Short-seller Gabriel Grego slams cannabis stock Aphria, shares tank

By Whitney Tilson

Monday, December 3, 2018
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It was an incredible day at our shorting conference today! Every speaker, without exception, was outstanding (for a summary of the ideas presented, see: Here’s What Short Sellers Presented at the Tilson Conference), but once again, Gabriel Grego of Quintessential Capital Management stole the show by exposing another company that appears to be engaging in massive fraud. At our last conference in May, it was Folli Follie, and today it was Canadian pot stock, Aphria (APHA), which started the day with a $2 billion market cap, but crashed 23% on the NYSE and 28% on the Toronto exchange (and is down another 6% after hours).

This Bloomberg article (Cannabis Company Craters After Shortseller Calls It a ‘Black Hole’) summarizes his thesis well:

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.

… 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.

You can read Yahoo Finance’s Julia La Roche’s article and watch her interview with Gabriel here: Short-seller Gabriel Grego slams cannabis stock Aphria, shares tank.

Here are Gabriel’s slides and here is the 49-minute video of his presentation followed by Q&A on the Kase Learning YouTube channel (be sure to subscribe for notifications when we post other videos).

Here is an article by Hindenburg Research, which collaborated with Gabriel on this research: Aphria: A Shell Game With A Cannabis Business On The Side. Summary:

  • Aphria’s recent C$280m Latin American acquisitions raise major red flags. Our extensive on-the-ground research shows that the transactions appear to be largely worthless.
  • Example: The official registered office of Aphria’s C$145m Jamaican acquisition is an abandoned building that was sold off by the bank earlier this year.
  • Example: Aphria’s C$50m Argentine acquisition publicly boasted sales of US$11m in 2017. A worker at the company, however, affirmed that 2017 revenue was only US$430k.
  • Documents show that Aphria insiders were likely undisclosed beneficiaries of the deals. We estimate Aphria has diverted upwards of C$700m via such transactions, or ~50% of Aphria’s total net assets.
  • Aphria consistently generates negative cash, and its cannabis seems to be of low quality. Interviews with sources describe facilities infested with bugs, stricken with mold, and having failed audit inspections.

The company’s response has been comical: this morning, it threatened litigation and one of the ringleaders of the scheme, Andy DeFrancesco, called himself a “goat fucker” on Twitter (among other barely literate ramblings) (see screenshot below), then at 3pm the company issued a lame, non-responsive response, which further fueled the stock’s collapse. This tells you all you need to know about the veracity of the charges…

Whitney Tilson

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About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to nearly $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor’s degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

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