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 much and the Thinkolator 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, as of January 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 still, though the ad is getting very old in the tooth and outdated now, 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 $1 billion — 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? I’m going to go through my initial thinking from January here, and then will share some updates on the (really disastrous) results the company has had since then. If you just want to see my current thoughts, skip down to the bold text update.

Well, the primary “dislike” for me was the lack of detailed disclosure of their deals, and the massive dilution… which has gotten even worse since I wrote the first version of this article in January.

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. If the sector becomes less attractive or any of their deals go sour, and they have to raise new money to grow while their existing deals aren’t making money, you can pretty quickly get into a spiraling disaster of share issuances or private debt deals that end up putting the company in even worse shape. 

They had about 133 million shares outstanding in January, per their Canadian Securities Exchange page, and that’s now up to 171 million (fully diluted, their latest investor presentation now says 238 million, though that would require a lot of adjustment to warrants that are far underwater).   That number was 80 million in May of 2018, when they were just getting started in earnest, and 110 million a year ago, 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 the summer of 2018).

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 said 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 first 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.

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, 2018 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 October 1… and we’ve gotten a few more quarters of info, so we can update this a little bit. Things have changed some for CROP in the past eight months.

First of all, of course, is the price — it was never quite a $1 company as teased, though it got close for a while last year, and the ad was updated to call it a perfect “30 cent” company sometime a few months ago, which was briefly accurate… but it’s now trading below five cents (that’s in Canadian dollars, the last trade was at about 3.7 cents in US$). The marijuana sector has been weak since the Spring for almost every stock, but this is among the worst performers I’ve seen in a long time.

Operationally? Well, the presentation from Koyfman has grown ever more out of date — 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 — they were raising private money recently, and had a deal to reverse-merger their way onto the CSE a few months ago, but I haven’t seen any recent updates).

And I did get a little bit more clarity on the deals, in case you’re curious — 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 from March (things may have changed since then, I haven’t been in touch with them since):

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, and another $1 million convertible in June, so that 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 well over 200 million, the market cap on the already issued and outstanding 154 million shares was C$49 million when I looked back in March, and now after further precipitous decline it’s down to about C$7 million. They also tried to push through a warrant acceleration last month, which is a somewhat desperate-sounding move (with limited success, they say it brought in only about $50,000).

Which means, of course, that this is so very tiny that I really shouldn’t be writing about it to a few thousand of my closest friends, and Alex Koyfman probably shouldn’t be heavily promoting it — though the power of promotion has its limits, too, given the stock performance since we first wrote about this ad and Kofyman started touting the company. Here’s the ugliness in graphic form:

We have no idea what kind of cash flow they are likely to have, or when they might have positive cash flow, 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 May, 2019, and at that point they were down to $86,661 in cash (they did borrow a million after that, though I haven’t seen any other financings).

They have announced some progress in production from a couple of their more advanced tenants/partners along the way: 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 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.

And more recently, it looked like their financial rescue might come in the form of a sale of their partner’s properties in Nevada (and associated licenses), which would have brought something like $8 million back to Crop, but from their latest press release about lost harvests and weed infestation it seems that the purchase has been canceled.

Their investments now total 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), and they added new deal in Oklahoma.

So if this is a finance company that’s perhaps worth some multiple of what they’ve invested plus the cash on hand (they don’t have any as of May), then that base number is now roughly C$25 million. At the current price of about C$7 million, the way I read it, you’re valuing the company at less than a third of their investment portfolio, with all their investments having been made in the past year and a half.

There’s no right answer for what their portfolio of investments and their management acumen and relationships is worth, but when I first wrote this and it was trading at 3X their investments, I thought that was too 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.

Given the disastrous performance as they’ve burned through cash and have received no cash flow from the “amounts due from associates” as far as I can tell (“amounts due from associates” is essentially their only meaningful positive line item on the balance sheet), I can’t say that I have any confidence at all in this one after seeing them operate for a few quarters. And I’m quite relieved to have not invested in the somewhat appealing “business plan” of being a financier… since now, with a falling share price, being a financier looks like an almost impossible business (they have to sell shares to try to make more deals to rescue the company, but the stock is too cheap to sell shares). Unless there’s some windfall coming in the form of a gusher of cash that’s just around the corner from their investee companies, and I’ve seen no sign of such a thing (though can’t completely discount the possibility), there’s nothing at all to inspire confidence in an investor here.

Having their one valuable asset be overtaken by weeds and essentially put off for another year seems like it was pretty much the last straw. And a reminder that bankers and stock promoters don’t always make good farmers.

And yes, it will not surprise you to hear that I’m still not interested — the business plan seems to get ever more iffy, given the many variables, but the execution of the business plan has consumed a lot of cash without generating any as harvests work their way through the system, and it looks to me like they must be pretty strapped at this point, with those huge offtake agreements that any investment case would have to be built on seeming ever more ephemeral (the offtake agreements that were teased as a $54 million opportunity are based on the weed-cursed Nevada property, which presumably won’t produce nearly enough to satisfy the offtake this year).

Here’s how I summed it up back in March:

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 deals, 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 “you could probably do worse” might have been too optimistic — yes, it’s technically true that you could do worse, but not many stocks have done worse in the past six months. And while they should be generating revenue, they aren’t — that’s still just on the books as money they’re supposed to be getting from their partners, but haven’t received — if I were to guess, I’d suppose that’s partly because of the harvest schedule (with most of that screwed up by the Nevada weeds at this point), and partly because their other partners really aren’t generating enough revenue for any to reach Crop Infrastructure.

Maybe they’ll have some revenue in the next quarter, which would include numbers through the end of August (probably won’t get that for another month), but I don’t see any reason to hold your breath on that being meaningful. They did announce that their Washington and California farms had some sales from the 2018 harvest in August, but we’ll have to wait to see how that trickles down to CROP’s report in a month or so. I will be very surprised if they don’t end up having to raise money again very soon, and if they’re raising money from this position of extreme weakness it will be hard to pull out of a downward spiral.

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, and I continue to not have any position in Crop Infrastructure, long or short (though I do still own shares of Innovative Industrial Properties, which is now one of my largest holdings). Thanks for reading!

P.S. I do have to give Angel Publishing a little credit… they’re using this extremely outdated pitch for what’s purported to be Kofyman’s grand stock idea, and the company teased is obviously different than it was when the ad was written, and is not going to “hit $20, $50 or even $75 within the coming months” (and is clearly, at least to me, on very shaky ground)… but at least they’re not making this promise and also withholding refunds like some publishers do — they say they will offer a refund to subscribers within 60 days, which is the least you can do for folks who might be awfully disappointed when they get their “special report” (“Cannabis 2.0: From Grow Op to Global Empire”) and realize that this notion of a “perfect pot stock” was sold to them so disingenuously. If anyone subscribes to Koyfman’s newsletter, I’d be curious to hear if he’s still pushing the stock internally, or if it has become just a marketing ploy that’s never mentioned to subscribers any more.