I’m not looking over my shoulder anymore wondering when someone will say “Gotcha”,’ interim CEO says
By Vanmala Subramaniam
It’s earnings day at Aphria Inc. and Irwin Simon has a smile on his face.
The interim chief executive of Canada’s third-largest licensed cannabis producer has just walked into a boardroom at the company’s Leamington, Ont. headquarters — the same boardroom in which he and his executive team have been holed up for a week, finalizing the details of their latest quarterly earnings report.
Dressed casually in jeans and a dark blue sweater, Simon knows there is good news on the way: Aphria is about to post a surprise profit, its first since the legalization of recreational cannabis last year.
On this day, with the positive earnings and the company’s automated flagship cultivation facility, Aphria One, humming away at full capacity a few hundred yards away, it might be easy to forget that at the beginning of the year, some were questioning whether Aphria would even survive.
In December, a series of short-seller reports about inflated foreign assets and self-dealing involving the CEO and founders of the company had sent Aphria’s stock plummeting by as much as 60 per cent.
Simon was brought in late last year to lead a special committee of the board to investigate the allegations and serve as a steady hand through the crisis.
“I had no idea how bad things were when I first got to Leamington,” Simon said, noting the company’s issues stretched beyond the question of the asset sales.
“There was not a strategic plan or vision. You had grow, marketing, sales, operations, Broken Coast (a licensed producer owned by Aphria) all in silos. So, you know, how do you pull all that together?”
But while Simon said he has cleaned house and put Aphria back on track, the cloud raised by the short-seller reports still hangs over the company.
Questions remain about the value of some of Aphria’s international assets, the sustainability of its sales and production growth, and the strength of the company’s oversight, including what role, if any, the old guard — Aphria’s founders and controversial dealmaker Andy DeFrancesco — are still playing.
Then there’s the other big unknown: whether Simon will be the one to lead the company forward.
The question of his future with Aphria is one he has already had to wrestle with once this year.
Simon joined the company in December, when it was reeling from the allegations levelled by Hindenburg Research and Quintessential Capital Management, two U.S.-based short-selling firms that claimed in a pair of reports that Aphria had overpaid for acquisitions in Colombia, Jamaica and Argentina (known as its LATAM assets). The assets, the short sellers claimed, were largely “worthless.”
They also accused the company’s founders, John Cervini and Cole Cacciavillani, former CEO Vic Neufeld and DeFrancesco — the latter singled out as the architect of the deals — of personally profiting from a series of transactions that were involved in the LATAM acquisition.
In the special committee’s report released to the board on Feb. 15, Simon and his team — with the oversight of auditor Deloitte LLP and legal adviser Lenczner Slaght Royce Smith Griffin LLP — concluded that, yes, the controversial assets in question were purchased at a high price, but that they were still “within an acceptable range.”
Certain “non-independent directors” were found to have “conflicting interests” in the acquisition of those assets that were not fully disclosed to the board.
Neufeld, Cervini and Cacciavillani were to leave the company by March 1, although no specific reasons were given for their departures.
The short sellers who had levelled allegations against Aphria saw the committee’s findings — particularly the departures of the CEO and co-founders — as a “corroboration” of their initial accusations.
“We applaud the independent committee for taking this matter seriously and for making significant changes to the company’s board and governance policies. The review largely corroborated our findings that acquisition prices were high and that multiple insiders had undisclosed conflicts of interest,” said a joint statement by Gabriel Grego of Quintessential Capital Management and Nate Anderson of Hindenburg Research.
We applaud the independent committee for taking this matter seriously and for making significant changes to the company’s board and governance policiesjoint statement from Quintessential Capital Management and Hindenburg Research
On Valentine’s Day, with the special committee’s findings complete, Simon said he met with a pair of Aphria board members at the Shangri La Hotel in Toronto, where they tried to sell him on the interim CEO role.
“I sat there, thinking, my family is all in New York, it’s Valentine’s Day, what am I doing here in Toronto?” he said.
Although born and raised in Nova Scotia, his past four decades had been centred in Manhattan, where he briefly worked at gourmet ice cream producer Häagen-Dazs and then founded the organic food company Hain Celestial. Hain was worth $3.5 billion at the time of his departure in December 2018.
“I had just walked out of a public company I founded. But what I saw at Aphria was incredible value and employees that wanted help and were yearning for some leadership,” he said.
One thing that Simon said confused him about the company was the lack of focus on the core aspect of Aphria’s business, growing cannabis in Canada.
“Everyone was talking about international acquisitions, how we have to get our U.S. strategy right, this and that. We were a company basically just doing acquisitions … we were buying LATAM, buying Nuuvera, what was really the plan?” he said.
The company’s signature greenhouse in Leamington was a perfect example.
A year ago, parts of the facility, known as Aphria One, were still empty, mainly because it had not yet been retro-fitted to grow cannabis and, hence, was not yet fully licensed by Health Canada.
Aphria had some cannabis growing consistently in a smaller 20,000-square-foot room, but it was struggling to keep up with provincial orders, and lagging on supply.
Today, Aphria One appears to be at full capacity. Almost every step in the process from planting to harvesting to packaging is automated.
Robotic hands pick up tiny plant cuttings, stick them in a pot, and place them onto a large conveyor belt system that leads to a 200,000-sq.- ft. room that houses tens of thousands of cannabis plants at different stages of growth.
The plants move in and out of the greenhouse on automated silver trays, depending on what stage of growth they are at, and whether or not they are ready to be harvested and dried.
It is the company’s biggest achievement to date, Simon said, and will be the key to sustained growth in cannabis revenue in the immediate future.
But while production numbers have improved, the controversy sparked by the short sellers has continued to follow the company.
In April, after the Ontario Securities Commission got involved, Aphria was forced to take a $50-million writedown of the LATAM assets, which added significantly to its financial woes that quarter.
Just recently, SOL Global Investments Corp., the company linked to DeFrancesco that sold the LATAM assets to Aphria, claimed in its recent quarterly report that it had made as much as $150 million from selling the shares of Aphria it had acquired in the deal.
“So here’s where I come back and tell you that the LATAM purchase was before me,” Simon said, when asked about the value of those assets, and whether he felt the writedown was warranted. “But what I will say is that … it’s not that we paid too much for the asset, it’s that the stock went up between the time the deal was announced and the time we acquired it because shareholders thought it was a good deal.”
Simon has also had to defend against a hostile bid for Aphria launched by U.S.-based cannabis retailer Green Growth Brands. The offer came under fire due to connections between the two firms.
In late April, the bid fell apart, but Aphria, as some skeptical investors have pointed out, booked a $50-million gain from the transaction in its recent quarter, something it is unlikely to repeat.
Just how much influence the old guard continues to wield has also been a frequent question for industry watchers.
Simon insists that any ties Aphria had to DeFrancesco are now a thing of the past.
“There is absolutely no relationship to Andy. Again, before December 27 when I became chairman, I did not know who Andy DeFrancesco was … he has no involvement with Aphria.”
He acknowledges he has met DeFrancesco, but only because they were both involved in the cannabis industry. “I met him along with many, many, many other industry veterans.”
DeFrancesco, for his part, said he is still a champion of Aphria — and a big fan of Simon. He claims he used to have a much larger investment in Aphria, but that he started selling his position towards the end of 2018, only to buy back in when Simon joined the company.
“I only bought them back after I got to know Irwin, when he told me how he saw the cannabis space, and his vision for the company,” DeFrancesco said, noting that they met once in late 2018.
He said his last visit to Leamington was more than six months ago.
As for Cervini and Cacciavillani, who still own almost 20 million shares in Aphria, Simon said they have no role at all in the company.
“Today, I’m accountable to all shareholders, whether you own one share or five million shares,” Simon said.
Simon and the company have moved to fill the board posts previously occupied by Cacciavillani and Cole with prominent names: Walter Robb, the former co-CEO of Whole Foods Market and international sports marketing executive David Hopkinson, who serves as football club Real Madrid’s global head of partnerships and was previously the chief commercial officer for Maple Leaf Sports and Entertainment.
“Irwin and I had a prior history in the consumer packaged goods business. I know he’s determined to shoot straight and put up some numbers, and execute against those numbers,” Robb said, in an interview with the Financial Post.
There have been changes in the executive suite as well. In May, Jakob Ripshtein, who some believed was poised to be anointed CEO, resigned as president of the company. Simon appointed James Meiers, a former colleague at Hain Celestial, as chief operating officer.
Aphria’s latest earnings results, which saw the company more than double the amount of cannabis it sold compared to the previous quarter, have also fuelled a partial resurgence in its share price.
The shares soared as much as 40 per cent following the report, and closed Friday at $8.47 — still well below the $17 level at which it was trading before the short seller reports landed, but above its all-time low of $4.76.
It was the recovery Simon and the board had long hoped for, the result, Simon said, of “months and months of cleaning up the messy stuff.”
In its earnings release, the company gave forecasts for revenue and profits for fiscal 2020: it expects net revenue of approximately $650 million to $700 million and adjusted EBITDA of between $88 million and $95 million.
Analysts’ assessments of the quarter, however, were mixed.
“We were pleasantly surprised to see the company’s cannabis revenue solidly rebound placing Aphria back on track to potentially compete for a top-three spot in the Canadian market,” wrote Canaccord Genuity’s Matt Bottomley.
In a note put out a day after Aphria’s results, however, Bank of Montreal analyst Tamy Chen pointed out that although the results were a “notable turnaround from the prior quarter,” it was “difficult” to fully assess how sustainable they would be given the “ongoing ramp up at Aphria One.”
CIBC’s John Zamparo — who had just weeks earlier slashed his target price for the stock to $6.50 from $12 on fears that a writedown on Nuuvera (Aphria’s European and Brazillian assets) could be coming — expressed concern over management’s 2020 forecast, and the fact that they still not chosen a permanent CEO.
“Fiscal 2020 relies heavily on second-half performance. Aphria still operates with an interim CEO so the potential remains for an unknown change in strategy,” Zamparo wrote.
Simon poured cold water on the notion of a Nuuvera writedown — “I don’t know where he got that” — and said the analyst reports didn’t faze him.
“I don’t look at the Street’s reaction. We put out the outlook because we have a plan in place and we have confidence in our plans,” Simon said. “Look, we don’t have all these other investments and side deals out there like we used to. That was my objective. I can tell you one thing, I’m not looking over my shoulder anymore wondering when someone will say ‘Gotcha’.”
As to whether he will stay to see those forecasts through in a permanent role as CEO, Simon said the title was not what was driving him.
“Whether I’m CEO or interim CEO, I’m committed to this place 24 hours a day, seven days a week. I want to make sure that everything is in place … whether it’s me or someone else.”
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Original article from Financialpost