We first published this teaser solution on January 8, and I’m continuing to get the ad forwarded to me here at Gumshoe HQ pretty much every day… so I thought I’d repost this solution and provide you with a bit of an update (the story has changed a little, and I’ve learned a little more about it, though the share price has not changed).
So we’ll start with the teaser solution — the ad has not changed and the answer has not changed, so we’ll re-post that here for you… then I’ll pop in at the end again and provide some updates.
1/8/19: This ad from Alex Koyfman is really bursting with hyperbole, and readers have been asking about it for close to a month now… so let’s see if we can get you some answers.
After all, Alex Koyfman’s picture is right up there at the top of the ad with the inflammatory quote, “If I had to bet my entire life savings on just one stock… this is easily the one.”
He even uses a little “order” button on his form that says “Yes, I want to get rich!” That makes you want to pony up $999 for a subscription, right?
No? Well, then let’s see if we can ID the stock and tell you a little bit about the company for a lower price… maybe something free-ish, does that work for you? Great!
And don’t worry, the “secret” stock is still right around where it was when I first saw these ads in early December… so if there’s anything exciting in the wings for the shares, you haven’t missed it.
That’s a substantial “if,” of course… this is a penny pot stock we’re talking about, after all. But which one?
He says that this stock is “on the verge of disrupting a $146 billion global market” and “recently signed a massive three-year $54 million contract” — which makes it sound like the sky’s the limit… and then he gets into some specifics:
“… this company has already signed dozens of deals in countries, like Canada, Jamaica, and Italy….
“And in several U.S states, like Nevada, Washington, and California.”
Then some hints about specific deals:
“The single contract that this company just signed will pay it roughly $11.4 million per year…
“On just one contract, for the next three years — guaranteed.”
That sounds pretty impressive for what he says is a “$40 million company” — presumably there’s some kind of catch, no?
If so, Koyfman doesn’t mention that — he doubles down on the hype:
“Based on all current partnerships, I fully expect this company to make up to 10 times more than that — per year.”
This is my favorite part of the ad, though:
“THIS $1 COMPANY IS MORE POWERFUL THAN THE FEDERAL GOVERNMENT…
“… on the federal level, marijuana is still considered an illegal Schedule I drug.
“This means that federal institutions, like banks, can’t or won’t do business with pot companies.
“But the company that I’m telling you about today legally can and will…
“And that’s why other companies, industries, and even entire countries are turning to this one tiny company.
“It effectively has more power than the U.S. government, t the knowledge, and most importantly, it’s flush with cash.
“This is why it’s been able to land a series of massive deals that federal institutions simply can’t take part in….”
Huh? Oh, I see — maybe he means national institutions, like big investment banks? The Federal Government doesn’t generally do much venture or equity investing, so it’s not at all surprising that they have not partaken in any given investment… and no, it doesn’t mean that the feds are “less powerful” than some little pot company.
But anyway, let’s dig out a few more clues… then we’ll get your answers…
“It recently inked a 1,000-acre deal in Nevada….
“It’s also in on a huge project in Jamaica, a country that’s part of a $494 billion marijuana tourism market.”
We can probably add “huge” to the list of “adjectives that don’t have any legal meaning,” by the way. But I digress… there are more clues:
“In California, this company is backing — and has a large interest in — 40,000 square feet of indoor growing facilities.
“In Italy, it’s involved in a 25-acre project with a company that’s ready to launch its first line of retail hemp oil in a $2 billion market.
“It’s also developing its own line of cannabis-infused soft drinks, a $200 million industry that even Coca-Cola is about to get in on.”
Those are all numbers that sound big, which is an enticement to make you feel like the opportunity is endless… but remember, even if there’s a shred of truth to the projects hinted at (there probably is, copywriters excel at exaggeration but they’re not hired to lie and get you in trouble with the law), they aren’t the only company doing these things. Does the fact that Coca-Cola is about to get into cannabis-infused beverages support your belief in a company that’s bout to try to release it’s own drink… or does it make you quake in your boots at the notion of competing with the Atlanta soda cartel?
Anyway, that’s enough clues… ready?
So who is it? Thinkolator says this is the CSE-listed Crop Infrastructure Corp (CROP.CX, CRXPF OTC in the US), which bills itself as essentially a financier for the pot industry — since banking and borrowing are tough for illegal industries like marijuana (in the US, at least), those companies don’t have easy access to bank loans and mortgages and regular financing… so CROP is one of the many companies that have sprung up to fill that niche, usually by backing land acquisition or property development in exchange for some return (equity, rent, or some economic exposure to the underlying business).
That’s what the only “marijuana” stock I own does, too, that’s Innovative Industrial Properties (IIPR), which is a marijuana cultivation facility real estate investment trust (REIT) — they buy properties from (or for) medical marijuana growers and lease the properties back to them on long term leases on extremely generous (to IIPR) terms, since that’s relatively easy non-dilutive financing for the pot growers. Since IIPR pays more than the facility would be worth to a non-grower, and demands an extremely high cap rate on its leases in return, they have the potential for extraordinary dividend growth… which is why I own the shares (though we happen to be above my “buy below” target price at the moment).
IIPR is risky enough, and very young, with a market cap of only about $750 million — but even that means they’re huge and established compared to CROP, so having a similar strategy is not enough to make the two comparable (CROP is not a REIT, but is partially a land-based financier that gets its investment returns through leases).
What is there to like or dislike about Crop Infrastructure?
Well, the primary “dislike” for me is the lack of detailed disclosure of their deals, and the massive dilution.
Like most financiers who don’t have access to the debt markets, including IIPR, they have to issue new shares to fund their deals…. but since they’re brand new and don’t have any revenue-generating assets yet (let alone income), the share count quickly balloons because they’re selling shares for pennies to raise money for both operating costs and new projects.
They currently have about 133 million shares outstanding, per their Canadian Securities Exchange page, and have “filed” to bring that up to 150 million if they want to (they will, I’m sure, but no idea when). That number was 80 million in May when they were just getting started in earnest, and 110 million in August, so the capital raises have been steady in their young life as an operating company (they effectively went public late in 2017, through a reverse merger, but didn’t really trade publicly until this past summer).
The basic strategy, as I understand it per the company’s somewhat dated presentation, is to loan capital and receive a “60% preferential payback” via lease and management fees on the greenhouse infrastructure and equipment until they get their capital back, then after that “CROP’s 30% interest in the real estate and infrastructure will receive dividends indefinitely.” I have no idea what the “preferential payback” terms are — does that mean their fees are anything up to 60% of profits? Revenues? That seems very steep, but I didn’t find any detail about how they structure their deals, there’s nothing in the filings that I read about actual dollar amounts or percentages for leases or management fees.
In that same presentation they say that “client operators with 12 greenhouses at full capacity could generate over $24M in annual sales” — which doesn’t really mean anything to me. Does that mean they’d get 60% of that amount? 30%? That’s pretty much impossible, if terms like that were available no one would ever invest in anything else — CROP’s deals are made in joint ventures, and with non-controlling stakes, so there’s a lot of confusion that they don’t really help to clear up with any facts. At least not in the filings and press releases that I read, and I read more on this one than I usually do when revealing these “secret” penny stocks, just because I kept thinking there must be more information somewhere.
To be fair, they do make clear that they are in the business of looking for new money all the time. This is how the company words it in the MD&A from their last quarter (August 31):
“At present, the Company’s operations generate minimal cash inflows and its financial success after August 31, 2018 is dependent on management’s ability to continue to obtain sufficient funding to sustain operations through the development.”
Which is, at the least, an understatement.
With little companies like this that are trying to build property or investment portfolios, I try to look at them as if I were buying the portfolio — what are you willing to pay for the assets they’ve acquired so far? This is important, because future assets that they acquire are going to be paid for by selling new shares — which means that if they buy dumb stuff or overpay, the value of the investments you thought you were buying into will fall on a per share basis.
So I went through that August 31 MD&A, which seems to list all of the deals they had in place at the time, and then looked through subsequent filings and press releases to see if any new stuff should be added. The disclosure is not terribly helpful, since we don’t really have a rational understanding of what kinds of joint ventures and deals these are, or what the repayment period is likely to be (or even what the upside is if things go really well), but we do get some basic numbers…
“At August 31, 2018, the Company had cash of $717,227 (February 28, 2018- $490,677) and a positive working capital of $1,051,333 (February 28, 2018- $481,860). As of August 31, 2018, the Company advanced DVG LLC $1,581,094 and Humboldt $1,719,640 to commence operations. Also, the Company advances to Wheeler Park Properties LLC $3,637,704, Elite Ventures LLC $2,016,778, Ocean Green Management LLC $21,723, as part of the JV Agreement. The advances were non-interesting, bearing, unsecured and no formal terms of repayments.”
I assume they meant to say non-interest bearing… but “non-interesting” is perhaps more accurate for this particular reader (there are quite a few typos in their filings, which isn’t that unusual for four-person companies like this). I read through the list of investments they’ve made so far, and investments they’ve agreed to make but haven’t funded, and that seems to be a fair approximation of their total assets at the time — their investments totaled up to about $9 million. Which matches up with the $8.977 million on their balance sheet under “loans and advances,” and you really get a sense for the unsustainable nature of the company at this small scale when you see that their operating expenses for six months were just about equivalent to the total investments they’ve made through “loans and advances” (total operating expenses for the period were $8.348 million, not counting their listing expenses that would have added about another million).
The primary business of Crop Infrastructure, or at least their core competency, seems to me to be promotion — they spent $1.8 million in six months on professional fees, office overhead of $71,000, and $2.1 million on marketing and promotion. They say they have no payroll, but much of their consulting and professional fees appear to be paid to officers and directors (who also got share-based compensation of $1.2 million in the first six months of last year).
I don’t say that just to be facetious — they are a equity-based financier, and there are lots of other financiers out there… their only real way of standing out is by self-promotion, both to possible customers and, more importantly, to investors (more important, because they have to raise every dollar they spend by selling shares — and if they can get the price up by promoting themselves, they can sell shares at higher prices and bring in more money). This is often an extremely unappealing business at small scale if you can’t borrow other peoples’ money, which is why financiers usually also either manage outside investment assets or issue debt… neither of which are really available to Crop, so presumably they’re looking for much higher returns on their investments.
Frankly, when you read the background story a little bit and see that this is a company run by an investor relations/PR guy, with a person from Stockhouse on the board, you might begin to think of it as a company that specializes mostly in convincing investors that it’s an exciting company. It doesn’t specialize in detailing how they’ll actually make money… which might be intentional, if they’re spending as much on operating the company (even without employees) as they are on the actual investments that are supposed to generate revenue at some future point.
The promotional budget appears to have been well spent, to be fair — they’ve gotten plenty of attention in the junior stock press and the cannabis investment world (examples here, here and here, many of them paid promotions).
For companies like this, I like to make things simple by assuming that the price the company is paying is what the property or asset is worth… so if they’ve spent about $10 million and that’s the book value of the investments made to date (they keep saying “advance” instead of “property acquisition” or “purchase,” which gives me little confidence… but we’ll assume these are real investments that have some contractual backing), then the company should be worth that much plus some premium to cover the cost of the management team and the future deals they have in the works… right? It shouldn’t be worth 5X that much, because this is an open market and if the deals they made are really worth 5X what they paid, the other party wouldn’t have agreed to them… maybe 2X book value if you think the management team is really on the ball, or if the deals they have in the works are valuable but not yet paid for, so they don’t show up on the balance sheet yet? 3X?
You’ll have to make your own call on that… balanced by the fact that just operating the company and sustaining the business as they try to grow is costing them something like $18 million a year (annualizing the last six months of opex). Right now, they don’t seem to have made any further payments of note, at least according to their press releases, but they have sold more stock… so the stock at a current valuation of C$45 million, 5X the value of the investments they’ve funded so far, is not so appealing to me unless we get some idea of what the returns would be from their individual deals to justify that kind of steep premium.
Yes, they should start receiving some revenue at some point — they say that a couple of the greenhouse facilities in which they are junior JV partners are producing or near producing cannabis flower now, and they’re planning to plant hemp outdoors in Nevada for CBD extraction, so presumably there will be revenue coming into those businesses and that will allow for some kind of return to Crop Infrastructure… something based on that mysterious “60% preferential payback” term, which might mean something to you but doesn’t mean anything to me.
And yes, they do sort of have that “$54 million” contract — that’s just an extrapolation of the supply agreement that Hempire, Crop’s “brand and tenant” in Nevada, signed in October (500,000 pounds per year of CBD flower, for three years, at a price in the range of $36-57/lb based on CBD content… at $36/lb, that’s $54 million in potential revenue)… how much of that CROP receives from their “brand and tenant”, of which they own 49%, I have no idea, nor do I know what the terms are of that lease and brand license, or whether the farm will be profitable at $36/lb. This is all a complete mystery to me. As is the ownership of the other 51% of the project.
So I’ll be boring and stick with big ol’ IIPR, which is plenty risky enough for me and actually generates a profit, with 15-year leases and publicly discussed terms and cap rates that make clear financial sense (one of Koyfman’s colleagues, Briton Ryle, has been teasing IIPR, too — just FYI). Perhaps Crop Infrastructure will do great things, and they definitely are experienced at promotion so they may well get a lot of attention and drive the share price higher (giving them the opportunity to sell more shares), but I’ll stay out of it until I understand exactly what kind of revenue would be flowing CROP’s way from their projects — maybe I’ll feel differently after another couple quarters, maybe there is a brilliant strategy underneath this, but for now it just looks like they’re spending $20 million a year to support a portfolio of $10 million in investments… which might work if they’re brilliant investments that are about to explode in value and generate gushers of cash flow, but it doesn’t provide any “margin of safety” if they aren’t.
Now back to the present… it’s March 13… and we’ve gotten one more quarter (the November 30 filing), so we can update this a little bit. Things have changed a little bit for CROP in the past couple months.
First of all, that Italy and Jamaica connection is no more… they sold those assets to a private company, World Farms Corp, for $2 million worth of stock (World Farms’ other asset seems to be a South African marijuana facility, though they don’t even have a website yet so the details are vague). That doesn’t bring any liquidity or cash, since it’s a private company, but I guess it gets them off the hook for spending any money to develop those properties… and they’ll still have some exposure (their contribution of these assets gives them 20% of World Farms Corp, which does look like it has some substantial venture backing, though “20% of what, exactly?” might be a reasonable response).
And I got a little bit more clarity on the deals — after I published this article originally a consultant for CROP followed up with me and provided some written answers to a few of my questions… here’s our Q&A:
Travis: What is the nature of CROP’s investments in subsidiaries or properties? Are these tenants, or joint venture partners, or both? From your last quarterly statement, the disbursements appear to not be purchases or investments, but cash advances without any contractual obligations.
Crop: CROP forms a partnership via new LLC with the local operations team. The local operator has licenses held in a 3rd party company to that partnership. CROP has an option to acquire each license when Federally legal to do so. CROP by way of loan lends 100% of the Capex required to develop the infrastructure and cover initial Opex until cash flow begins. A promissory note is in place against the property and infrastructure until the loans are repaid.
Travis: How does CROP earn a return on those investments or cash advances, and what rate of return is written into the leases or contracts? What is the length of those leases, and how variable would the returns be over that time period? What is the recourse if rent or lease payments are not made?
Crop: The cannabis or hemp activity operated under the local partners license is subjected to lease, management fees, and branding fees to extract the profits into the LLC partnership. The company could seize the assets if the loans are not repaid.
Travis: Can you explain the basis for the 60% preferred payment return (perhaps that’s not the exact wording) that is mentioned a few times in your filings materials? 60% of what?
Crop: Until the loans made to the LLC is paid back in full, 60% of all profits generated by the LLC are returned to CROP. Once paid back the company sits on its dividend interest between 30-49% depending on its ownership interest of the LLC
So that’s a little bit more clarity about how they’ve set up the company to work… and they did update the investor presentation a bit to show some more of that detail here. How about the financials? Any changes?
Well, they’ve raised some more cash — they did a private placement for about C$3 million in February, then a senior secured convertible debenture offering of C$4 million later that month, so that has provided some (presumably needed) capital and also boosted the share count — the total diluted share count, given all the warrants and debentures, would now be over 200 million, the market cap on the already issued and outstanding 154 million shares is C$49 million (about US$37 million).
We have no idea what kind of cash flow they are likely to have, partly because we don’t know what outlays they will eventually have for any of their current deals or how profitable those operations might be (or when they might become profitable), but they had not yet received any revenue as of November. They have announced some progress in production from a couple of their more advanced tenants/partners: Hempire, which is selling some finished product to Antler Retail… in exchange for Antler shares, which I believe are also private; their Washington State tenant has sold its first crop of soil-grown marijuana, generating a tiny bit of revenue before switching over to hydroponic operations; and their subsidiary in Nevada has partnered with MYM Ventures to get $500,000 in funding for the rights to half of the CBD they grow on 120 acres, minus processing and sales costs.
So where do we end up? The assets are still mostly investments in very small operations that have just started production and have not yet recorded enough revenues to generate revenue for the parent/landlord. As of the November quarterly filing in SEDAR (the most recent, dated Jan. 24) here are the updated assets they owned (meaning, the investments they’ve made in partners, with hope of return as the businesses generate profit using equipment or property financed through CROP’s investment):
“As at November 30, 2018, loans and advances consisted of the following:
a. Advances made to DVG, LLC in the amount of $1,806,905 as described in Note 4.
b. Advances made to Humboldt Holdings LLC (“Humboldt”) in the amount of $2,437,812 in
connection with the acquisition of a 49% interest in Humboldt by CROP.
c. Advances made to Wheeler Park Properties LLC (“Wheeler”) in the amount of $4,839,765
in connection with the acquisition of a 30% interest in Wheeler by CROP.
d. Advances made to Elite Ventures LLC (“Elite”) in the amount of $3,417,303 in connection
with the acquisition of a 49% interest in Elite by CROP.
e. Advances made to Ocean Green Management LLC (“Ocean”) in the amount of $21,723 in
connection with the acquisition of a 49% interest in Ocean by CROP.
The balances are unsecured, non-interest bearing and without fixed repayment terms”
That’s now a total of about C$12.5 million, with all of the same partnerships that they had as of the August filing (noted above) but an increased commitment to most of them (total in August was $9 million, so about a 30% increase on average). They still had about a million in cash, though that would have been added to by the $7 million they raised in February, minus whatever they’ve spent (typically about $5 million per quarter, mostly on advertising and promotion, though half of that is stock-based compensation).
So if this is a finance company that’s worth some multiple of what they’ve invested plus the cash on hand, then that base number is now roughly C$20 million (cash plus investments made to date, counting cash raised since the November quarter ended). At the current price of about C$49 million, the way I read it, you’re valuing the company at a little more than 3X their investment portfolio plus cash, with all their investments having been made in the past year. There’s no right answer for what their portfolio of investments and their management acumen and relationships is worth, but I think 3X is a bit much. I’d be more interested at less than 2X their investments if I had a lot of confidence in management, and a discount to the investments if I didn’t have much confidence.
So personally, it still doesn’t appeal — mostly because these are agreements without set repayment or specific lease terms that they’ve publicized so it’s hard to guess at what their returns might be from these dals, and they depend on the partner company generating a profit that can then be shared with CROP (which has that call on 60% of profits), so there’s a huge range of possible returns on those investments that CROP has made — and the range does include “zero” if the assets don’t end up being worthwhile, though I understand they have some protection from control of leases, land or equipment if their partner defaults.
The positive spin would be different, of course, and with this company you do at least have a very promotional group of core employees who are focusing now on hemp and CBD in Nevada, which has some potential to scale up as a larger business, and have junior shares in several different marijuana enterprises in Washington State and California that should be generating revenues soon (maybe not profits, I can’t figure out what the possible range of returns might be, but certainly revenues). They also have some investments in companies that are trying to build brands in the space, which is worthwhile because I expect branding to be a key to future success in marijuana… even if it’s hard to see a lightly funded operation like this developing a powerful and sustaining brand in an extremely competitive business. That is, at least, more than a lot of marijuana penny stocks offer — so even a stick in the mud like me will admit that you could probably do worse.
That’s just my opinion, though, and you already know I’m an old fuddy-duddy when it comes to some of these things. Perhaps you’ve caught the speculative bug with CROP, or have other enticing ideas in the marijuana or hemp space that make more sense to you — if so, I’m sure we’d all be delighted to hear your thoughts… just use the happy little comment box below to spill your guts. We’ve also kept all the original comments on this thread from January appended so you can see the wisdom of your fellow readers. Thanks for reading!