aphria Rebuts Short-Seller
Written by: Bill Peters – Investors Business Daily
The report, from Quintessential Capital and Hindenburg Research, alleged a pattern in Aphria’s acquisitions of companies in Latin America and Jamaica that left most of its shareholders holding “essentially worthless” assets. It also claimed connections to boom-bust crypto stock Riot Blockchain (RIOT).
Quintessential said it had taken a short position in Aprhia, or a bet that the stock will fall.
One of Aphria’s main backers, the report alleged, would buy or set up an international company. Ownership of that company would change hands until Aprhia itself would eventually acquire it at a big markup and, through that process, enrich insiders, the report alleged.
Attempts to vet the addresses of companies involved in the acquisitions, at times, also turned up an abandoned building or no location at all, the report claimed. In addition, Hindenburg and Quintessential said they had trouble tracking down a scientist named on the board of Marigold, a Jamaican company Aprhia brought into its portfolio this year. Another doctor listed on that board said she had never served as a director of any company.
Aphria, on Monday, called the accusations in the report “false and defamatory,” and said it was pursuing “all available legal options” against Quintessential. Canaccord Genuity analyst Matt Bottomley, in a research note on Tuesday, said Aphria told him it “categorically denied” allegations that the company’s insiders held undisclosed interests in any acquisition targets.
On Tuesday, Aphria said it received independent guidance on those deals, and had conducted due diligence, including site visits, beforehand. It also said the acquisition prices they paid were consistent with the industry and that its businesses in the region were licensed and operational. Aphria said it said it had nearly 100 employees in the region.
Still, Aphria stock crashed 25.5% to close at 4.51 in the stock market today. On Monday, Aprhia stock finished 23% lower.
The outlier was Cronos Group (CRON), which rose 5.6% Tuesday, a day after it said that it was in talks with tobacco giant Altria Group (MO) over a “potential investment by Altria Group Inc. in Cronos Group.” Earlier Monday, Reuters reported that Altria was in early discussions to buy Cronos.
The report from Hindenburg and Quintessential also tried to connect the dots between the key Aphria backer, Andy DeFrancesco, and some of the people who were involved in converting Riot Blockchain. That stock was a biotech company that became a blockchain and cryptocurrency company last year, as the hype surrounding Bitcoin and blockchain reached its peak.
Those people, the short-seller’s report said, included DeFrancesco’s spouse, investor Barry Honig, and former Riot Blockchain CEO John O’Rourke.
DeFrancesco’s spouse pressed for O’Rourke’s installment on the board of the company that would become Riot Blockchain.
Honig, O’Rourke and others in September were accused by the SEC of being involved in a pump-and-dump scheme unrelated to Riot Blockchain.
O’Rourke left Riot Blockchain following the SEC charges. Riot Blockchain’s conversion, which took place last year, raised questionsabout a massive spike in its stock, and the legitimacy of Riot Blockchain’s acquisitions and operations.
A voice mail left at the Florida office of Delavaco Group, the company the report alleges orchestrated the acquisitions, was not immediately returned. A call to DeFrancesco’s line at that Delvaco’s offices in Toronto received no answer.
The report also claims that DeFrancesco and Honig invested in the building that holds Delvaco’s Florida headquarters.
The investment research firm Grizzle called the short-seller report a “hit piece” and a “master class in cherry picking numbers.” Grizzle said Aprhia had $314 million of cash and was among the industry’s biggest sales generators in Canada.
“The real question is whether regulators will find enough material to come down on Aphria,” the firm said. “We think the answer is a strong no.”
“The most serious allegation about fabricated directors is at worst an issue for Jamaican regulators and prior management of Marigold Acquisitions and is far outside the jurisdiction of U.S. or Canadian regulators,” it continued.
Bottomley said “fundamental value remains” for Aprhia. But he cut his price target on the stock.
GMP Securities analyst Martin Landry said he was putting his rating and price target for Aphria under review as its stock plummeted. He said GMP would wait until they had “more visibility on the action plan of Aphria’s board of directors” in the wake of the report.
“We believe that management’s credibility may have been impacted by the allegations raised in this report,” he said in a brief research note. “It is unclear at this point how the company will re-establish trust with investors.”