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Dec 6, 2018

Aphria CEO fires back at short-sellers, vows 'our side of the story'

Aphria shares under pressure amid short-seller report

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Aphria Inc. (APHA.TO) Chief Executive Officer Vic Neufeld is firing back at a short-sellers' report that has sent his company's shares into a tailspin, vowing to soon release more detailed information after the pot producer failed to ease investors' nerves with its initial response. 

In a phone interview with BNN Bloomberg, Neufeld said Aphria will soon provide a detailed, line-by-line response to the report released by Hindenburg Research and Quintessential Capital Management (QCM) on Monday that alleges the Leamington, Ont.-based company acquired assets in Jamaica, Argentina and Colombia worth a total of about $280 million at “vastly inflated” prices in a transaction the short-sellers claim benefited a group of insiders.

"We need a complete rebuttal, not a piecemeal rebuttal. There’s lots of allegations of impropriety and we want our deck to speak on the facts," Neufeld said on Wednesday.

In their report, QCM and Hindenburg Research allege that the foreign companies Aphria acquired in Jamaica, Argentina and Colombia appear to be “largely worthless” and that there were "systematic attempts to hide the true nature of these transactions." Both QCM and Hindenburg have taken short positions in Aphria, meaning they stand to benefit if its stock falls.

Neufeld described the allegations published in the report -- notably several claims relating to Aphria's acquisition of its Jamaican cannabis licence from SOL Capital Investments Corp., formally known as Scythian Biosciences Inc. -- as "slanderous".

"[Aphria's] report will be very sequential and factual to tell our side of the story," he said.

Quintessential Capital Management founder Gabriel Grego said he’s "eager" for Aphria to make good on its previously-stated threat to explore all legal options, adding he thinks documents obtained during the discovery process would contain a “smoking gun” proving the report’s allegations. 

"We have a long list of documents which we already know we’re going to request to review. We believe those documents contain smoking guns," he said in an interview Wednesday afternoon with BNN Bloomberg's Amanda Lang.



Grego, who declined to comment on the specific size of the short position his firm took against Aphria, said the pot producer may report "a huge asset write-off" if his thesis is correct. He also criticized investment banks for failing to do enough due diligence in providing a fairness opinion on Aphria's deals, citing a potential conflict of interest between the firms.

"Would these parties have to be more entrepreneurial and dig a little deeper and do proper due diligence? My answer is yes. Am I surprised about it? No," he said.

In a statement released on Tuesday, Aphria said it “unequivocally” stands behind the purchase of its Latin American and Caribbean assets and stated that the deal was "negotiated at arms' length between two publicly traded companies, each of which retained professional financial advisors.” 

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    Aphria added that one of its advisors, Cormark Securities Inc., provided financial advice and a fairness opinion that said the transaction for the Colombia, Argentina and Jamaica businesses was “fair, from a financial point of view.”

    James Kofman, vice-chairman of Cormark Securities and head of its advisory service, told BNN Bloomberg in a phone interview that the firm has a “very rigourous process to review every fairness opinion we give including the one that was given in this transaction. We take the role of providing opinions very seriously and we are confident in the process we have and the opinions we give.”

    When asked if Grego has shared his findings with security regulators, he said that "the situation has a lot of spotlight on it so I wouldn’t be surprised if something wasn’t going on right now. If [regulators] decide to intervene they will."

    Both the Ontario Securities Commission and the U.S. Securities and Exchange Commission have declined to comment on whether they have begun an investigation into Aphria.

    Aphria's board has initiated an internal strategic review behind the Latin American transactions through an independent committee, according to one person directly familiar with the matter. The committee was instructed to ensure the transactions were completed “according to proper corporate governance and guidelines," said the person, who declined to be named because the information is confidential.

    Aphria later confirmed the special committee in a release Thursday morning.

    Since the release of the report by QCM and Hindenburg Research, Aphria has lost approximately half of its market value, which currently stands at $1.26 billion. Shares in the pot producer fell nearly 17 per cent on Wednesday to close at $5.00 on the Toronto Stock Exchange.

    Neufeld acknowledged Aphria's value has been "diminished" due to the short-sellers' report and would not be surprised if he receives calls from peers in the cannabis industry who might want to acquire his company. He added that while he hasn't entertained any offers yet, "no option is off the table."

    Neufeld also responded to allegations in the short-sellers' report about poor-quality cannabis production at its Leamington, Ont. facilities, saying Aphria hasn't suffered any mass crop failures.

    "Did we have some small mould issues? Sure, but those were only a few plants. Nothing that any other [licensed producer] hasn't experienced before,” he said.

    Cannabis Canada is BNN Bloomberg’s in-depth series exploring the stunning formation of the entirely new – and controversial – Canadian recreational marijuana industry. Read more from the special series here and subscribe to our Cannabis Canada newsletter to have the latest marijuana news delivered directly to your inbox every day.