Brattle Street Investment Corp. – update at Q2 2020

If you are new to Brattle Street, or the new entity that is yet to become free trading (Salona), then a more complete review of the investment thesis can be found here. For those that are familiar with the story, this will be a fairly brief update.

What’s changed ? The short answer is not much. Shares are still halted, and Yahoo doesn’t even pull up the symbol, BRTL, although one can still pull up historical pricing via the pink sheet ticker, LNDZF. The company has issued a press release (October 28th 2020) indicating they are moving forward with the proposed acquisition, a re-listing on the TSX Venture as “Salona Global”, and two proposed financings in the future. The company also released quarterly financials (Q2 ended as of August 31 2020), which we discuss below.

What do the financials say ? There are no surprises here – the company is a well capitalized shell, essentially “waiting to happen”.

Based on the current shares outstanding (as of August 31 2020), the company has a book value of $0.18/share, the vast majority of which is cash. The cash balance and book value did fall somewhat since February of 2020, but not significantly. Given that the company has been in a transitional status for some time, review of the income statement does not add significant insight. One can sum up the activity on the income statement by saying that both revenues and expense fell precipitously, which is not unexpected. Given that some expenses are fixed, it is fair to say that revenues fell much more than expenses, which accounts for the approximately $400,000 in overall cash burn since August of 2019, which is evident on the cash flow statement.

What is the opportunity here ? Readers who have visited recently may have read a recent post entitled “Recognizing small cap opportunities”. The post detailed two very different companies, each of which ended up providing returns to investors in very different ways – one through excellent management of capital and outsized dividends, the other via a focused and consistent investor communication campaign and a perceived catalyst, which then drove the share price. The opportunity with Brattle Street / Salona will be, in my opinion, the latter. In this case, review of historical financials and typical investment metrics will not be very useful, as there is no history to work with. With this in mind, the opportunity here can be summed up as follows:

• The company has clearly indicated that it will be embarking on acquisitions and financings.
• Financings are proposed at prices higher ($0.35 and $0.63, pre-consolidation) than the last traded price of BRTL.
• A rebranding will also be happening, with an associated change in symbol at some point.
• The combination of these events suggests there will be significant news flow about the new entity.
• As of today, there are essentially zero social media postings (on investment boards) about the company.

Given how the stage has been set, a significant “press cycle” is probably in its early stages, and investors will hear more and more about the new entity as time goes on. Just as movies suggest that “This feature is suitable for mature audiences”, I would suggest that this ride is only suitable for those who can stomach some volatility. This is not to say that this will be a bad investment, but simply, share price movements will (at some times) lurch rather than climb nicely. For those investors who are OK with momentum plays, the newly branded “Salona Global” may provide an opportunity to hitch one’s wagon to an accelerating share price – just wear your seatbelt.

That being said, it is worth noting that Brattle Street (BRTL) , and the predecessor company, Inspira (LND) traded for months in “net-net” territory, which highlights how small cap investments can live in obscurity for extended periods of time. As I mentioned in my prior post, it wasn’t clear to me what was happening within the company, but given the heavy insider ownership and net-net price, I believed it was just a matter of time before something happened.

As I indicated in my prior post, I am already long on Brattle Street shares, and was a buyer before the shares were halted.  I believe, given the various factors described in this post (and my prior post) that many of the unique ingredients for a successful small cap investment are in place. Of course, these are only my thoughts & opinions, and it will take some time for this thesis to bear fruit (or not). If you have questions or comments, I can always be reached at mark@grey-swan.com.