Aphria review of acquisitions at centre of short seller allegations finds price paid was on the high end

Cannabis company Aphria Inc. says a review of recent transactions that a short seller cast doubt on has found the company paid a high price for the assets in question, and certain company directors had "conflicting interests" in the deals that weren't disclosed at the time.

Independent review of controversial deals also found that one director didn't disclose 'conflicting interests'

A short seller accused Aphria of overpaying for foreign assets last year, allegations that rocked the company's stock. (Susan Ormiston/CBC)

Cannabis company Aphria Inc. says a review of recent transactions that a short seller cast doubt on has found the company paid a high price for the assets in question, and certain company directors had "conflicting interests" in the deals that weren't disclosed at the time. 

The Leamington, Ont.-based company revealed the results on Friday of a special committee of independent directors tasked with looking into a slew of deals the company made last year.

The controversy began in December after two New York short-selling firms — Quintessential Capital Management and Hindenburg Research — accused the company of paying hundreds of millions of dollars for assets in the Caribbean and South America that the short sellers alleged were basically worthless.

The short sellers also said insiders at Aphria personally profited from the deals because they had financial stakes in some of the companies that were taken over.

Aphria's shares plunged in the days that followed, even as the company disputed the claims and promised to get to the bottom of the matter by way of an independent review.

That review found the company paid on the high side of what the assets in questions are worth — albeit within a range that would be considered a fair price.

"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," Aphria said of the so-called LATAM deals, which together cost the company roughly $700 million.

The company also revealed Friday that "it appears that certain of the non-independent directors of the company had conflicting interests ... that were not fully disclosed to the board," but didn't specify which directors.

Friday's news is Aphria's most significant statements on the issue since the story broke last year. During its last earnings release, the company declined to say much on the matter until the review was done.

In late December, Aphria named Irwin D. Simon to be the independent chair of the company's board of directors, and then in January announced that CEO and founder Vic Neufeld and co-founder Cole Cacciavillani would be leaving their roles at the company, something which will formally happen on March 1.

On Friday, Aphria announced that John Cervini would also leave his position on the board as of that date, although he will stay on in a "non-executive operational capacity."

Cacciavillani and Neufeld will remain as "special advisers" while having no formal role at the company.

"Though I was not part of Aphria at the time of the LATAM acquisition, the special committee's findings give me and the board full confidence that it was executed at an acceptable value and is consistent with the company's international growth strategy," said Simon, who will become the company's CEO on an interim basis until a permanent replacement can be found.

"With this behind us, we are committed to fully focus on our bright future and creating value for all Aphria shareholders. I'm optimistic that the special committee's further recommendations for improving our corporate governance will serve us well in the future."

One of the author's of the original short selling report, Hindenburg Research, told CBC News in a statement Friday that the Aphria's report vindicates their original argument.

"We applaud the independent committee for taking this matter seriously and for making significant changes to the company's board and governance policies," founder Nathan Anderson said. "The review largely corroborated our findings that acquisition prices were high and that multiple insiders had undisclosed conflicts of interest. We hope the company can turn a new leaf going forward."

Investors seemed to welcome the news Friday, as Aphria's shares gained half a dollar to $12.59 on the TSX. In the days immediately following the short report, the company's stock bottomed out at $5 a share.

Analyst Stuart Rolfe at investment bank Veritas, who covers the cannabis sector, said he can see why the market viewed the news as mildly positive. "I understand the short-term enthusiasm," he said. "It does appear to close a dark chapter of worries and deep uncertainty, and hopefully removes a big distraction."

But ultimately, he said the company needs to start putting up results in order to put the story behind it. 

"The press release was sparse and, aside from the big name firms involved, it didn't quite put to bed all that was alleged."