Author Topic: INP.CVE - Input Capital  (Read 33807 times)

AAOI

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Re: INP.CVE - Input Capital
« Reply #10 on: March 09, 2015, 02:53:04 PM »
Google this phrase:
The following companies mentioned in the interview are sponsors of Streetwise Reports: Input Capital Corp.

Their sponsors tend to be excellent shorts.

2- The volatility assumptions in their options accounting seem too low.

For reference:  https://glennchan.wordpress.com/2012/12/18/reading-financial-statements-options/

3- Their financials sort of state how much the company spends on "investor relations" and travel expenses.  It's high but I suppose it's not truly excessive like some of the other companies on the TSX Venture (e.g. Barkerville).

4- Read AAOI's posts on Sandstorm Metals and Energy.  And then look at how that stock turned out.

Input Capital may not turn out as bad.  It's much easier to lose money quickly in mining than in agriculture.

Will make my rounds responding to the rest of these comments a little later when I have more time but for now I want to make the following points and circle back later with the rest. Unfortunately I didn't see this post until earlier this afternoon.

That in mind then: 

1. While I'd agree that most companies sponsored by Streetwise make good shorts (a topic for another day), the implication your making with respect to Input is comically off base. I'll elaborate in detail if you prefer but before I do, you might want to pick up the phone and give the CFO a call. I'm sure he'll be happy to dive into each and every concern of yours in detail.

Should you do so, odds seem pretty good you'll find management to be extraordinarily sharp in regards to not only strategy, but with respect to operations, and capital allocation as well - not to mention above board in terms of ethics and integrity in every way. In fact, overused terms that are largely cliches these days like "pioneering" and "visionary" are actually applicable here.

If the above strikes you as hyperbole, again, study their paper trail first (in detail), then given them a call with an eye towards holding their feet to the fire and getting to know them. I'd happily bet you a beer you'll change your tune if/when you do.

2. You can't be serious. The idea that these guys would fiddle with the IV of their options to massage GAAP earnings is even more ludicrous than the insinuation you made above. Again, glad to elaborate here for anyone that takes this charge seriously when I have more time.

3. Huh? Again, I don't even know what to make of this. I guess I'm just confused as to why you believe INP's expense base is excessive? Compared to what?

I'll grant you overhead expenses will remain somewhat elevated as a % of revenue relative to where things will ultimately balance out at maturity. I mean what else would you expect from a rapidly growing business thats still in the first inning of its long-term evolution?

For example, there is almost always a clear correlation between a company's growth rate and how efficiently it utilizes its overhead. And this is exactly as it should be given INP's needs with respect to spreading the word vis a vi both farmers and investors, not to mention the expenses related to building out a world class sales team, as well as all the other up front costs associated with creating a rapidly scalable platform capable of delivering exponential growth in the years ahead.

Point being, corporate op ex should be somewhat elevated. Otherwise they'll never find themselves in a position to fully exploit the opportunity before as without a proper platform and targeted marketing spend, the education driven market adoption that's starting to take hold would never hit exit velocity. This is all common sense.

Keep in mind too that the capital efficiency of said spend should naturally improve over time as they experiment and learn what works and what doesn't.

Last but not least, remember the "all in" fixed costs of Input's low cost operating model (at its current size) should balance out somewhere between $2 and $3M a year in total! If that's strikes you as worrisome I just don't know what to say. 

4. Fair enough. I'll be the first to admit I got my ass handed to me with SND. I mean what can I say? LITERALLY everything that could have gone wrong, did go wrong and I lost money because of it.

Sh*t happens. 

Regardless, is it fair in your mind to insinuate that because I had high conviction in SND there's a good chance I'll be wrong with Input? You realize how specious of a comparison that is right?

« Last Edit: March 09, 2015, 03:15:23 PM by AAOI »


ItsAValueTrap

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Re: INP.CVE - Input Capital
« Reply #11 on: March 09, 2015, 05:13:01 PM »
Fair enough. I'll be the first to admit I got my ass handed to me with SND. I mean what can I say? LITERALLY everything that could have gone wrong, did go wrong and I lost money because of it.

Sh*t happens. 

Regardless, is it fair in your mind to insinuate that because I had high conviction in SND there's a good chance I'll be wrong with Input? You realize how specious of a comparison that is right?

Hi Ryan, I did not mean to offend you.

To clarify about Sandstorm Metals and Energy:
1- Part of the game they were playing is (constantly) selling stock at inflated prices.
2- In my opinion, it's hard to create value out of financial engineering.  If you make a lot of money on a streaming deal, that means your counterparty paid a lot for the financing that they received.  Usually in the real world, the counterparties and rational and only take expensive financing if they are in big trouble.
3- It turns out that they invested in a lot of projects with really bad economics.  Was it because of adverse selection or was it because they didn't do due diligence?  It's unclear.  Given that they didn't seem to have a lot of engineering staff, it could be a lack of due diligence.  However, back in 2011 when equity prices were really high, anybody with a good project could get "cheap financing" by selling themselves to a senior miner at a very high valuation (because the senior could pay for the acquisition in stock).  So even if they had done their due diligence like a senior miner would, it is unlikely that they could have funded anything at attractive terms.

Or maybe they just got unlucky due to falling commodity prices (which would not explain why Sandstorm's investment in Donner went sour).  Certainly I wouldn't blame them for falling commodity prices.  But if commodity prices did not fall a lot, I think they would have had a lot of situations like Donner Metals.

Anyways, there may be a few parallels between Sandstorm and Input given that:
A- Both do financial engineering.  (From my point of view.)
B- They both trade(d) on the TSX Venture, which I regard as a stock exchange filled with garbage.

----------------
The more I dig, the more this looks dubious.

1- The CEO of Input currently runs two different companies.  One is a private firm (Security Resource Group) that doesn't seem to have anything to do with finance or agriculture. 

He is/was also involved in Assiniboia Cap and the farmland fund it ran.  He is kind of a part-time CEO who gets paid half a million for the job.

2- Input may or may not be a client of smallCapPower.com

https://twitter.com/AssiniboiaCap/status/554453520787996673
Top Technical Breakout Stocks: @InputCapital (TSXV: INP) and Arena Pharmaceuticals (NASDAQ: ARNA) Break 200-DMA http://ow.ly/H918B

3- They issued a press release highlighting their shills.  To me, this makes them a fairly obvious short.

http://investor.inputcapital.com/news/Press-Release-Details/2013/Fundamental-Research-Initiates-Coverage-on-Input-Capital-with-a-Buy-Recommendation-Video-Research-Alert-on-InvestmentPitchcom/default.aspx

4- The directors pull in around $200k each.  (The value of their options are disputable.)

Quote
not to mention above board in terms of ethics and integrity in every way

I guess we'll disagree.

I wish you the best of luck on your position.  I have no position.
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Otsog

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Re: INP.CVE - Input Capital
« Reply #12 on: March 09, 2015, 07:41:34 PM »
Although I disagree somewhat with your accounting, I do agree that they are over priced.

I don't think that the accounting is fishy.  This is from memory, and I'm not so interested in the name as to work back through my notes, but basically they properly have to account for streaming transactions through both operation and the investing CF statement.  That is okay, it's just accounting rules.  Furthermore, the assets are worth more in that they have created a stream that is a producing asset. 

You are absolutely right in that the market value of the company and therefore those assets is way to high.  There is zero margin of safety and no particular barriers to entry that I can see.  (Although farmers can be conservative and tend not to change.) An aggressive bank up there on the prairie could look at that market and decide to own it.  At half the price, the name would be worth looking, but not where it is today. (They do get style points for creating a new market niche though.)

Streaming contracts don't have a blanket accounting treatment.  Every contract has to be individually considered on its underlying characteristics and there is a significant amount of professional judgement called for.  At the least I'd say what they're doing is aggressive accounting. I don't see how most of what Input does qualifies as 'streaming'.  It largely doesn't share the characteristics of a typical mine streaming transaction.  It is a fixed, medium length term and has a fixed minimum amount of delivery that has a near certain chance of being delivered, plus a potential bonus kicker that is subject to higher variance.  To me it is mostly a commodity arrangement (typical mining streams would be mineral interests), the Farmer would record the payment as Deferred Revenue and consider it an advance payment and the Financer is making a commodity loan.

Just to be clear on what Input is doing now: 100% of cash outflowing for anything to do with these Canola streams is an outflow on the Investing section of the Cash Flow statement. 100% of cash inflowing for anything to do with these streams is an inflow on the Operating section of the Cash Flow statement.  Not just the upfront payments are going out Investing and in Operating, but the actual crop purchases are as well, I'm not really sure how they are doing this.  They must be making the actual purchases in an advance period as well, which doesn't make sense from everything they've said.  The only cash outflows for Canola in the Operating section are from trading activities, absolutely $0.00 from Canola streams. 

Even if their accounting was above board, operating cash flow is a useless metric for this company taken by itself.  Input uses it as a management benchmark and touts it in presentations.  It would be like a capital intensive business using operating cash flows as a key metric and completely ignoring CAPEX.  They also invented a non-IFRS metric 'cash operating margin' that is equally as useless.
« Last Edit: March 09, 2015, 08:15:16 PM by Otsog »
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AAOI

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Re: INP.CVE - Input Capital
« Reply #13 on: March 10, 2015, 10:49:05 AM »
I did some work on Input after seeing AAOI's posts and ended up passing for now. I never like stock promotion/hiring IR firms but it's usually not a deal breaker and I do like Input's business model a lot. I mainly passed because the valuation--I think a whole lot of future growth is priced in and that is far from guaranteed. I like companies that are cheap today with expected growth as a bonus. AAOI's valuation and expectations seemed incredibly optimistic to me.

In 3Q15 they deployed $16.874M into 25 new streams for 74,197 base tons. That's 74,197MT / 25 streams / 6 year avg contract = 495MT/stream/yr. They currently have 42 streams total but let's say they get to 200 streams producing 500MT/yr at $150 gross profit/MT. If half of gross profit falls down to EBITDA that's only $7.5M/yr in EBITDA vs a current enterprise value of $160M. You can argue different assumptions and change numbers but in my eyes it's not even in the ballpark of cheap.

Travis,

I'm having a hard time understanding where your coming from and making heads or tails of your math. For example, why do you say a ton of growth is priced in? Are you assuming the excess cash (both internally and on the balance sheet) won't get put to work at 20%+ IRR's? At any rate, the price relative to Inputs normalized earnings power (based on its existing asset base) is cheap no matter which way you slice it.

Just trying to get a better feel for where your coming from.

In terms of your example, your unit economics arent making sense to me. If I'm I reading you right your using the capital deployed in December - a month mind you that has historically fallen outside capital deployment season altogether - as if that will be the only capital deployed this year? Perhaps I'm just being dense but I'm totally lost.

You mind laying out your reasoning so I'm sure I'm understanding you correctly?

Thanks!

AAOI

« Last Edit: March 10, 2015, 11:18:08 AM by AAOI »

Travis Wiedower

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Re: INP.CVE - Input Capital
« Reply #14 on: March 10, 2015, 11:25:22 AM »
I was simply using the most recent deployment to show what a typical stream looks like (495MT/yr) and then using that number (I rounded it up to 500) to look at what kind of EBITDA they can get to if they reach 200 streams just like those.

Assuming all excess cash gets reinvested at 20+% is part of where I think you're being very optimistic. I like the business model a lot and it seems to be a win-win for all parties involved, but it's hardly been proven. While only having 42 streams right now provides a very long runway for growth, it also is a very small sample size. And if the model provides the returns management promises over a longer period there will be competitors to beat down their margins. This business does not have a real competitive advantage.

I haven't spoken to management and I only spent a few days on this company, so I have no doubt you know it better than I do. Do you mind giving a simple back-of-envelope valuation that makes you think it's so cheap based on its current streams?
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AAOI

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Re: INP.CVE - Input Capital
« Reply #15 on: March 11, 2015, 02:45:55 PM »
Gent's,

See below for my thoughts on all your questions. Would have responded sooner but I had to wait for a response from management on the options question given how hectic the last few days have been (didn't have the time to pull up all their filings and go through each one by one). In any case, feel free to fire back if what's below doesn't satisfy your concerns - as always, happy to delve deeper if necessary.
 
"The volatility assumptions in their options accounting seem too low."
 
Response: The early volatility assumptions were based not on stock price volatility (because the company was private and/or there was extremely limited trading history), but on the historical price volatility of canola itself.
 
Currently, the volatility of the stock is in the 40% to 50% range.  The company uses the following tools to calculate this: http://www.stockvantage.com/solium/servlet/VolatilityCalculator.do. Regardless, after thinking it through their initial rationale doesn't bother me a bit.
 
"Their financials sort of state how much the company spends on "investor relations" and travel expenses.  It's high but I suppose it's not truly excessive like some of the other companies on the TSX Venture (e.g. Barkerville)."
 
Response: Advertising and investor relations are lumped together in note 12. 2014 is indeed higher than 2013. This is because of Input's marketing program rather than due to a large increase in investor relations costs. As I was getting at in my initial response to Glen, Input’s investor relations costs will not necessarily increase at the same pace as the balance sheet; as it is essentially a fixed cost driven by the need to visit analysts and investors over the course of any given year. In other words, investor relations costs are stable and should continue to be.  Advertising to farmers is what is ramping up, and that's as it should be given a TINY fraction of potential partners (farmers) in western Canada are even aware of the product at this point. And the sooner awareness spreads, the faster education driven market adoption kicks off. That said, eventually awareness will spread to the point where marketing spend will become unnecessary/normalize relative - its about maximizing "mind share" as Buffett would say.     
 
"Various comments re: “I never like stock promotion/hiring IR firms”"
 
Response: Input's logic with respect to Streetwise is that they wanted to raise the profile of the business in some venues where they we're not well equipped to do so on their own. Generally, they are skeptical of sponsored IR stuff too, but they believe it can play a role where necessary. Again, management is in the testing stage in terms of deciphering the best/most capital efficient ways to educate both farmers and investors, so "optics" in this regard takes a back seat to results - the plan now is to try a variety of promising channels - test and measure - then refine as they get a feel for what works best. So to read into it some sort of shadiness on the part of management is wildly off base as I see it. 
 
"My Dad asked me to look at these guys ~a year ago after seeing them on BNN.  I forget the actual numbers, but the market valuation on the Canola interests was nuts. Looking at it again it is still nuts.
 
Very rough #s
48 canola interests + 61 cash & equiv - 7 ap = 102 net assets
215 market cap - 54 non-canola interests = 161 / 48 canola interests = 3.35
 
Are their canola interests really worth 3.35 what they paid for them? Within such a short time frame from acquisition?"

 
Response: I get the logic as far as your 3.35x multiple relative to what Input paid for the stream. Your essentially doing a price to book value multiple here, the only difference being I see no problem with that at all. In other words, that's exactly how it should be as any capital efficient business with the ability to generate sustained ROIC/ROE's of 20%+ should trade at 3x to 4x book pretty much by definition (for example see Bill Ackman's commentary on the topic in relation to where his new permanent capital vehicle should trade).

At any rate, here are a few thoughts on that:
 
Because Input carries the canola interests at cost, there will be an inherent bump in the multiple since the streams should be worth more than cost else Input would not enter into a streaming contract in the first place.
 
Input’s stock price, like most streamers and inherently capital light business models, are driven by cash flow multiples rather than a multiple of book value. For example, if you look at Silver Wheaton, their balance sheet has $4.3 billion of silver and gold interests and total assets of $4.6 billion. If you do the same math ($4.6 total assets less $1.0 billion of debt = $3.6 billion net assets, and divide through their $8.6 billion market cap I get a number that looks like 2.4x). Keep in mind SLW common is depressed from a recent disastrous financing. Nonetheless, if you look at their usual ~$10 billion market cap, that multiple looks like 2.8x, which makes sense. As an aside, the only analyst covering Input who uses book value as the key driver of the share price is Steven Salz of M Partners, who actually has the highest target price on the stock. Make what you might out of that.

Point being, why you have a problem with the multiple expansion that occurs when cash is swapped out for a growing, high margin annuity like revenue stream eludes me. Again, that's exactly as it should be.
 
"Also, their cash flow from operations smells fishy.  Their Q3 operating cash flow of 6.8 has 5.5 added back from realization of canola interests. In notes 7 and 11 you can see this is 4.3 return of upfront payments and 1.2 return of crop payments. The problem is that the purchase of canola interests goes through investing cash flow. It would be like a retailer taking inventory purchases out of investing cash flow while adding back cogs to operating cash flow. Really take a good look at note 7 of their Q3 report and match it to their cash flow statement."
 
Response: When Input enters into a streaming contract, it commits a defined amount of capital to the farmer, most of which is usually paid upfront. Both the upfront payment and the crop payment (the amount paid to farmer upon delivery), are therefore both treated as an acquisition of canola interests when the cash is paid.

For example, if $100,000 is paid today as the upfront payment, it will hit investing cash flow as an acquisition of canola interests. When the farmer delivers the canola in year one, and Input makes another $15,000 payment (for example), that goes through the investing cash flow and hits the income statement as COGS. The realization of the upfront payment is also COGS. COGS is then broken out between realization of upfront payments and crop payments in note 11.
 
Regarding adding back the realization of canola interests to operating cash flow:
 
1. The realization of upfront payments ($4.3 million for nine months) is the equivalent of adding back depreciation or amortization. This is a non-cash item that comes out of net income and therefore gets added back.

2. The realization of crop payments ($1.2 million for nine months) is taken from cash flow on page 22 of the MD&A to calculate adjusted cash flow. This is the cash flow figure that, in Input's (as well as my own) opinion, that is most representative of the actual cash generating power of the model, which is of course most analysts use it when applying a cash flow multiple to the business.

All that said, here are the basic mechanics of a canola stream where Input is paying $1,000 upfront payment for 10 tonnes per year for 10 years with a $10 crop payment (split $5 in spring upon seeding, the other $5 upon delivery):

(apologies on the formatting)

1) Upfront payment:

          a. Balance sheet -- Canola interest, current: $100 (the one tenth of the contract that is owed this year)

              Canola interest, long-term: $900 (the remaining portion of the contract)

              Total canola interests for this contract: $1,000

          b. Cash flow -- Investing cash flow: $1,000 (amount of upfront payment)

 
2)    Year 1 - Spring portion of crop payment ($5 per tonne x 10 tonnes owed = $50):

           a. Balance sheet -- Canola interest, current: $150 ($100 of the prior canola interest plus the $50  spring crop payment)

           Canola interest, long-term: $900 (unchanged)

            Total canola interests for this contract: $1,050

            b. Cash flow --  Investing cash flow: $50 (amount of spring crop payment that is considered an investment to canola interests)

 3) Year 1 - 10 tonnes of canola is received and sold for $450 per tonne, triggering final $50 delivery crop payment:

            a. Balance sheet -- Canola interest, current: $200 (at this point we will assume this is the instant that the canola has been delivered and the remaining $50 delivery crop payment is triggered. Therefore Input is looking at $100 of prior canola interests + $50 spring crop payment + $50 delivery crop payment)

            Canola interest, long-term: $900 (the remaining portion of the contract)

            Total canola interests for this contract: $1,100

            Assuming the canola has now hit the bottom of the bin and Input is receiving its cash ticket for the canola delivery ….

            Canola interest, current: $0 (both the upfront portion and the crop payment portion have been realized due to the delivery; it        has now been delivered, and will be “realized” or “amortized”)

            Canola interest, long-term: $900 (the remaining portion of the contract)

            Total canola interests for this contract: $900

            Once Input moves into next year, the next $100 will be taken from the long-term portion to current portion and cycle will repeat

            b. Inc. statement -- Revenue: $4,500 (10 tonnes x $450)

            Realization of canola interests (upfront payment): $100 (again, this is just a “realization” or “amortization” of an asset)

            Realization of canola interests (crop payment): $100 ($10 per tonne * 10 tonnes, paid to farmer)

            c.    Cash flow -- Investing cash flow: $50 (this is the delivery crop payment, which then gets immediately realized as it is fully realized, along with the other $150 current portion of the streaming contract)

Make sense?

I guess I just don't see the issue here. At the same time, its possible I could be missing (or not properly appreciating) something here. And I'm always paranoid about being wrong no matter how confident I am that I'm in fact right. Anyhow, this is a long winded way of asking you to be a little more specific vis a vis your reasoning here, if only so I know I fully understand the "rational walk" if you will behind why this accounting treatment bothers you. After all, purposefully seeking out and listening to thoughtful disagreement is a big reason I started my blog/posted my Input write-ups to it in the first place.

Thanks in advance for taking the time!

And last but not least...

"Even if their accounting was above board, operating cash flow is a useless metric for this company taken by itself.  Input uses it as a management benchmark and touts it in presentations.  It would be like a capital intensive business using operating cash flows as a key metric and completely ignoring CAPEX.  They also invented a non-IFRS metric 'cash operating margin' that is equally as useless."


In all sincerity, why again do you feel their accounting is not "above board"? In other words, what am I missing and why in your opinion should I be more concerned about it? Capex is accounted for by amortizing the upfront payments as they are given over the life of the contract, which is of course non-cash. What's the problem. 

Again, I could be missing something but at this point I see nothing wrong with their use of "adjusted cash flow from operating activities" (non-IFRS) as it seems to me to be far and away the most effective way to look at Input's business performance. At a high level, it is comparable to EBITDA. However, because cash flow from operations inherently adds back all realization of canola interests (both the realization of the upfront payment and the crop payment), adjusted cash flow from operating activities then subtracts the crop payment portion of the realization of canola interests to provide a more accurate gauge of business performance and true cash flow generating ability. It's not like they don't take into account the fact that the crop payment portion of realization of canola interests is included in cash flow from operations by subtracting it in the calculation. That is the only adjustment, a downward adjustment, to the metric.
 
That, and its not like a capital intensive company doesn't depreciate their assets as they are used. A million dollar piece of equipment with a ten year useful life will be depreciated over ten years. That depreciation will be taken out of EBITDA and operating cash flow as it is non-cash.
 
Point being, cash operating margin compares Input’s realized selling price per tonne to Input’s crop payment per tonne, allowing management and investors to understand the direct cash flow of buying and selling one tonne of canola. This is commonly used across the streaming industry and it is a preferred metric with management. I guess I'm at a loss as to why it shouldn't be. Which is why I'd like you to school me on what I'm missing if I am in fact missing something.
   

AAOI

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Re: INP.CVE - Input Capital
« Reply #16 on: March 11, 2015, 03:34:36 PM »
My Dad asked me to look at these guys ~a year ago after seeing them on BNN.  I forget the actual numbers, but the market valuation on the Canola interests was nuts. Looking at it again it is still nuts.

Very rough #s
48 canola interests + 61 cash & equiv - 7 ap = 102 net assets
215 market cap - 54 non-canola interests = 161 / 48 canola interests = 3.35

Are their canola interests really worth 3.35 what they paid for them? Within such a short time frame from acquisition?


Also, their cash flow from operations smells fishy.  Their Q3 operating cash flow of 6.8 has 5.5 added back from realization of canola interests. In notes 7 and 11 you can see this is 4.3 return of upfront payments and 1.2 return of crop payments. The problem is that the purchase of canola interests goes through investing cash flow. It would be like a retailer taking inventory purchases out of investing cash flow while adding back cogs to operating cash flow.

Really take a good look at note 7 of their Q3 report and match it to their cash flow statement.

Net/net,

Although I disagree somewhat with your accounting, I do agree that they are over priced.

I don't think that the accounting is fishy.  This is from memory, and I'm not so interested in the name as to work back through my notes, but basically they properly have to account for streaming transactions through both operation and the investing CF statement.  That is okay, it's just accounting rules.  Furthermore, the assets are worth more in that they have created a stream that is a producing asset. 

You are absolutely right in that the market value of the company and therefore those assets is way to high.  There is zero margin of safety and no particular barriers to entry that I can see.  (Although farmers can be conservative and tend not to change.) An aggressive bank up there on the prairie could look at that market and decide to own it.  At half the price, the name would be worth looking, but not where it is today. (They do get style points for creating a new market niche though.)

It looks like we agree on the accounting but I think your wildly off base in terms of the valuation (fwiw, if memory serves, my entire position was accumulated between $1.59 and $2.10 - that said, I still thing the stock is cheap relative to its normalized earnings capacity based on the capital it's raised to date - said another way, purchasing Input at or around today's price should result in a low risk double over the next 18 to 24 months assuming the multiple expands to a level that amounts to a slight discount to other streamers, an assumption I view as conservative given I think Input's model is superior all things considered) as well it relates to barriers to entry.

For what its worth, with every investment I make I typically insist on developing one or more original insights that the market hasn't caught on to yet. Usually of the qualitative variety. In any case, I spent ~4 months studying this issue w/r/t Input before buying a share. The result of all that digging surprised me in that my initial premise was that the market was so big relative to the dozen streams on the books (at the time), it would be a looong time before a couple of players operating in such a massive market would become an issue (read; the point where you would see downward pressure regarding the economics of new streaming contracts). Furthermore, given where the business was/is in terms of its long-term evolution/its incredibly small base of streams it would be building from, where talking about a business that would likely be 20x its current size before such worries would come to fruition. In other words, originally I viewed it as a rather good problem to have if you follow me. As the arrival of pricing pressure would mean the model was massively successful and thus, by that point an investment in Input would almost certainly have generated exponential returns on my invested capital. 

The thing is, the more I started to peel the onion, the more I realized how sizable the barriers to entry in this business actually were. In fact, a large part of the final write-up deals with exactly this issue (along with just how mind bogglingly inefficient Canadian farming is relative to the U.S. for example - the productivity gap is wide enough to drive a truck through and it will take a decade or more of consolidation - along with companies like Input helping these small farmers to optimize their farming operations - at least, for that gap to close to any meaningful degree). So if I were you I'd go back and reread part 3, then study part 4 when it comes out (plan is to do it once capital deployment season is complete), as I'll be outlining a myriad of very specific points that in combination create what I believe to be a relatively wide and durable competitive advantage.

Of course if time proves me wrong and the barriers to entry are indeed as low as you seem to think, I believe, for good reason (hate to be that guy but I'm not going to elaborate until part 4 is posted) that it will take at least 3 to 4 years before another viable competitor could be created. And a heck of a lot of value could be created between now and then. Of course I should add that even with another competitor, it's not like it's a slam dunk to conclude that 2 ag streamers = worsening economics anyway, so I'd humbly propose you might want to take another look with an eye towards discerning the issue in greater detail. Hunch is you'll come away with a different point of view.     

In sum, If I'm write about the moat, I win...if I'm wrong, odds are still very good I'll win regardless. And head I win tails I don't lose setups are what its all about are they not?

Anyway, appreciate the commentary. Look forward to digging into the specifics at some point soon!

AAOI   

AAOI

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Re: INP.CVE - Input Capital
« Reply #17 on: March 11, 2015, 03:48:08 PM »
Fair enough. I'll be the first to admit I got my ass handed to me with SND. I mean what can I say? LITERALLY everything that could have gone wrong, did go wrong and I lost money because of it.

Sh*t happens. 

Regardless, is it fair in your mind to insinuate that because I had high conviction in SND there's a good chance I'll be wrong with Input? You realize how specious of a comparison that is right?

Hi Ryan, I did not mean to offend you.

To clarify about Sandstorm Metals and Energy:
1- Part of the game they were playing is (constantly) selling stock at inflated prices.
2- In my opinion, it's hard to create value out of financial engineering.  If you make a lot of money on a streaming deal, that means your counterparty paid a lot for the financing that they received.  Usually in the real world, the counterparties and rational and only take expensive financing if they are in big trouble.
3- It turns out that they invested in a lot of projects with really bad economics.  Was it because of adverse selection or was it because they didn't do due diligence?  It's unclear.  Given that they didn't seem to have a lot of engineering staff, it could be a lack of due diligence.  However, back in 2011 when equity prices were really high, anybody with a good project could get "cheap financing" by selling themselves to a senior miner at a very high valuation (because the senior could pay for the acquisition in stock).  So even if they had done their due diligence like a senior miner would, it is unlikely that they could have funded anything at attractive terms.

Or maybe they just got unlucky due to falling commodity prices (which would not explain why Sandstorm's investment in Donner went sour).  Certainly I wouldn't blame them for falling commodity prices.  But if commodity prices did not fall a lot, I think they would have had a lot of situations like Donner Metals.

Anyways, there may be a few parallels between Sandstorm and Input given that:
A- Both do financial engineering.  (From my point of view.)
B- They both trade(d) on the TSX Venture, which I regard as a stock exchange filled with garbage.

----------------
The more I dig, the more this looks dubious.

1- The CEO of Input currently runs two different companies.  One is a private firm (Security Resource Group) that doesn't seem to have anything to do with finance or agriculture. 

He is/was also involved in Assiniboia Cap and the farmland fund it ran.  He is kind of a part-time CEO who gets paid half a million for the job.

2- Input may or may not be a client of smallCapPower.com

https://twitter.com/AssiniboiaCap/status/554453520787996673
Top Technical Breakout Stocks: @InputCapital (TSXV: INP) and Arena Pharmaceuticals (NASDAQ: ARNA) Break 200-DMA http://ow.ly/H918B

3- They issued a press release highlighting their shills.  To me, this makes them a fairly obvious short.

http://investor.inputcapital.com/news/Press-Release-Details/2013/Fundamental-Research-Initiates-Coverage-on-Input-Capital-with-a-Buy-Recommendation-Video-Research-Alert-on-InvestmentPitchcom/default.aspx

4- The directors pull in around $200k each.  (The value of their options are disputable.)

Quote
not to mention above board in terms of ethics and integrity in every way

I guess we'll disagree.

I wish you the best of luck on your position.  I have no position.

Glen,

Appreciate the response and clarification. I've run out of time today as far as fielding questions but I'll circle back with my thoughts on your points at some point within the next few days. That being said, I'll leave you by saying you should look at Input's ability to create value for its partners/shareholders much along the lines of what distinguishes a great private equity firm these days (3G comes to mind). Meaning, the real value is created not through financial engineering (so not through the ability to access low priced debt or by playing multiple arbitrage) but through post LBO operational improvement (except in this case their is no LBO so to speak...I'm sure you get my point though). In other words, the model's success will largely be about helping farmers optimize their hugely inefficient farming operations by implementing best practices (harvesting low hanging fruit if you will) and adding value around the edges with their trading ops etc. etc. Just something to keep in mind until I get around to addressing your questions.

AAOI

AAOI

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Re: INP.CVE - Input Capital
« Reply #18 on: March 11, 2015, 03:55:09 PM »
I was simply using the most recent deployment to show what a typical stream looks like (495MT/yr) and then using that number (I rounded it up to 500) to look at what kind of EBITDA they can get to if they reach 200 streams just like those.

Assuming all excess cash gets reinvested at 20+% is part of where I think you're being very optimistic. I like the business model a lot and it seems to be a win-win for all parties involved, but it's hardly been proven. While only having 42 streams right now provides a very long runway for growth, it also is a very small sample size. And if the model provides the returns management promises over a longer period there will be competitors to beat down their margins. This business does not have a real competitive advantage.

I haven't spoken to management and I only spent a few days on this company, so I have no doubt you know it better than I do. Do you mind giving a simple back-of-envelope valuation that makes you think it's so cheap based on its current streams?

Travis,

Ahh, copy that.

On the competitive advantage angle, stay tuned for part 4. That being said, I'll happily shave my head and post a picture to this board if 1) another major competitor arrives and 2) Input experiences margin pressure within the next 5 years. In other words, this isn't a conviction lightly held - rest assured me with a shaved head isn't a good look so to speak :) 

For sure on the unit economics, you'll have to give me a day or two as I've already spent way too much time today fielding these questions.

Till then!

AAOI

Otsog

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Re: INP.CVE - Input Capital
« Reply #19 on: March 11, 2015, 10:12:16 PM »
"Even if their accounting was above board, operating cash flow is a useless metric for this company taken by itself.  Input uses it as a management benchmark and touts it in presentations.  It would be like a capital intensive business using operating cash flows as a key metric and completely ignoring CAPEX.  They also invented a non-IFRS metric 'cash operating margin' that is equally as useless."


In all sincerity, why again do you feel their accounting is not "above board"? In other words, what am I missing and why in your opinion should I be more concerned about it? Capex is accounted for by amortizing the upfront payments as they are given over the life of the contract, which is of course non-cash. What's the problem. 

Agreed, but that is only reflected on the Income Statement.  The Cash Flow Statement or an adjusted cash flow metric is 100% useless for analyzing this company. 

Again, I could be missing something but at this point I see nothing wrong with their use of "adjusted cash flow from operating activities" (non-IFRS) as it seems to me to be far and away the most effective way to look at Input's business performance.

Input could lose money on every single contract for their entire terms and still have positive operating cash flow and huge cash operating margins.  Cash Flow metrics don't reflect the reality of their operations at all.  The fact that cash flow metrics are a large part of management's presentations and disclosures is a huge red flag to me.

At a high level, it is comparable to EBITDA. However, because cash flow from operations inherently adds back all realization of canola interests (both the realization of the upfront payment and the crop payment), adjusted cash flow from operating activities then subtracts the crop payment portion of the realization of canola interests to provide a more accurate gauge of business performance and true cash flow generating ability. It's not like they don't take into account the fact that the crop payment portion of realization of canola interests is included in cash flow from operations by subtracting it in the calculation. That is the only adjustment, a downward adjustment, to the metric.

These contracts are only 6 years long though, those upfront payments are deteriorating very quickly.  Quickly enough for a metric that doesn't include their depletion is useless.  Also, any reliance on this metric gives management a pretty easy way to dupe investors.  Say all the low hanging fruit is gone and terms on contracts are getting tighter, management can easily manipulate this metric by increasing upfront payments so their cash flow metrics will say whatever management wants them to say. 

That, and its not like a capital intensive company doesn't depreciate their assets as they are used. A million dollar piece of equipment with a ten year useful life will be depreciated over ten years. That depreciation will be taken out of EBITDA and operating cash flow as it is non-cash.

Any CAPEX business that touts operating cash flow without accounting for CAPEX raises an immediate red flag.  It's not as obvious with Input because it's not CAPEX.

Point being, cash operating margin compares Input’s realized selling price per tonne to Input’s crop payment per tonne, allowing management and investors to understand the direct cash flow of buying and selling one tonne of canola. This is commonly used across the streaming industry and it is a preferred metric with management. I guess I'm at a loss as to why it shouldn't be. Which is why I'd like you to school me on what I'm missing if I am in fact missing something.

Cash operating margin absolutely does not show the relation between buying and selling one tonne of canola. I think slide 14 of the presentation in the OP shows best my issue with Input.   The upfront payments are not buying a "stream", all of managements points on slide 14 to show how "Ag streaming" is different from metals streaming actually just show how "Ag streaming" isn't actually streaming.  The Base Tons in the contracts are just prepaid inventory or commodity loans and have nothing to do with streaming.  The Bonus Tons are far more characteristically streaming.  Input's use of the same accounting for Base Tons and Bonus Tons is flat out misleading.  I think they are stretching pretty hard accounting-wise to justify FVTPL treatment on the entirety of the contracts.


Their pushing of cash flow metrics probably helps hide the fact that even stripping out all administration and professional expenses they are still not profitable and dangerously leveraged to a singe commodity.
                               
                                  9mo Q3 2014     YE2014         YE2013        Total
Gross Profit                  2,267,573     1,357,315           0            3,624,888
MV adjustments          -4,059,306   -2,056,671    -116,568     -6,232,545
                                                                                                  -------------
                                                                                                   -2,607,657





« Last Edit: March 11, 2015, 10:18:19 PM by Otsog »
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