Aphria Crushed After Short Sellers Call It A 'Shell Game'

Aphria Inc APHA fell 20 percent Monday after the stock was named as a short target by a presenter at the Kase Short Selling Conference.

Quintessential Capital founder Gabriel Grego named Aphria as a top short idea, and said his call has nothing to do with his outlook for cannabis stocks in general. Hidenburg Investment Research co-authored the bearish thesis in a post on Seeking Alpha giving a detailed description of the red flags they see at Aphria.

Why It’s Important

Grego said Aphria has been on a buying spree over the past year, but that some of the other companies it has acquired have almost no value or positive fundamentals. He also accused Aphria of hiding the fact that Aphria insiders have been involved with some of the companies Aphria has acquired.

“We believe there’s something sinister happening in this company,” Grego said Monday, according to Yahoo Finance.

“These acquisitions get made from shell companies that are theoretically at arm’s length, but we can see very clearly there was the presence of some of the company’s insiders.”

Grego said Aphria also appears to produce low-quality cannabis and is using dilutive share offerings to finance its questionable acquisitions.

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In its Seeling Alpha article, Quintessential Capital and Hidenburg Investment Research claim the registered headquarters of Aphria's large Jamaican acquisition is an abandoned building. They also said a worker at Aphria's Argentinian acquisition said the company's 2017 revenue was only $430,000, not the $11 million Aphria claims.

What’s Next

Accusations of shareholder deception have clearly spooked the market Monday. Aphria is a newcomer to the New York Stock Exchange, adding an NYSE listing roughly a month ago. However, the cannabis industry has plenty of skeptics, and claims such as these may deal damaging blows to investor sentiment.

Traders will be watching to see if there is any regulatory fallout from Grego’s claims. Back in May, Grego disclosed a short position in Greek company Folli Follie. Regulators halted trading of the stock just weeks later, and it has yet to resume trading.

Aphria traded around $6.51 per share at time of publication, down 17.7 percent.

Aphria responded to the allegations Monday afternoon. In a statement, the company said this "is a malicious and self-serving attempt to profit by manipulating Aphria's stock price at the expense of Aphria's shareholders."

"The report makes reference to the Company's LATAM acquisition," the statement said. "In connection with this transaction, the Board of Directors of Aphria confirmed it received financial advice and a fairness opinion from a reputable firm that the consideration to be offered by Aphria in respect of the transaction was fair, from a financial point of view, to Aphria and its shareholders."

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