Author Topic: INP.CVE - Input Capital  (Read 34891 times)

ItsAValueTrap

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Re: INP.CVE - Input Capital
« Reply #20 on: March 12, 2015, 10:28:55 AM »
after thinking it through their initial rationale doesn't bother me a bit.
It should. 

Their methodology is very dubious because it underestimated volatility by a wide margin.  Even before the stock started trading, it would have been reasonable to assume that the stock's volatility would be somewhere around 30-90%+.  Maybe as low as 20% if you get generous.  To guess that future volatility would be as low as 13.3% strikes me as unreasonable.  In comparison, a stock index might be somewhere around 13-18% and you would expect Input to have more volatility than a diversified index.

The bottom line is that they are greedy and not to be trusted.

As for the business itself, I don't get how it makes sense from an agricultural standpoint.  If insiders are trying to harvest investors, then what they're doing makes a lot of sense.  But I don't see the value creation.  I think the path to very high returns in agriculture is to do something like:
A- Sell management services / offer contract farming services.  Given that most people on the Input Capital staff don't have ag backgrounds, it is unlikely that they are doing this.
B- Become an asset manager.
C- Sell some type of technology like seeds (Monsanto), etc. etc.

Agriculture has been around for a long time.  Ag financing has also been around for a long time.  I doubt that Input has come up with a game-changing piece of financial engineering.  There are reasons why people don't want to trade canola futures contracts with a 6-year maturity.
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AAOI

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Re: INP.CVE - Input Capital
« Reply #21 on: March 15, 2015, 05:25:09 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,

As far as Sandstorm, that's a topic for another day but what went down there was far more nuanced then the gross oversimplification laid out above. In fact, the Donner story is worthy of a post in and of itself given a) had it worked out as planned the SND saga would resulted in a very different outcome and b) it's failure was almost entirely due to nefarious actions by Glencore Xstrata, a fact you'd only know if you were as close to the situation as I was. In any case, in my opinion an intellectually honest post mortem tosses SND in the good process, bad outcome bucket.

All that said, here are some more thoughts to your comments.

Q. 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. 
 
A. Actually, he is the Chairman of SRG, a company he founded. I haven't looked into it much as he is not actively running the company, as you comment implies.
 
Q. Input may or may not be a client of smallCapPower.com
 
A. Input is not a client of SmallCapPower – management has never heard of them.
 
Q. 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
 
A. Here is management's direct response - "That’s a strange one because it isn’t our press release.  We only issue press releases via CNW.  I think it got swept onto the website in the web redesign because it was in some feed of some kind.  We did hire Fundamental to write an independent report on us back then because we didn’t expect to have any other coverage.  Turned out we were wrong about that, and the Fundamental coverage period ends soon."
 
Q. The directors pull in around $200k each.
 
A.  More false accusations casually tossed around as if you don't have a responsibility to actually verify them by doing real work before lobbing them out there. Anyhow, if you actually read the MIC and AIF you will see that the directors are paid $70,000 per year each, plus $8,000 extra if they chair a committee.  All have elected to be paid in DSUs, which means that none of them has yet received a dime in cash. Kind of important details to get wrong don't ya think?   

In sum, every one of your bullet points is wrong upon further investigation. And like I said, I think you'll change your mind if you actually take the time to roll your sleeves up and dig into the company yourself. 

AAOI

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Re: INP.CVE - Input Capital
« Reply #22 on: March 15, 2015, 05:58:13 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

Otsog,

Thanks a ton for the detailed response. I will definitely discern everything you've said some more. That said, you realize that Input has no control over how IFRS rules in terms of derivative accounting force them to account for their steams no?

In other words, if the accounting strikes you as off base, your issue is with IFRS, not with Input. And as far as Input's non IFRS measures, all Input has done is basically copy Silver Wheaton's non IFRS measures because they're helpful in drawing attention to the actual cash economics of the business.

For example, here is managements response to one of your earlier q's. 

"Q. "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." 
 
A. This is a good observation.  But nothing weird on purpose.  It is a reality of the derivative accounting that we are forced into by IFRS.  The accounting for these contracts way overcomplicates the business, which is actually quite simple.  All payments to farmers are considered Investing Activities by IFRS because they add to our Canola Interests.  That’s why there is no “cost” to the canola streams.  And why we had to develop a bunch of non-IFRS stuff to show how the business really works.  Much of the non-IFRS stuff is similar to Silver Wheaton non-IFRS measures so comparisons can be made."

Furthermore, after forwarding on the rest here was their solid (as usual) response...

"Ryan,
 
Without trying to spend too much time appeasing a skeptic, I would answer all of these questions with a view towards our historic gross margins. Gross margins take into account both the realization of upfront payment and crop payment and show a true snapshot of contract metrics without taking into account time value.
 
If we use the last financial statements:

(See attachment for formatting purposes)

If you then consider that realization of upfront is non-cash then it shows the true cash-generating power of the business.
 
If you want to account for the fact that this is a “capital intensive” business (with very low overhead), then you can look at gross margins since each tonne sold is directly attributed to canola interests the balance sheet.
 
Interesting to note, is that if canola prices went up, the realization of upfront payment would be greater since MTM of canola interests would be up, but we should make more revenue in that scenario too.
 
At the end of the day, the business is cash flow positive. I understand the skepticism of a new business model, and the guy seems to have some technical financial background, but I’m at a bit of a loss for what he is trying to get at here. Our view is that IFRS does not reflect the reality of the business very well, so we’ve created some non-IFRS measures to help investors understand what we think is important.  There’s no attempt on our part to stretch accounting – if he doesn’t like the non-IFRS measures, he is free to ignore them."
 

So that's their take, one I happen to still agree with but thanks again for taking the time to articulate your point of view. As with all great devils advocacy, I've walked away with my understanding of things crystalized and will definitely keep an eye on it going forward. As always, time will tell in the end.

Best,

AAOI

 

ItsAValueTrap

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Re: INP.CVE - Input Capital
« Reply #23 on: March 15, 2015, 06:03:26 PM »
We did hire Fundamental to write an independent report on us back then because we didn’t expect to have any other coverage.
(emphasis mine)

I suppose we strongly disagree on a lot of things.  In any case, I wish you the best of luck.  I have no position in this.
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AAOI

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Re: INP.CVE - Input Capital
« Reply #24 on: March 15, 2015, 07:25:56 PM »
after thinking it through their initial rationale doesn't bother me a bit.
It should. 

Their methodology is very dubious because it underestimated volatility by a wide margin.  Even before the stock started trading, it would have been reasonable to assume that the stock's volatility would be somewhere around 30-90%+.  Maybe as low as 20% if you get generous.  To guess that future volatility would be as low as 13.3% strikes me as unreasonable.  In comparison, a stock index might be somewhere around 13-18% and you would expect Input to have more volatility than a diversified index.

The bottom line is that they are greedy and not to be trusted.

As for the business itself, I don't get how it makes sense from an agricultural standpoint.  If insiders are trying to harvest investors, then what they're doing makes a lot of sense.  But I don't see the value creation.  I think the path to very high returns in agriculture is to do something like:
A- Sell management services / offer contract farming services.  Given that most people on the Input Capital staff don't have ag backgrounds, it is unlikely that they are doing this.
B- Become an asset manager.
C- Sell some type of technology like seeds (Monsanto), etc. etc.

Agriculture has been around for a long time.  Ag financing has also been around for a long time.  I doubt that Input has come up with a game-changing piece of financial engineering.  There are reasons why people don't want to trade canola futures contracts with a 6-year maturity.

Glen,

No, it shouldn't. I've known and interacted with a legion of management teams over the years, and I can count the number of teams on my right hand that have impressed me as much, in as many different ways, as these guys have over the last couple of years. They are about as candid and strait shooting as it gets. In fact, I have two close friends (both of which are highly respected investors) who where private investors in Input prior to the company going public, and they would tell you much the same thing. So the idea that all of us have been duped in our various interactions is just silly in my mind. I know an unusually talented executive when I see one. Furthermore, the idea that these guys are just a bunch of pump and dumpers backing some pie in the sky promote is truly preposterous. Regardless, who know's how successful Input will be in the end, but as businessmen they have earned my respect and then some. Their track record speak for itself. 

That, and how you can swing from Bill Erbey's balls and defend him and various members of the Ocwen family like you did with literally zero personal interaction with the man and yet crucify these guys based on a bevy of superficial charges just doesn't compute. One would think you'd be an equal opportunity skeptic. Better yet, you'd think your skepticism would be based less on superficial google searches, where the stock trades, etc etc. and more on hard facts, rock solid reason and plenty of personal interaction. Not trying to be a jerk, just offering some constructive criticism/food for thought. 

As far as your commentary on agriculture and the industry writ large, again, no disrespect here but you are wildly out of your depth.

Input's value add has nothing to do with financial engineering and everything to do with pioneering something entirely different in a crop with huge yield upside if the agronomics are properly funded. This is a massive win/win for everyone involved and not a matter of getting over on a weaker party as you elude to in your comment about SND and the nature of streaming deals in general. Regardless, they'll be the first to tell you they're happy to have skeptics – it means they can get on board later when the stock is higher.
 
As stated in my first 3 write-ups, small changes at the margins make a big difference in agricultural economics.  A 5% increase in realized prices, a 5% increase in yields, and a 5% decrease in expenses increases profits by 310%. Which is a different way of illustrating that the return on capital for these farmers is massively in excess of the cost.
 
http://www.agadvance.com/web-articles/business/blog-mar-2015/the-5-rule-%E2%80%93-a-little-tool-with-exponential-effects.aspx

Input drives value much in the same way that Malone or Lampert go about using a multi pronged approach to drive sustained periods of exponential compounding in the equity of the company's they control - it's not any one lever or another that does it, but all of them in combination drive the intended result.   

The key for example with all Lampert controlled businesses, was his ability to rapidly shrink the share count while driving substantial improvements in net margin and healthy revenue growth (with the former objectives being much more important than the latter). At Autozone for example, revenues grew at almost 6% a year, but the real drivers were his ability to grow AZO’s net margin from 5.6% to 10.9% while shrinking the shares outstanding by a whopping 71%. You know as well as anyone how Malone works his magic.

In any case, the blueprint for Lampert typically looks like this. Pillar number one aims to modestly grow revenues. Pillar number two looks to expand net profit margins. And Pillar number three aims to rapidly shrink the share count as the first and second pillars play out. Individually these tactics help create value, but in combination they are far more powerful than any one of them alone over an extended time frame. And so in that sense it's akin to the value that Input helps create - it's not any one individual thing that Input does that supercharges a farmers economics, but all of them together, over a period spanning a number of years, that changes the game for him and his individual financial situation.

Sorry for the repetition above...I only mention it because its analogous in a way that might pique your interest (and break through your prejuidices) given all the great work you've done on Malone in the past. And remember, these guys spent nearly a decade running the first private equity fund in Canada focused on farming. You think owning and renting ~115,000 acres of Saskatchewan to farmers and working side by side with them, boots on the ground, might have given them some unique insights into how to run a small farm right? I mean there is no management team in Canada (or in the world for that matter) that has spent as much time or money focusing on how to optimize undermanaged/inefficient farming operations as these guys have. Which is why the idea that these guys are just financial engineers is truly laughable. Sure, there are plenty of financial engineers in investment banking land up north - but private equity guys with the relevant operating and domain expertise...not so much.   

AAOI

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Re: INP.CVE - Input Capital
« Reply #25 on: March 15, 2015, 07:36:39 PM »
We did hire Fundamental to write an independent report on us back then because we didn’t expect to have any other coverage.
(emphasis mine)

I suppose we strongly disagree on a lot of things.  In any case, I wish you the best of luck.  I have no position in this.

Ha! Boom! Clearly you've found the smoking gun!! Check mate. (sarcasm mine)

I have a big position in this.
« Last Edit: March 19, 2015, 08:03:00 PM by AAOI »

ItsAValueTrap

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Re: INP.CVE - Input Capital
« Reply #26 on: March 16, 2015, 12:02:17 PM »
Ryan, I think you and I have very different interpretations of the hard facts, figuring out when management is BSing you, and the value of meeting with management.
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AAOI

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Re: INP.CVE - Input Capital
« Reply #27 on: March 16, 2015, 11:12:00 PM »
Ryan, I think you and I have very different interpretations of the hard facts, figuring out when management is BSing you, and the value of meeting with management.

Yes, that's becoming clear to me now.

To be clear, I totally empathize with the concerns as experience has taught me that these things can point to larger issues that can be easy to miss. Which is of course why it's always good to take a step back and carefully think through whether managements actions/comments downplaying the issue really hold up to careful scrutiny. As a commenter on my blog once put it, "all CEO's are lying whores" (lol).

Regardless, while I'm not quite that sceptical as the commentator there is a lot of truth to his (and apparently your) point of view, incentives being what they are and all. At the same time, remaining skeptical in the face of overwhelming evidence that your initial concerns are off base is just as idiotic as the gullible analyst who gobbles up every word management speaks as gospel. Personally, I try to carefully weigh the evidence and derive a reasoned conclusion based on where the evidence shakes out. Anyhow, to paraphrase Keynes, when the facts as I understand them change, I change my mind. And the facts concerning this team speak for themselves. I mean it's ok to admit that you may have misjudged these guys - your concerns we're good ones - they just don't add up.

In any case, speaking of evidence and more importantly, incentives with respect to Input's management and the whole stock promote/pump and dump charge, I thought the CFO's response pretty much says it all. In fact, if there is such a thing as a "check mate" in this regard this is it.

"You’re right - it’d be pretty hard to actually look at the insider trading records for Input and think we are a bunch of pump & dumpers.  The collective current value of the shareholdings of the three co-founders is just over $28 million.  Plus another $5 million or so in vested, in-the-money options.  The last of our shares and options came out of escrow in January of this year, and if we were pump & dumpers, we’d be bound to have sold something by now.
 
Instead, we’ve all bought additional shares in every financing since we started the company – that means at $1.00, at $1.60 and at $2.30, plus we have a significant number of our family members who have bought shares with their own money, including my own mother.  Plus I believe that every employee has been a buyer of shares over the last year or so.  And the only options that have been exercised have been exercised with cash and without selling the resulting shares."

Of course maybe I'm just a gullible fool getting bullshitted by some clever con artists ;). I'm sure members of this board can come to their own conclusion.

Best of luck!

AAOI
 

ItsAValueTrap

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Re: INP.CVE - Input Capital
« Reply #28 on: March 22, 2015, 04:24:11 PM »
Hey does anybody have a copy of one of their streaming contracts?

Maybe this is a good short and I haven't picked up on it.  So how are these contracts actually structured?

- What is the counterparty risk?  What is the collateral for the contract?

- So if something terrible happens to canola crop in the area, what happens?  Is the former forced to buy up some canola (possibly at a very high price due to a local canola shortage) to meet the requirements of the streaming contract?

- Is the farmer incentivized to allow soil depletion to happen and let yields fall?
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AAOI

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Re: INP.CVE - Input Capital
« Reply #29 on: March 22, 2015, 07:00:19 PM »
Hey does anybody have a copy of one of their streaming contracts?

Maybe this is a good short and I haven't picked up on it.  So how are these contracts actually structured?

- What is the counterparty risk?  What is the collateral for the contract?

- So if something terrible happens to canola crop in the area, what happens?  Is the former forced to buy up some canola (possibly at a very high price due to a local canola shortage) to meet the requirements of the streaming contract?

- Is the farmer incentivized to allow soil depletion to happen and let yields fall?

Omg, just read part one and two of my write-ups on the details so you don't get your face ripped off like you have with Avid.

This will be more fun then when you were posting about shorting it at 6 while I was buying the shit out of it (Fyi, it's now at $15 and set to go higher). Short away!!