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Home / Business / Aphria: A Shell Game with a Cannabis Business on the Page – Aphria Inc. (NYSE: APHA)

Aphria: A Shell Game with a Cannabis Business on the Page – Aphria Inc. (NYSE: APHA)



Background

Whenever an exciting new industry draws attention, it also attracts retail capital, which in turn can attract unscrupulous players. This is neither a story about the cannabis industry and its commercial potential, nor a story about ratings and competitive market dynamics. It is simply one of the larger companies in the industry, apparently at the direct expense of its public shareholders, has diverted a huge sum of money towards the private interests of its insiders.

Co-Author Quintessential Capital Management (QCM) Background

We are proud to share this report with QCM. QCM has an unparalleled track record in identifying and detecting corporate abuses through in-depth due diligence.



QCM's latest report was released in May of this year, focusing on Greek retailer Folli Follie. The report claimed widespread revenue inflation. FF's share fell 60% in two days after its release and was suspended two weeks later. In July 2018, the company sought protection from creditors under the Greek Bankruptcy Code. Management is now facing criminal charges and the shares have not resumed trading.

Prior to Folli Follie, QCM published a report on Globo PLC, a provider of enterprise mobility management software and services. Globo's shares were suspended in less than 12 hours, and the management admitted it was a fraud in accounting within 48 hours of publication. Globo was never reopened for trading and was declared worthless by the bankruptcy trustee.

Background: Aphria's Nuuvera Scandal

Earlier this year, Aphria was scrutinized after we had exposed Nuuvera's unauthorized insider trading in relation to the company's $ 425 million acquisition.



We had written that Nuuvera was a worthless artifice that should enrich insiders at the expense of investors in Aphria. Later, the company admitted that its executives and directors had undisclosed shares in Nuuvera before acquiring Aphria along with an important deal partner named Andy DeFrancesco.



The company was down about 30% in the weeks following the exposure and its subsequent approval. Following the episode, the company confirmed that the newly acquired international assets were of great value. They also sought to mitigate investor concerns by adding compliance personnel and announcing government reforms related to their investment policy. Since then, the stock has largely recovered and reached even new highs in September.

Introduction: It's Your Turn Again – The LatAm Transactions

Despite the announced government reforms, our research has shown that Aphria's insiders have doubled their questionable investments:

Recently, Aphria invested over $ 280 million for almost worthless acquisitions in Latin America, which are evidently showing signs of insider trading.

We have conducted extensive due diligence in Jamaica, Colombia, and Argentina and will provide evidence that the newly acquired assets are very bloated or virtually fabricated.

We will also provide documents showing that the same Aphria consultant, who had described himself as the "architect" of the Nuuvera deal, Andy DeFrancesco was an undisputed funder of this latest series of deals. DeFrancesco completed the transactions together with Aphria Chairman / CEO Vic Neufeld, who was also Chairman of Scythian Biosciences (recently renamed Sol Global Investments), another company involved in the execution of these & # 39; LatAm & # 39; businesses is.

All the, the effect was massive. We anticipate that at least 50% of Aphria's net worth of $ 1.46 billion has been diverted into "investments," which are at best bloated. Our balance sheet assets break down as follows:

  • Goodwill, which we believe is completely worthless, $ 524 million;
  • $ 246 million of intangible assets, including licenses, permits, and "trademarks" acquired from these businesses. that we estimate are inflated by 80% +; and
  • $ 86 million in equity investments and long-term investments that we believe are the result of related party transactions and are materially affected.



( Source: Cap IQ )

After reviewing the LatAm deals, we will then explore the background of Andy DeFrancesco, including his push with Canadian regulators and his close relationships with individuals who use the SEC allegedly using several pumps and dump schemes, including Bobby Genovese, Barry Honig, John O'Rourke and John Stetson.



( Andy DeFrancesco Source: DeFrancesco's Instagram Account )

Finally, we will review the cannabis business of Aphria. While the company claims to set the standard for cost-effective production, it actually appears to be the standard for low-quality production. We share the content of an interview with a former employee who described in detail the failed audits with Health Canada, a circus-like environment, and a facility that has had repeated mold problems and been "bug-infected". We also share the content of our interviews with industry experts, all of whom underpin the poor quality of the product.

With bright red flags in terms of its investment activity, strong negative historical cash flow and low quality cannabis We believe that Aphria's stock will be smoked .

Part I: The Unusual Structure of Aphria's "Acquisitions"

We believe that Aphria distracted the shareholders' assets through a systematic process: 19659027] Aphria insider Andy DeFrancesco founds or acquires an international company, the one Acquisition mark warrants (eg conditional cannabis licenses, a leased facility, purchase of a small existing local business.)

  • The international company is then purchased by a Canadian company that is under the control of DeFrancesco, through its closely held Private equity company, the Delavaco Group.
  • The Company Adopts Acquisition by Aphria's sister company Scythian Biosciences, in which Vic Neufeld, Chairman / CEO of Aphria, and DeFrancesco held important insider functions.
  • Scythian then sells his stake in the company with a large premium to Aphria.
  • As a result, DeFrancesco and unnamed employees receive cash or Scythian shares, Scythian receives cash and / or Aphria shares, and Aphria's shareholders receive international assets that are essentially worthless.
  • The following explains how this process has evolved with Aphria's recent LatAm investment:



    (Sources: Scythian / Aphria Submissions & Press Releases, Canadian Company Records and Research Locally)

    Undisclosed Insider Self-Dealing?

    The architect of these stores appears, as we will be showing Aphria / Scythian insider Andy DeFrancesco. DeFrancesco was instrumental in founding Aphria and Scythian, which acted as a founding investor and organized the reverse mergers that both companies brought to the public. He was a consultant on all Aphria-sourced finance and is currently chairman and chief investment officer of Scythian. At the beginning of this year, Scythian even had the same office and meeting numbers as the Delavaco group of DeFrancesco, the private private equity firm.

    Our first important indication that something is wrong was the following discovery: Canadian Company Records Prove This The companies acquired under the LatAm deal were all previously held by DeFrancesco's personal investment company, Delavaco- Group, were named:

    It seems that efforts have been made to hide the relationship with Delavaco. The names of all these companies were changed prior to the takeover announcements to ensure that the name "Delavaco" did not appear in any of the trade press releases. Canadian company records show, for example, that the name of the company, which allegedly holds Jamaican assets, was changed two days before the announced letter of intent from Scythian.

    In short, money flows from the retail investors of Aphria, who then used the capital for the purchase of "assets" from insider-affiliated companies.

    Let's take a look at some of the assets.

    Aphria's $ 145 Million Jamaican Acquisition: Marigold Projects

    ] In March 2018, Scythian signed a letter of intent to acquire Marigold Acquisitions Inc., which was described as a "privately held company in British Columbia" (p. 24). , At that time, Marigold Acquisitions was about to acquire a 49% stake in the Jamaican company Marigold Projects. In other words, the company did not even have the Jamaican fortune.

    Four months later (in July), Scythian then announced the sale of the Marigold Letter of Intent along with its other LatAm "assets" to Aphria. Scythian completed his purchase in mid-September and completed the sale to Aphria two weeks later.

    Ultimately, Aphria paid an estimated $ 145 million for the Marigold stake, giving Scythian a $ 127 million profit on an asset. was owned for about 2 weeks. (P. 96). [1]

    In the meantime, unnamed Marigold investors have been paid $ 18 million in the privately held Shell unit. We will provide evidence that these investors, along with Aphria / Scythian Insider DeFrancesco, are present with unnamed partners. On-site in Jamaica: Marigold's official registered office is an abandoned building

    So, what exactly did Aphria buy? We visited Jamaica to find out. According to Marigold's last petitions, the company's headquarters is 28 Lancaster Road, Kingston St. Andrew:



    When Aphria ended its Latin American takeovers, they were declared "world-class assets." In late September, we visited the official seat during working hours and found that it was a world class withdrawal. Here we are on Lancaster Road:



    And here we are at 28 Lancaster. Similar to the acquisitions of Aphria, it looked almost passable from the outside:



    But from the inside, it became obvious that the building had been abandoned for years:







    Crushed doors and ceilings. Holes in the wall. Yellowed newspaper on the floor. Filth everywhere. Not exactly the most modern operation we would expect.

    Lloyd Tomlinson, the much-vaunted manager of Marigold, calls the same abandoned property as his personal address: [194559049]

    After our visit, we checked Jamaican property registers and learned that neither Tomlinson nor Marigold owned the abandoned property anymore. Tomlinson used to be the owner sold by the mortgage lender in January:





    Nevertheless, Marigold's and Tomlinson's recent applications have still indicated the abandoned property as their current address.

    On the Ground in Maritime: Marigold Claims Next to the abandoned building, Marigold claims that there are three leases in Jamaica (p. 17):



    We also visited other Marigold properties, or at least the ones we did can confirm.

    Locally in Jamaica: Marigold claims to lease "Unit 51" of a building complex that only extends to Unit 50

    Marigold claims to rent an 800-square-meter herb house in collaboration with the Peter Tosh Museum at "Unit 51, Pulse Center, 38a Trafalgar Road, Kingston "(p. 17). The company claims to have rented the facility from April. (P. 57) We visited the place in October:



    We spoke with the landlord during our visit. He told us that the units only go to 50. In other words: The "Unit 51" of Marigold did not exist .

    Later in the month we called the museum. They could not provide us with any contact information for Marigold. They said, "They have not really opened yet."

    On Jamaica: "Jamaica's leading medical cannabis company" … has a sign on the door of his door Empty Office?

    According to reports, Marigold rented "Suite # 6" in an office building in Kingston Jamaica (p. 17). The lease for the office was signed in April (p. 57). Our investigator visited the site several times during office hours in October and found that no one was home when the lights were on. He talked to the neighborhood shop who said they rarely saw anyone entering or leaving the office. Here is the picture of the locked, empty suite:



    Why does this "world-class asset" have a paper sign on its office door six months after its lease? (Someone can occasionally stop by to water the dehydrated office area):



    Here was also the signage of the company at the entrance of the building:



    The other lease of the company relates to extension facilities on a plot in the parish of Saint Catherine. According to the company, this country will eventually support greenhouses and a state-of-the-art research facility. After a long search, our researcher could not find the website. We therefore could not confirm its existence.

    Locally in Jamaica: Marigold's Team of Cutting Edge Scientists

    When Scythian signed the Memorandum of Understanding in March 2018 to acquire a stake in Marigold The reasons for the transaction were Marigold's strong scientific team: [19659065] Marigold's leadership in the groundbreaking science of cannabis cultivation and precision dosing adds depth and prestige to an already strong team.

    Marigold's Medical Director denies Ever Anying on Any Board, Let Alone Marigolds

    We reviewed Jamaican company data to see who was among Marigold's team of top scientists. One of the original founding directors of Marigold's team was dr. Janice Simmonds-Fisher, one of two scientists of the company:



    Dr. Fisher is a Jamaican-based doctor (and a very nice lady). We visited her office and talked to her. She denied ever having held senior posts in any company (19459036), let alone Marigold. In fact, she later signed a document confirming this:



    (Note: Dr. Fisher's personal information was blurred)

    Marigold's Genetic Engineer. A Total Unknown

    Marigold's other directorial researcher 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 these Names live there and they have never heard of someone with that name.

    We searched extensively for signs of a (or a) genetic engineer named Ray Anthony Chin through scientific journals, ResearchGate, Internet sources, social media, and so forth. We were completely empty. Has Mr. Chin managed to become a top scientist without leaving a trace of his achievements?

    Locally in Jamaica: The much-vaunted reason for the deal – a local cannabis R & D license – costing just $ 500

    At the time of the announcement of the deal, much was said about Marigold in Jamaica had received one of three initial permits for research and development of cannabis products.

    We met with the Jamaican Cannabis Licensing Authority (CLA) and learned there. Until the Marigold deal was completed in September, the CLA had approved at least 22 full licenses and over 80 conditional licenses. [194559074]

    We asked about the procedure for obtaining a license. It requires about $ 500, some paperwork and a wait of less than 6 months. That was basically it.

    Jamaica: But wait … Marigold is not even fully licensed!

    Shortly after our visit, the Jamaican media reported on Marigold's deal with Aphria. Marigold CEO Lloyd Tomlinson said Marigold plans to set up five herbal homes throughout Jamaica, "the first of which will open in the Pulse Center." In other words, none is open.

    In addition, Tomlinson said he would reserve the full commentary on the retailer Ganja:

    until all licenses are issued by the Cannabis Licensing Authority.

    The article continues …

    … Marigold already has approval for several licenses.

    … The operation will be fed by a 20 acre farm in Bernard Lodge, but could source raw material from a farm run by the Tomlinson family in the Blue Mountains as a separate business. This farm is awaiting permission to grow marijuana.

    Marigold is not waiting for his approval, but is waiting for the approval of his conditional licenses.

    Jamaica / Marigold: To Recap So Far …

    • Official residence is a derelict property that was 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 denies ever having been a company director of the company.
    • The other mystery scientist has no clear internet presence.
    • The property of the company is not approved for the cultivation of cannabis.
    • The company owns conditional licenses and is still awaiting completion approval.

    All this … for 145 million CAD? So, what's up?

    Jamaica: Marigold stakes were originally bought for a total of $ 118. Who was this happy shareholder?

    The undisclosed Aphria / Scythian deal partners who had acquired their stake in Marigold did not seem to believe that the property was worth $ 145 million.

    According to Jamaican companies, two Canadians are claiming several DeFrancesco -covered deals had acquired their stake in the Jamaican unit for about $ 118 ( and not million) for shares issued a few months later for $ 18 million CAD to Scythian (and finally to Aphria for $ 145 million). )

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

    Marvin Igelman's relationship with Aphria / Scythian insider DeFrancesco spans more than a decade, working for the Brokerage Standard Securities Capital Corporation (SSCC), where DeFrancesco was a managing partner:



    Since then, Igelman has had one active role in transactions sponsored by DeFrancesco, including:

    • Deputy Chairman of Delavaco-backed Breaking Data Corp. / Sprylogics,
    • Director of Delavaco-backed Jamba Juice and
    • Director of Delavaco-Supported American Apparel. Clifford Strong was described as "an early stage investor and financier of Nuuvera Corp." prior to its acquisition by Aphria. As mentioned in our previous article, we consider Nuuvera as worthless as the other takeovers of Aphria. The deal had undisclosed conflicts of interest, including the ownership of DeFrancesco and the Chairman / CEO of Aphria, Vic Neufeld, CFO of Aphria, and several Aphria directors.

      Jamaica: The cheap shares belonged to an entity previously named after Aphria / Scythian insider Andy The Company of DeFrancesco

      The shares were later transferred to an opaque, newly formed Bermudan entity. This entity once again belonged to the Canadian shell entity previously called "Delavaco Caribbean Ventures". Let's remember that Delavaco is the name of the private private equity firm of Aphria / Scythian insider Andy DeFrancesco.

      Following the name change, Scythian announced its letter of intent to acquire the company. The name change took place only two days before Scythian signed on March 21 st his letter of intent to take over the entity. However, the Canadian company documents conquered the originals:



      Then 2 days later on March 21 st :



      Remember that Aphria Chairman / CEO Vic Neufeld was next to DeFrancesco's role also the chairman of Scythian at the time of the announced marigold deal. This is the same Vic Neufeld who just a few months later oversaw the acquisition of Aphria and eventually paid $ 145 million to Aphria shareholder money for the Jamaican company.

      Shareholders of the private shell company were paid $ 18 million, which had probably been almost pure profit.

      Aphria's $ 50 Million Argentine Acquisition: ABP SA

      On March 11, 2018, Scythian signed a letter of intent to acquire MMJ International, later described as a "privately held company in British Columbia" (p 24). MMJ International had an agreement to buy an Argentine company called ABP, a "pharmaceutical import and distribution company".

      Four months after Scythian's letter of intent to acquire the Argentine assets, Scythian announced the sale of the ABP letter along with other latAm "assets".

      Scythian completed his purchase in late September and completed the sale to Aphria six days later.

      Ultimately, Aphria paid about $ 50 million to invest in ABP, which quickly netted Scythian A $ 23 million profit on an asset he actually for 6 days possessed. (P. 3). [2]

      In the meantime, the private shell unit investors have been paid CAD 27 million for their stake in MMJ. We will provide evidence that these investors, along with Aphria / Scythian Insider DeFrancesco, are present with unnamed business partners.

      Locally in Argentina: ABP's "strong" trading platform consists of exactly one small pharmacy

      The company has announced that "ABP's distribution and retail sector had a strong platform on which to build." [19659118] Per Aphria's transactional documents show that ABP had a total of two factories (p. 74):

      ABP operates two factories ] located in the city of Buenos Aires – a pharmacy the traded under the tradename Farmacia & Perfumeria and a drug distribution center which also serves as a secondary store for Farmacia & Perfumeria

      Thus, the "strong" trading platform consisted of exactly one pharmacy, here is a picture of the outside of the pharmacy , by courtesy of Google Maps:



      We visited the site, located in a subdued part of Buenos Aires, smaller than a traditional one it's CVS or Rite-Aid. Here are pictures from inside and a receipt confirming the name of ABP on our purchase:



      Locally in Argentina: a "leading importer and distributor of medicines" … with empty, dilapidated office

      At the time of Business announcement, Vic Neufeld was chairman / CEO of Aphria and chairman of Scythian. He described ABP as "one of the leading importers and distributors of medicines in the US".

      We visited ABP's "Drug Distribution Center" by ABP. The area was largely dilapidated and populated. Here is a picture of the entrance of Google Maps and a picture of our visit:



      Inside, we saw almost no signs of existing operations, except for a single desk and a few stacked boxes in a seemingly empty warehouse:



      ABP: Virtually no digital presence and a handful of staff. 19659131] As part of our research into ABP, we called the company, visited its offices, and searched the Web for signs of business presence. We saw virtually no digital signs of life and found very few employees.

      The Facebook page of ABP strangely enough shows that its first entry was in August, five months after the deal with Scythian had been announced. This page has 7 likes at the time of writing.

      All in all, we were only able to locate 3 actual employees of ABP, with the exception of the sales staff. Two of them were college students:

      1. The manager, Gonzalo Arnao, provides actual laboratory experience according to his Linkedin profile.
      2. The second employee identifies on his LinkedIn that his main occupation is a university student. 19659018] The third identified employee is a 20-year-old employee who lists his job as a footballer / coach on his Facebook page.

      Company Press Release: ABP Generated "$ 11 Million Revenue in 2017"

      vs.

      Interview with Employees: Revenues Actually Reached $ 430 Thousand

      The first press release from Aphria's sister company Scythian, announcing the letter of intent to acquire ABP, boasted the head of the press release:

      ABP REVENUES In surplus of $ 11 million in 2017 and profitable

      The sting rate was strange for us as the company's operations consisted of a small retail pharmacy and an empty, unfinished warehouse. We reviewed Dun & Bradstreet, which reported that the company's annual revenue was only about $ 212,000, which seemed more inline:



      (Source: Dun & Bradstreet)

      We then talked to Employee # 2 (from the above section) and picked up the call. When asked about ABP's annual revenue, he said that it was about 15 million Argentine pesos, which is about $ 430,000.

      Locally in Argentina: ABP's "Purchase Order" with a Local Hospital Was Actually a Donation

      ] Prior to the completion of the purchase of ABP by Aphria / Scythian, Scythian announced that a significant milestone had been reached in its future subsidiary :

      Scythian announces first purchase order from ABP SA to Aphria Inc. Supply World Renowned Pediatric Hospital for Research and Education

      The purchase order was for Aphria's CBD oil, which was intended to support clinical research in Argentina's renowned Garrahan Pediatric Hospital ,

      "I am very proud that ABP is working with the Scythian team New milestone of a first order …" bubbled the CEO of Scythian in the press release.

      It was claimed to be a great achievement – a contract for a large, multi-year study interval over 100 patients. Die neu gegründete argentinische Partnerschaft schien neue Umsätze zu generieren, was der geplanten Übernahme von Aphria Glaubwürdigkeit verleiht.

      Ein Problem: Wir sprachen mit Vertretern des Krankenhauses und sie teilten uns mit, dass sie dies nicht machten jeder Kauf. Es war tatsächlich eine Spende der Firma.

      Das Bild rechts zeigt unser Treffen mit Lucas Schiaffini, einem Abteilungsleiter im Krankenhaus.



      Bei der Gefahr, den Punkt zu beeinflussen, definiert Merriam-Webster den Begriff "Kauf" als "durch Geld oder ein gleichwertiges Äquivalent erhalten".

      Während Scythian den Eindruck erweckt hatte, es sei gesichert Ein wichtiger mehrjähriger Kaufvertrag. In Wirklichkeit hatte Scythian den Kauf von Aphria getätigt. Das Produkt wiederum wurde kostenlos an den Endverbraucher abgegeben.

      Das Krankenhaus bestätigte dies später öffentlich. Laut einer vom Krankenhaus herausgegebenen Pressemitteilung (übersetzt aus dem Spanischen):

      Das in diesen Versuchen verwendete medizinische Cannabis wurde vom Aphria-Labor in Kanada bereitgestellt, das das Medikament während der gesamten Studie spenden wird alle Patienten, bei denen erwiesenermaßen gearbeitet wird.

      Der Krankenhausangestellte sagte, er sei dankbar für die Spende, beklagte uns jedoch, dass der Vertreter des Unternehmens in Argentinien sie immer wieder aufforderte, weitere Pressemitteilungen über die Partnerschaft herauszugeben.

      Argentinien: Undisclosed Insider Self-Dealing?

      Wer waren also die glücklichen Investoren der "in Privatbesitz befindlichen" Shell-Entität, die 27 Millionen C $ für die argentinischen Vermögenswerte gezahlt wurden?

      Kanadische Unternehmensunterlagen zeigen, dass die Shell-Entität verwendet wurde Delavaco, MMJ International, wurde jedoch vor der öffentlichen Bekanntgabe des Deals geändert:



      Zur Erinnerung: Delavaco ist der Name von Aphria Insider und dem heutigen Scythian-Vorsitzenden, Andy DeFrancescos persönlichem Private Equity-Unternehmen.

      Wenn immer noch Zweifel bestehen, was hier vor sich geht können wir uns an Andy DeFrancescos privaten Instagram-Account wenden. Dies ist ein Instagram-Beitrag, der eine Woche vor der Ankündigung von Scythian, die "in Privatbesitz befindlichen" argentinischen Vermögenswerte zu erwerben, datiert wurde:



      Ja, das sind Aphria-Insider, Scythian-Insider und der aktuelle Scythian-Vorsitzende und Chief Investment Officer Andy DeFrancesco, die damit prahlen, dass er eine Woche lang die Apotheke von ABP in seine persönliche Private-Equity-Firma kaufte Scythian für 27 Millionen C $. Er hat sogar das Hash-Kennzeichen #GreedIsGood.

      Wir können bestätigen, dass es sich genau um dieselbe Apotheke handelt. Hier ist das Bild unseres Besuches desselben Abschnitts des Geschäfts aus einem anderen Blickwinkel:



      Aphrias kolumbianische Akquisition in Höhe von 84 Mio. $: Colcanna SAS

      Im April 2018 unterzeichnete Scythian eine Absichtserklärung zur Übernahme einer kanadischen Einheit wurde MMJ Colombia Partners genannt und in den Anmeldungen als "ein in Privatbesitz befindliches Unternehmen in Ontario" bezeichnet (S. 24). Zum Zeitpunkt der Ankündigung war MMJ Colombia dabei, eine 90% ige Beteiligung an der in Kolumbien ansässigen Colcanna SAS zu erwerben. Mit anderen Worten, Scythian ging eine Absichtserklärung ein, um eine "in Privatbesitz befindliche" Entität zu erwerben, die noch nichts besaß.

      Später verkaufte Scythian die Absichtserklärung zusammen mit ihren anderen LatAm-Anlagen an Aphria. Letztendlich zahlte Aphria 84 Millionen C $ für die Beteiligung, was Scythian einen schnellen Gewinn von 45 Millionen C $ einbrachte.

      In der Zwischenzeit hatten die ungenannten Investoren von MMJ Colombia Partners, die sich in Privatbesitz befinden, fast 39 Millionen C $ investiert. [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.


      Editor's Note: We spoke with Hindenburg Investment Research and Quintessential Capital Management about this idea on Behind the Idea. Listen to this podcast if you'd like more background on this idea and the research process:

      Disclosure: I am/we are short APHA.

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