As stated in our last report, we are of the strong opinion that Aphria shareholders’ equity has been diverted into acquisitions that were egregiously overpriced, and that Aphria insiders were likely undisclosed beneficiaries. We focused primarily on the company’s recent LatAm transactions and identified multiple red flags of believed undisclosed related-party transactions.
We noted that key Aphria/Scythian deal partner/insider Andy DeFrancesco was an undisclosed backer of that slew of deals. DeFrancesco effected the transactions in conjunction with Aphria Chairman & CEO Vic Neufeld, who had served as Chairman of Scythian at the time the deals were originally announced and was Chairman & CEO of Aphria when the transactions ultimately closed.
We realize we could stop the Aphria story at this point, having given readers a good sense of what went on at Aphria and Scythian (now known as Sol Global Investments). We don’t intend to do that, however. There is much more to tell.
Aphria’s relationship with Scythian BioSciences is not the only one that raised questions during our research.
Liberty Health Sciences (CSE:LHS) is another cannabis company that was taken public via reverse merger with Aphria’s backing. As part of the deal, Vic Neufeld was appointed director and Chairman of Liberty, a role he continues to hold to this day.
As noted in our previous piece, Andy DeFrancesco was the believed architect of an elaborate shell structure that culminated in Aphria’s C$280 million LatAm acquisitions. DeFrancesco was also the self-described architect of the Nuuvera transaction, which we also determined to be largely worthless and in which insiders eventually admitted to having held undisclosed stakes.
DeFrancesco has played a key role in both Aphria and Scythian BioSciences, and has similarly played a foundational role at Liberty Health Sciences:
Normally, when companies acquire a piece of property, they just go out and buy it. In what readers of our last report may consider a now familiar pattern, Liberty took a rather odd approach to their purchase.
On January 4, 2018, Liberty Health Sciences announced a binding term sheet to acquire a privately held Canadian entity called 242 Cannabis, Ltd. (“242 Cannabis”). The entity had a wholly owned Florida-based subsidiary with a similar name, which in turn had an agreement to purchase a parcel of Florida land and greenhouses.
In other words, Liberty appears to have agreed to acquire a “privately-held” entity that itself hadn’t yet purchased a piece of property.
As Liberty’s audits would later show, 242 Cannabis entities were shells with no operations. Liberty ultimately paid almost C$13.5 million for the land and greenhouses acquired through these entities:
“As 242 Cannabis did not have any operations, this acquisition was accounted for as an asset acquisition, with $13,492,572 allocated to land and greenhouse infrastructure” (audit pg. 17).
Florida real estate records show that the private shell entities had acquired the property for only US$6.5 million (C$8.5 million) on February 9, 2018. The private entity, therefore, closed its own purchase 6 days before the Liberty deal closed, on February 15, 2018 (audit pg. 21).
In other words, the holders of the private shell entity made an estimated C$5 million gain in 6 days:
So, which investors made ~C$5 million in 6 days? Canadian and Florida corporate records show that the 242 Cannabis shell entities were brand new entities registered to the spouse of none other than Andy DeFrancesco.
Additionally, Canadian Stock Exchange records show that holders of the entity include:
Yet again, this transaction took place under the oversight of Vic Neufeld as Chairman of Liberty.
We urge readers to note the parallels between this transaction and those of the LatAm transactions described in our previous report, which similarly involved Neufeld & DeFrancesco, intermediary shell entities placed between acquisitions, and presumed quick profits for the holders of those shell entities at the direct expense of public shareholders.
Liberty Health Sciences became a public company via a reverse merger in April 2017, with Aphria’s backing. As noted in the press release announcing the transaction, Aphria agreed to purchase over 120 million common shares of the entity for $25 million, or $0.208 per share.
Documents describing the lead up to the transaction show a worrying sequence of events. The press release announcing Aphria’s investment at $.208 was made on April 4, 2017.
However, Canadian filings show that 242.6 million shares were sold through a private placement one week after that announcement, on April 11, 2017. This round was not mentioned in the press release, but it allowed unnamed individuals to purchase shares at $0.001, or a ~99.5% discount to the Aphria round. (pg. 72):
Why would Aphria – which announced its foundational transaction to purchase $25 million worth of Liberty shares at $0.208 per share – allow a separate, highly dilutive purchase to occur at such a massive discount only days later?
Based on a subsequent filing, it appears that Aphria’s own Chairman & CEO, Vic Neufeld may have participated in the $0.001 share round.
A filing with the Canadian Securities Exchange (CSE) details the holders of the later April 27th $0.208 round who invested alongside Aphria at that price. Within that document we also see how many securities were already held by the named holders prior to that point. From this we can infer the number of securities likely purchased in the $0.001 round.
Most shareholders detailed in the exchange filing were buying for the first time, so the number of securities they purchased ended up equaling the number of securities they owned. But we see an anomaly:
Vic Neufeld apparently owned over 2.4 million securities following this round, yet he only bought 280,000 securities in the round itself. This suggests that he held over 2 million securities in advance, which raises a critical question:
Did Aphria Chairman/CEO Vic Neufeld invest in Liberty at a steep discount, weeks ahead of Aphria, thereby diluting and undermining the interests of his own company in order to personally benefit?
We emailed Neufeld and asked if he had invested in the $0.001 round of Liberty ahead of Aphria. We have not heard back as of this writing but will certainly update this if we do.
When reviewing the document further we see several more anomalies. Along with Vic Neufeld, multiple entities associated with Andy DeFrancesco and his spouse also look to have held significant stakes in Liberty prior to the April 27th round.
In addition to DeFrancesco, we also see that Barry Honig had a large stake prior to the April 27th round through his firm GRQ Consultants, an acronym that multiple sources informed us stands for “Get Rich Quick” Consultants. Barry Honig was recently alleged by SEC prosecutors to have run multiple pump and dump schemes.
We condensed the table to show the number of shares believed to be purchased by these individuals in the $.001 round and the estimated windfall reaped when Liberty actually opened for trading at ~$1.30/sh:
We believe Aphria’s public shareholders deserve to know the complete list of beneficiaries of this $0.001 round, which had significantly diluted their stakes just weeks ahead of the Aphria investment.
As short-biased investors, people often apply a level of skepticism and scrutiny to our work based on an understanding of our incentives. That’s totally fair and we welcome it. A lively, well-informed debate makes for a vibrant market and ultimately benefits everyone.
Often lost in that debate is the role of sell-side research and where the incentives of bankers are pointed. Following our report on Aphria’s LatAm acquisition, several banks either voiced meaningful reservations or placed Aphria’s ratings under review in order to take time to assess our research. We noticed, however, that one bank stood rather starkly at odds with the others.
Clarus stated that our report, which had alleged glaring red flags of undisclosed related party-dealings, “Distracts from the Real Value” of the Canadian adult use market:
They reiterated their buy rating, with a target price implying a 350% return from current levels. We were pleased to see this, largely because we were in the process of writing about Clarus’s unusually close relationship with Aphria and Andy DeFrancesco.
Once again, turning to DeFrancesco’s private Instagram account (I highly recommend him as a follow), we see what appears to be DeFrancesco in the Clarus offices raising money on behalf of Aphria.
We also see that Clarus (along with Aphria) sponsors DeFrancesco’s son’s racing endeavors:
We see that both Clarus’s Head of Research (Brock Winterton) and its CFO (Tom Monahas) were granted personal shares in the Liberty private placement round mentioned above:
It is unclear whether the bank’s Head of Research or executives have participated in other Aphria-backed private placements given the limited disclosure around many of those filings.
Clarus seems to have a remarkably close relationship with Aphria and its related web of deals:
As stated above, we think it is important to fully understand where incentives point when assessing potential bias.
Following our earlier March exposé on Aphria’s irregular acquisition of Nuuvera, Aphria admitted that their CEO, CFO, and six directors had personal stakes in the company that they were acquiring that had not been previously disclosed.
At the time, we asked a follow-up question:
“Who else participated in these early Nuuvera funding rounds? How many family members, affiliates, or deal partners of Aphria’s executives and advisors?”
We never got an answer. We also asked the company yesterday if Aphria’s executives or family members had participated in the shell deals for the LatAm investments. We haven’t received an answer to that either. Normally that information would be available through Canadian Securities Exchange filings, but the company chose to redact ALL of the names of the shareholders of the LatAm shell entities (1,2).
The company has been rather thin with its disclosure, but we can get a glimpse of who may benefit from these private placement deals from the holders we see in the Liberty private placement round mentioned above.
Putting aside questions around Liberty’s $.001 giveaway round, holders of the $0.208 private placement who invested alongside Aphria clearly benefited from the involvement of the company. Liberty’s backing by Aphria, considered a major player in the space, gave the fledgling company a great deal of credibility.
Those who were lucky enough to invest in the round made a quick 100% on their money following Liberty’s public open. So, who participated in this lucrative private round?
A Local Union Boss That Later Struck a Deal with Aphria
About one month after Petroni’s investment in the round, he announced that the union would be offering medical cannabis to its employee benefits plan, which will be good for the health and wellbeing of their workers. Especially with it being hard to concentrate if you are experiencing mental and physical pain. There are many different dispensaries that can offer residents with cannabis if they need to use it for medical purposes, (you can Click here to find out more). It’s something that all companies should consider having in place for their employees. Then, a month later, that very union announced a partnership with Aphria. In a press release entitled, “Aphria Launches First Partnership with Major North American Union” Petroni stated:
“The health and wellness of our members is of critical importance to LiUNA, and in launching this partnership with Aphria, we are taking a major step forward in improving the lives of our members.”
The Family Members and Spouses of Key Aphria Executives and Directors
Without naming names, the spouses and family members of at least 4 Aphria executives/directors also benefited from the Liberty private placement.
We think investors deserve full transparency on the holders of ALL of Aphria’s private deals, whether it be relating to Liberty, Aphria, Scythian, or any of the apparently numerous shell entity acquisitions.
Much like Scythian, we view Liberty as just another extension of the Aphria web of highly questionable deals. At this point, we think the responsibility is on management to earn back shareholder trust and begin making all the beneficiaries of these shell transactions, discounted private placements, and related deals FULLY TRANSPARENT. We will continue to report on this subject.
 Note: The only known HoldCo shares issued prior to the Liberty reverse-merger were “issued in connection with and as consideration for entering into the Know-How license.” Aphria obtained all the shares in the “Know-How” placement.
 Note: The price of shares bought by the $0.208 round holders included a 3 for 1 consolidation, so the resulting price was $0.624. Given Liberty’s opening trading of ~1.30 the resulting gain was approximately 108%.
Disclosure: I am/we are short APHA.
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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