Canadian financier Andy DeFrancesco is seen in a handout photo.Andy DeFrancesco
The company was called Cooltech, then Cool Holdings. But the experience of investors who followed the lead of two prominent Canadian cannabis investors and bought the rapidly rising shares of a small U.S. technology retailer has been profoundly uncool.
Canadian financiers Andy DeFrancesco and Aaron Serruya were part of a group that took the electronics seller on a wild ride in 2018. In the space of seven trading days last year, the shares of Miami-based Cool Holdings Inc. rose more than fivefold. Just more than a month later, that entire gain was erased. Soon after, both men left the company’s board.
The business methods of Mr. DeFrancesco in particular have been under greater scrutiny since December, when short-sellers took aim at his role at Aphria Inc., the Leamington, Ont., company that he helped get off the ground and that has become one of Canada’s largest producers of legal marijuana. The short-sellers’ report alleged that Mr. DeFrancesco was a central player in a series of peculiar transactions that ultimately saw Aphria agree to pay nearly $200-million in stock for cannabis assets in Colombia, Argentina and Jamaica that were "nearly worthless.”
Mr. DeFrancesco and Aphria management have defended the deals, and Aphria’s board set up an independent committee to investigate the situation. Last week, the board said it had concluded the price it paid for the assets was “acceptable,” but that certain directors, whom it didn’t name, had “conflicts” they failed to disclose. (Mr. DeFrancesco was not an Aphria director.)
Aphria’s shares have fully recovered from the sell-off that followed the short-sellers’ report. Investors who bought Cool Holdings shares during a bout of euphoria around the company last September haven’t been quite as lucky.
The company’s dramatic rise has a number of similar elements to Aphria and other transactions Mr. DeFrancesco has been involved in, including international asset sales by insiders and paid stock promotion.
The tale begins a little more than two years ago with a struggling company called InfoSonics Corp. The San Diego-based company, a seller of smartphones in Latin America, had seen its shares trade at less than US$1 for most of 2016 and it risked delisting from the Nasdaq stock exchange.
According to securities filings, in January, 2017, talks between an independent director of InfoSonics and unidentified representatives of a company called Cooltech Holding Corp. led to the idea of a merger between the two.
Just four weeks earlier, Cooltech, with Mr. DeFrancesco as chairman, had been a shell company with no business operations. It then acquired a small, money-losing consumer-electronics seller. It also had an agreement in hand to acquire two consumer-electronics companies both using the name OneClick, which Cooltech would describe as authorized resellers of Apple Inc.'s products.
In mid-March, 2017, according to the filings, the talks heated up. A Cooltech shareholder, John O’Rourke, conducted calls with InfoSonics to describe Cooltech’s strategy and ownership. Ultimately, Mr. O’Rourke represented Cooltech in 12 meetings or communications with InfoSonics, including an April meeting that also included Mr. DeFrancesco.
Today, Mr. O’Rourke is a defendant in an allegation from the U.S. Securities and Exchange Commission (SEC) that he participated in what are known as pump-and-dump schemes from 2013 to 2018. In the three schemes the SEC alleges, the defendants grossed US$27-million in stock sales, leaving other shareholders “left holding virtually worthless stock.”
An attorney for Mr. O’Rourke did not respond to an inquiry from The Globe and Mail. Three other defendants in the same SEC matter have invested alongside Mr. DeFrancesco in other deals, and Barry Honig, the primary defendant, was also a shareholder of Cooltech, according to a securities filing describing the InfoSonics-Cooltech merger. An attorney for Mr. Honig declined to comment for this article. Mr. DeFrancesco said in a December interview with The Globe that he did not own shares in the companies described in the SEC complaint and has not been contacted by the commission.
As Cooltech worked to combine with InfoSonics, it was also acquiring the OneClick companies.
Securities filings and corporation records show Mr. DeFrancesco, or members of his family, had ownership or leadership positions with various OneClick corporations, including one in Argentina. An unspecified member of his family had a 25-per-cent interest in OneClick International, which Cooltech acquired on Oct. 1, 2017, for US$4.6-million including the assumption of debt, according to one filing.
In January, 2018, Cooltech also entered into an option agreement to pay US$4.57-million to acquire some number of OneClick stores in the Dominican Republic from Verablue Caribbean Group SRL, which is described in a separate securities filing as an entity “controlled by the DeFrancesco family.”
The InfoSonics-Cooltech merger closed in March, 2018, with an estimated purchase price of US$7.9-million. Cooltech shareholders acquired 82 per cent of the new, combined company, according to securities filings, and Mr. DeFrancesco and Mr. Serruya joined the board. (Neither a message left on Mr. Serruya’s voice mail at his family company, Yogen Fruz, nor a LinkedIn message were returned.)
Financial reports of Cool Holdings did not look great. In its first quarterly report after the merger, filed May 21, the company said it operated nine OneClick stores – three in Florida and six in Argentina. It had lost US$2.77-million on US$5.32-million in sales in the first quarter of the year. Its accumulated deficit – a balance-sheet tallying of past losses – totalled US$12.55-million.
It also acknowledged that its management “has substantial doubt” it could stay in business over the next 12 months as a going concern, owing to its “significant losses over the past year” and “substantial amount of debt.” The company would need to refinance or restructure its existing debt and raise additional capital to survive, it said. At the time, the shares traded between US$3 and US$4.
Then things started to happen.
In June, the new public company changed its name to Cool Holdings, evoking the Cool Brands name used by the Serruya family for its frozen-dessert company for roughly a decade starting in the late 1990s. The new ticker AWSM can be pronounced as “awesome.”
In mid-September, Cool Holdings stock caught fire, apparently goosed by a series of promotional articles.
One such article said: “As Apple passes one of the greatest milestones in corporate history, it is also giving a tiny company a taste of its hugely profitable real estate segment. Cool Holdings … has its hands on the opportunity of a lifetime." The article claimed the company’s One Click stores “earn [US]$3,750 per square foot,” outperforming, it said, Kate Spade & Co., Lululemon Athletica Inc., Michael Kors and Tiffany & Co.
Then came the promise of rapid growth. Cool Holdings, the article said, “plans to roll out 200 boutique stores by 2020. The stores will tap into undiscovered or underutilized markets all across the country. At [US]$3,750 of revenue per square foot, and with an average size of 1,200 square feet – that’s a projected revenue stream worth [US]$900-million in Phase 1 alone.”
Disclaimer language at the bottom said the article “is a paid advertisement,” with the publisher, Safehaven.com and Advanced Media Solutions Ltd., receiving US$415,000 from Cool Holdings. The disclosures also said the owner of Safehaven owned shares and/or stock options in the companies it profiled and would not disclose any future sales of the company’s stock. A variation of the article was placed on PR Newswire, a legitimate news-release service.
At the same time as the Safehaven.com articles were appearing, Cool Holdings issued news releases about “the new lineup of iPhones coming to its OneClick stores” and the “new OneClick Apple Premium Reseller store, the first ever in the Dominican Republic.”
The shares went from a closing price on Sept. 14 of US$5.18 to trade as high as US$22.61 on Sept. 21.
The next trading day, they closed at $12.09. That was the beginning of a nearly uninterrupted decline.
Thomas Gorman, a partner at Dorsey & Whitney LLP in Washington, responded to questions on Cool Holdings’s behalf via e-mail. He said of the US$3,750-a-square-foot sales figure, “At the time that estimate was made it was accurate." That number, he said, "illustrates the high revenue versus cost of our OneClick locations since it is a function of sales and the square feet in the store.”
Asked if the claims in the Safehaven article are still an accurate characterization of the company’s expansion plans, Mr. Gorman said: “The business plan for the company calls for an expansion of its key operations. The firm plans to implement that plan by growing the number of stores. … We are on track to accomplish our goals and we are very excited about the future ahead for us.” He says the company currently has 16 stores: three in Florida, six in Argentina and seven in the Dominican Republic.
But what about the practice of paying outside writers to write promotional stories such as the ones about Cool Holdings?
Mr. Gorman claims that Cool Holdings “does not and has not had a relationship with Advanced Media.” He said the company “was introduced to Advanced Media by one of its executive[s] who believed Advanced Media to be reputable.” Advanced Media proposed the story and submitted a proposed contract and invoice, but “Cool Holdings did not approve the copy, execute the proposed agreement or pay the invoice or any sum to Advanced Media or any firm for the publication of any material.”
For this article, Mr. DeFrancesco spoke briefly with The Globe, then provided written statements via e-mails from a publicist. He said "I routinely look at service firms for the companies I work with. Advanced Media was just that – a company we looked at briefly as an option to provide IR [investor relations] services for Cool Holdings. Ultimately the contract was not executed and the company made no payments.”
James Stafford, described on his LinkedIn page as founder and chief executive of Advanced Media Solutions, did not respond to a message from The Globe.
The use of paid promotional articles to raise the profile of otherwise-obscure small-cap stocks is not uncommon. In the interview with The Globe in December, Mr. DeFrancesco said companies have to take measures to ensure investors hear their stories. “I would say that I’m 100-per-cent against pump-and-dumps, but I’m not against promotion and public relations and investor relations.”
He said he left the board of Cool Holdings so that he could focus on his role at Sol Global Investments, a small, Canadian-listed company in the cannabis industry that had flipped the Latin American assets to Aphria.
About the company, Mr. DeFrancesco added: “Cool Holdings has a remarkable proof of concept in the retail technology sector with the most recognized and innovative brand in the world. My family has invested a considerable amount of capital in the company and continues to increase their holdings because of our belief in the management team and in the validity of their retail strategy in the Americas."
Apple Inc., contacted in late January by The Globe with questions about Apple Premier Partner arrangements in general, and its relationship with Cool Holdings specifically, failed to produce a comment.
In October, as Cool Holdings shares continued their meltdown, Safehaven.com and Advanced Media Solutions took on a new assignment: Promoting Sol Global Investments (then known as Scythian Biosciences Corp.) and its deal with Aphria for the assets assembled by Mr. DeFrancesco.
The Safehaven.com article called Scythian “a little-known,” but “very smart and sophisticated incubator of cannabis assets [that] is stuffing its war chest.”
“How do incubators make money? They take equity stakes in startups and build them up until they get big enough and successful enough to sell. It’s all about building it up fast, for high-profit sale."
After praising the two top Scythian executives, the article said: “And most recently, Andrew De Francesco has been added to the Scythian Biosciences board. He’s a 26-year veteran of capital markets and has led a string of companies to multimillion-dollar sales.”
The disclosures say Scythian paid Safehaven.com US$70,000 for the article, which is “for entertainment purposes only … a commercial advertisement only.”
On Dec. 14, Cool Holdings re-elected the company’s five directors, including Mr. Serruya and Mr. DeFrancesco. Two days later, Mr. Serruya resigned. On Dec. 27, the company’s auditor, MNP LLP, which has audited a number of companies associated with Mr. DeFrancesco, quit. And on Dec. 31, Mr. DeFrancesco resigned as chairman and as a board member.
In all three resignations, there was no dispute with the company, Cool Holdings said in its securities filings. The departure of Mr. Serruya and Mr. DeFrancesco left it out of compliance with Nasdaq rules on the number of members it should have on its audit committee, a problem the company says it is trying to solve by finding new directors.
Mr. DeFrancesco’s resignation, the company said in a securities filing, “was due to other obligations of Mr. DeFrancesco. … It is expected that Mr. DeFrancesco will remain actively involved with the Company in his role as a shareholder. The Board has begun a search for his replacement on the Board.”
The company has not issued a news release since Oct. 15. The shares closed last week at US$2.15.