Author’s note 3/26: Given the lack of management’s response to our requests for information, this article relied on the partial disclosures made by management to the Globe & Mail article dated March 22. In the article, a spokesperson stated that Aphria insiders had participated in the “initial financing round”, which was inferred to be the initial round per the table below. Afterwards, in an article dated 3/25 entitled “Aphria insiders held shares in takeover target, didn’t disclose“, Aphria clarified to the Globe & Mail that insiders purchased in a round priced at $1/sh. Please take this update into account as you read the article below. We find these piecemeal and partial disclosures to be wholly inadequate, and reiterate our call for management to release the full details of participants in these early Nuuvera financing rounds.
Yesterday we wrote that we saw rampant red flags with Aphria’s (OTCQB:APHQF) proposed Nuuvera (OTC:NUUVF) transaction. In particular, the transaction seemed to make little economic or strategic sense, and we had found it worrying that a self-described Aphria advisor named Andy DeFrancesco seemed to have business dealings with both sides of the deal.
At the time, we had asked both Aphria and Nuuvera to disclose any business interests between the two company’s executives, advisors, and key backers. We had suspected at the time that there may have been undisclosed conflicts given that we believed there was no credible alternative rationale for why this deal was taking place. Neither company responded to our questions and they still have not responded to us.
However, they did respond to the Globe and Mail. In an article today entitled “Short-seller sounds warning over Aphria-Nuuvera deal”:
(NYSE:A)n Aphria spokesman confirmed in an e-mail Wednesday that a number of Aphria insiders participated in the initial financing round for Nuuvera when it was a private company.
In other words, one day prior to the proposed deal closing (i.e.: tomorrow) Aphria admitted that insiders participated in Nuuvera’s initial financing round. For context, per Nuuvera’s filing statement (Pg. 204) here was the initial capital raising round in question:
Based on the above, Aphria insiders participated in the round that priced 20 million shares for 20 thousand dollars, or $.001 per share.
Given that the Nuuvera deal is expected to close tomorrow at about $5.40 in cash and stock, the holders of 20,000,000 shares at $.001 would collectively stand to reap about $100 million in pure profit from the closing of this transaction. We find the disclosure of insider ownership one day before the deal is expected to close, and only AFTER direct questioning by a reporter to be completely outrageous.
Worse yet, rather than respond to the Globe & Mail’s request for further information, the spokesman only provided partial disclosure. Per the article:
The spokesman said those insiders owned 0.9 per cent of Nuuvera on a fully diluted basis., but did not respond to further e-mails asking to identify the insiders and their holdings.
This flimsy response raises a multitude of additional important questions. Namely:
In our piece yesterday we had also highlighted that the self-described architect of the Aphria/Nuuvera deal (Andy DeFrancesco) seemed to have business interests with the Chairman and largest shareholder of Nuuvera, Ron Schmeichel. In particular, we had found a document dated less than 1 week prior to the creation of Nuuvera showing that DeFrancesco had received a loan through an entity controlled by Ronald Schmeichel. In the Globe article DeFrancesco admitted the existence of this loan. Per the article:
“It has nothing to do with Nuuvera”. He further added that the loan had been settled and “It’s not relevant.”
Despite that proclamation, DeFrancesco also admitted that he had invested in Nuuvera prior to Aphria’s taking a stake in the company:
Mr. DeFrancesco, through his family firm Delavaco Group, was also an early investor in Nuuvera, buying into the private company when it first raised outside capital. He said his family’s investment came before Aphria acquired its stake. Aphria first announced a $2-million equity investment in Nuuvera in August as part of a partnership with the company.
Given that a significant portion of the value of Nuuvera came from its relationship to Aphria, we find it highly concerning that insiders and unofficial advisors took previously undisclosed stakes in the company prior to both (A) announcing its strategic relationship to Aphria and (B) Nuuvera’s acquisition announcement. Clearly the actions of Aphria’s insiders substantially increased the value of Nuuvera’s shares, which they then directly benefited from. Again, why didn’t Aphria disclose that its insiders and advisors had stakes in Nuuvera through these key initial financing rounds?
We think the issues with this deal run deep and that conflicts of interest must be fully understood. Frankly, this deal looks worse to us than the recent Maricann deal that fell through amidst an OSC insider trading investigation.
We are reiterating our call for the company to make full disclosure about who the beneficiaries of this deal are. We think our work here is done. We are maintaining our short position and now believe it is up to the company or the regulators to be fully transparent to all Aphria and Nuuvera shareholders.
Disclosure: I am/we are short NUUVF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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