Aphria investor denies short-seller’s report

Short-sellers report claims pot producer is ‘black hole’ for shareholders’ money

TORONTO A private equity investor affiliated with Aphria Inc., one of Canada’s largest cannabis companies, is refuting allegations by short-sellers that he orchestrated a scheme to benefit himself and Aphria insiders through that company’s purchase of a number of Latin American assets.

“The majority of this report is inaccurate. The numbers in this report are also completely inaccurate,” Andy DeFrancesco, the chairman and chief investment officer of SOL Global Investments Corp., said in an interview.

Shares of Aphria fell nearly 30 per cent on Monday after the joint report by Quintessential Capital Management and Hindenburg Research alleged, among other things, that assets Aphria had acquired from SOL for $280 million in September were essentially “worthless.”

The shares closed down 21.18 per cent or $1.61 at $5.99 on Tuesday.

At a short-selling conference in New York on Monday, Gabriel Grego of QCM called Aphria a “black hole for shareholders’ money,” accusing DeFrancesco of masterminding a complicated scheme involving shell companies to essentially funnel money away from shareholders, and toward key company insiders, including Aphria’s CEO Vic Neufeld.

In an emailed statement Monday, Leamington, Ont.-based Aphria denied all allegations made by Quintessential Capital, calling them “false and defamatory.” The company also said it is preparing a “comprehensive response” addressed to shareholders and that it is pursuing “all available legal options” against Quintessential Capital and Hindenburg Research.

The allegations in the short-seller report centre on a transaction first announced in July, in which Aphria agreed to buy three Latin American assets held by SOL, then known as Scythian Biosciences.

The assets included Marigold Projects Jamaica Ltd., which the company said had obtained a coveted Tier 3 cultivation licence — one of the only licences of its kind to provide spa services using cannabis products — as well as an Argentinian pharmaceutical distributor called ABP and a cannabis producer in Colombia called Colcanna.

Grego and his team claim that site visits in all three countries raised significant questions about the values of the underlying operations.

In search of Marigold’s registered office in Jamaica, for example, the report said they found an abandoned building, one which Marigold’s managing director Lloyd Tomlinson also lists as his personal address.

When it came to ABP, the Argentinian company that Aphria touted as “a successful pharmaceutical import and distribution company,” Grego provided photos of an ABP facility that appeared to just be a small pharmacy in Buenos Aires, “smaller than a conventional CVS or Rite-Aid.”

In a statement released Tuesday morning, Aphria reiterated its commitment to the company’s Latin American operations.

“We have nearly 100 employees across the region dedicated to advancing the Company’s business interests, including cultivation, processing, research and development, partnerships and continued expansion.”

With specific regard to its Jamaica operation, Marigold Projects Ltd., Aphria called Marigold’s farm “operational” and said it had “harvested approximately 2500 kg of cannabis to date.”

Aphria continued to call its Argentina operation, ABP, a “well-established and successful pharmaceutical import and distribution company”, but did not specifically address pictures of the pharmacy referenced by Grego in his report.

“Aphria and SOL Global Investments Corp. (formerly Scythian Biosciences Corp.) are not ‘sister’ companies and were not ‘sister’ companies at the time the Transaction was agreed to between the parties,” Neufeld said in the statement.

Together with other members of the company’s executive team, Neufeld said they personally bought a total of more than $3.1 million in Aphria shares on Monday as a demonstration of confidence in the company.

“It is the commitment of our incredible team and partners that has gotten us to where we are today, making Aphria a global cannabis success story,” Neufeld said.

Aphria shares were halted in U.S. pre-market trading before the statement, but resumed after its release.

The short-sellers report’s authors allege that they believe DeFrancesco used shell companies — which had originally been named after his private equity firm, Delavaco Group — to first purchase the assets, before they were later acquired by SOL and then flipped to Aphria at “inflated” prices.

In the interview, DeFrancesco said the use of shell companies was not unusual in private equity transactions, and defended the quality of the assets.

DeFrancesco said the photos of Marigold in the report were “inaccurate” and that he had visited their operations prior to the acquisitions.

“It was a five to six acre facility and they had just started cultivation when we were there. We spent time with the team and met with government officials,” he said.

DeFrancesco also questioned the photos of the ABP facility.

“I’m not sure when those pictures were even taken,” DeFrancesco said. “I want the story to be crystal clear. Part of the requirement to win the licence to grow in Argentina is that you have to have an import and distribution licence within Argentina. What we did, is we went out and bought a pharmaceutical distribution company called ABP — that company came with a pharmacy, that’s what you’re seeing there.”

SOL’s chief executive Brady Cobb also questioned the report, and noted it was premised on DeFrancesco being an “insider” of Aphria, which he said was not the case.

“This entire report assumes Andy DeFrancesco was an insider of Aphria. A very quick search of SEDAR will confirm that’s not true. He’s not an insider and has never been,” Cobb said in an interview.

DeFrancesco’s close ties to Aphria are not a secret.

A September press release announcing DeFrancesco’s appointment to the board of directors of SOL, noted that DeFrancesco and his private equity firm, the Delavaco Group, along with Serruya Private Equity, had made a $6.2-million “founding” investment in Aphria in 2013, and that they became “strategic advisors” of (Aphria co-founders) Cole Cacciavillani and John Cervini, as well as Neufeld.

“Since then,” the released added, “Andy and the Delavaco Group have invested or advised on every Aphria equity financing.”