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Aphria shares sink on short-sellers' report
Cannabis grower allegedly paid almost $300-million for foreign assets that are largely worthless and were previously owned by firms with ties to key investor

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Tuesday, December 4, 2018 – Page B1

Aphria Inc. paid nearly $300-million to buy allegedly worthless foreign assets that had been owned previously by firms with apparent ties to a key investor in the cannabis grower, a short-seller report claims.

The company's stock plunged nearly 28 per cent to $7.60 on Monday, erasing the gains it made in the past year, after Gabriel Grego - who runs a fund in New York called Quintessential Capital Management and co-authored the report with Nate Anderson - presented the allegations Monday morning at a shortselling conference in New York. The authors have bet against shares in Aphria and stand to benefit when the stock price falls.

In July, Leamington, Ont.-based Aphria said it would issue nearly 16 million shares to purchase a company that owned stakes in three cannabis entities in Jamaica, Colombia and Argentina, countries that have only recently legalized medical marijuana. The seller - then-named Scythian Biosciences Corp. - was still in the process of finalizing deals of its own to buy the foreign assets from three privately held Canadian firms for what ultimately turned out to be less than a third of what Aphria would end up paying.

On Monday, more than two months after the Aphria-Scythian deal closed, the short-seller report claimed the valuations of those assets "appear to be vastly inflated or outright fabrications" and alleges that Scythian bought them from firms that look to be related to a key investor in Aphria.

Shares in Scythian, which is now known as Sol Global Investments Corp., fell almost 41 per cent to $1.39 on Monday. Aphria owns an equity stake in Sol Global Investments.

Aphria said Monday the allegations are "false and defamatory."

"The company is preparing a comprehensive response to provide shareholders with the facts and is also pursuing all available legal options against Quintessential Capital," spokeswoman Tamara Macgregor said in an e-mailed statement.

A steep rally in pot stocks over the past year helped fuel a buying binge that has seen cannabis companies use their shares to finance acquisitions in Canada and abroad. That has included Aphria, which also came under fire from Mr. Anderson in March over its $425-million all-stock acquisition of Nuuvera Inc.

In Monday's report, Mr. Anderson and Mr. Grego claim that the assets purchased from Scythian are largely worthless - an allegation they made after travelling to Jamaica, Colombia and Argentina to visit properties now owned by Aphria. The short-sellers say they found that the corporate name of each entity was changed days before Scythian announced its deals to acquire the assets, scrubbing any mention of "Delavaco" from them.

Delavaco is the brand name for a Florida-based private-equity firm founded by Andy DeFrancesco, a key investor in both Aphria and Scythian and several of the other North American cannabis companies in which Aphria has taken equity positions.

Mr. DeFrancesco said in a text message to The Globe and Mail Monday that the businesses that were acquired are "solid" and characterized the allegations as "more false fabrications from guys on the short side."

In March and April, Scythian signed letters of intent (LOI) to acquire the assets and inked deals that would ultimately cost the Toronto-based company a total of $96-million. Scythian agreed to flip them to Aphria in July.

By the time Scythian's sale to Aphria closed in September, the deal was worth $298-million. That meant Scythian would ultimately book a quick gain of $202-million.

Aphria chief executive Vic Neufeld was chair of Scythian's board when it signed LOIs to buy the three businesses. He resigned from the position in late April, as did another Aphria director who was also on Scythian's board.

Law firm Stikeman Elliott LLP advised Aphria on the deal.

Aphria's board obtained both financial advice and a fairness opinion from Cormark Securities Inc. Members of Aphria's executive team travelled to Argentina, Colombia and Jamaica this year to meet with the local management teams and conduct site visits, according to regulatory filings.

Canada's largest cannabis companies have been using their shares to pay for deals at eye-popping prices. The latest batch of transactions has seen producers such as Canopy Growth Corp., Aurora Cannabis Inc. and Aphria acquire assets in other countries in bids to expand their reach into new markets. While the prospects of future growth are enticing for investors, it's also hard for them to know exactly what is being acquired. A large portion of purchase prices are often being booked as goodwill, meaning the companies don't have many hard assets at this stage.

The concern with Aphria, the report alleges, is that the apparent structure of these Latin American and Caribbean deals raises questions about whether Aphria insiders or key investors, including Mr. DeFrancesco, are benefiting at the expense of other shareholders.

Mr. DeFrancesco is influential at Aphria, acting as an adviser to the company and claiming that he was the "architect" of the Nuuvera deal. But he isn't an insider in Aphria according to the legal definition, so his holdings aren't disclosed publicly. He was, however, named chair of Scythian's board in September and became its chief investment officer in November.

In March, The Globe reported that seven Aphria executives and directors had personally owned shares in Nuuvera in January when they orchestrated a deal for the company. Those holdings were not disclosed to investors.

Under Ontario corporate law, the Aphria insiders weren't required to disclose their Nuuvera shares to the market unless Aphria deemed their holdings to be material, which it didn't. The shares were worth $5-million, five times what the insiders initially invested months earlier.

In late April, the company said it was taking steps to improve its corporate governance by adopting a formal policy for how its insiders can invest in other cannabis firms and sit on their boards.

Associated Graphic

Cannabis plants reach toward light at an Aphria facility in Leamington, Ont., in 2014. GEOFF ROBINS/ THE GLOBE AND MAIL

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