CBC Investigates

Short-seller calls Manitoba-based company 'ticking time bomb'

The Manitoba-based company targeted by a U.S short-seller put on a brave face for investors Thursday, presenting a second-quarter report it says shows it's on the path to a record-breaking year

Exchange Income Corp. releases second quarter report early after U.S. investor targets company

Perimeter Aviation is one of the airlines owned by Exchange Income Corp. (Jill Coubrough/CBC)

A Manitoba-based company targeted by a U.S short-seller put on a brave face for investors Thursday, presenting a second-quarter report it says shows it's on the path to a record-breaking year

Exchange Income Corp.'s quarterly results were released under a cloud, announced ahead of schedule after Marc Cohodes revealed he was betting against EIC's stock earlier this month.

"The reason to report earlier was driven by the uncertainty in the marketplace, and we felt the best way to relieve this uncertainty was with facts," CEO Michael Pyle said Thursday in a teleconference with investors.

The uncertainty was driven by Cohodes's aggressive short campaign, dubbed Mayday EIF Dividend (the company's name on the stock market), which carries a host of allegations against the company.

He alleges EIC — a diversified, acquisition-oriented corporation that owns several northern Manitoba aviation companies including Calm Air and Perimeter Aviation — is a ticking time bomb. He argues it is paying its investors dividends it can't afford and could go belly-up if it doesn't change its business model.

The company's aviation wing also provides airline, charter service and emergency medical services to communities located in Manitoba, Ontario, Nunavut and Alberta. 

And it has a very famous chair of its board: former Progressive Conservative premier Gary Filmon. 

"Understand: if the company does not sell stock or raise money through debt they will go broke at the trajectory they're at," Cohodes told CBC News.

'Record highs' for company

Mike Pyle is the CEO of Exchange Income Corp.
However, on Thursday morning Pyle presented a company with a healthy financial outlook — arguing the company has hit "record highs on most financial metrics" despite challenges over the winter due to weather as it spent millions upgrading its fleet.

"To those familiar with our story, the growth will not come as a surprise, as we have a 13-year track record of increasing profitability of our company through investment in a creative acquisitions," Pyle boasted to investors on Thursday.

The results released show the company's revenue grew by 20 per cent to $273.1 million from last quarter, while net earnings rose 50 per cent to $25.8 million.

Cohodes scoffed at the company's results, calling them "awful" and further sounding the alarm that EIC raised its debt load by $462 million, yet continues to pay record-high dividends to shareholders.

"The quarter all in all was a disaster," Cohodes said. 

Profiting as the stock price drops

Cohodes's short means that as EIC's stocks fall — as they did significantly following the release of his short campaign on July 5 — he stands to profit.

It's a financial practice first introduced to many people by the film The Big Short, based on the true story of Michael Burry who famously shorted the American housing market D 2005. Cohodes made a name for himself in 2014 when he announced he was shorting Canadian lender Home Capital Group.

Marc Cohodes says housing markets in Vancouver and Toronto will blow to 'complete and utter smithereens' 5:44

How much Cohodes stands to make if stocks fall again isn't known, but Cohodes says it's not just about making money.

"Yes, I'm shorting the stock, yes I'd benefit that it goes down, but it's important for people not to shoot the messenger but listen to the message," he said.  "Because I'm an old man, and I've been doing this for a very long time and I have a history of exposing people who tend to do wrong things."

Cohodes's stance on EIC is not the consensus among all financial analysts in Canada. David Tyerman, an analyst with Cormarck Securities, says it comes down to two different schools of thought for how a company should operate.

"It's not a conventional model.  Conventional model companies would work the way he is describing them," Tyerman said.

"He [Cohodes] wants them essentially to fund all the growth and the dividends out of existing businesses cash flows and he's right.  The existing businesses don't generate enough cash flows to do both those things, but that's not the way the company has ever been structured to work."

He admitted the company has been able to raise its dividend 12 times in as many years, but said it is consistently able to service its debts and pay out investors.

"So what that says is you've got sustainable returns, sustainable debt service and you're raising your dividend. If there was something wrong with the model you wouldn't be able to do those things," he said.

As for those ready to contradict Cohodes, the American investor says he will debate them any time, anywhere. 

"It could be on CBC Radio wherever you want to do it. I will even buy a ticket and come up to Manitoba and you can sell tickets and we'll donate the money to charity," he said, challenging Pyle to a debate.

"He cannot stand the scrutiny I will bring him."