Weed stocks: Aphria crashes after research firm alleges shell game

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• The marijuana producer Aphria is crashing after Hindenburg Research said its business was full of overvalued buyouts and fraudulent financial reporting.
• The research firm alleges that Aphria insiders used funds from dilutive share issuance to complete unfair acquisitions and diverted millions of dollars through the transactions.
• Aphria moved to the New York Stock Exchange from Canada in November, and shares have been under pressure in the aftermath of Canada becoming the second country to legalize the marijuana. 
• Watch Aphria trade live.

The marijuana producer Aphria slumped as much as 30% — to a low of $5.60 a share — after a research firm alleged the company’s business was full of overvalued buyouts and fraudulent financial reporting.

“Aphria is part of a scheme orchestrated by a network of insiders to divert funds away from shareholders into their own pockets,” Hindenburg Research said Monday in a report titled “Aphria: a shell game with a cannabis business on the side.” Aphria did not immediately respond to a request for comment. 

According to Hindenburg Research, Latin American acquisitions announced by the company in July appear to be “largely worthless.” For example, Aphria announced plans to buy Marigold Acquisitions for $145 million from its sister company, Scythian Biosciences, where CEO Vic Neufeld also served as chairman. Hindenburg says Marigold Acquisitions isn’t worth the valuation as its official registered office is an abandoned building that was sold off by its mortgage lender in January. 

Hindenburg alleges that Scythian served as the bridge in the shell game — agreeing to buy the shell Latin American companies and then sell its stake in the entity to Aphria at a large markup. The acquisitions were financed by copious and dilutive share issuance, and Aphria insiders have diverted as much as $700 million, or nearly half of its total net asset, through these transactions, according to Hindenburg.

Aphria’s fundamentals cannot support its floating market cap, Hindenburg added.

“Aphria consistently generates negative cash, and its cannabis seems to be of low quality,” the research firm said. “Interviews with sources describe facilities infested with bugs, stricken with mold, and having failed audit inspections.”

Aphria, one of Canada’s largest marijuana producers, listed on the New York Stock Exchange in November, transferring from Canadian markets. Shares exploded by as much as 155% in August and September after as tobacco makers such as Imperial Brands and beverage companies such as Constellation Brands triggered a “green rush” by entering cannabis space.

But cannabis stocks including Aphria have been under pressure recently as traders sold the news of Canada becoming the second country to legalize the drug. 

MI