Plandaí Biotechnology (OTCPK:PLPL), "headquartered" in Seattle, is seeking to "transform the world of nutraceuticals" by growing green tea in South Africa and employing specialized extraction technologies in order to produce a highly bioavailable green tea gallate catechin. The company believes that it can potentially cure malaria, and it also suggests that its "Phytofare Catechin Complex" may lead to weight loss among many other possible positive health indications, like curing cancer or HIV. While these are significant opportunities to address large problems that have led investors to drive PLPL up over 1000% in 2013, a careful review of the company's background and financials reveals many red flags that suggest investors are at risk of losing their entire investment. With approximately 111mm shares, PLPL commands a market cap of $73mm.
Before I share my observations, I would like to credit Rami Grunbaum of the Seattle Times. In the course of my research, I found his investigative piece "Green Tea Firm Raises Red Flags" that appeared earlier this summer. Mr. Grunbaum's observations are spot-on in my view, and with his permission I have incorporated several of them in my analysis. I also want to share that I exchanged many emails with Shane Traveller and also spoke with him on phone for about 90 minutes. Traveller, who Grunbaum described as "the guy with the SEC problem," indeed appears to have a checkered past which we discussed. With that said, he has an extensive background in the medical device and healthcare industry. I will be sharing many red flags, and perhaps Traveller's involvement merits more attention, but I am not including his past in my analysis as he is not an officer of the company.
PLPL came into existence in late 2011 through a simultaneous reverse merger with a worthless meat distributor, Diamond Ranch Food, and an acquisition of Global Energy Solutions, which was based in Ireland and owned primarily by "Caldar Valley Limited" and founded in 2001 by Roger Duffield (70), who serves as Chairman, President and CFO currently. Duffield also founded a "U.S. based research company," CRS Technologies, Inc. I have been unable to find any substantive information on either of these companies or Caldar. Global Energy Solutions was dissolved in 2012.
Callum Baylis-Duffield (28), son of Roger, serves as VP of sales. He worked in sales for Johnson & Johnson for three years. Daron Baylis-Duffield (62), wife of Roger, serves as a director. There are two other directors currently, including Brian Johnson (57) and David Rzepnicki (46). Roger Duffield was associated with developmental stage companies Klinair Environmental Technologies and Rhombic Corporation, both of which traded on the OTCBB (Rhombic under the symbol "NUKE"). Duffield resigned suddenly in late 2001 from Rhombic, which was never successful. Perhaps concerning to shareholders of PLPL, the University of Missouri disputed that the company was improperly claiming intellectual property that belonged to the university.
Insiders own about 75% of the shares (as of 6/30/12), which was 83mm shares and the vast majority of which were held in a trust benefiting Roger and his wife. The balance of shares have been issued primarily in exchange for services.
Red Flag #1: Headquarters is a P.O. Box
I had already determined that PLPL's address in Seattle is a rented mail box before I read Grunbaum's article. The company calls it "headquarters" and "principal executive offices" and not a "mailing address," which is highly misleading. PLPL is incorporated in Nevada and has nothing in Seattle but a rented mailbox at 2226 Eastlake Avenue. I called to speak with the Vybe Communications, which rents the property, to confirm this to be the case.
Red Flag #2: Complex Structure
An 8-K filing in early May 2012 was the first real outreach to the investing public. The stock had started to trade under the "PLPL" ticker effective January 5, 2012. Here is how the structure was described: PLPL owns 81% of Dunn Roman Holdings. Dunn Roman Holdings, in turn, owns 74% of Breakwood Trading 22 and 74% of Green Gold Biotechnology.
In the 10-K, the company describes a subsequent event where it licensed out all rights to "cancers, viruses, parasitic infections and all other health related diseases" to "Phyto Pharmacare" for just $3mm, with PLPL retaining a 51% ownership of Phyto Pharmacare. Phyto Pharmacare, in turn, sold 44% of the company for $5mm to an undisclosed party.
The complexity increased with the announcement of a subsidiary, Phyto Nutricare:
As you may have seen, Plandai signed an exclusive license agreement with a UK firm - Phyto Nutricare PLC to market and sell all Phytofare TM products
This subsidiary tried to sell stock in the UK - it is not clear if it was successful. Phyto Nutricare is responsible for the nutraceuticals marketing. Duffield and his son are listed as shareholders of this subsidiary in the offering. The company states that it, and not either Duffield, owns the stake at this point.
Red Flag #3: Majority of Assets are in South Africa
I think it goes without saying, but any company with 99% of its assets in South Africa creates an additional level of risk.
Red Flag #4: No Patents Listed, Data Not Shared
The 10-K filing refers to patents but doesn't list any. Nor does the website. Similarly, the company refers to in vitro studies but doesn't release the data to the public. Shane Traveller had told me that he would provide that information, but I hadn't received it at the time of publication.
Red Flag #5: Broken Promises
The same 8-K from early 2012 serves as a nice test of credibility, and PLPL fails. This graphic suggested that there would be commercial extract available for wholesale by Q2-13, but the company did not reach this milestone:
The company also shared financial projections based on sales at prices from $400/kg for 120 tons in FY13 ramping to 180 tons at $600/kg in FY17. The resulting sales and net income projections were $48mm and $21.6mm in FY13 to $108mm and $40.7mm in FY17.
The company also posted a brochure to its website in 2012, with promises of "income of $27,000,000 in 2012-2013, accelerating within 5 years of inception to $90,000,000 +", which was wildly off-the-mark, at least so far. Not only were the numbers clearly wrong, but they appear to be in conflict with the SEC-filed 8-K described above.
The 10-Q filed for the quarter ending 12/31/11 projected "The Company will also continue developing products using its bioavailable green tea extract with plans to have market-ready product within 12 months." To date, there have been no green tea extract products sold.
Red Flag #6: Tim Matula Leaves
I actually spoke with Mr. Tim Matula, who is a former director and also handled investor relations for Diamond Ranch Foods (the predecessor company). Mr. Matula is also a long-time director at Nuvilex (NVLX.PK), which I recently suggested is an overly promoted stock exhibiting several of the signs about which FINRA has been warning investors (more on this later). Matula answered the phone number included on recent press releases by PLPL - I was expecting to hear an answering machine, as my call was in the late evening. He explained that he was no longer involved with the company due to having too many time-constraints. He also explained his sale of 4.9mm shares back to the company at $0.025 on February 7th, suggesting an open market sale would have been impossible. Note that PLPL has never traded below $0.04, so I found this curious. It was Matula who passed me along to Shane Traveller. He also told me that he is the brother of Tom Matula, the Chairman of the Scientific Advisory Board (more later).
Matula, who is currently a SVP for LiveDeal (LIVE), has a history of association with penny stock failures. An interesting angle is his tie to a lawyer in Las Vegas, Michael Balabon, who purports to have two separate practices, including a bankruptcy/divorce practice and an employment law practice who has acted as Registered Agent for many of these companies. I was unable to reach anyone at either office on several occasions. In any event, Balabon is the registered agent for PLPL. Coincidentally, he served in that role for NVLX as well as well as all of the former subsidiaries and partners the firm used (the new Medical Marijuana Sciences subsidiary too). Recall that the predecessor to PLPL was Diamond Ranch, and Balabon was the RA there as well. Matula has served in I.R. roles for perpetual failures like VelaTel Global (OTC:VELA).
The real issue, though, isn't only that Matula was involved, it's that he left. He is the one who put the deal together apparently, as he was associated with Diamond Ranch. His brother, as I describe below, joined the Scientific Advisory Board. Matula received a big stock award - he was the only insider paid in FY12 according to the 10-K. It's very curious that he would sell his 4.9mm shares back for such a large discount to the market price, suggesting he was anxious to distance himself.
Red Flat #7: Scientific Advisory Board Appears Defunct
One of the ways to instantly establish credibility in the biotech world is to include prominent scientists on the Scientific Advisory Board. In the case of PLPL, they currently list three members here. As I mentioned, Tom Matula is the brother of Tim. I contacted him, and he suggested that he had not been involved in quite some time. As my investigation progressed, he failed to respond to my question about the company's assertion that its extraction technology is based upon his own inventions. Both Dr. Volker Böhm and Dr. Ming Hu suggested in writing to me that their involvement has been trivial at best, with no interaction lately. Given that the company is engaging in clinical trials allegedly, this makes little sense.
Red Flag #8: Dr. Krishna Denies Clinical Claims
Grunbaum's piece suggested that the doctor in London responsible for in vitro testing for malaria, Professor Sanjeev Krishna, contradicted a press release issued by PLPL on June 6th. The company stated:
The study, conducted under the supervision of Dr. Sanjeev Krishna, a professor of molecular parasitology and medicine at St George's London School of Medicine, showed proof in analytical tests that Plandaí's Phytofare™ Catechin Complex was effective in killing the malaria parasite, plasmodium falciparum. Dr. Krishna developed the tests that were conducted at St George's London School of Medicine at the Division of Cellular and Molecular Medicine, Centre for Infection.
In the study, the most dominant catechin, Epigallocatechin Gallate (EGCG) was isolated from Plandaí's Phytofare™ extract and then had its effectiveness in killing the P. falciparum parasite compared against a purified EGCG extract.
In fact, as Grunbaum initially determined and I confirmed directly with Dr. Krishna:
"Our in vitro data did not indicate the Plandai product that they supplied had any important difference when compared with purified catechins that are commercially available."
In my conversation with Mr. Traveller, he suggested that there was a botched sample and that a follow-up study done by another analytical lab ended up supporting the company's claims. He also suggested that the company and Dr. Krishna had a commercial dispute that was at the center of the disagreement about the results.
The problem, though, is that the company has been caught misleading. In a follow-up to that press release shared contemporaneously by Stock Market Media Group, Duffield stated:
"These initial findings provide evidence corroborating previous scientific findings that Epigallocatechin Gallate catechin can kill the malaria parasite. This study involving Phytofare™ is the first to show the effectiveness of using a commercial botanical extract, rather than purified extract of EGCG catechin, as an anti-malarial."
Red Flag #9: Paid Research
This is an excellent lead-in for my next point, which is that PLPL (or someone) is paying for extensive "research" that is little more than regurgitation of what the company says, with multiple links to other "research" of this same nature. Sound familiar? Not only is this the exact same issue I cited with NVLX, but, it's the EXACT SAME PLAYERS! Specifically, not only Stock Market Media Group (Kenn Kerr, who was previously calling his company Stock House Group), but also Goldman Small-Cap Research, OTC Report and even Larry Dirks.
First out of the gate was a $5000 job by Murphy Analytics (Patrick Murphy) published on 2/7/12. It clearly states that he was paid by the company. On page 22 of 26, he shares his valuation analysis, suggesting that the company could be worth $285mm in 2017 (or about $2.80 per share) based on the assertion by CEO Duffield that PLPL earnings could be $19mm and the assumption of a 15PE. He then suggests that the company's brochure (linked but no longer accessible) forecasts a profit of $90mm in 2020, suggesting a potential market cap of $1.35 billion. He uses a discount rate of 25% per year to suggest a present value of $225mm or $2.20 per share. Note that his math is wrong - the present value would actually be $135mm. The real issue is that this was an intellectually dishonest as well as mathematically incorrect exercise to arrive at a published price target of $2.20 when the stock was trading at about $0.44. His disclosure clearly states:
MA made no attempt to independently verify the reliability, accuracy or completeness of this information utilized in the writing of this report.
There have been numerous positive "research" pieces published subsequently by the same group that is promoting NVLX.
The bottom-line is that investors seeking to learn about PLPL encounter a herd of reports that are cross-linked and extremely bullish inevitably, with little or no basis for aggressive price targets. I highly recommend that anyone reading these research reports become familiar with the backgrounds of the individuals providing them.
Red Flag #10: Excessive Promotion
Like NVLX, PLPL is heavily promoted, meaning that individuals receive email after email alerting them to the opportunity. StockPromoters.com is a great place to check for this kind of information. In the case of PLPL, it has been promoted 296 times since January 2012, the first of which suggested that the company itself paid $50K for a one-week program. Most of the other promotions were for substantially less costly (often $2-4K) and not paid directly by the company (which likely pays someone else to act as a clearinghouse), but the fact is that hundreds of thousands of dollars have been spent to promote the stock in the past 19 months.
Red Flag #11: Self-Dealing
The most recent 10-Q describes several instances of related party transactions. According to his LinkedIn profile, Director David Rzepnicki, who failed to respond to my request for information, has been an employee of CRS Technologies for many years. The company should be disclosing that the director is a related party, as Rzepnicki self-discloses that he has served as CFO since June 2012 and was Controller from 2001-2006. The CRS Technologies issue is important because it suggests that Rzepnicki isn't independent, as the company purports. Further, as the most recent 10-Q details, "in June 2012, the Company ordered machinery and equipment from CRS Technology, Inc., a company controlled by an officer and director of the Company. A deposit of approximately $5,632,240 was paid from proceeds from the Land and Agriculture Bank of South Africa."
The most recent 10-Q also discloses $217K owed to a company controlled by an officer or director of the company (paying expenses on behalf of the company), $527K owed to the CEO (4% interest rate) for working capital advances, and rent expense paid for South African office space to a director of Dunn Roman.
Finally, I point back to the Phyto Nutricare transaction, as the CEO and his son had equity stakes in the subsidiary. It's possible too that they retained equity in Phyto Pharmacare.
Red Flag #12: Abysmal Financials
The most recent data is through March, the company's 3rd quarter. YTD sales of just $314K (avocado, macadamia nuts and timber) have resulted in a gross loss of $407K, an operating loss of $1.78mm and a net loss of $1.37mm. The balance sheet shows -2.19mm in equity. $6.35mm of the $8.4mm in assets is a deposit on equipment (ordered from a related party - described above and supposed to have been delivered by 8/31/13). Current liabilities exceed current assets. The company has borrowed $9.4mm, which is larger than its entire asset base. $752K plus $73K accrued interest is part of a credit line that matures in four months (1/5/14).
The remaining debt is related to a 100mm Rand ($13mm at the time but now $10mm) borrowing from the Land and Agriculture Bank of South Africa. The loan is due in 7 years from the June 2012 closing and has a Prime + 50bps interest rate, with a 25-month holiday. It is collateralized by the assets and operations of the company, and has covenants that require "a debt to equity ratio of 1.5:1, interest coverage ratio of 1.5:1, and security coverage ratio of 1:1." Note that the auditors have issued a "going concern" opinion and that the company will need to raise additional capital. The company dismissed its auditor, Robison, Hill & Company on 8/23/12 and engaged Michael Cronin, CPA. On December 3rd, he was replaced by Patrick Rodger, CPA.
Red Flag #13: Dangerous Financing
On August 30th, the company issues an 8-K detailing additional borrowing. PLPL has not yet issued its 10-K for the year ending 6/30/13, so this was an important update. The company began the filing with disclosure of a license agreement that requires it to pay R20K ($2000) per year as a minimum, so we can see it's not too material. More importantly, the company issued a convertible debenture for $103,500 in May that is due in nine months. PLPL will accrue the 8% interest for six months, at which point if not repaid, the holder can convert to common stock at 42% of the current price (not the price presently but the future price, which could be materially lower, and a big discount to that price as well). In August, it executed two convertible promissory notes that totaled a more substantial $550K, with similar terms, and it has been advanced $125K already. PLPL also indicated that it had sold 542K restricted shares for just $145.5K from 5/1 to 8/26 ($0.27 per share, well below the current price and the prices during that four-month period).
While these sums aren't large, they are signs of weakness given the very poor terms. Shareholders could be diluted, especially if this type of financing is a precursor to more borrowing of this nature. The fact that the company is selling shares at such a steep discount to the market price is another red flag.
PLPL began the year near .06 and recently traded to an all-time high:
The volume was very high on the run earlier this year and August was busy too. The histogram to the left indicates a large amount of the volume has traded at about $0.50. There is a small bolus at the .30 area, but notice how much volume over the past year has been at the .16 area (last September).
Short-interest is fairly modest as reported by OTC Markets, with 151K shares sold short. This represents about 0.15% of the shares outstanding, though obviously a larger amount of the float. It also represents about 2 days of average trading volume. It bears mentioning that the tight control of the vast majority of shares results in a float that is most likely less than 30mm shares.
I did not set out to prove that PLPL will not one day solve the world's obesity problems or cure malaria, as that is beyond my expertise. Rather, I have reviewed company filings, press releases and other publicly-available information as well as interviewed a representative of the firm and several individuals connected to the company. I have also shared observations about excessive stock promotion and paid research providers with unsubstantiated promises of vastly higher prices. It's clear to me that the red flags I have described suggest very high potential risk, which is exacerbated by the weak financial condition. Given the nature of the assets (South African land and process equipment), any sort of failure to generate cash flow to service the debt, which has restrictive covenants, would likely lead to complete loss of equity. The company tells an exciting story, but it has failed to deliver on its promises thus far. Heavy promotion and a thin float have left this company significantly overvalued, and I recommend selling the stock following its massive run. For those who are able to short PLPL, it's not crowded and could yield a 50% return if it retraces to the 150dma.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
This article was written by
Alan Brochstein, CFA, was one of the first investment professionals to focus exclusively on the cannabis industry. He has run 420 Investor, a subscription-based due diligence platform for investors interested in the publicly-traded cannabis stocks that he is moving to Seeking Alpha, since 2013, and he is also the managing partner of New Cannabis Ventures, a leading provider of relevant financial information in the cannabis industry since 2015. Alan is based in Houston. He and his wife have two adult children.
Before focusing exclusively on the cannabis industry in early 2014, Alan had worked in the securities industry since 1986, primarily with the responsibility for managing investments in institutional environments until he founded AB Analytical Services in 2007 in order to provide independent research and consulting to registered investment advisors. In addition to advising several different hedge funds and investment managers, including Friedberg Investment Management, where he participated as a member of its investment management committee, Alan was also a senior analyst for the independent research firm Management CV. In 2008, he began providing a first-of-its-kind subscription-based service for individual investors, Invest By Model, which offered two different portfolios that investors could replicate in their own accounts. Alan also offered The Analytical Trader at Marketfy, where he used fundamental and technical analysis in a disciplined process to offer specific trade ideas geared towards swing traders.