Aphria’s proposed Nuuvera acquisition is one of the worst looking acquisitions we have seen, and we believe its consummation would represent a near total destruction of capital for Aphria’s [TSE:APH] (OTCQB:APHQF) shareholders.
The self-described “architect” of the Aphria/Nuuvera deal is Andy DeFrancesco, founder of the Delavaco Group. DeFrancesco is credited in his Delavaco executive team bio as being a “founding investor to Aphria, leading all rounds of financing and strategic advisor to the company since inception.”
Despite DeFrancesco apparently representing Aphria as a strategic advisor, we found a document dated less than 1 week prior to the creation of Nuuvera showing that an entity controlled by Ron Schmeichel, Nuuvera’s Chairman and largest shareholder, had entered into a loan agreement with DeFrancesco. Collateral on the loan appears to include real estate recently assessed to be worth about $49 million, suggesting that the loan could be substantial in size. We believe the interrelated nature of these business interests could represent a massive conflict of interest, especially given that Schmeichel stands to personally clear over $71 million from the Nuuvera acquisition (Pg 26). (Also, note that Schmeichel previously served as the Chairman of Concordia Healthcare, a company that had parallels to Valeant Pharmaceuticals (VRX) and saw its share price eventually plummet as issues surfaced with its business model.)
As to Nuuvera’s operations, Nuuvera is a newly formed business that was incorporated only on January 30, 2017, and has generated total revenue of $29,770 from inception to September 30th, 2017 (Pg. 56). (That revenue is in actual dollars, not thousands). The company went public via reverse merger through a shell corporation and listed on the TSX Venture Exchange just months ago in January 2018.
After reviewing Nuuvera’s limited history, we characterize the company’s operations as very preliminary stage. Aside from an estimated $35 million in cash on the balance sheet, we believe the rest of the company is likely too early stage and too speculative to have any meaningful economic value.
Despite the lack of material assets, immediately after its listing, Nuuvera heavily promoted itself through a flurry of press releases announcing numerous preliminary initiatives such as non-binding letters of intent and a “blockchain” partnership with a company run by one of Nuuvera’s own directors.
On January 29, 2018, less than 3 weeks after the company began trading, Aphria announced an offer to acquire the company for $826 million in cash and stock, representing a premium of about 21% over Nuuvera’s trading price at the time.
The deal price was later lowered from $1 in cash plus 0.3546 Aphria shares to $0.6 in cash plus 0.3546 Aphria shares. Given Aphria’s current share price the current deal value stands at about $470 million, which we believe is still massively overpriced.
While the economic rationale for the transaction is hard for us to fathom, the strategic rationale similarly strikes us as totally nonsensical. The lead bullet point from the acquisition announcement on January 29th underscored the desire to capitalize on Nuuvera’s international operations:
(the) Combination capitalizes on Nuuvera’s expansive international footprint, expanding network into Europe, Africa and the Middle East.
The press release further highlighted Nuuvera’s international footprint:
The combined company will leverage Nuuvera’s extensive international network and best-in class manufacturing practices to become the preeminent global supplier of premium cannabis.
Despite that stated key rationale for the transaction, the Globe and Mail reported less than a week later that Aphria planned to launch a new business in February called “Aphria International” which would be spun out into a separate public company. Per the article originally published on February 1st:
Mr. Neufeld [Aphria’s CEO] said Aphria is planning to launch a new business this month called Aphria International. The proposed company will focus on growing and selling cannabis for patient use outside Canada and the United States, including across Europe, Africa, Latin America and the Caribbean. It is expected that the company intends to grow a variety of different cannabis strains. Correspondingly, the company has been doing some initial research into blue dream fem seeds as well as other popular seed types. This is set to be a separate public company, coming to market through a reverse takeover in mid-February of an entity listed today on the TSX Venture Exchange.
It is also expected that the business will be embracing the latest developments in cannabis cultivation technology such as marijuana software.
However, we find it bizarre that Aphria is both acquiring (through Nuuvera) and spinning out public international operations virtually simultaneously. We have emailed Aphria seeking comment on the rationale behind this seemingly contradictory strategy and have not heard back as of this writing. Should we hear back from the company, we will update this accordingly.
Following our failure to understand the Nuuvera transaction on any credible economic or strategic basis, we began exploring the relationships of key individuals that participated in the transaction. On DeFrancesco’s Instagram page, we noticed that he posted a news release relating to the Aphria/Nuuvera transaction and claimed to be the “architect of bringing these 2 great brands together”
As noted above, DeFrancesco is credited in his Delavaco executive team bio as being a “founding investor to Aphria, leading all rounds of financing and strategic advisor to the company since inception.” Thus, the implication would seem to be that he had represented Aphria in its negotiations with Nuuvera.
Despite DeFrancesco’s believed role with Aphria’s structuring of the deal, we found several documents indicating that DeFrancesco also has business interests with key sponsors of Nuuvera. In particular, we 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, Nuuvera’s Chairman and largest shareholder. For context, Schmeichel stands to personally clear about $71,491,845 in the Nuuvera acquisition. (Pg 26)
Per a Uniform Commercial Code (UCC) filing in Florida dated January 24th, 2017, (note that Nuuvera was created on January 30th, 2017) we see that JJR Private Capital secured a lien on DeFrancesco’s interest in an entity that appears to hold real estate. For the full document, see here. Below is the first page of the filing:
Ronald Schmeichel is the Chairman of JJR Private Capital according to his biography on the Nuuvera executive team website. The address listed in the UCC filing, 5 Hazelton Avenue, Suite 300, corresponds to the address of both JJR Private Capital and to the address of Nuuvera, per a filing statement (Pg. 38):
We are unable to see the loan itself through the UCC filing, but we are able to get a sense of the collateral, which indicates that the loan could be substantial in size.
The collateral is defined to include all of DeFrancesco’s interest in an entity called Las Olas Bay Properties Park Colony, LLC, including “any and all payments, dividends or distributions of whatever kind or character”. Corporate records show that Las Olas Bay Properties Park Colony, LLC is the manager of an entity called Park Colony, LLC. According to Broward County real estate records, Park Colony, LLC owns 730-812 S Park Road, Hollywood Fl, which was recently assessed to be worth about $49 million.
We are not able to determine the full details around the loan agreement or any other potential interrelated business dealings between Aphria and Nuuvera’s key individuals. Nonetheless, we find DeFrancesco’s self-described role as “architect” of the Nuuvera/Aphria deal, coupled with his potentially conflicting interests to both sides of the deal, to be tremendously troubling. The companies should fully disclose the full details of the relationship to investors before Aphria closes any proposed transaction.
Furthermore, the companies should disclose any other business interests between the two company’s executives, advisors, or key backers. We have emailed both Nuuvera and Aphria’s investor relations seeking comment on this. We have not heard back as of this writing, but should we hear from any of the parties, we will update this accordingly.
We also emailed DeFrancesco seeking comment on questions relating to his role in the transaction and any business dealings with any of the key executives or key holders of Nuuvera. He replied stating that he would discuss in a face-to-face meeting. We requested instead that he answer our questions in email and have not heard back as of this writing. Should he respond, we will update this article accordingly.
Given that the transaction is anticipated to close in April, we believe it is imperative that management provides more information soon.
As we reviewed DeFrancesco’s history, we identified another troubling connection. DeFrancesco has seemingly had multiple close business interests with Barry Honig, a controversial financier who was recently featured in (i) a CNBC exposé relating to Riot Blockchain’s questionable business practices; (ii) a ShareSleuth exposé relating to undisclosed stock promotion; (iii) multiple exposés by investigative reporter Teri Buhl relating to dubious financial dealings; and (iv) a series of articles we have written focused on numerous Honig-related enterprises, including Riot Blockchain (1, 2 ,3 ,4), PolarityTE(COOL), Pershing Gold (PGLC), and Marathon Patent Group (MARA) that have all identified numerous red flags relating to businesses he has been involved in. Honig was also previously alleged to have committed stock manipulation and was fined $25,000 and suspended for 10 days, according to his FINRA records.
SEC and Canadian records show that Honig and Andrew DeFrancesco (together with family accounts) have cooperated on a slew of deals, including:
Aside from company investments, real estate and corporate records show that the Florida office of Delavaco Holdings and multiple other DeFrancesco corporate interests are located at 2300 E. Las Olas Boulevard, 5th Floor, Fort Lauderdale, Florida. (Source: 1, 2, 3, 4, 5) According to Broward County property records the building is owned by an entity called Las Olas Sunset Bay, LLC. As of June 1, 2017, Las Olas Sunset Bay, LLC was managed by none other than Barry Honig and Andy DeFrancesco, according to Florida corporate records. In July 2017, DeFrancesco was replaced on the manager list by John Stetson, another regular deal-partner of Honig’s who appears to have an office one floor down from DeFrancesco (on the 4th floor of the same building).
Given Honig’s dubious track record and his connection to a wide range of questionable deals, we find it troubling (a) that he has a close association to DeFrancesco, the self-described architect of the Aphria/Nuuvera deal; and (b) has participated along with DeFrancesco in other deals directly related to Aphria.
Our concern is compounded greatly by the fact that a review of Nuuvera’s assets leaves us scratching our heads as to the supposed value of the enterprise. As noted above, Nuuvera has generated virtually no revenue to date, thus we are led to look toward the company’s key assets to assess its value. The December filing statement for the reverse merger and subsequent press releases describe Nuuvera’s primary assets, which include:
All told, the company’s assets strike us all as highly preliminary and fraught with a great deal of regulatory and operational uncertainty. We have a hard time understanding how Aphria could have ever credibly extended an $826 million offer to acquire Nuuvera’s assets, which appear to be at such a speculative and early stage.
While Nuuvera seems to lack a significant asset base, the company has nonetheless aggressively promoted itself. In the aftermath of Nuuvera’s listing on the TSX Venture exchange on January 9th, the company issued a slew of press releases that touted numerous preliminary achievements and initiatives. Below, we have provided a brief review of many of the press releases to date:
All told, we find the various above announcements, letters of intent, and agreements to purchase product that in many cases do not even exist yet to collectively be thin on actual substance. We cannot see the economic rationale behind paying hundreds of millions of dollars to acquire what largely amounts to a loose agglomeration of early stage initiatives and plans.
We believe Aphria’s proposed acquisition of Nuuvera has numerous red flags. We see little economic or strategic rationale for the purchase and believe the parties involved need to address potentially significant conflicts of interest.
The cannabis industry undoubtedly holds tremendous promise. There is clearly a well-defined market that can be seen if you check out films featuring cannabis which you can understand more here. Companies trading in the cannabis space have seen high volatility as of late, given the early-stage nature of the industry and the commensurate excitement and setbacks that occur with any new industry. Therefore, any investment in the sector (both long or short) should be considered higher risk regardless of the outcome of this particular deal.
That being said, we simply do not see any credible value in this transaction for Aphria. In the absence of this deal, we believe Nuuvera’s shares would trade closer to its intrinsic worth, which we estimate to be over 90% lower than current share prices suggest.
We are short shares of Nuuvera, and should the acquisition close, we will gladly roll our short position over into shares of Aphria as we think Nuuvera would represent a substantial drag on the entire enterprise due to the aforementioned issues. We wish the best of luck to all.
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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