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General Category => Investment Ideas => Topic started by: 60°North Investments on March 07, 2015, 05:17:44 AM

Title: INP.CVE - Input Capital
Post by: 60°North Investments on March 07, 2015, 05:17:44 AM
Input Capital is a Canadian small cap ($215m mcap) that provides streaming contracts for canola farmers. As far as I know, Input is the first one adopting the streaming model in agriculture. The basic idea goes as follows: 1. a prepayment of the canola crop (about 80%) for the farmer, 2. farmer getting consultancy/help from an agrologist in order to grow canola more efficiently, 3. farmer grows the crop, 4. farmer delivers Input's part of the crop into an elevator and gets a price per tonnage that was agreed, 5. Input gets part of the upside when the farming has been made more efficient with the help of the agrologist, 6. cash flow gets reinvested into new streaming contracts. The timeline goes roughly so that Jan-Apr they deploy most of the capital and sell canola, May-Aug is for canola sales/marketing and logistics, Sep-Dec again canola sales and re-deploying capital. In each streaming contract they've said that they target at least 20% IRR.

It is a fairly new company and the model is yet to be truly tested in scale. In FY14 they did $3.2m in operating cash flow, and bought $25.8m worth of canola interests. As of Q3, they had done $6.8m OCF and bought $24.5m of canola interests, still having $56m in cash.

For the farmers this model gives valuable cash that enables them to for example take advantage of fertilizer discounts by buying off-season. They get the consultancy from the agrologist. And sometimes Input puts a clause in the streaming contract, giving the farmer more of the price upside in canola. For example, if canola price is $450 and the farmer thinks that fixing the price on that level leaves a lot of upside on the table. With the clause, Input might share the upside with the farmer if the price goes above, say, $500.

The management team seems to know what they're doing, and I like hearing them being not too greedy with farmers by trying to squeeze the final bits of upside from them. Insider ownership is currently 14% and 20% fully diluted.

Biggest risks I'm seeing with this are the unknown unknowns that I haven't figured out, being a young company with a new model, the risk of someone copying the model or something else happening that'd make it obsolete/unattractive for the farmers.

Above Average Odds has written extensive posts about the company here (http://www.aboveaverageodds.com/2015/01/24/input-capital-corp-inp-v-a-field-of-streams/), here (http://www.aboveaverageodds.com/2015/01/24/input-capital-inp-v-if-you-build-it-farmers-will-come/) and here (http://www.aboveaverageodds.com/2015/01/25/input-capital-inp-v-game-changing-inflection-point/), all worth a read. Input Capital's own presentations (February presentation (http://investor.inputcapital.com/files/doc_presentations/2015/150211-Input-Capital-February-Distribution-vF.pdf)) are also worth looking at, one can get a detailed picture from them.

I'm very curious to hear what the board says about the company and its model. I don't dare to throw in an estimate of value of the company before I have a better understanding of at what rates they're able to compound the cash flow, and how quickly they can deploy all of the available capital. I've got a starter position in this one and need to do more work to understand it better.

Disclosure: long INP.CVE
Title: Re: INP.CVE - Input Capital
Post by: ItsAValueTrap on March 07, 2015, 09:02:39 AM
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.
Title: Re: INP.CVE - Input Capital
Post by: 60°North Investments on March 07, 2015, 10:19:50 AM
Much appreciated Glenn! So far I had missed the hair that you brought up. I should've noticed that they were sponsoring something like that by doing a better Google search.

Out of curiosity, what would you say is a fair volatility assumption for a small cap like this? They've used 25-35%.

Quite a few of the companies that AAOI has covered are in the mining, O&G etc. sectors, haven't read those nor am I even remotely interested in them. I'm not sure if it's a huge negative that Input is covered there, although the posts do have an excessively positive tone at least for my taste.

I'll reconsider whether it's the right place to be in a company that does stock promotion. It's an interesting model though, and I'll at least curiously watch whether it turns out well or not. Thanks again Glenn.
Title: Re: INP.CVE - Input Capital
Post by: ItsAValueTrap on March 07, 2015, 10:51:58 AM
Out of curiosity, what would you say is a fair volatility assumption for a small cap like this? They've used 25-35%.

Historical volatility would be reasonable.  Some companies use other methods though.

It seemed like they were assuming 15%/25% in some of the financials.

Quote
Quite a few of the companies that AAOI has covered are in the mining, O&G etc. sectors, haven't read those nor am I even remotely interested in them. I'm not sure if it's a huge negative that Input is covered there, although the posts do have an excessively positive tone at least for my taste.
I'm not saying that it's a negative.

It's just that it's worth looking at history.

Smallcap shenanigans are extremely widespread in Canada.  90%+ of the TSX Venture is junk.  So I'm just saying that you should be careful.  These guys strike me as less shady than average actually... because some of the other stuff out there is so egregious.
Title: Re: INP.CVE - Input Capital
Post by: 60°North Investments on March 07, 2015, 11:23:29 AM
I just checked their latest annual report and there they used 25% to 35%, not sure where you saw 15%. Might still be too low. For companies without traded options, is there an easy way to find historical volatility figures?

No doubt a lot of small cap TSX Venture companies are real shady as you say. I agree 100% with that, and I hope I came across appreciating your thoughts and findings (also, I've learned a lot from your blog posts). That's why it's great to be able to discuss ideas here with people who can show you stuff that you hadn't noticed yourself. I'd still be interested in hearing views about the company and the model though, whether people see it as a viable one or not.
Title: Re: INP.CVE - Input Capital
Post by: Travis Wiedower on March 07, 2015, 11:50:56 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.
Title: Re: INP.CVE - Input Capital
Post by: Otsog on March 07, 2015, 12:41:22 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.
Title: Re: INP.CVE - Input Capital
Post by: KJP on March 07, 2015, 01:58:11 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.

I don't think anyone would argue that Input's current assets are worth its current market cap.  You only get to the current market cap by pricing in a massive amount of very profitable growth.  It would be reasonable to do that only if you were convinced that there was (i) tremendous demand for the service and (ii) Input has very durable and strong competitive advantage that will allow them to capture that market at high returns on capital.  I don't know about (i), and I don't see a real basis for being confident that (ii) is true.
Title: Re: INP.CVE - Input Capital
Post by: ItsAValueTrap on March 07, 2015, 02:51:53 PM
Much appreciated Glenn! So far I had missed the hair that you brought up. I should've noticed that they were sponsoring something like that by doing a better Google search.

I wouldn't blame yourself for that.  I doubt I would've found it myself on Google.  It's better to read the annual report and see if they break out investor relations and travel and entertainment.  (In this case it only says travel.)

I just checked their latest annual report and there they used 25% to 35%, not sure where you saw 15%.
It might be in an older annual report.

is there an easy way to find historical volatility figures?

It used to be easy with morningstar.  Try finding an excel spreadsheet that lets you calculate historic volatility.
Title: Re: INP.CVE - Input Capital
Post by: netnet on March 09, 2015, 12:41:14 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.

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.)
Title: Re: INP.CVE - Input Capital
Post by: AAOI 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?

Title: Re: INP.CVE - Input Capital
Post by: ItsAValueTrap 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.
Title: Re: INP.CVE - Input Capital
Post by: Otsog 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.
Title: Re: INP.CVE - Input Capital
Post by: AAOI 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

Title: Re: INP.CVE - Input Capital
Post by: Travis Wiedower 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?
Title: Re: INP.CVE - Input Capital
Post by: AAOI 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.
   
Title: Re: INP.CVE - Input Capital
Post by: AAOI 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   
Title: Re: INP.CVE - Input Capital
Post by: AAOI 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
Title: Re: INP.CVE - Input Capital
Post by: AAOI 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
Title: Re: INP.CVE - Input Capital
Post by: Otsog 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





Title: Re: INP.CVE - Input Capital
Post by: ItsAValueTrap 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.
Title: Re: INP.CVE - Input Capital
Post by: AAOI 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. 
Title: Re: INP.CVE - Input Capital
Post by: AAOI 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

 
Title: Re: INP.CVE - Input Capital
Post by: ItsAValueTrap 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.
Title: Re: INP.CVE - Input Capital
Post by: AAOI 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
Title: Re: INP.CVE - Input Capital
Post by: AAOI 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.
Title: Re: INP.CVE - Input Capital
Post by: ItsAValueTrap 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.
Title: Re: INP.CVE - Input Capital
Post by: AAOI 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
 
Title: Re: INP.CVE - Input Capital
Post by: ItsAValueTrap 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?
Title: Re: INP.CVE - Input Capital
Post by: AAOI 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!!
Title: Re: INP.CVE - Input Capital
Post by: ItsAValueTrap on March 22, 2015, 10:57:12 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?

http://www.agriville.com/cgi-bin/forums/viewThread.cgi?1410366955
So the contract is securitized with land.  A lot of the farmers on agriville.com seem to think that they are loan sharks, though I'm guessing that none of the posters have looked at an actual contract.

The SEDAR farmings describe some of the things about their contracts (e.g. Input can't own farmland for more than 2 years, it has to sell farmland that it acquires from defaulted contracts).

In any case, I don't think that Input will lose money that quickly.  Plus, they sit on a pile of cash.  I'm probably better off spending time on finding some company that spends $1M/year on "investor relations".
Title: Re: INP.CVE - Input Capital
Post by: Otsog on March 23, 2015, 06:52:41 AM
Ya, at the very least I'd wait until the cash hoard is deployed.  They do keep a nice looking balance sheet.
Title: Re: INP.CVE - Input Capital
Post by: f62 on April 02, 2015, 11:09:40 AM
Hi there,

I wanted to remark on the issue of non-IFRS metrics. I actually find them very useful for valuing the business (much more so than their IFRS figures, which make no intuitive sense to me), but I am not an expert on streaming models, so I would very much appreciate if anyone could please point out flaws in my reasoning below (also see attached xls):

a: Projected tonnes per year 42,000
b: Cash operating margin per tonne   380
c: Cost per tonne acquired   230
d: Gross Margin   15,960,000(=a*b)
e: OpEx   3,000,000(approx. LTM figure)
f: EBITDA   12,960,000(=d-e)
g: 'Maintenance Capex'   1,610,000(= 1/6 * a * c ; to maintain constant stream of 42k tonnes p.a, 7k tonnes have to be acquired p.a.)
h: FCF   11,350,000(=f-g)

Now apply a 10x multiple to the FCF, and you get an EV of 113,5m, plus 56m in cash for a market cap of approx. 170m. This would be a reasonable valuation for a steady state, i.e. assigning zero value to growth from now on.

Lets assume they manage to contract 240 farmers by 2020 (their plan is 200-300 in 5 years). You can do the same calculation as above and get a FCF between 70m and 80m for a steady state valuation north of 700m. Discount that @ 15% for 5 years and the present value would be approx. 350m+ (without cash).

This of course assumes that the "cash operating margin per tonne" and "cost per tonne acquired" remain at current levels. For all I know the company does not hedge the canola price, so a permanent decline in canola price is a risk.

It will be very interesting to see how many new farmers they could contract in Q4 (ending March 2015), should give a sense of the tragectory towards 200-300 farmers.

Any comments highly welcome. Thanks.
Title: Re: INP.CVE - Input Capital
Post by: Otsog on April 02, 2015, 12:03:28 PM
From latest MD&A

Quote
Cost per Tonne Acquired is based on the tonnes the Company expects
to receive over the term of a streaming contract. For example, if the Company enters into a six year streaming
contract for 1,000 MT per year, the Company expects to receive 6,000 MT over the term of the streaming contract.

I think the maintenance capex s/b a*c = 9,660,000

FCF = 3,300,000
*10 = 33,000,000
plus cash = 89,000,000
Title: Re: INP.CVE - Input Capital
Post by: f62 on April 02, 2015, 01:18:15 PM
Otsog, thanks for the quick reply.

Let me explain how I came up with the maintenance capex figure:

Currently there are 42 farmers contracted, which translates to ~42,000 tonnes per year from those 42 farmers. If that were the steady state of the company, they would have a "churn" of 7 farmers per year on average, since the "lifetime" of 1 farmer is 6 years. So they would have to contract 7 farmers per year (which translates to 7,000 tonnes per year on average) to maintain the stream of 42,000 tonnes p.a.

Does that make sense? Or, what am I missing that you include in your mc figure?
Title: Re: INP.CVE - Input Capital
Post by: Otsog on April 02, 2015, 05:19:08 PM
Their cost per ton includes every ton for the entire life of the contract.

Say they only have 1 contract for all 42,000 tons for 6 years that they paid their average cost of 230/ton for

42,000 tons of production per year means the contract has a total production of 252,000 tons

Contract cost = 252,000 * 230 = 57,960,000

57,960,000 cost will deplete at $9,660,000 per year over the life of the contract
252,000 tons will deplete at 42,000 tons per year over the life of the contract


Title: Re: INP.CVE - Input Capital
Post by: f62 on April 03, 2015, 03:39:57 AM
Otsag thanks again, now I get it, you are absolutely right of course.

So the steady state calculation with 240 farmers would look like this:

a: Projected tonnes per year 240,000
b: Cash operating margin per tonne   380
c: Cost per tonne acquired   230
d: Gross Margin   91,200,000(=a*b)
e: OpEx   6,000,000(approx. twice(?) LTM figure)
f: EBITDA   85,200,000(=d-e)
g: 'Maintenance Capex'   55,200,000(=a*c)
h: FCF   30,000,000(=f-g)

At 10x FCF this amounts to an EV of 300m. Current EV is approx. 200m (260m market cap minus 60m cash). If I use a 15% discount rate, the current valuation implies that the company will get to 240 farmers in 3 years (200 * 1.15^3 = 300).

Do you agree with that view?

Thx.
Title: Re: INP.CVE - Input Capital
Post by: bargainhunter on April 08, 2015, 06:09:44 AM
Input just released their Q4 update -- they deployed another $20 million. I must say I agree with AAOI on this one.

http://investor.inputcapital.com/news/Press-Release-Details/2015/Input-Capital-Corp-Announces-Record-Capital-Deployment-in-Q4-Operations-Update/default.aspx
Title: Re: INP.CVE - Input Capital
Post by: bargainhunter on November 13, 2015, 07:28:31 AM
Down over 40% today after saying the company is "terminating" three of its contracts. Seems a gross overreaction assuming they can fully recover the investment through the enforcement of security.

Nonetheless the lack of detail in the statement -- and the fact this didn't come out at their earnings call a week ago -- is disconcerting. Anyone else following this name?

More broadly speaking, the market seems extremely jittery right now. We are seeing massive outsized moves in response to even mild earnings disappointments, etc.
Title: Re: INP.CVE - Input Capital
Post by: tripleoptician on November 13, 2015, 07:51:52 AM
I just increased my position by 50% on this. Having read the annual reports, I think the security claims they put in place seem rigorous including having potential claim to the farm itself.
The $80 million market cap decline today is out of proportion in my opinion. Total contracts (current and future) is around $92 million and the 3 contracts is ~$18 million and input says the security claim is around $24 million.
The market is pricing this as a fundamental impedance to their business model, but I don't think it is. In fact, if they achieve even a 50% return on the security claim I would make the case it strengthens the business model to show it has withstood one of the risks here. Seems like a good bet to make at this time as management have been at this game a while before in the Assinaboia private group and hopefully have the experience to deal with this.

Would be interesting to get AAOI's take as he has done a lot of work here before.
Title: Re: INP.CVE - Input Capital
Post by: bargainhunter on November 13, 2015, 08:05:31 AM
I just increased my position by 50% on this. Having read the annual reports, I think the security claims they put in place seem rigorous including having potential claim to the farm itself.
The $80 million market cap decline today is out of proportion in my opinion. Total contracts (current and future) is around $92 million and the 3 contracts is ~$18 million and input says the security claim is around $24 million.
The market is pricing this as a fundamental impedance to their business model, but I don't think it is. In fact, if they achieve even a 50% return on the security claim I would make the case it strengthens the business model to show it has withstood one of the risks here. Seems like a good bet to make at this time as management have been at this game a while before in the Assinaboia private group and hopefully have the experience to deal with this.

Would be interesting to get AAOI's take as he has done a lot of work here before.

I'd be adding too if I had the funds. Have been hit by a perfect storm of events like this in my portfolio in the past few weeks. Note to self: Always keep some cash at hand!
Title: Re: INP.CVE - Input Capital
Post by: GrizzlyRock on November 13, 2015, 10:36:44 AM
Buying opportunity of the year.  Wish I could say more publicaly
Title: Re: INP.CVE - Input Capital
Post by: ItsAValueTrap on November 13, 2015, 12:23:14 PM
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!!

So... both Avid and Input Capital are down significantly since your post in March.
Title: Re: INP.CVE - Input Capital
Post by: Patmo on November 14, 2015, 06:38:57 AM
Very interesting business model, can someone walk me through how cheap it is currently though, ELI5 style? I'm a simpleton. Thanks for sharing the idea by the way.


What I see right now is the 9mil net earnings/operating cash flows in the last 6 months, giving a 8x diluted multiple at run rate, which I guess is pretty cheap given the business' economics. If things work out as pumped by AAOI,  earnings could realistically grow to $100million and above within 5 years, and given the economics of the business it could easily trade at 20x earnings.

I might throw some pocket change at this and see where it goes...
Title: Re: INP.CVE - Input Capital
Post by: GrizzlyRock on November 15, 2015, 05:36:36 AM
If starting fresh, I would do the following:
- Go back t the IPO presentations and model out each of the first 10 streams so you understand contract mechanics
- Spend time with the materials and CFO to understand downside protection on a stream by stream basis. 
- Also work to understand why Input's flexible financing is so powerful for a farmer
- Assess mgmt quality
- THEN try to model the biz holistically going forward

Hope this helps
Title: IR response to cancelled contracts
Post by: Swami X on November 27, 2015, 06:54:06 PM
I recently queried the Input Capital Investor Relations about the collateral underlying the three cancelled contracts and the reasons for cancellation. Here is the response I received:

Collateral against the loans:

Input has three layers of security. The first, and highest priority, is mortgage security on farmland. The second is a General Security Agreement (or GSA) that gives us security over other assets on the farm such tractors, bins, tools, other buildings, etc. The third is a Purchase Money Security Interest (or PMSI), which is a security in the crop itself as Input provides funds to plant the crop. There is a fairly standard process around the foreclosure process.  On farmland, it takes about 18 months.  The crop and rolling stock are faster than that.  Liquidation will be no problem at all.  The land market is vibrant, and equipment sells at auction in competitive bidding every month of the year.  Farmers see farmland as one of their more liquid assets, and management spent 10 years in the farmland investment business – we know what to do with farmland if it comes into our possession. Our streaming contract and associated security documents are not available as they contain sensitive information about our producers’ farming operations and personal information.

Reasons the three contracts were cancelled:

The biggest one failed after multiple years of deteriorating results.  Good steps were taken this year which improved results, but not satisfactorily.  We could have put more capital in, but it would have been unsecured, and we weren’t willing to take that risk.  The farmer is in arrears on tonnes, and we are in a strong security position now.  So we determined that this would be the best approach.

The other two failed for failure to deliver, generally by choice.  We do not understand why.  There are likely some integrity issues here, and there were episodes last week that convinced us we could go no further.

We are highly confident in the rest of our portfolio.  With the elimination of these three bad ones, we will have a strong portfolio of 76 streams, all of whom communicate with us regularly, do what they said they would do, and have been living up to their obligations under the contracts.  Plus, none of them will be so large as to be terribly material to the overall business.
Title: Re: INP.CVE - Input Capital
Post by: Haasje on November 28, 2015, 12:32:03 PM
Maybe one of you is kind enough to help me get started how to think about this?:

1) Is there a tax advantage with this streaming model as compared to the farmer borrowing from the bank?
2) Are Canadian bank regulations having an effect on bank lending to farmers or are they otherwise hesistant? If banks are careful with financing right now, what is the cause of that?
Title: Re: INP.CVE - Input Capital
Post by: wellmont on December 08, 2015, 12:12:41 PM
to me this sounded very gimmicky when I first heard the idea. like the perfect business model had just been invented. I remember it being heavily promoted on investment blogs.
Title: Re: INP.CVE - Input Capital
Post by: beerbaron on December 08, 2015, 05:59:00 PM
to me this sounded very gimmicky when I first heard the idea. like the perfect business model had just been invented. I remember it being heavily promoted on investment blogs.

Agreed, universities and coops are full of experts that already help farmer's grow. Not sure why the farmer's would engage in such a scheme. Sounds fishy...

Beerbaron
Title: Re: INP.CVE - Input Capital
Post by: sculpin on December 09, 2015, 03:54:36 PM
Here is Cormark's take on Input. Many better ideas out there with less uncertainty....

Lowering Target To $1.50: On November 12, 2015, Input Capital announced that it was terminating
three contracts in Saskatchewan representing $18.4 MM of deployed capital and 15K MT of expected
F2016 deliveries. With that news, we downgraded the stock to Reduce and lowered our target to $2.30.
This morning, as we survey the business prospects, economics and valuation, we are taking our target
down to $1.50, and reiterating a Reduce recommendation.

Is This A Viable Business? Capital deployment has been the key arbiter of value since inception, as it
represents the best proxy for demand for Input’s product offering and helps to answer the question – is
this a viable business? Notwithstanding strong deployment figures, as we examine recent events (detailed
below), it is clear to us that this question remains very much unanswered.

• In April 2015, 9,400 MT of the expected ~35,000 MT from the 2014 crop (~30% of expected
deliveries) were delayed indefinitely due to farming issues. This information was not disclosed until
April 2015, though the crop was harvested in the fall of 2014.

• In July 2015, two contracts for an aggregate 11 K MT were bought back by farmers. This information
was only disclosed formally with financial results in August 2015.

• In November 2015, three contracts representing 19% of capital deployed ($18.4 MM) and 19% of
2016 deliveries (15 K MT) were terminated, with the farmers in question either unable or unwilling to
deliver. Though contracts were advertised as ~$1 MM in average size and ~6 years in average
duration, somehow $18.4 M was tied up in three contracts which appear to be largely one year in
duration. This news comes five weeks after disclosure policies were materially altered and just seven
days after the release of Q2/F16 results.

Risks Have Grown Materially: As a result of these recent events, and the termination event in particular,
we believe risks to the business have escalated materially, as outlined below:

• $18.4 MM or $0.22 per share is now at risk of writedown. Management highlights $24.5 MM of
security against these contracts, but the realization of this value remains unprecedented and in any
event looks to involve a long, protracted legal process.

• Further delivery delays or terminations in F2016 are possible. To date, only 38% of expected F2016
deliveries have been received and recent events may potentially serve as a negative precedent for
further delays.

• Deployment of capital may be more challenging given that a large element of the value proposition to
farmers has been the flexibility that Input’s offering provides. This appeal may change now that legal
action is being taken against farmers. This is particularly important given that the company is now in
the key deployment period of CQ4.

• Input Capital is a financing company and its cost of capital has increased materially. We have been
sceptical of the company’s ability to raise any meaningful debt financing, and with recent events this
is highly unlikely, in our view. This leaves equity as a source of funding, and the share price has
declined materially, increasing the cost of equity capital. Assuming all 2016 deliveries are received,
we estimate that cash flow and current adjusted cash (~$24 MM) aggregate to $38 MM, which if fully
deployed this coming crop year would drive a decline in deployment Y/Y and likely only modestly
grow Y/Y deliveries given that a large portion of one-year duration deliveries will need to be replaced.
Economics Point To Low ROE And P/BV: There remains a number of unanswered questions with Input
Capital. The one thing we believe to be true, however, is that regardless of whether this is an “agriculture
streaming company” or not, this is clearly an alternative lender that happens to be repaid in canola. If we
look at INP on this basis and asses it on traditional lending metrics – ROE, BVPS, P/E – the stock still
looks overvalued.

EBITDA and CFPS are not relevant valuation metrics, in our view, as neither considers the duration of the
contracts nor takes into account the fact that one-year contracts need to be replaced with fresh capital.
The stock trades at 6.5x F2016 CF vs. the metal streaming companies at 18.8x, but this is largely
irrelevant. What really matters is the ROE of the business and the earnings growth potential. In 2016,
assuming 65 K MT delivered, we calculate $21 MM of EBITDA and $0.27 in cash flow, but only $0.05 in
EPS after taking into account amortization, a figure which accounts for the declining nature of the book.
This equates to just 4% ROE, which grows only basis points at best next year, as capital deployed serves
to merely replace lost tonnes. As the chart below indicates, robust P/BV multiples are typically reserved
for businesses that earn high ROEs. With EPS growing very modestly and with ROE limited, the stock still
looks expensive trading at 36x P/E and 1.3x P/BV.

So What Is INP Worth? BVPS is currently $1.39. Given the lack of ROE, the uncertainty in 20% of the
capital, the lack of visibility and transparency, and the general questions around the viability of the
business, we see no reason to ascribe a material premium to book. As a reference, Callidus Capital (CBLTSX,
Buy rating, $18.00 target, covered by Jeff Fenwick), a sub-prime alternative lender that went public
in April 2014, once traded at 3.0x BV, but has since had operating challenges and now trades at 1x P/BV
despite still posting a robust ~15% ROE. Looking at it differently, Input’s NAVPS is a similar $1.39,
assuming $460 canola (current spot of $470), a 10% discount rate and the full recovery of all $18.4 MM of
capital at risk. On this basis, the stock trades at 1.3x NAV. The two most relevant metal stream companies
are likely Sandstorm Gold (SSL-TSX, Buy rating, $6.00 target, covered by Richard Gray) and Osisko
Gold Royalties (OR-TSX, Market Perform rating, $16.50 target, covered by Richard Gray), which trade at
1.2x and 1.3x NAVPS, respectively. All in, we believe a 1.1x P/BV, which implies a 1.1x P/NAV, is likely a
fair multiple at this point. This implies a target of $1.50 from $2.30 (1.75x BV)

Reiterate Reduce Rating: Input Capital’s business model remains unproven. 33% of last year’s crop was
delayed and 20% of this year’s crop (so far) has been terminated. There is material upside should the
business regain a strong deployment and earnings trajectory, yet there also remains material further
downside should there be additional delivery delays or a need to write off all or some of the $18.4 MM of
capital at risk, especially considering that BV is largely just the aggregate value of similarly structured
contracts and absent of any hard value. We note as well that at this point deployment remains the key
driver of value but any positive update in this regard in early January may lead to the presumption of a
dilutive equity raise.
Title: Re: INP.CVE - Input Capital
Post by: Schwab711 on December 09, 2015, 04:30:45 PM
Nice post sculpin.

Quote
The other two failed for failure to deliver, generally by choice.  We do not understand why.  There are likely some integrity issues here, and there were episodes last week that convinced us we could go no further.

This scares me because it sounds like the farmers may be incentivized to voluntarily default at times.
Title: Re: INP.CVE - Input Capital
Post by: winjitsu on April 24, 2016, 05:39:32 AM
Can I get a model check?

I'm going off this document (http://s1.q4cdn.com/584800959/files/doc_downloads/Input-Capital-FAQ.pdf), where Input takes 2/6 of crop delivery in payments, pays 80% of the remaining amount upfront, and the rest of the 20% over the 6 year period.  I'm not sure how AAOI (http://www.aboveaverageodds.com/2015/01/24/input-capital-inp-v-if-you-build-it-farmers-will-come/) is getting 20% IRR on just base deliveries assuming no change in commodity prices, which is about 4% off from my number.

So from my gross number, I feel like I am missing delivery costs, call risk (farmer canceling), agricultural risks (less insurance), and default risk (less asset collateral). On the upside, I am missing bonus tonnes. Canola price variance I'll consider neutral. Anything else?

Nice post sculpin.

Quote
The other two failed for failure to deliver, generally by choice.  We do not understand why.  There are likely some integrity issues here, and there were episodes last week that convinced us we could go no further.

This scares me because it sounds like the farmers may be incentive to voluntarily default at times.

But for an asset backed investment, this is fine as long as LTV is sufficient -- I don't see a problem. Mortgage payers walk away all the time. The only time this would be a problem would be a asset bubble crash, like the property crash in 07/08.

Regarding Cormack's take, posted by Sculpin ... while I do think he is right in analyzing the stock similar to a bank, I disagree with his valuation based on current EPS/ROE, since the cost structure is  inevitably bloated since it is a new and growing company. Growth for a widget manufacturer requires expansion capex, and there isn't a huge impact on operating profits. But for a companies like this, growth requires hiring more people, which increases operating costs.

At the end of the day, the idea is fixed operating costs will stabilized/grow slower than revenue, and eventually the company will turn a profit as it matures. This works well for companies that have figured out a superior business model, but the story breaks down for companies that have not. Facebook and Google are in the former, companies like Yelp, Linkedin, Twitter (honestly, take your pick of like 99% of tech IPOs), fall in the latter. If Input is making 15% IRR on each deal, with crop insurance and asset collateral, I believe it belongs in the former.

Saying that the company should trade similar to banks on EPS/ROE/BVPS is a terrible comparison. Growth in revenue was 281% (2015 yoy), 262% LTM, with fixed costs trending down as a % of revenue. How many banks can claim that?

Title: Re: INP.CVE - Input Capital
Post by: Schwab711 on April 24, 2016, 02:01:33 PM
Nice post sculpin.

Quote
The other two failed for failure to deliver, generally by choice.  We do not understand why.  There are likely some integrity issues here, and there were episodes last week that convinced us we could go no further.

This scares me because it sounds like the farmers may be incentive to voluntarily default at times.

But for an asset backed investment, this is fine as long as LTV is sufficient -- I don't see a problem. Mortgage payers walk away all the time. The only time this would be a problem would be a asset bubble crash, like the property crash in 07/08.

I don't think it's like mortgages at all. Input would be left with a perishable good that needs to be sold for a loss (if they have anything at all). That's part of the reason they expect high returns.
Title: Re: INP.CVE - Input Capital
Post by: winjitsu on April 24, 2016, 02:36:03 PM

I don't think it's like mortgages at all. Input would be left with a perishable good that needs to be sold for a loss (if they have anything at all). That's part of the reason they expect high returns.

It's secured against farmland and farm equipment.

From: http://s1.q4cdn.com/584800959/files/doc_downloads/Input-Capital-FAQ.pdf

Quote
What are the security requirements for a streaming contract?
A streaming contract does require a higher level of security than a deferred delivery contract. The upfront payment requires security to prevent non-delivery of the canola. Typically, a mortgage registration against farm real estate is required.

From: http://s1.q4cdn.com/784243260/files/doc_news/Input-Capital-Corp-Publishes-Q4-Operations-Update.pdf

Quote
Update on Terminated Streaming Contracts
On November 12, 2015, Input announced the termination of three streaming contracts and which are now classified as inactive contracts. Input immediately began legal proceedings to begin the process of recovering its investment in these three contracts. Management is pleased to report that the recovery process is proceeding smoothly and is either on track or ahead
of previously expected timeframes. On the largest of the contracts, Input has now taken titled possession of 12.3 quarters of farmland (approximately 2,000 acres), and the foreclosure process on the balance of the land associated with the security package for this contract is proceeding ahead of schedule. Input is in the process of finalizing rental arrangements with local farmers for the upcoming growing season to ensure that the land is maintained in good condition in preparation for a sale of the entire property once the foreclosure process is fully complete. In the interim, the farmers will pay a market rental rate to the benefit of Input for the use of the land this year.

In addition, Input has consigned a significant number of pieces of farm equipment to a regularly scheduled auction to be held on May 1. An additional batch of equipment associated with this contract will be auctioned this summer. The recovery efforts associated with the two smaller terminated contracts are progressing and are on track with previous expectations. Management continues to expect to fully recover all of the capital associated with the three terminated contracts.
Title: Re: INP.CVE - Input Capital
Post by: Schwab711 on April 24, 2016, 09:00:05 PM
I got that. Maybe poor word selection. Either way, small farms can experience volatile output and costs. If it becomes unprofitable to farm in a small region that the farmland may lose a lot of value. Is it really farmland if it's no longer profitable to utilize it? Unless the population or wealth of a location declines drastically, most types of housing generally hold their value (+/- 10-20%). You have capped upside and a large downside, so underwriting seems to be key. At what prof cap rate did Input value the land?  believe farmland has declined in the last 6-9 months (cap rates were around 2-3% a year or two ago). I also think mortgage prepayment has slightly different dynamics because it's someones personal homestead.
Title: Re: INP.CVE - Input Capital
Post by: winjitsu on April 25, 2016, 03:57:51 PM
Valuable perspective. I'll be first to admit I don't know too much about farmland and reading the headlines, things do appear frothy (but forecasts are for continued appreciation in 2016 -- taken with a grain of salt).

I absolutely agree -- at the end of the day, this is a financial stock and they key is underwriting standard and management's attitude towards risk.

I do believe there are risks. We haven't seen the business model  go through a full cycle yet, be it in canola, farmland, or even the full term of the contract. We're 3 years into the first 6 year contract cycle, and already we've had farmers delaying delivery, pre-payment, and defaults. Others tout the 10 years of management experience, and while valuable, truth is management has only ever known a bull market. I know some real estate guys who made a killer IRRs 2000 - 2006, but that is not hard in a rising market, and it did not prevent them from being slaughtered in the downturn. In my opinion (and in reading the sell-side note posted), this is the current market view.

But such is the flavor of financial investments. If you had to invest in a financial company in the agricultural space, what would you like to see? Personally, I like to see diversification (check), prudent use of leverage (none -- so check), and rock solid underwriting, even to withstand collateral write-downs (I don't know yet on this one, will have to see the outcome of the current defaults and personally reach out to management).

On the positive side, the company has a huge untapped market both within Canola and in other agricultural commodities. And according to my calculations for LTM, it is operating profit positive to the tune of ~$5M, so it can be self-sustaining from here. My rough calculations are $5M EBIT, growing 180% y/y, $100M EV -- definitely attractive enough to spend more time researching.

The main question will be if management can continue to improve and refine underwriting standards (can they be disciplined not to chase growth) while growing the portfolio.

Two quick comments to some points brought up previously in this thread (now that I've had time to read through it all):

edit: some numbers were off
Title: Re: INP.CVE - Input Capital
Post by: Otsog on April 26, 2016, 11:02:19 AM
  • I don't think its financial engineering at all. It's just lending where the company is paid back in crop instead of cash. In that sense, it is hardly innovative and has been around for thousands of years.

Agreed, it is hardly innovative.  But, their website and all their disclosures prominently sell "WORLD'S FIRST AGRICULTURAL STREAMING COMPANY".  Their metrics focusing on cash flow on the first pages of every MD&A and Investors Presentation are without a doubt unscrupulous. Q32016 MD&A: "Cash operating margin from streaming contracts of $13.613 million, or $427 per MT (87.0% cash operating margin)".  That is a completely engineered metric that misrepresents the actual operations of the company for the sole purpose of misleading investors. 



Title: Re: INP.CVE - Input Capital
Post by: winjitsu on April 26, 2016, 05:35:59 PM

Agreed, it is hardly innovative.  But, their website and all their disclosures prominently sell "WORLD'S FIRST AGRICULTURAL STREAMING COMPANY".  Their metrics focusing on cash flow on the first pages of every MD&A and Investors Presentation are without a doubt unscrupulous. Q32016 MD&A: "Cash operating margin from streaming contracts of $13.613 million, or $427 per MT (87.0% cash operating margin)".  That is a completely engineered metric that misrepresents the actual operations of the company for the sole purpose of misleading investors. 



We both agree that the business model is simple and not innovative: you give some money at the start and a little money each year to get the farmer going, and in return you get some crop back over the next 6 years. This is very simple on a cash basis: I lend out $60, get back net $15 over the next 6 years, I make an 1.5x cash on cash return and 16% IRR. But how do you show this in an accrual-based accounting system?

When I first glanced at the financials, I found it incredibly difficult to follow. But now that I understand the business better on a deal-by-deal basis, I understand why things have to be they way they are (and also why GAAP/IFRS revenue and net income are absolutely the wrong way to think about this investment). On the net income statement for example, revenue and costs from trading are irrelevant and negligible, interest income/expense is irrelevant, and market value adjustments are material but don't tell you anything about the underlying business (not to mention they'll show up in revenue & cogs when realized anyways).

Cash-based accounting is hands down the easier way to think about this business. The $427 number is basically the ~$480 cash they made from selling canola in harvest less the ~$50 they paid for the seeding. From there, you subtract out cash costs from operating (SG&A, lawyers, taxes), and you are left with a number to replenish your capital base and make money. If I owned this business outright, that is how I would think about it.

The company's business model lies somewhere between a traditional bank and streaming company (as others know them), with some agricultural spice thrown in. That's a little clunky and hard to convey. I think "Agricultural Streaming" is about the best approximation you can get (but if you think of something better -- please share!). 

I work with a lot of new companies so my inclination (perhaps weakness?) is to not get too caught up in the accrual accounting representations of the underlying business.  There is a great comment on a blog post by Fred Wilson, a top VC,  on this topic (http://avc.com/2016/04/generally-accepted-accounting-standards-gaap/):

"I hear ya man. It's accrual world."  :)

edit: grammar and some more thoughts for clarity
Title: Re: INP.CVE - Input Capital
Post by: rpadebet on April 27, 2016, 06:18:24 PM
This is more like receivable financing, isn't it?
You are letting the farmers sell their future receivables to you at a discount to today's price...but you take on the collection risk and risk of future canola price.(there are some more payments later, but u can adjust for those).

I am definitely not an expert in accrual GAAP accounting or Cash accounting, but I agree with winjitsu that the financial statements put out by the company do their best to complicate a simple model. Its best to think of this as an owner of one such contract.

Title: Re: INP.CVE - Input Capital
Post by: Otsog on April 28, 2016, 03:32:11 PM
Quote
4.5. Common classification errors in practice

(iii) Failure to classify cash flows arising from an entity’s principal operating activities as operating

An entity in the financial services sector typically derives operating income from advancing loans to customers in
return for future payments of principal and interest. Although IAS 7.31 permits an entity to classify interest cash flows
as operating, investing or financing, the requirements of IAS 7.6 (which includes the definition of operating activities)
override this option.

Consequently, cash flows relating to loans advanced to customers by a financial institution are required to be classified
as operating activities.

http://www.bdointernational.com/Services/Audit/IFRS/IFRS%20in%20Practice/Documents/IFRS_IAS7_print.pdf


Title: Re: INP.CVE - Input Capital
Post by: Patmo on April 29, 2016, 07:15:50 AM
Quote
4.5. Common classification errors in practice

(iii) Failure to classify cash flows arising from an entity’s principal operating activities as operating

An entity in the financial services sector typically derives operating income from advancing loans to customers in
return for future payments of principal and interest. Although IAS 7.31 permits an entity to classify interest cash flows
as operating, investing or financing, the requirements of IAS 7.6 (which includes the definition of operating activities)
override this option.

Consequently, cash flows relating to loans advanced to customers by a financial institution are required to be classified
as operating activities.

http://www.bdointernational.com/Services/Audit/IFRS/IFRS%20in%20Practice/Documents/IFRS_IAS7_print.pdf

Sure, I could just flip over to the cash flow statement, but then how would I show others how much of a Sophisticated Investor (TM) I am if I don't go about it in a super convoluted way? Dem accounting rules be all wrong, I tell ya.
Title: Re: INP.CVE - Input Capital
Post by: winjitsu on April 29, 2016, 03:14:36 PM
Quote
4.5. Common classification errors in practice

(iii) Failure to classify cash flows arising from an entity’s principal operating activities as operating

An entity in the financial services sector typically derives operating income from advancing loans to customers in
return for future payments of principal and interest. Although IAS 7.31 permits an entity to classify interest cash flows
as operating, investing or financing, the requirements of IAS 7.6 (which includes the definition of operating activities)
override this option.

Consequently, cash flows relating to loans advanced to customers by a financial institution are required to be classified
as operating activities.

http://www.bdointernational.com/Services/Audit/IFRS/IFRS%20in%20Practice/Documents/IFRS_IAS7_print.pdf

I have a hard time following -- could you state your point outright?

All the money from loan repayment in included in the cost of sales which ends up in CFFO:
Title: Re: INP.CVE - Input Capital
Post by: tripleoptician on May 26, 2016, 02:47:21 PM
I just increased my position by 50% on this. Having read the annual reports, I think the security claims they put in place seem rigorous including having potential claim to the farm itself.
The $80 million market cap decline today is out of proportion in my opinion. Total contracts (current and future) is around $92 million and the 3 contracts is ~$18 million and input says the security claim is around $24 million.
The market is pricing this as a fundamental impedance to their business model, but I don't think it is. In fact, if they achieve even a 50% return on the security claim I would make the case it strengthens the business model to show it has withstood one of the risks here. Seems like a good bet to make at this time as management have been at this game a while before in the Assinaboia private group and hopefully have the experience to deal with this.

Would be interesting to get AAOI's take as he has done a lot of work here before.

Market opinion is finally starting to turn again on this stock. Up about 40% from the lows of the last several months.
Business updates:
1.demonstration of the resilience for the security packages associated with the contracts. They have essentially resolved the largest terminated contract with the ability to rent the foreclosed land and then sell at what remains to be elevated agricultural land prices. Machinery is shown to be reasonably liquid asset and will be sold soon.
It seems safe to assume that a very high percentage of the deployed $18 million will be re-cooperated; a profit may in fact be squeaked out here to as package was estimated at $24 million.

2. Total yearly capital deployed FY16 was $35 million with smaller deal sizes and more diversified contract portfolio. No material risk of any one contract currently, after the 3 terminated contracts in November.

3. Balance sheet will likely show cash on hand in the $27-29 million as of May 30th fiscal with no debt. With opex and potential deployment into "addons"  on existing contracts, we may see cash position decrease into $20 million range around harvest timeframe.

4. With the quick canola to cash conversion cycle we experienced in this last fiscal year combined with potential return of capital from foreclosures on the terminated contracts, I think the company could go through this next year of deployment without necessarily doing an equity raise.

Overall this business continues to look to have potential solid IRR's and cash compounding cycles with an iron clad balance sheet, huge canola reserves, continued interest from farmers despite of recent terminated contracts, incentivized management with high percentage ownership, and demonstration of solid security packages for loans made.

At the previous low, we were paying below adjusted book value. At current price, we are paying above ABV but long term growth prospects are higher than what the current price reflects.
Title: Re: INP.CVE - Input Capital
Post by: Tim Eriksen on May 26, 2016, 03:23:59 PM
Quote
4.5. Common classification errors in practice

(iii) Failure to classify cash flows arising from an entity’s principal operating activities as operating

An entity in the financial services sector typically derives operating income from advancing loans to customers in
return for future payments of principal and interest. Although IAS 7.31 permits an entity to classify interest cash flows
as operating, investing or financing, the requirements of IAS 7.6 (which includes the definition of operating activities)
override this option.

Consequently, cash flows relating to loans advanced to customers by a financial institution are required to be classified
as operating activities.

http://www.bdointernational.com/Services/Audit/IFRS/IFRS%20in%20Practice/Documents/IFRS_IAS7_print.pdf

I have a hard time following -- could you state your point outright?

All the money from loan repayment in included in the cost of sales which ends up in CFFO:
  • Companies makes a loan, classified as CFFI, shows up in Canola Interest in BS
  • Company Sells Canola. Canola interest goes down on the BS. COGs is calculated based on change of value in Canola Interest (basically principle balance paydown + fees associated with collecting). Revenue and COGs are operating activities, which is in CFFO
  • Gross Margin then can be though of as your Net Interest Income. Again, as a line item statement in NI, this ends up in CFFO

I think his point is that cash flows from operations is a terrible way to value the company based on how it treats the cash flows on its loans.  If that isn't his point, it should be  :)
Cash flows from operations are grossly over stated since it includes repayment of principal, while the issuance of loans is in cash flow from financing activities.   
Title: Re: INP.CVE - Input Capital
Post by: winjitsu on May 26, 2016, 04:40:30 PM

I think his point is that cash flows from operations is a terrible way to value the company based on how it treats the cash flows on its loans.  If that isn't his point, it should be  :)
Cash flows from operations are grossly over stated since it includes repayment of principal, while the issuance of loans is in cash flow from financing activities.   

Ahh -- makes sense though I don't think anyone on this thread mentioned valuing the company on the basis of CFFO at any point. I thought it was in some weird reference to cash operating margin he referenced earlier.

Eagerly waiting for their annual report -- is it me or is this taking longer than usual? Also, any idea if they have any exposures to the Alberta fires?
Title: Re: INP.CVE - Input Capital
Post by: Otsog on May 27, 2016, 08:14:02 AM
INP management places a lot of emphasis on CFFO and cash operating margin.  Do they not understand their business or are they trying to mislead people? 
Title: Re: INP.CVE - Input Capital
Post by: tripleoptician on May 27, 2016, 09:12:57 AM
INP management places a lot of emphasis on CFFO and cash operating margin.  Do they not understand their business or are they trying to mislead people?

A somewhat facetious statement, but I will bite.
Let's assume that IFRS is followed as per accounting principles. Then it is the non IFRS measures that you are referring to and questioning if management is trying to mislead investors here.

1. Adjusted Operating Cash flow (total and per share)
I find this fairly useful because it truly represents the available cash available I that quarter for re-deployment of capital into new contracts. IT helps me determine when the company can be self generating in re-deployment cycles vs relying on equity financing or debt.

2. Adjusted Ebitda (total and per share)
I care about this less but the net income/EPS is widely affected by financial derivative and mark to market accounting related to the swings in canola prices.
Therefore this measure gives a closer static look at EBITDA growth over time.

3. Adjusted Net Income (total and per share) essentially same as above removing market adjustments and taxes. I personally wouldn't remove taxes from this if I was management.

4. Crop Payment per tonne - I find this particularly useful a it helps us predict future operating cash flow for re-deployment. We can estimate realized canola sale prices after harvest and subtract this crop payment which will tell us the amount available.

5. Cash Operating Margin (total and per tonne)
Same as above statement

6. Canola Replacement Cycle
As noted above, this helps to tell us when the company can grow solely with internally generated cash flows. Given that contracts cycle on average of 6 years, if they can't re-deploy they may go from internally funded to requiring outside capital to start back up again. This is again helpful for me to evaluate.

The one measure I think is pointless for them to state is when they say they have 87-90% cash operating margins on the $ per tonne they sold. Real margin is trying trying figure out total sale - upfront payment - crop payment. But if an investor doesn't get this point and thinks the company is making 90% margins than they are out to lunch t begin with.

I think AAOI addressed your concerns well earlier in thi thread and would refer to that for more detailed explanation.
Title: Re: INP.CVE - Input Capital
Post by: tripleoptician on May 27, 2016, 09:45:08 AM

I think his point is that cash flows from operations is a terrible way to value the company based on how it treats the cash flows on its loans.  If that isn't his point, it should be  :)
Cash flows from operations are grossly over stated since it includes repayment of principal, while the issuance of loans is in cash flow from financing activities.   

Ahh -- makes sense though I don't think anyone on this thread mentioned valuing the company on the basis of CFFO at any point. I thought it was in some weird reference to cash operating margin he referenced earlier.

Eagerly waiting for their annual report -- is it me or is this taking longer than usual? Also, any idea if they have any exposures to the Alberta fires?

Unlikely any effect from fires as it is Northern Alberta while most of the farmland is in the Southern part
Title: Re: INP.CVE - Input Capital
Post by: Tim Eriksen on May 27, 2016, 10:20:45 AM
INP management places a lot of emphasis on CFFO and cash operating margin.  Do they not understand their business or are they trying to mislead people?

Exactly.  CFFO is heavily emphasized by management and it is misleading to investors. Is it intentional?  You would have to think so.  If it isn't intentional it means management is ignorant on how to value the business, which would be a concern.   

Net income (and ROE) is a more accurate reflection of the quality of the business, and it is low.  In fact earnings are mostly from market value adjustment on the contracts.  Market value adjustments are not of the same quality as normal operating earnings.  There is a risk that none will be earned in a given year, as well as the possibility of a downward revision.  Input has a short term "streaming" business, which is the worst kind.  It would be like being a lender that has to replace its loan book more frequently.  That inherently means higher operating costs.  The company is more of a lending company than a royalty company.   Based on ROE, I would value it at cash plus no more than 8-10 times earnings.  To be buyer I would want a discount from that due to the nature of earnings being heavily tilted to market value adjustments.         
Title: Re: INP.CVE - Input Capital
Post by: Schwab711 on May 27, 2016, 12:16:20 PM
INP management places a lot of emphasis on CFFO and cash operating margin.  Do they not understand their business or are they trying to mislead people?

Exactly.  CFFO is heavily emphasized by management and it is misleading to investors. Is it intentional?  You would have to think so.  If it isn't intentional it means management is ignorant on how to value the business, which would be a concern.   

Net income (and ROE) is a more accurate reflection of the quality of the business, and it is low.  In fact earnings are mostly from market value adjustment on the contracts.  Market value adjustments are not of the same quality as normal operating earnings.  There is a risk that none will be earned in a given year, as well as the possibility of a downward revision.  Input has a short term "streaming" business, which is the worst kind.  It would be like being a lender that has to replace its loan book more frequently.  That inherently means higher operating costs.  The company is more of a lending company than a royalty company.   Based on ROE, I would value it at cash plus no more than 8-10 times earnings.  To be buyer I would want a discount from that due to the nature of earnings being heavily tilted to market value adjustments.         

Does this assume that some portion of the company's value is due to their expertise, reinvestment opportunities, ect? How should I determine when to switch from a BV/NAV method to a multiple-based method for companies like this?

I'm not interested in Input so much as I'm interested in what the "critical point" is.
Title: Re: INP.CVE - Input Capital
Post by: Tim Eriksen on May 27, 2016, 02:12:07 PM
INP management places a lot of emphasis on CFFO and cash operating margin.  Do they not understand their business or are they trying to mislead people?

Exactly.  CFFO is heavily emphasized by management and it is misleading to investors. Is it intentional?  You would have to think so.  If it isn't intentional it means management is ignorant on how to value the business, which would be a concern.   

Net income (and ROE) is a more accurate reflection of the quality of the business, and it is low.  In fact earnings are mostly from market value adjustment on the contracts.  Market value adjustments are not of the same quality as normal operating earnings.  There is a risk that none will be earned in a given year, as well as the possibility of a downward revision.  Input has a short term "streaming" business, which is the worst kind.  It would be like being a lender that has to replace its loan book more frequently.  That inherently means higher operating costs.  The company is more of a lending company than a royalty company.   Based on ROE, I would value it at cash plus no more than 8-10 times earnings.  To be buyer I would want a discount from that due to the nature of earnings being heavily tilted to market value adjustments.         

Does this assume that some portion of the company's value is due to their expertise, reinvestment opportunities, ect? How should I determine when to switch from a BV/NAV method to a multiple-based method for companies like this?

I'm not interested in Input so much as I'm interested in what the "critical point" is.

I am actually assuming the opposite.  That there is no value attributable to expertise or reinvestment opportunities.   Returns on equity are low and it has a fair amount of cash so I am valuing it based on the cash plus the value of the present earnings.  There may be some expertise but it is not reflected in the numbers so it seems a stretch to assume there is.  There are reinvestment opportunities but since the current returns are low, how valuable is it?  I would also note that if reinvestment opportunities are so great, why is cash so high?  Shouldn't they have already made additional deals?

While it is an oversimplification, I would say that only when a company shows a consistent ability to earn a greater than 10% ROE should someone switch from a book value / liquidation approach of valuation to a cash flow/earnings approach.  A second factor to look for that leads to the switch is when the earnings are not required to be plowed back into the business in order to maintain current earnings levels.  In reality both valuation approaches are always being considered it is just that one is more heavily weighted or emphasized.     
Title: Re: INP.CVE - Input Capital
Post by: winjitsu on May 27, 2016, 04:12:13 PM
I'm actually shocked how different my understanding of the accounting is versus other people... who is right? I have no idea haha but open to criticism...

From 12/31/15 Financials:

Quote
Canola Interests
Canola interests are agreements for which settlements are called for in tonnes of canola, the amount of which is
determined based on terms in the canola purchase agreements which are capitalized on a contract-by-contract basis
and are recorded at fair value. As the contracts contain an embedded derivative relating to the market value of
canola, at each reporting date the fair value of each contract is calculated using internal discounted cash flow models
that rely on forward canola and other correlated commodity pricing provided by independent sources. Subsequent
changes in fair value of these derivative financial instruments are recognized in profit or loss in Market value
adjustments.

Included in contracts are pledges of general and specific security made by the farmer as collateral against delivery of
canola tonnes. From time to time, in normal course, the Company may take steps to terminate streaming contracts
that are in default. Contracts that are in the process of being terminated are fair valued at each reporting date based
on the expected amount of capital to be recovered net of legal and other costs. Legal and other costs relating to the
enforcement of security are included in canola interests until the contact termination is complete (see Note 6).

Cost of Sales
The initial upfront payment allocated to canola interests is capitalized. Upfront payments allocated to canola interests
are realized as cost of sales on a proportionate contractual tonne basis as sales are realized for each specific
contract. Crop payments are recognized as cost of sales on a tonne basis as sales are realized for each specific
contract

As I mentioned earlier in my post, you really need to sit down and get your hands dirty with these financials and think of yourself as a owner of these contracts. There's loads of things on NI that don't really tell you how the business is doing. Total revenue is vastly overstated based on trading revenues, a true owner would only think about growth in streaming revenue, for example. I think most people on this board that are invested have made the necessary adjustments, such as ignoring trading revenues + cogs and market value adjustments at the bottom of NI. There's only like 3-4 annual reports and the accounting/financials are pretty straightforward, so there's really no excuse for not doing the work.

Your gripe with NI is market value adjustments. Well that makes it simple, just add it back and you'll see on a LTM basis, the company is still EBIT positive (~$5.5mm CAD when you take out ~$500k gain in "other"). This is the number I've been using to derive my valuations, and I suggest you do too.  The reason is market value adjustments make their way back into COGs when canola is finally received and sold, so in the end it works out and gross margin is a clean number (though you can make a point that the derivative models are unknown and can be subject to fraud -- I couldn't agree more and this ultimately comes down to if you trust management and I'll point out you have no idea how GS/BAC/C value their derivative books either).

Its unfair to value the company based on ROE and similar metrics, since operating costs are elevated for a growing company. You need to think of this company on an ongoing basis. Two points:

I will add in a negative point: I don't like how non-performing streams are included in canola interests. I think it should be broken out into a different line item.
Note: I used COGS and cost of sales interchangeably... hope you get my point
Title: Re: INP.CVE - Input Capital
Post by: tripleoptician on May 29, 2016, 03:13:27 PM
I'm actually shocked how different my understanding of the accounting is versus other people... who is right? I have no idea haha but open to criticism...

From 12/31/15 Financials:

Quote
Canola Interests
Canola interests are agreements for which settlements are called for in tonnes of canola, the amount of which is
determined based on terms in the canola purchase agreements which are capitalized on a contract-by-contract basis
and are recorded at fair value. As the contracts contain an embedded derivative relating to the market value of
canola, at each reporting date the fair value of each contract is calculated using internal discounted cash flow models
that rely on forward canola and other correlated commodity pricing provided by independent sources. Subsequent
changes in fair value of these derivative financial instruments are recognized in profit or loss in Market value
adjustments.

Included in contracts are pledges of general and specific security made by the farmer as collateral against delivery of
canola tonnes. From time to time, in normal course, the Company may take steps to terminate streaming contracts
that are in default. Contracts that are in the process of being terminated are fair valued at each reporting date based
on the expected amount of capital to be recovered net of legal and other costs. Legal and other costs relating to the
enforcement of security are included in canola interests until the contact termination is complete (see Note 6).

Cost of Sales
The initial upfront payment allocated to canola interests is capitalized. Upfront payments allocated to canola interests
are realized as cost of sales on a proportionate contractual tonne basis as sales are realized for each specific
contract. Crop payments are recognized as cost of sales on a tonne basis as sales are realized for each specific
contract

As I mentioned earlier in my post, you really need to sit down and get your hands dirty with these financials and think of yourself as a owner of these contracts. There's loads of things on NI that don't really tell you how the business is doing. Total revenue is vastly overstated based on trading revenues, a true owner would only think about growth in streaming revenue, for example. I think most people on this board that are invested have made the necessary adjustments, such as ignoring trading revenues + cogs and market value adjustments at the bottom of NI. There's only like 3-4 annual reports and the accounting/financials are pretty straightforward, so there's really no excuse for not doing the work.

Your gripe with NI is market value adjustments. Well that makes it simple, just add it back and you'll see on a LTM basis, the company is still EBIT positive (~$5.5mm CAD when you take out ~$500k gain in "other"). This is the number I've been using to derive my valuations, and I suggest you do too.  The reason is market value adjustments make their way back into COGs when canola is finally received and sold, so in the end it works out and gross margin is a clean number (though you can make a point that the derivative models are unknown and can be subject to fraud -- I couldn't agree more and this ultimately comes down to if you trust management and I'll point out you have no idea how GS/BAC/C value their derivative books either).

Its unfair to value the company based on ROE and similar metrics, since operating costs are elevated for a growing company. You need to think of this company on an ongoing basis. Two points:
  • Based on the definition of Canola Interest above, I think of Gross Margins as effectively Net Interest Income, since principle repayment is recognized in COGs. FYE 3/31/15, Gross Margins was $3,374,162 and SG&A was ~$3.7mm -- EBIT negative. LTM 12/31/15, Gross Margins was $10,513,928, SG&A was ~$4.7mm, EBIT positive. SG&A as a percent of gross margins will only trend downward as revenues increase
  • Capital deployed by year is $6mm, $25mm, $49mm, and $35mm for FYE 2012 - 2016. Current revenue is going to be understated relative to a company at maturity at a steady state making $35mm in loans a year since loans at the onset were much smaller than they are today. Assuming no growth capital deployed by year, you'll see peak revenue in like 2019

I will add in a negative point: I don't like how non-performing streams are included in canola interests. I think it should be broken out into a different line item.
Note: I used COGS and cost of sales interchangeably... hope you get my point

I agree winjitsu with your general thought process. I think evaluating the business on its book value vs. earnings multiple is a better, choice because it isn't a true royalty streamer given its shorter life cycle of the contracts relative to traditional streamers. Like Tim Eriksen suggested, this business is required to re-invest on short durations otherwise it will be in run-off and eventually build up excess cash. This is especially true, because I believe the company is participating in more "add on" deals which are essentially very short duration, but still reasonable IRR. So attaching earnings multiples of 16-20x (traditional streamers) seems far too aggressive in my opinion for this company.
 
I have my own math for how this book value grows with time, but it is similar to the attached presentation. I think book value growth at this rate should be priced higher then a 1x multiple. A key consideration is when the business is self propelling with internal cash flow combined with a consistent ability to churn $30-$40 million of annual deals. If deal flow drops off, then the multiple drops. Luckily, the business capex and opex ($4-5 million/year) is more or less static moving forward without affecting the business as it expands. So even in a "total run-off" scenario , owners aren't penalized too severely while awaiting capital return from contracts. As stated before, we are getting a live demonstration of how the security package holds up and it appears total loan loss seems unlikely. There is also no debt to bankrupt the company in the scenario of loss of deal flow.

 I think this is an "alternative lender" business not really a "royalty streamer". I think it is unique with its ability to charge enough interest via its received tonnage to generate high IRR's, but the borrower has an asymmetric risk profile given the degree to which they can benefit, as well as the company's downside is more robust then typical high interest alternative lenders. Bonus tonnage and improved agronomic yields was the equivalent of a performance fee or bonus structure, but it has not shown enough consistency to rely on it for valuation purposes. 

I'm trying to understand if those critical of the business are worried this is a promotional management attempting to pump and dump with their heavy insider ownership? Or is it being skeptical of a new business model that at one point was being given an absurd book value multiple ( I think 2-2.5x BV in the first 1-2 years)? Or in other words, this may just be a mediocre/ okay business and not a good/great business?

Thanks for any critical thoughts
Title: Re: INP.CVE - Input Capital
Post by: Schwab711 on May 29, 2016, 04:58:13 PM
In the GrizzleyRock presentation:
*Why would the hypothetical farmer's revenue increase by 15% with a stream contract?

Without this increase in revenue, the hypothetical farmer is appears to be worse off with Input's financing, even with the assumption of 20% savings on fertilizer and 15% on seeds.
Title: Re: INP.CVE - Input Capital
Post by: tripleoptician on May 29, 2016, 05:38:20 PM
In the GrizzleyRock presentation:
*Why would the hypothetical farmer's revenue increase by 15% with a stream contract?

Without this increase in revenue, the hypothetical farmer is appears to be worse off with Input's financing, even with the assumption of 20% savings on fertilizer and 15% on seeds.

It has to do with the farmer's timing of sale for their leftover canola tonnes after giving Input their share. Traditional farmers that aren't flush with capital all have to sell their canola at the same time to finance portions of their ongoing capital expenditures. Peak supply is September/October right after harvest and the farmer will need to sell at a lower price during this time secondary to typical supply/demand curves. If they can wait to sell into Dec/Jan and onwards then they can achieve superior prices for their canola.

The savings on fertilizer and seed are not hypothetical and are borne out in objective data. It is the same supply/demand issues at play and off-season purchases go a long way.

An additional variable that appears to have the potential for some customer stickiness to Input is their superior grain marketing results. They have consistently achieved better than average yearly canola pricing in the 7-15% range. This is not a hedging program, but an in-year locking-in of prices at opportune times. They have an employee that worked at the Winnipeg Commodities future Market who has this as his primary task. This superior pricing will only grow with time as Input have effectively become the biggest mover of canola in the Canadian market. Keep in mind that canola farming in Canada is essentially all private farmers with no institutional involvement. So by selling far more then anyone else, Input is getting superior pricing discounts and this will grow with time. In conference calls, they have alluded to allowing the farmer partners to also market their canola portions along side the company, thereby achieving far better canola market strategies and pricing then the farmers could ever do by themselves.

This business is not meant for the experienced, cash rich farmer who would hate to give up the High IRR's for capital that doesn't significantly change their business profitability. Yet for expanding or newer farmers, this business can equate to a win-win for lender/borrower which puts the growth potential and risk profile in a different category then alternative lenders.

Title: Re: INP.CVE - Input Capital
Post by: Schwab711 on May 29, 2016, 06:07:05 PM
In the GrizzleyRock presentation:
*Why would the hypothetical farmer's revenue increase by 15% with a stream contract?

Without this increase in revenue, the hypothetical farmer is appears to be worse off with Input's financing, even with the assumption of 20% savings on fertilizer and 15% on seeds.

It has to do with the farmer's timing of sale for their leftover canola tonnes after giving Input their share. Traditional farmers that aren't flush with capital all have to sell their canola at the same time to finance portions of their ongoing capital expenditures. Peak supply is September/October right after harvest and the farmer will need to sell at a lower price during this time secondary to typical supply/demand curves. If they can wait to sell into Dec/Jan and onwards then they can achieve superior prices for their canola.

But they are selling their canola for $300 as opposed to $475 spot price (to continue with the example). How could revenue possibly be higher? Would you mind spelling it out for me?

The savings on fertilizer and seed are not hypothetical and are borne out in objective data. It is the same supply/demand issues at play and off-season purchases go a long way.

I agree with the theory, I know this has historically been true. With greater price transparency online, why can't farmers get loans/LOCs to do the same thing? Seems like savings >> interest would make this low-hanging fruit...

An additional variable that appears to have the potential for some customer stickiness to Input is their superior grain marketing results. They have consistently achieved better than average yearly canola pricing in the 7-15% range. This is not a hedging program, but an in-year locking-in of prices at opportune times. They have an employee that worked at the Winnipeg Commodities future Market who has this as his primary task. This superior pricing will only grow with time as Input have effectively become the biggest mover of canola in the Canadian market. Keep in mind that canola farming in Canada is essentially all private farmers with no institutional involvement. So by selling far more then anyone else, Input is getting superior pricing discounts and this will grow with time. In conference calls, they have alluded to allowing the farmer partners to also market their canola portions along side the company, thereby achieving far better canola market strategies and pricing then the farmers could ever do by themselves.

Canola oil looks to have low speculator volume so I could see the trader having some benefits considering they represent true volume. Input has relatively low share of the market compared to some of the largest farmers. Either way, it appears to be a fragmented supply. I think Input will have relative sticky customers if the deal actually makes sense for both sides of the deal. I'm not convinced that is the case at the moment and it I think it is the make-or-break question for Input as an investment.

This business is not meant for the experienced, cash rich farmer who would hate to give up the High IRR's for capital that doesn't significantly change their business profitability. Yet for expanding or newer farmers, this business can equate to a win-win for lender/borrower which puts the growth potential and risk profile in a different category then alternative lenders.

Do their customers need them less with each passing year? If Input does everything they say, most farmers do not need them (since farmers <45 years old are uncommon) and the ones that do will need them less each year (they gain experience and profit [hopefully] each year). There is relatively low farmer turnover each year and I'm guessing the area is consolidating like most Northern US farms. It seems possible to me that demand for Input's services may be at an all-time high, which would be a tough headwind.
Title: Re: INP.CVE - Input Capital
Post by: tripleoptician on May 29, 2016, 09:53:23 PM
In the GrizzleyRock presentation:
*Why would the hypothetical farmer's revenue increase by 15% with a stream contract?

Without this increase in revenue, the hypothetical farmer is appears to be worse off with Input's financing, even with the assumption of 20% savings on fertilizer and 15% on seeds.

It has to do with the farmer's timing of sale for their leftover canola tonnes after giving Input their share. Traditional farmers that aren't flush with capital all have to sell their canola at the same time to finance portions of their ongoing capital expenditures. Peak supply is September/October right after harvest and the farmer will need to sell at a lower price during this time secondary to typical supply/demand curves. If they can wait to sell into Dec/Jan and onwards then they can achieve superior prices for their canola.

But they are selling their canola for $300 as opposed to $475 spot price (to continue with the example). How could revenue possibly be higher? Would you mind spelling it out for me?

This is pretty key to understanding both the risk to Input and the farmer on these contracts. Refer to AAOI's detailed write-ups for more details. To quickly summarize, Input is only getting about 1/3 of the total canola crop for an individual farmer, therefore the farmer still has 2/3rds of their acutal canola to sell. In addition, canola is usually only a 1/3 rotation, which means there are 2 other crops taking up the other 2/3 of the total farmer's acreage (wheat, durham, barley, corn, lentil etc). The cheaper inputs by buying off-season can help influence improved yields on the other crops beyond canola as well, which is gravy for the farmer as Input doesn't get any of this crop. So really Input is only taking 1/9 of the total portion of a farmer's acreage production.

The terminated contracts are interesting for why they actually occurred. Before getting to foreclosure, there are 2 other protections before the main security package:
1) Crop Insurance - should cover 70% of previous average yields and this is mandatory for the farmer to buy to enter a contract with Input (its at the farmer's expense)
2)PMSI which is a lien to the other crop

These contracts was original contracts that were larger in size and paid out more than 1/3rd of total canola production. This led to some breakdowns in the initial security features before foreclosure, and is why the company are now doing smaller sized deals and sticking to the 1/3rd maximum.

The savings on fertilizer and seed are not hypothetical and are borne out in objective data. It is the same supply/demand issues at play and off-season purchases go a long way.

I agree with the theory, I know this has historically been true. With greater price transparency online, why can't farmers get loans/LOCs to do the same thing? Seems like savings >> interest would make this low-hanging fruit...

There are a ton of alternate financing options, and this was my first question when I saw what high IRR's were when you analyze the initial deals. It seems like a no-brainer a farmer could find cheaper capital. See the link below. After this and other research, I found out that many farmers have many sources of capital and the ones involving themselves with Input almost certainly have other loans as well. It's a $92 billion total loan industry and Input's total ~$100 million financing capital represents a miniscule fraction of total agriculture financing.

The LOC's and trade credit aren't very flexible and can cause sub-optimal capital allocation decisions. That's why Input tries there best to be seen as "flexible" capital that is willing to work with farmers on dealing with short-falls are giving additional capital when warranted. Again, it's a distinct niche of farmer that both needs and benefits from Input's capital, but they aren't competing with traditional lending products here.

http://www5.statcan.gc.ca/cansim/pick-choisir?lang=eng&p2=33&id=0020008

An additional variable that appears to have the potential for some customer stickiness to Input is their superior grain marketing results. They have consistently achieved better than average yearly canola pricing in the 7-15% range. This is not a hedging program, but an in-year locking-in of prices at opportune times. They have an employee that worked at the Winnipeg Commodities future Market who has this as his primary task. This superior pricing will only grow with time as Input have effectively become the biggest mover of canola in the Canadian market. Keep in mind that canola farming in Canada is essentially all private farmers with no institutional involvement. So by selling far more then anyone else, Input is getting superior pricing discounts and this will grow with time. In conference calls, they have alluded to allowing the farmer partners to also market their canola portions along side the company, thereby achieving far better canola market strategies and pricing then the farmers could ever do by themselves.

Canola oil looks to have low speculator volume so I could see the trader having some benefits considering they represent true volume. Input has relatively low share of the market compared to some of the largest farmers. Either way, it appears to be a fragmented supply. I think Input will have relative sticky customers if the deal actually makes sense for both sides of the deal. I'm not convinced that is the case at the moment and it I think it is the make-or-break question for Input as an investment.

This business is not meant for the experienced, cash rich farmer who would hate to give up the High IRR's for capital that doesn't significantly change their business profitability. Yet for expanding or newer farmers, this business can equate to a win-win for lender/borrower which puts the growth potential and risk profile in a different category then alternative lenders.

Do their customers need them less with each passing year? If Input does everything they say, most farmers do not need them (since farmers <45 years old are uncommon) and the ones that do will need them less each year (they gain experience and profit [hopefully] each year). There is relatively low farmer turnover each year and I'm guessing the area is consolidating like most Northern US farms. It seems possible to me that demand for Input's services may be at an all-time high, which would be a tough headwind.

Again, AAOI's detailed write up went into a number of differences with how agriculture in the US has gone vs Canada. There is no significant consolidation in Canadian agriculture; it is highly fragmented. Only private ownership of agricultural land is allowed, so big business is blocked out. There are 43,000 canola farmers in Canada. The general thought would be at the end of a six year contract, the farmer may no longer need them. But if they are young and things have gone well, using capital to grow their acreage or rent more land may make sense. This is too early to tell, but given the size of potential addressable market I think it is a small risk of running out of deal flow. That is certainly a risk in a new business model with a niche lender.
Title: Re: INP.CVE - Input Capital
Post by: winjitsu on May 30, 2016, 02:20:35 AM
First time seeing Grizzly Rock's deck. Thanks for upload.

Correct me if I'm wrong, but between Grizzly's deck, AAOI's posts on his blog and VIC, and the posts on this thread, no one has actually spent time boots on the ground in Alberta actually talking to farmers on why they would choose this financing. Instead, all I've seen are pages of reasons why, with input from management, they think this business model works. I think this is a glaring hole in due diligence.

As I've mentioned, the upside on this stock is dependent on the growth case, so it's really important to criticize it strongly rather than just assume loans continue to grow. For example, would a farmer take another loan after 6 years? Does it make sense to take two loans out at the same time? etc etc. If borrowers wouldn't use this service again, its a really bad omen for things to come, for example. I'm reminded of the Jiffy Lube short example in The Art of Short Selling where the stock's growth story was hyped up while in local classified ads, franchisees were trying to get out of the business. These are things that management won't and can't tell you.

I am always worried that a group of very intelligent people rationalize a million reasons for why a farmer would want to take these loans, rather than *actually* just talking to them.

This stock has always been a punt for pint money for the aforementioned reason and since I am very lazy.
Title: Re: INP.CVE - Input Capital
Post by: Otsog on May 31, 2016, 02:08:43 PM
http://www.stockhouse.com/news/press-releases/2016/05/31/input-capital-corp-announces-fiscal-2016-year-end-results

Capital Deployed2 down 28%
Canola Reserves (MT)2 down 8%
Cash operating margin1 up 187%
Adjusted Operating Cash Flow1 up 209%
Adjusted EBITDA1 up 371%

1 Non-IFRS financial measures with no standardized meaning under IFRS. For further information and a detailed reconciliation, refer to "Non-IFRS Measures" in the accompanying MD&A.

2 Includes contracts that were signed but not completely funded at the end of the fiscal year.
Title: Re: INP.CVE - Input Capital
Post by: AAOI on May 31, 2016, 07:09:22 PM
Winjitsu/Tripleoptician - guys, appreciate the voice of reason here (much appreciated!), and apologies for not popping up sooner but it's been awhile since I've spent much time on these boards. Regardless, I think most of your commentary is spot on.

With that said I'm going to spend some time reviewing all the misguided and uninformed bear arguments (even the mind mumbling tired ones on accounting), and hopefully circle back with a detailed response within the next few days. Besides needing to top of my position, it will take a fair amount of time to effectively slice through the nonsense.

Moreover, I'll do my best to address the more reasonable questions and concerns, such as those related to growth and why I believe worries on that front are understandable yet ultimately overblown.

In any case, looking forward to the discussion! There is no doubt it was a disappointing year in certain respects, but for what it's worth I continue to think Input is severely mispriced.
Title: Re: INP.CVE - Input Capital
Post by: Schwab711 on June 01, 2016, 09:52:04 AM
Again, AAOI's detailed write up went into a number of differences with how agriculture in the US has gone vs Canada. There is no significant consolidation in Canadian agriculture; it is highly fragmented. Only private ownership of agricultural land is allowed, so big business is blocked out.

http://www.theglobeandmail.com/news/national/family-farms-are-fewer-and-larger-statscan-says/article4106102/
http://www.statcan.gc.ca/ca-ra2006/articles/snapshot-portrait-eng.htm
http://www.statcan.gc.ca/pub/95-640-x/2011001/p1/p1-01-eng.htm

There is quite clearly a consolidation of Canadian farms throughout the country, which is especially pronounced in Saskatchewan. Larger farms have easier access to traditional bank loans so I don't we'll see a reverse of this trend anytime soon. I've lived next to small farms for most of my life and I've heard the same sentiments nearly everywhere. I imagine the board has numerous folks from the communities Input targets that could provide a better perspective.

The government tends to frown upon predatory lending to needy farmers. There is a very long history of government intervention (in both Canada and the US) when this occurs. Input might not be predatory but if it isn't, it's darn close to the line. For Input to record 15%-20% returns, obviously that interest must be paid by the farmers. That is astronomical given farmland margins and going rates at banks. I think Input could actually run into regulatory issues if they did manage to grow to $250m to $500m in capital invested (or at least see regulations that incentivize easier loan access). Canada seems even more protective then the US. There is also the CALA program in Canada that has focused on helping young farmers in the last 5-10 years. Input is competing with big pockets offering cheap loans.

I'm also not sure that Saskatchewan farmland is fully restricted from large corporations. It sounds like any private, Canadian-owned company can acquire unlimited farmland, at the moment. I think the province is leaning towards opening up investment as opposed to further restrictions, though it's hard to predict these things.
https://www.saskatchewan.ca/~/media/files/government/have%20your%20say/farmland/farmlandownership.pdf

Quote
For most of modern history, farming, and farmland was seen, at best, as an uncertain investment.
Title: Re: INP.CVE - Input Capital
Post by: Otsog on June 01, 2016, 10:35:39 AM
This is exactly what management is going for:

(http://i.imgur.com/jycIuT5.jpg?1)

http://www.stockhouse.com/companies/bullboard/v.inp/input-capital-corp?postid=24923452

Title: Re: INP.CVE - Input Capital
Post by: AAOI on June 01, 2016, 11:00:03 AM
Just laughed out loud Otsog. Gotta hand it to you, that's pretty funny. A gross mischaracterization with no relation to reality but funny nonetheless.
Title: Re: INP.CVE - Input Capital
Post by: Tim Eriksen on June 01, 2016, 12:47:07 PM
Just laughed out loud Otsog. Gotta hand it to you, that's pretty funny. A gross mischaracterization with no relation to reality but funny nonetheless.

It is not like the company emphasizes this in any way.  if they were pushing this kind of thinking in any form it would be one of the top bullet points in their earnings releases.   :)
Title: Re: INP.CVE - Input Capital
Post by: elc13 on April 12, 2017, 06:18:39 PM
I spent about a week looking at this company, so I'm hoping someone on here understands the company better than I do and can point to places where my analysis goes wrong.

---

Hurdle

At the current market cap of $160m CAD, the market has priced Input Capital so that it will generate 20% returns if has annual cash earnings of 32m. Alternatively, since Input is growing, we can consider what the business must look like in five years to yield 20% annual returns; given its current price, it would need to reach a 400m market cap to meet this return benchmark.

Under what circumstances will Input be worth 400m? If Input were to generate 80m in cash earnings – or indeed anywhere near that – it would certainly be worth this much, as it would generate 20% annually for its owners.

How much, exactly, would Input have to grow to generate 80m in annual FCF? Conveniently, Input only really has one kind of contract, so if we understand what those contracts look like individually, we can understand what the business will look like in a steady-state scenario.

Unit Economics

Input’s contracts, broadly speaking, break down into two parts: upfront payment and delivery. When Input enters into a canola streaming contract, it pays the farmer a certain amount. This seems to be a part of the attractiveness of the contracts for farmers; they can put this cash to use immediately to make their operations more productive. Then, the farmer sends a certain amount of canola to input each year, Input pays some below-market price for it, and sells it on the open market.

The key variables are: (1) sale price/ton, (2) upfront payment/ton as % of sale price, and (3) delivery payment/ton as % of sale price. With these numbers set, the only question left is how many tons of canola Input is buying and selling each year, and you have a good idea of their pre-opex income.

Let’s make some rough assumptions, which we can revise later on. Suppose Input sells canola for $500/MT, and pays 44% ($220) upfront and 20% ($100) upon delivery. These numbers roughly match their reported figures in the latest quarterly report. They would have to sell 450K MT of canola each year to reach $81m in FCF. 

In the past 12 months, Input’s streaming volume was about 54k MT of canola. At anywhere near the ballpark assumptions I made, the company would have to grow very rapidly to generate 20% returns.

Predictions

It seems unlikely (20%) to me that Input will be able to match somewhere close to this rate of growth without triggering a significant competitive or regulatory response that compresses its margins. For that reason, I think it is unlikely (30%) that Input will clear the $400m CAD market-cap hurdle at any point over the next five years.
Title: Re: INP.CVE - Input Capital
Post by: winjitsu on April 12, 2017, 08:04:43 PM
Grizzlyrock sold out and put a note on Sumzero saying that he liked the management team but the TAM simply wasn't there. After holding this for a tiny position for a while now, I tend to agree...

Lending $50M a year seems reasonable the data from the recent quarter, but $100M+ seems implausible, so I don't think this is a "grand slam" investment

Recent earnings was optimistic and the company outlines some upside if they can continue to lend out $50M/year, but I don't think they account for loan losses, as real financial firms should. There's also a real danger to having over-priced farmland as collateral. See slide 22 on http://s1.q4cdn.com/784243260/files/doc_presentations/2017/jan/updtd/170118-Corporate-Presentation-Jan-2017-After-Ops-Update-vF.pdf

I think 5x cash flow, $80M for a $400M market cap is way too draconian.

Also as I noted before,  LTM OCF or MT isn't representative of the company at steady-state since the company is still penalized for smaller early year investments. If you modeled anything, it should be a company lending at a steady 30/40/50M a year for the full 6 year duration. 
Title: Re: INP.CVE - Input Capital
Post by: Otsog on August 03, 2018, 03:55:03 PM
I haven't thought about this company in years.  Had to google for a few minutes to even remember the name. 

It turns out the shady management team who misled investors was also shady and misleading to their clients.  Who woulda thunk?

http://www.cbc.ca/news/canada/saskatchewan/judge-ruling-input-capital-saskatchewan-farmer-1.4669680

http://www.cbc.ca/news/canada/saskatchewan/sask-farmers-accuse-regina-canola-trader-of-predatory-lending-in-class-action-lawsuit-1.4644105

https://www.producer.com/2018/05/judge-calls-input-capital-contracts-unconscionable/

https://www.canlii.org/en/sk/skpc/doc/2018/2018skpc31/2018skpc31.pdf

Hopefully everyone is fully divested from these parasites.

Title: Re: INP.CVE - Input Capital
Post by: bargainhunter on August 06, 2018, 10:39:18 AM
I haven't thought about this company in years.  Had to google for a few minutes to even remember the name. 

It turns out the shady management team who misled investors was also shady and misleading to their clients.  Who woulda thunk?

http://www.cbc.ca/news/canada/saskatchewan/judge-ruling-input-capital-saskatchewan-farmer-1.4669680

http://www.cbc.ca/news/canada/saskatchewan/sask-farmers-accuse-regina-canola-trader-of-predatory-lending-in-class-action-lawsuit-1.4644105

https://www.producer.com/2018/05/judge-calls-input-capital-contracts-unconscionable/

https://www.canlii.org/en/sk/skpc/doc/2018/2018skpc31/2018skpc31.pdf

Hopefully everyone is fully divested from these parasites.

This is old news. Management has been pretty candid about mistakes made in the early years. They have tightened their underwriting. And I don't have the numbers in front of me but the size of the average streaming contract has significantly fallen. That of course has created worries that the TAM here is much smaller than some of us thought. Hence where the share price is today.

The new mortgage streaming product could change this. Management estimates a TAM 3x the size of the working capital needs that their legacy streaming product addresses. There are other benefits too. Interest payments will be accrued monthly, smoothing out their earnings (rather than just a big annual lump sum which moves around depending on the harvest). Only the interest payments will be delivered in canola (principal repayments in cash) so Input's balance sheet will over time become much less volatile. Early pace of capital deployment is promising. 

I've followed these guys for a long time. Only a small position currently but I would not write off this management team.




Title: Re: INP.CVE - Input Capital
Post by: Philbert77 on September 29, 2018, 11:57:03 AM
Well I'm down 40 percent on this one. I sure hope they can do something good from here.