Categories: world

Aphria: A Shell Game With A Cannabis Business On The Side – Aphria Inc. (NYSE: APHA)

Background Every time an exciting new industry gets a lot of attention, it also attracts capital, which in turn can attract unscrupulous players. This is not a story about the cannabis industry and its commercial potential, nor is it a story of values ​​and competitive market dynamics. This is simply about one of the major companies in the industry that seems to have spent a huge amount of money against their insiders' private interests at the direct expense of their public shareholders. Co-author Quintessential Capital Management (QCM) We are proud to present this report together with QCM. QCM has an unrivaled record for identifying and revealing corporate fraud through deep investigative due diligence. QCM's latest report was published in May this year and focused on Greek retailer Folli Follie. The report claimed widescale inflation of revenues. Following publication, FF's stock fell 60% in two days and terminated two weeks later. In July 2018, the company filed for protection against creditors through the Greek bankruptcy code. Management is now facing criminal fees and shares have not resumed trading. Prior to Folli Follie, QCM published a report on Globo PLC, a software development software provider and business services provider. Globo's stock was discontinued in less than 12 hours, and the management acknowledged a failure to report within 48 hours of publication. Globo was never opened for trading and was declared useless by the liquidator. Background: Aphria Nuuvera Scandal Earlier this year, Aphria was under investigation after revealing unlimited insider trading with the…


Every time an exciting new industry gets a lot of attention, it also attracts capital, which in turn can attract unscrupulous players. This is not a story about the cannabis industry and its commercial potential, nor is it a story of values ​​and competitive market dynamics. This is simply about one of the major companies in the industry that seems to have spent a huge amount of money against their insiders’ private interests at the direct expense of their public shareholders.

Co-author Quintessential Capital Management (QCM)

We are proud to present this report together with QCM. QCM has an unrivaled record for identifying and revealing corporate fraud through deep investigative due diligence.

QCM’s latest report was published in May this year and focused on Greek retailer Folli Follie. The report claimed widescale inflation of revenues. Following publication, FF’s stock fell 60% in two days and terminated two weeks later. In July 2018, the company filed for protection against creditors through the Greek bankruptcy code. Management is now facing criminal fees and shares have not resumed trading.

Prior to Folli Follie, QCM published a report on Globo PLC, a software development software provider and business services provider. Globo’s stock was discontinued in less than 12 hours, and the management acknowledged a failure to report within 48 hours of publication. Globo was never opened for trading and was declared useless by the liquidator.

Background: Aphria Nuuvera Scandal

Earlier this year, Aphria was under investigation after revealing unlimited insider trading with the company’s $ 425 million acquisition of Nuuvera.

We had written that Nuuvera seemed to be a worthless work of art intended to enrich insiders at the expense of Aphria’s investors. The company later acknowledged that its executives and board members had undiscovered efforts in Nuuvera prior to Aphria’s acquisition together with a key partner named Andy DeFrancesco.

The company traded lower by about 30% during the weeks after exposure and subsequent access. After the episode, the company responded by assuring investors that the recently acquired international assets were of great value. They tried to further worsen investors’ concerns by adding compliance staff and announcing governance reforms related to its investment policy. The stock has largely recovered since then and even reached new heights in September.

Introduction: They Are On The Again-LatAm Transactions

Despite the announced reforms by the Board, our research shows that Aphria insiders have doubled on their dubious investments:

Aphria recently spent $ 280 million on almost worthless Latin American acquisitions which appear to have clear signs of insider trading.

We conducted extensive on-site due diligence in Jamaica, Colombia, and Argentina, and will provide evidence that the newly acquired asset values ​​appear to be very inflated or single manufactures.

We will also present documents showing that the same Aphria adviser, who had described himself as the “architect” of the Nuuvera store, Andy DeFrancesco, was an indefinite carrier of the latest death of offers. DeFrancesco conducted the transactions together with Vic Neufeld, Chairman / CEO of Aphria, who also served as Chairman of Scythian Biosciences (recently named Sol Global Investments), another company that is integrated into the implementation of these “LatAm” agreements.

All told effects have been massive. We estimate that at least 50% of Aphria’s $ 1.46 billion net assets have been delivered to “investments” which are at best grossly inflated. Our breakdown of these balance sheet assets is as follows:

  • $ 524 million in goodwill which we consider to be completely useless
  • $ 246 million in intangible assets, including licenses, licenses and “trademarks” acquired from these transactions which We estimate is inflated with 80% +; and
  • $ 86 million in equity investments and long-term investments that we believe are related products and significantly impaired.

Source: Cap IQ )

Following A review of the LatAm agreements we will investigate the background of Andy DeFrancesco, including his submission with Canadian regulators and his close business contacts to persons whom the SEC has claimed have engaged in several pump and dumping plans, including Bobby Genovese, Barry Honig, John O & # r; Rourke and John Stetson.

( Andy DeFrancesco. Source: DeFrancescos Instagram Account )

Finally, we will review Aphria’s cannabis activity. While the company decides to be “setting the standard” for low cost production, it actually seems to be a standard for low-quality production. We share the content of an interview with a former worker who detailed failed revisions with Health Canada, a circus-like environment and a plant that has had repeated mildew problems and is “infected with bugs”. We also share the content of our interviews with industry experts, who all confirmed the product’s low quality nature.

With sharp red flags related to its investment activities, strong negative historical cash flow and low-quality cannabis product, we believe the Aphria store will smoke .

Part I: The Unusual Structure of Aphria’s Acquisitions

We believe Aphria has diverted shareholder assets to insiders through a systematic process: 19659027] Aphria insider Andy DeFrancesco sets up or acquires an international company that provides a declaration of intent for an acquisition (eg conditional cannabis licenses, a leased facility, purchase of a small existing local company.)

  • The international company is then purchased by a Canadian shell company controlled by DeFrancesco through its related Private Equity Firm, Delavaco Group.
  • Skalbolaget agrees to be acquired by Aphria’s sister company, Scythian Biosciences, where Vic Neufeld, Aphria’s President / CEO and DeFrancesco hold important insider roles.
  • Scythian then sells its share in the company to Aphria at a great deal of attention.
  • DeFrancesco and unlisted associated companies receive cash and / or Scythian shares, Scythian receive cash and / or Aphria shares and Aphria shareholders receive international assets that are basically useless.
  • See below for how this process has been playing with Aphria’s latest LatAm investments:

    (Sources: Scythian / Aphria Archives and Press Releases, Canadian Corporate Recordings and Investigations on the Ground)

    Undisclosed Insider Self-Dealing?

    The architect for these shops, as we show to be Aphria / Scythian insider Andy DeFrancesco. DeFrancesco was integrated into the formation of both Aphria and Scythian, which served as a founding investor and orchestrated the reverse mergers that publicly took both companies. He has served as adviser to all Aphria’s purchased business finance, and currently serves as chairman and chief investor in Scythian. In fact, earlier this year, Scythian is run by the same office and suite number of DeFrancesco’s private private equity company, Delavaco Group.

    Our first major indication that something was unpleasant came through the following revelation: Canadian corporate records show that the entities acquired in the LatAm Agreement were all previously named after DeFrancesco’s private private equity company, Delavaco- The Group:

    It seems that efforts were made to conceal the relationship with Delavaco. The names of all these units were changed prior to acquisition, so that the “Delavaco” name did not appear in any of the business-related press releases. For example, Canadian corporate records show that the name of the entity holding alleged Jamaican assets has been changed two days before the scytically announced letter of intent to acquire it.

    In short, money has come from retail investors in Aphria, which then used the capital to buy “assets” from entities associated with insiders.

    So, let’s take a look at some of the assets.

    Aphria’s Jamaican Acquisition of $ 145 Million: Marigold Projects [19659041] In March 2018, Scythian signed an intention to acquire Marigold Acquisitions Inc., described as “a private British Columbia company”. (S. 24) At that time, Marigold Acquisitions was in the process of buying a 49% stake in Jamaican company Marigold Projects. In other words, the company did not even own the Jamaican asset yet.

    Four months later (in July), Scythian announced the sale of the Marigold Intent Statement together with their other LatAm assets to Aphria. Scythian completed its purchase in mid September and then closed the sale to Aphria 2 weeks later.

    In the end, Aphria paid an estimated $ 145 million for the Marigold stake, which Scythian claimed a $ 127 million profit for an asset that was only owned for about 2 weeks. (p. 96). [1]

    Meanwhile, unnamed Marigold investors were paid in the “privately owned” scale unit C 18 million. We will present evidence that these investors include Aphria / Scythian insider DeFrancesco together with named associates.

    On Ground in Jamaica: Marigold’s official registered office is an abandoned building

    So, what has Aphria bought? We visited Jamaica to find out. According to Marigold’s latest applications, the company’s official seat is 28 Lancaster Road in Kingston St. Andrew:

    When Aphria closed their Latin American acquisitions, they declared they were “world-class assets”. We visited the official office during working hours at the end of September and found that it was a world class dumping. Here we are on Lancaster Road:

    And here we are at 28 Lancaster. Like Aphria’s acquisition, from the outside it looked almost passable:

    But from within it became apparent that the building had been abandoned for years:

    Busted doors and roofs. Hole in the wall. Gulad newspaper on the floor. Dirt everywhere.

    After our visit, we checked Jamaican real estate records and taught us that neither Tomlinson nor Marigold even owns the abandoned property anymore. Tomlinson used to be owner but it was sold by mortgage in January:

    Despite this, Marigold and Tomlinson’s recent applications have still listed the abandoned property as their current address.

    On Ground in Jamaica: Marigold Claims to Have 3 Other Leases

    Aside from the abandoned building, Marigold claims to have 3 leases in Jamaica (p. 17):

    We visited Marigold’s other properties as well, or at least the which we could confirm actually exists.

    On Earth in Jamaica: Marigold claims to rent “Unit 51” of a building complex that only goes up to Unit 50

    Marigold claims to rent an 800 sqm / herb house in collaboration with the Peter Tosh Museum located at the “Unit # 51, Pulse Center, 38a Trafalgar Road, Kingston “(p. 17). The company claims that it has hired the facility from April. (p. 57) We visited the site in October:

    We talked to the landlord during our visit. He informed us that the units only go up to 50. In other words, Marigold’s “Unit 51” did not exist .

    We then called the museum later this month. They could not give us contact information for Marigold and said they have not been opened yet. “

    On The Ground in Jamaica:” Jamaica’s Leading Medical Cannabis Company “… Has a paper sign on the door to its empty office?

    Marigold intentionally hid space in” Suite # 6 “in an office building in Kingston Jamaica (page 17). The lease for the office was signed in April (page 57). Our investigator visited the site in October during opening hours on several occasions and found that when the lights were on, no one was at home. He spoke with nearby companies who said that they rarely saw anyone enter or leave the office. Here is the image of the locked empty suite:

    Why does this “world class asset” have a paper sign on its office door for 6 months in its lease? (Someone may also want to stay at the time of watering the dehydrated office plant):

    Here were also the company’s paper signs at the entrance to the building:

    The company’s other leasing is for cultivation plants on a plot in the Saint Catherine parish. According to the company, this country is intended to eventually support greenhouses and a state-of-the-art research facility. After much search, our researchers could not find the site. Therefore, we could not confirm its existence.

    On the ground in Jamaica: Marigold’s Law of Cutting Edge Researchers

    When Scythian signed the letter of intent to acquire a stake in Marigold in March 2018, one of the reasons for the transaction was Marigold’s strong scientific team:

    Marigold’s leadership in the excellence of cannabis cultivation and precision dosing gives greater depth and prestige to an already strong team.

    Marigold’s Medical Doctor Director refuses to ever serve on any Board of Directors, Let Alone Marigold

    We reviewed Jamaican company records to see who was at Marigold’s team of top researchers. One of the original founding directors of Marigold’s team was Dr. Janice Simmonds-Fisher, one of two researchers associated with the company:

    Dr. Fisher is a doctor based in Jamaica (and is a very nice lady). We visited her office and talked to her. She ever denied having any leadership in any companies, even less Marigold. She actually signed a document confirming this:

    (Note: Dr. Fisher’s personal information has become blurred)

    Marigold’s Genetic Engineer. A Totally Unknown

    Marigold’s second director of research was a person named Ray Anthony Chin, who was listed as Marigold’s “Genetic Engineer”:

    We visited Mr. Chin’s address at 7 Norbrook Crescent:

    The tenant said no one of that name lives there and they had never heard of anyone with that name.

    We searched largely for signs of a topmate (or any) genetic engineer named Ray Anthony Chin through scientific journals, ResearchGate, Web Sources, Social Media, etc. We came up completely empty. Has Mr. Chin managed to be a top scientist without leaving a track of his achievements?

    On Ground in Jamaica: The Very Challenged Reason for the Deal-a Local Cannabis R & D License-Cost Only $ 500 to Acquire

    At the time of the business announcement also made much that Marigold had issued one of three original licenses in Jamaica for R & D of cannabis products.

    We met the Jamaican Cannabis Licensing Authority (CLA) and learned that at the time the Marigold Agreement had closed in September, CLA had approved at least 22 full licenses and over 80 conditional licenses.

    We asked about the process of obtaining a license. It requires about $ 500, some paperwork and a waiting period of less than 6 months. That was basically that.

    Jamaica: But wait … Gold jewelry is not even fully licensed!

    Shortly after our visit, the Jamaican media reported on Marigold’s agreement with Aphria. Per article, Marigold’s CEO Lloyd Tomlinson says that Marigold plans to set up 5 herbs over Jamaica, “the first one will open at Pulse Center.” In other words, no one is open.

    In addition, Tomlinson said he would reserve full comment on the retail ganja venture:

    until all his licenses are issued by Cannabis Licensing Authority.

    The article continued …

    … Goldfish already has conditional on approval for multiple licenses.

    … The operations will be carried out by a 20-acre farm at Bernard Lodge, but may potentially produce raw materials from a farm operated as a separate activity of the Tomlinson family in the Blue Mountains. The farm is waiting for approval to grow marijuana.

    So, instead of being licensed to work, Marigold expects its conditional licenses to be approved.

    Jamaica / Marigold: Recap So Far …

    • Official office is a deserted property sold by the lender almost a year ago.
    • The company claimed to rent a “Unit 51” that did not exist.
    • One of the company’s founding directors ever denies being one
    • The second mystery researcher has no clear online presence.
    • The company’s land with raw land is not approved for the cultivation of cannabis.
    • The company has licensed license and is waiting for full approval.

    All this … for $ 145 million? So what is happening?

    Jamaica: Marigold Stakes was originally purchased for US $ 118 in total. Who were these lucky shareholders?

    The unlisted partners Aphria / Scythian, who bought their efforts in Marigold, did not seem to believe that the asset worth $ 145 million.

    Jamaican company records show that two Canadians associated with several DeFrancesco backed stores had bought their shares in the Jamaican unit for about US $ 118 (] not million) for shares turned to Scythian a few months later for $ 18 million (and finally turned to Aphria for $ 145 million.)

    The two individuals named in Jamaican corporate records were Marvin Igelman and Clifford Starke.

    Marvin Igelman’s relationship with Aphria / Scythian insider DeFrancesco spans for more than a decade and has collaborated with the securities company Standard Securities Capital Corporation (SSCC) where DeFrancesco had served as a management partner:

    Since then, Igelman has played an active role in DeFrancesco -backade offers including serving as:

    • Vice Chairman of Delavaco-Backed Breaking Data Corp / Sprylogics,
    • Delavaco-backed Chef and
    • Head of Delavaco-Backed American Apparel.

    Clifford Starke has been described as “An early stage investor and financier of Nuuvera Corp” before its acquisition of Aphria. As stated in our previous paragraph, we consider Nuuvera to be as useless as other Aphria acquisitions. The agreement had unconflicted conflicts of interest, including the ownership of DeFrancesco together with Aphria’s Chairman / CEO Vic Neufeld, Aphria CFO, and several Aphria Directors.

    Jamaica: The cheap parts were owned by a unit previously named after Aphria / Scythian Insider Andy DeFrancescos Firm

    The shares were later transferred to an opaque, newly formed Bermudan unit. The unit, in turn, owned the Canadian Scale Unit, previously called Delavaco Caribbean Ventures. Recall that Delavaco is the name of the private private equity company Aphria / Scythian insider Andy DeFrancesco.

    After the change of name, Scythian announced its letter of intent to acquire the unit. The name change took place only 2 days before Scythian signed its letter of intent to acquire the unit on March 21st st . Canadian corporate records captured the original, however:

    Then 2 days later on March 21st st :

    Please note that in addition to deFrancesco’s role, Vice Chairman / CEO Vic Neufeld was also chairman of the Scythian at the time of the announced marigold trade. This is the same Vic Neufeld who supervised Aphria acquisition just a few months later, and finally paid $ 145 million of Aphria shareholder contributions to the Jamaican entity.

    The shareholders in the private shell unit were, in turn, paid $ 18 million, which seems to have been almost pure profit.

    Aphrias $ 50 million Argentine Acquisition: ABP SA

    On March 11, 2018, Scythian signed an intention to acquire MMJ International, later described as “a privately owned British Columbia company” (p. 24). MMJ International had an agreement to buy an Argentine company called ABP, a “pharmaceutical importing and distribution company”.

    Four months after Scythian’s letter of intent to acquire the Argentinean assets, Scythian announced the sale to Aphria in ABP’s letter of intent together with other LatAm “assets”.

    Scythian closed its purchase at the end of September and then closed the sale to Aphria 6 days later.

    In the end, Aphria paid about $ 50 million for the ABP stake, netting Scythian a quick C $ 23 million gain for an asset as it actually owned for 6 days . (p. 3). [2]

    At the same time, investors in the private security company were paid $ 27 million for their share in MMJ. We will show proof that these investors include Aphria / Scythian insider DeFrancesco, along with named associates.

    At Ground in Argentina: ABP’s “Strong” Retail Platform consists of exactly a small pharmacy

    The company has spoken as “ABP has had a strong platform from its distribution and retail business to build on.”

    Per Aphria’s transaction papers we see that ABP had a total of 2 facilities (page 74):

    ABP operates two facilities ] located in the city of Buenos Aires – a pharmacy operating under the trade name Farmacia & Perfumeria and a wholesaler distribution center for drug use which also serves as a secondary store for Farmacia & Perfumeria.

    Thus, the “strong” retail platform consisted of exactly a pharmacy. Here is a picture on the outside of the pharmacy, licensed by Google Maps:

    We visited the site. It is located in a rundown part of Buenos Aires and is less than a regular CVS or Rite-Aid. Here are pictures from the inside and a receipt confirming the name of ABP at our purchase:

    On The Ground in Argentina: A “Leading Importer and Distributor of Medicines” … with an empty lost office

    At the time For the business announcement, Vic Neufeld was Chairman / CEO of Aphria and Chairman of the Scythian. He called ABP “one of the country’s leading importers and distributors of pharmaceuticals.”

    We visited ABP’s “wholesale distribution center”. The area was largely abandoned and residential area. Here’s a picture of the entry from Google Maps along with a photo from our visit:

    On the inside, we saw almost no signs of existing activities, except for a lonely desk and some stacked boxes in what looked like an unfinished empty layer:

    ABP: Virtually no digital presence and a handful of employees [19659131] As part of our ABP research, we called the company, visited their offices and cut online for some signs of business presence. We saw almost no digital signs of life and found very few employees.

    Oddly shows ABP’s Facebook page that its first post was in August, five months after the Scythian article was announced. The page had 7 likes in this writing.

    All in all, we could only find 3 actual employees in ABP, excluding retailers. Two of them were college students:

    1. Chef Gonzalo Arnao appears to have a true laboratory experience according to his Linkedin profile.
    2. The other identified employee reports on his LinkedIn that his main occupation is a university student. 19659018] The third identified employee is a 20-year-old who lists his profession as a football player on his Facebook page.

    Company Press Release: ABP-Generated “Revenue in Surplus of USD 11 Million in 2017”


    Employee interview: In fact, revenues were $ $ 430 thousand

    In the first press release of Aphria’s “sister company” Scythian, who announced the letter of intent to acquire ABP, the press release headlines:


    The title number struck us so odd considering that the company’s business consisted of a small retail pharmacy and a blank, unfinished stock. We checked the Dun & Bradstreet which reported that the annual sales at the company were approximately USD 212,000, which seemed more in-line:

    (Source: Dun & Bradstreet)

    We then talked with co-workers # 2 (from the above section) and recorded the conversation. When asked about ABP’s annual revenues, he replied that they were about 15 million Argentine pesos, which converts to about 430,000 USD.

    Founded in Argentina: ABP’s challenged “purchase order” with a local hospital was actually a donation [19659146] Before the closure of ABP’s acquisition of Aphria / Scythian, Scythian announced that an important milestone had taken place at our subsidiary :

    Scythian Announces ABP SA’s First Purchase Order with Aphria Inc. Order to Supply World Renowned Pediatric Hospital for Research and Education

    The purchase order was for Aphria’s CBD oil to support clinical research at Argentina’s well-known Garrahan Pediatric Hospital. “19659149” I am very proud that ABP works with the Scottish team to reach this new milestone of a first purchase order … “Gushed Scythians CEO in the press release.

    It was considered a big achievement – an order for a big multiannual study involved g over 100 patients. The newly formed Argentine partnership seemed to generate new sales and lent the proposed acquisition of Aphria to increased credibility.

    A problem: We spoke with representatives at the hospital and they informed us about

    The image to the right is from our meeting with Lucas Schiaffini, Head of the Department.

    Merriam-Webster defines that “buy” is “to get by paying money or equivalent”.

    While the chrysanthemum gave the impression that it had secured a large multiannual purchasing agreement, in fact, it was the Scythian who bought … from Aphria. The product was given free of charge to the ultimate consumer.

    The hospital later confirmed this publicly. According to a press release from the hospital (translated from Spanish):

    The medical cannabis used in these studies was provided by the laboratory in Aphria, Canada, which should provide the drug throughout the study and for all patients in which it has proved to work.

    The hospital worker said they were grateful for the donation, but he complained to us that the company’s representative in Argentina held them to issue more press releases about the partnership.

    Argentina: Undisclosed Insider Self-Dealing?

    So who were the lucky investors in the “privately owned” skull unit that paid $ 27 million for Argentinian assets?

    Canadian corporate records show that the used shell device is used to be named Delavaco MMJ International but changed before publication of the store:

    As a reminder, Delavaco is the name of Aphria insider and current scout chairman Andy DeFrancesco’s personal capital company.

    If there is still any lengthy doubt about what’s happening here, we can turn to Andy DeFrance’s Private Instagram account. This is an Instagram post dated one week before the Scythians announcement to acquire “privately owned” Argentinian assets:

    Yes, it’s Aphria’s insider, Scythian insider and current scytic chairman & Chief Investment Officer Andy DeFrancesco, boasting about buying ABP’s pharmacy for its own private limited company one week before browsing to Scythian for $ 27 million. He has also tagged #GreedIsGood.

    We can confirm that it is exactly the same pharmacy. Här är bilden från vårt besök i samma del av butiken som tagits i en annan vinkel:

    Aphrias Colombianska förvärv av kolumner på 84 miljoner dollar: Colcanna SAS

    I april 2018 skrev Scythian en avsikt att förvärva en kanadensisk enhet namngivet MMJ Colombia Partners, som beskrivs i arkivering som “ett privatägd Ontario-företag” (s. 24). Vid tidpunkten för tillkännagivandet var MMJ Colombia i färd med att köpa en 90% -andel i Colombia-baserade Colcanna SAS. Scythian skrev med andra ord en avsikt att förvärva en “privatägd” enhet som inte ägde någonting än.

    Scythian sålde senare avsiktsförklaringen tillsammans med sina övriga LatAm “tillgångar” till Aphria. I slutändan betalade Aphria 84 miljoner US-dollar för insatsen, netting Scythian en snabb C $ 45 miljoner vinst.

    Samtidigt bankade de namngivna investerarna i “privatägda” MMJ Colombia Partners nästan 39 miljoner dollar. [3] We will show evidence that those investors include Aphria/Scythian insider Andy DeFrancesco, along with unnamed associates.

    Colombian Corporate Documents: Zero Operating Activity and Total Assets of $16,000

    Colombian corporate records show that Colcanna was established on December 27, 2017, and was thus only months old when Scythian signed its letter of intent to buy it. The newly formed entity reported exactly zero operating activity and total assets worth about US$16,000:

    On the Ground in Colombia: An Actual Office! But Not Much Else

    Colcanna has an office and some property in Colombia. Here are pictures from our investigator’s visit in mid-November. He said there were about 5 people working there:

    As far as development of the property goes, it does not appear that much is going on, however. The Colcanna website features a pilot greenhouse:

    The other pictures from the website are rather underwhelming:

    Colombia: On Colcanna’s Much-Touted Cannabis Licenses—It Was One of About 73 Licensed Entities at Time of Deal Closing

    Much was made of Colcanna being the first entity to receive cannabis licenses in the particular region of Colombia where it is located:

    Colcanna is the first company in the coffee zone of Colombia with cultivation and manufacturing licenses for the production of medical extracts of cannabis

    Despite being first to receive those licenses in the coffee zone, by late September 2018, near the time of the Aphria deal-closing, Colombia had issued licenses to 73 different Colombian entities.

    Relatedly, an industry expert informed us that while Aphria was touting its coffee region licenses, other operators were avoiding the region due to its climate and conditions. The expert explained to us that the coffee zones are not desirable for growing cannabis. They are too moist and cool, which is fine for coffee but can lead to mildew problems in cannabis. The mountainous regions are also naturally less accessible, which increases costs.

    Colombia: But Wait…Colcanna Isn’t Even Fully Licensed!

    When our on-the-ground investigator asked for information about buying Colcanna’s products, the company rep said they were still in the licensing process and that they are not near production.

    An industry expert gave us the following insight on the key license Colcanna appears to be missing:

    I don’t think Colcanna is one of the four companies approved to do characterization. This is a necessary requirement for cultivation.

    …If the company doesn’t have a characterization license then it’s a huge red flag. I think the current government is in no rush to stimulate the industry. People are just twiddling their thumbs in the government departments at the moment.

    Colcanna has received some of its required cannabis licenses per Ministry of Justice and Ministry of Health records, but until they receive all their required licenses they appear to be in the thumb-twiddling business along with the local government.

    Colombian Comparable Transactions: Aphria Overpaid Relative to Peers for Land/Licenses

    When comparing the purchase price of Aphria’s acquisition relative to other Colombian cannabis producers we see that they stand out:

    (Sources: Company filings, company press releases, and local experts)

    The cannabis space is replete with debates about valuation, but putting that aside, the fact that Aphria’s purchase stands head and shoulders above the rest of the industry speaks for itself.

    Colombia: Undisclosed Insider Self-Dealing?

    Who were the shareholders in the privately-held shell entity that banked C$39 million for selling a newly-formed, stalled Colombian operation?

    Canadian corporate records show that two months prior to the Scythian announcement MMJ Colombia had a different name: Delavaco Colombia Partners. Recall that Delavaco is the name of Andrew DeFrancesco’s personal private equity firm. Also recall that DeFrancesco is the current Chairman of Scythian and a key insider of both Scythian and Aphria. The entity was registered in the name of DeFrancesco’s spouse:

    The timing of the name change looks prescient. Delavaco Colombia’s name was changed on February 16, 2018—the very day that Colcanna received its first license for cannabis R&D from the Colombian government, suggesting that the acquisition plan may have been set in motion upon receipt of the license (pg. 54).

    Aphria’s “Option” to Pay $24 Million+ for a Newly-Formed Brazilian Entity Which Appears to Own Nothing but a Pending License

    On July 23, 2018, Scythian announced a letter of intent to acquire a stake in “Brazilian Investments Inc”, a private British Columbia-based entity.

    Canadian corporate records show that “Brazil Investments” had also undergone a name change. It was originally named “MMJ Brazil Investments” and was incorporated only on March 14, 2018. We were unable to find its original owners, but its name was changed to the nebulous “Brazil Investments Inc” on June 15, 2018, about a month before the announced deal:

    The acquisition of LATAM provides the Company with an option to purchase 50.1% of a Brazilian entity for $24 million (USD), once it secures a medical cannabis licence from the Brazilian government and a right of first offer and refusal on another 20-39% of the Brazilian entity. (Pg. 23)

    Brazilian corporate records show that the ultimate target, “Green Farma Brasil”, had informally operated as of early 2017 but had only taken the step of legally constituting months after the announced deal, on August 23, 2018:

    The company was formed with capital worth only about US$27,000.

    Thus, it seems that Aphria purchased an option to buy a recently formed entity with no known operations except a pending Brazilian cannabis license. For the sake of their investors, we sincerely hope they don’t choose to exercise this option and shovel $24 million (or more) into this new shell.

    We can only guess who might have a stake in the related “privately-held” Canadian entity.

    Part II: Who is Andy DeFrancesco?

    Andrew DeFrancesco is the Founder of the Delavaco Group, a private equity and advisory firm based in Toronto and Florida. His biography was recently removed from the Delavaco site and his spouse is currently listed as the Chairman and CEO of the firm.

    Andy DeFrancesco’s Deep Relationship with Aphria

    As described briefly above, Andy DeFrancesco has been a key figure with Aphria from the beginning.

    (Source: Andy DeFrancesco’s private Instagram account)

    DeFrancesco’s biography on the Delavaco website stated that he was “founding investor to Aphria, leading all rounds of financing and strategic advisor to the company since inception.” Despite the recent removal of his biography, we can still see the original through Web Archives, which also shows that he was formerly listed as “Founder, Chairman & CEO” of the firm:

    Additional links to Aphria include:

    • DeFrancesco’s Delavaco Group is named as a “special advisor” to Aphria in the company’s press releases relating to all of their bought-deal financings (1,2,3,4,5,6,7).
    • DeFrancesco’s private equity firm, the Delavaco Group, was the advisor in Aphria’s reverse-merger into a shell entity named Black Sparrow Capital Corp. That transaction took Aphria public.
    • The COO of Delavaco Capital was the CEO and CFO of the Black Sparrow shell.
    • DeFrancesco was the self-described “architect” of the Aphria/Nuuvera deal which we previously identified as being laden with undisclosed related party conflicts.

    Andy DeFrancesco’s Deep Relationship with Scythian BioSciences (Now Renamed Sol Global Investments)

    DeFrancesco also has a close relationship with Aphria’s ‘sister’ company, Scythian BioSciences/Sol Global Investments:

    • Going back to the beginning, the “finder” of Scythian’s reverse-merger deal to take the company public was the COO of the Delavaco Group. The Delavaco Group is DeFrancesco’s personal private equity firm.
    • Until recently, Scythian’s head office was listed as 366 Bay Street, Suite 200, Toronto, the very same address and suite number of DeFrancesco’s Delavaco Group Toronto office (pg. v).
    • Scythian’s former CFO, Jonathan Held, served in the role until late September. Held operates his consulting firm ALOE Finance out of the exact same address and suite number as the Delavaco Group’s Toronto office.
    • In September, DeFrancesco was named Scythian’s Chairman of the Board and Chief Investment Officer. He is now in charge of allocating Scythian’s fresh batch of money received from Aphria through the LatAm deals.

    In short, DeFrancesco has played an integral role with Aphria, Scythian, and the LatAm transactions as outlined above. We view him as the architect of these questionable transactions.

    Now, we will explore his background and associations.

    Canadian Regulators: DeFrancesco Has “Little Regard for the Truth”

    A 2009 IIROC complaint mentioned Andy DeFrancesco’s prominent role in a scheme that led to the subsequent industry ban of a broker. For context, IIROC is the national self-regulatory association for Canadian investment dealers, similar to FINRA in the U.S.

    IIROC’s complaint made several conclusions about Andy DeFrancesco and the broker, who both worked at Standard Securities Capital Corporation (SSCC):

    Both the respondent’s and Andy DeFrancesco’s conduct in this matter showed they have little regard for the truth.

    Andy DeFrancesco was deceptive in his conduct with respect to his wife.

    He was deceitful to his employer, SSCC, in managing (a client’s) account by placing his own assets in her account.

    Both the respondent and Andy DeFrancesco were involved with the SSCC new account application form of (the client) which contained the false signature of (the client).

    Per earlier SEC filings, DeFrancesco had served as the Managing Partner at SSCC, a firm that was the recipient of multiple regulatory sanctions (1,2,3,4). SSCC was eventually absorbed by another brokerage firm.

    DeFrancesco’s Business Ties to Barry Honig, Who SEC Prosecutors Allege to Have Engaged in Multiple Pump and Dump Stock Schemes

    DeFrancesco has several close business interests with Barry Honig, a controversial financier who was recently alleged by SEC prosecutors to have orchestrated multiple pump and dump schemes.

    SEC and Canadian records show that Honig and Andrew DeFrancesco (along with family accounts) have cooperated on a slew of deals, including:

    • Riot Blockchain (formerly named Venaxis Inc.): DeFrancesco’s spouse reported a key ownership stake in Venaxis Inc. and even joined Barry Honig in an activist campaign to oust the prior board of directors.

    DeFrancesco advocated for Honig’s new director slate, which included John Stetson and John O’Rourke, two individuals who were later alleged by the SEC to have participated in multiple pump and dump schemes along with Honig.

    Venaxis later “pivoted” business models several times, ultimately becoming Riot Blockchain. Documents show that DeFrancesco had a key role in Riot as well…

    (Source: Cap IQ)

    As we alleged in an earlier report, Riot at one point made an irregular acquisition that is reminiscent of Aphria’s LatAm transactions: the company bought equipment by purchasing it through a newly-formed privately-held shell entity rather than just buying it on the open market. The equipment cost ~$2 million, but Riot paid ~$12 million for the entity, netting holders of the shell a roughly $10 million gain in about 2 weeks.

    So, who owned the shell? None other than DeFrancesco’s spouse together with Barry Honig (pg. 23).

    DeFrancesco / Delavaco’s Ties to a Stealth Stock Promotion Ring

    Delavaco was recently named in an exposé by investigative reporter Chris Carey relating to an “army of writers, both real and imaginary” that have produced hundreds of bullish articles on clients of investor relations firm IRTH and about companies backed by Barry Honig. The article is entitled “Pretenders And Ghosts: Stealth Promotion Network Exploits Financial Sites To Tout Stocks.” Per the article:

    The stealth promotion ring began posting stories last year about companies with financial ties to The Delavaco Group… The touting ring has spotlighted at least four companies in The Delavaco Group’s investment portfolio: MassRoots (OTCQB:MSRT), Aphria Inc., Liberty Health Sciences Inc. and Breaking Data Corp. (OTCQX:BKDCF).

    DeFrancesco’s Business Ties to Bobby Genovese, Who SEC Prosecutors Allege to Have Engaged in a Manipulative Penny Stock Scheme

    An SEC complaint filed August 2017 accused an individual named Bobby Genovese of “a penny stock promotion, manipulation and unlawful distribution scheme”. The complaint was related to an Ontario-headquartered and TSX-listed company called Liberty Silver Corporation.

    The IIROC complaint mentioned earlier provided insight into DeFrancesco’s business relationship with Bobby Genovese. Per the complaint, DeFrancesco had apparently illicitly deposited shares into a fake client account as payment for “services rendered from past transactions” that he had done with Bobby Genovese.

    According to a 2010 deposition of Andy DeFrancesco in an unrelated matter, he similarly referenced his business relationship to both Bobby Genovese (and the banned broker, Phil Vitug) (Pg. 27).

    In sum, when reviewing DeFrancesco’s past associations and regulatory run-ins, we view his role in Aphria’s irregular acquisitions as totally unsurprising.

    Part III—Aphria’s Side Business: Low-Quality Cannabis

    As shown in our introduction, Aphria has dedicated much of its cash to international ‘investments’

    (Source: Cap IQ)

    Aside from its questionable acquisitions, however, the firm has also made investments into its greenhouse operations in Canada which produce a variety of cannabis products.

    The firm believes they have an edge in the competitive production space. They have repeatedly touted their ability to produce cannabis at lower cash costs than competitors, which enables them to deliver “one of the highest adjusted gross margin levels in the industry”.

    We spoke with a former worker at Aphria’s facility which described the Aphria approach in rather different terms:

    The motto should be quality over quantity, but it’s probably the other way around. It’s more quantity over quality.

    As far as management:

    A lot of the people who are running the show are young, possibly not very experienced in what they are doing

    This has led to issues such as audit failures, mold, and bug infestations:

    We were constantly running into errors and not passing audits with Health Canada and having issues with bugs…it kind of became a bit of a circus.

    We had a lot of issues with mold and right now the facility is infested with bugs.

    Every single room that has product in it in that (Leamington) facility right now has bug problems.

    Another source with experience in Canadian and Colombian cannabis companies said the following:

    Aphria is a big company but is yet to deliver product. There is huge customer turnover. They get a lot of newbies to get prescriptions and get signed up, but first orders receive 3 times market value for low grade.

    It seems that Aphria could be sacrificing quality and its long-term brand in order to generate temporary high margins. Regardless, the strategy appears to be failing as Aphria is not generating positive cash flow from operations. A money-losing, poor-quality, low-cost operation does not strike us as a winning formula.

    Additionally, competition is only intensifying as more producers come on-line. Aphria had an early-mover advantage with its licensing and facilities, but that advantage dissipates with every new entrant. With their best times behind them we don’t think Aphria will ever generate meaningful positive cash flow from its Canadian growing operation.

    The ‘Blunt’ Truth: Aphria is Uninvestable

    All told, Aphria’s international deal spree has resulted in about C$736 million being deployed to its questionable “investments”, including the Brazilian purchase option:

    (Source: Company filings, press releases and user calculation)

    We hope this information has been informative and has given readers a sense of what is going on at Aphria. We believe the conduct of Aphria’s executives and deal partners has been deeply unethical and possibly criminal. With a slew of highly questionable transactions, negative operating cash flow, and a low-quality product, we ultimately see no credible path forward for this company.

    We’ll leave it at that (for now).

    Tickers mentioned: (APHA) (OTCQB:SOLCF) (RIOT)

    [1] Note: To arrive at this number we apply the final deal value (based on Aphria’s share price at closing) to the percentage allocated to Marigold per the transaction’s formal valuation opinion

    [2] Scythian purchased MMJ International for 6,176,320 shares of Scythian as of the closing price on the date immediately prior to the closing date of September 21, 2018 Scythian’s closing price on September 20, 2018 was 4.35, hence the transaction value of 6,176,320 * 4.35 = C$26,866,992

    [3] See Scythian Biosciences Closes Acquisition of MMJ Colombia Partners which includes US$6,200,000 in cash advanced prior to deal closing, US$5,000,000 in assumed debt (both converted to CAD at an exchange rate of 1.3 CAD/USD, and C$24 million in Scythian shares.

    Disclosure: I am/we are short APHA.

    I wrote this article myself, and it expresses my own opinions. I can not get compensation for that. I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: Use of Hindenburg Research’s research is at your own risk. In no event should Hindenburg Research or any affiliated party be liable for any direct or indirect trading losses caused by any information in this report. You further agree to do your own research and due diligence, consult your own financial, legal, and tax advisors before making any investment decision with respect to transacting in any securities covered herein. You should assume that as of the publication date of any short-biased report or letter, Hindenburg Research (possibly along with or through our members, partners, affiliates, employees, and/or consultants) along with our clients and/or investors has a short position in all stocks (and/or options of the stock) covered herein, and therefore stands to realize significant gains in the event that the price of any stock covered herein declines. Following publication of any report or letter, we intend to continue transacting in the securities covered herein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation, conclusions, or opinions. This is not an offer to sell or a solicitation of an offer to buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction. Hindenburg Research is not registered as an investment advisor in the United States or have similar registration in any other jurisdiction. To the best of our ability and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and who are not insiders or connected persons of the stock covered herein or who may otherwise owe any fiduciary duty or duty of confidentiality to the issuer. However, such information is presented “as is,” without warranty of any kind – whether express or implied. Hindenburg Research makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. All expressions of opinion are subject to change without notice, and Hindenburg Research does not undertake to update or supplement this report or any of the information contained herein.

    Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Published by