Aphria Inc (NYSE:APHA) is up 125% since we made our call on December 4th to buy the dip. We were given a gift from short sellers to get in on a great company at a discount after the shorts attacked the company. While we generally despise short sellers, it can be used to your trading advantage when they attack a good company and you can buy in at much lower prices. Our subscribers averaged $4.51 on their initial purchases and have ridden the stock back above $10.
Aphria’s panic was a classic “blood in the streets” panic opportunity. The short sellers were able to play into investor’s fears and create panic selling. The selling pressure coupled with a lack of buyers creates the perfect storm. The shorts are then able to profit with limit buy orders at lower prices. For investors like ourselves, we were able to take advantage of the shorts’ disinformation campaign. Now investors are asking what to do next?
Latin America Assets
The crux of the short sellers’ arguments centered around Aphria’s Latin American operations. Short sellers Gabriel Grego of Quintessential Capital Management and Nate Anderson of Hindenburg Research issued a scathing report about the company at the Kase Learning Short Selling Conference. According to the Seeking Alpha article:
- 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 board appointed a special committee to review the assets and found that everything was done in a proper manner. The company hired independent legal advisor Lenczner Slaght Royce Smith Griffin LLP, independent forensic advisors Deloitte LLP and independent financial advisors Duff & Phelps Canada Limited to review the short sellers’ allegations and found no improprieties. In effect, everything the short sellers alleged was disproven. The key findings were:
- The assets acquired pursuant to the Acquisition in Argentina, Colombia and Jamaica were verified to be in place and continued to develop according to the Company’s business plan since the Acquisition, consistent with Aphria’s previous public disclosure;
- Comprehensive, in-person site reviews were conducted by advisors to the Special Committee, which confirmed the existence of the LATAM assets and operations in each of Colombia and Jamaica, as well as work to confirm the contractual and permitting arrangements in Argentina; and
- The consideration paid for the assets purchased in the Acquisition was determined to be within an acceptable range as compared to similar acquisitions by competitors, be it near the top of the range of observable valuation metrics. In the normal course of business and on an annual basis, consistent with the requirements under International Financial Reporting Standards, the Company will assess the carrying value of the acquired assets.
Aphria Management Changes
Perhaps the best news to come from the short sellers’ report (besides being totally wrong) is that Vic Neufeld and Cole Cacciavillani are both out the door. Aphria now has professional management with Irwin Simon as Chairman and temporary CEO. He’s a person shareholders want in the driver’s seat having built The Hain Celestial Group Inc (NASDAQ:HAIN) from nothing into a multi-billion-dollar company.
APHA played out just as we said it would. We hate to say told ya so, but we did. For those that got in on our call, congratulations! We will have more just like APHA coming up for our subscribers.
We will be updating our subscribers as soon as we know more. For the latest updates on APHA, sign up below!
Disclosure: We have no position in APHA and have not been compensated for this article.
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