Quintessential Capital Management has opened a SHORT position in Aphria (NYSE: APHA).
In this report we present the results of our in-depth, investigative due diligence on Aphria and its related entities.
What would seem at the surface as a successful cannabis company, hides instead a more sinister reality. Based on a careful collection, analysis and interpretation of the facts, we are of the strong opinion that Aphria is part of a scheme orchestrated by a network of insiders to divert funds away from shareholders into their own pockets.
The scheme we reconstructed is simple: insiders acquire stakes in virtually worthless corporate entities overseas through shells companies located in jurisdictions where beneficial owners are kept secret. Shortly afterwards, insiders cause the public companies they control (or influence) to acquire these shells at enormous and unjustified markups, thereby generating large profits for themselves and setting up the end buyer, Aphria shareholders, for likely vast write offs in the near future.
In most instances, the entities acquired by Aphria exhibit little or no sales and operating activity, minimal assets and questionable corporate governance. Insiders seem to exaggerate the nature of these entities, for example quoting what we believe are grossly inflated revenue figures or trying to portray expensive donations as “purchase orders”.
More worryingly, we noticed what appear to us as systematic attempts to hide the true nature of these transactions, for example changing the names of the shell companies involved in a way that makes it harder to link them to Aphria’s insiders. These M&A transactions are entirely financed by copious and dilutive share issues.
Because Aphria generates a minimum amount of sales relative to its market cap, we believe that, the uncovering of this alleged scheme, coupled with a massive asset write-off, would have catastrophic consequences for its share price.
© 2014 Quintessential Capital