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.
The fact that the title of this post references one company, and the displayed logo references yet another is likely causing some confusion, so let me explain.
Brattle Street Investment Corp. is a company that has been in transition for some time, and (full disclosure) that I have been long on for some time. For quite a while, I debated creating a post about the company, however, I wasn’t sure what I could say – the company was opaque at the best of times, and basically existed as a shell. I had a hunch that, behind all of the “non-activity”, something was brewing, but that was all I had – a hunch. I kept buying at what I thought was a depressed price, but were I to post something, what would I say ? That something might happen in the future ? With no clear direction, I put it on the shelf for some future time. As it turns out, my suspicions were correct, as the company issued a significant press release as of September 17th 2020. I believe that the share price of the new company, once it starts trading, should improve. Because of the unique nature of this situation, this post is as much about why I continued to hold (and continued to buy), and why I believe there is an opportunity here.
However, before delving into the analysis, it probably makes sense to delve into the past.
A bit of history. Before it was Brattle Street Investment Corp., the company existed as Inspira Financial, and offered “…a full suite of billing, consulting, and financial services to the substance abuse and addiction treatment industry.” During it’s existence as Inspira, the company enjoyed some success, as it actually paid a dividend for a while, something which usually bodes well for the future. However, good times were fleeting, the financial services business was wound down, and the shares languished. The dividend was eventually eliminated, the shares fell further, and interest in the company became non-existent. One can see from the chart (below), that Brattle Street was essentially dead money.
While this chart suggested a lack of interest, it was exactly this “dead chart” , among other things, that continued to pique my interest. I’ll walk through the factors that compelled me to hold Inspira / Brattle Street, and, as always, I use a green , amber, and red format to hilite specific areas that I believe to bebullish, neutral, or bearish. Readers are also cautioned that as of the time of writing this (September 22nd, 2020), Brattle Street shares are halted, and there can be no guarantee as to what price they will open at once they begin trading again.
This chart was (and is) saying “buy me”.Yes, I know for a lot of you this chart is saying “I am on life support”, but the truth is that the company never flirted with insolvency (more on that later). More than a few of my successful investments (Athabasca, Macro, Pyrogenesis) have been initiated with charts such as this, as this chart tells me that things have been skipping along the bottom for some time. Unhappy shareholders have sold out of this position a long time ago, and there is very little (if any) negative news left. At this point, this chart is saying “the worst is likely over”. From a technical perspective, this chart doesn’t look sexy, but I believe that in conjunction with other factors, I believe it will start to look much better over time.
No debt, lots of cash.I know that the first response of many is that the cash (and lack of debt) on the balance sheet is reflective of the past, not the future, and I absolutely agree. The balance sheet will change when the proposed transaction takes place, but it’s always nice to start from a position of strength. Having money in the bank means that there’s more ability to weather any storms, and likely means less dilution in the future. As of Q1 financials (at May 2020), the company had $8.5 MM in cash and a total of $150,000 in liabilities. Based on the 46.8 MM shares outstanding (as of September 2020), this equates to $0.181 per share in cash, meaning that the company is trading at “net-net” status. While it’s clear that there is no intent to liquidate the company, the net-net situation simply highlights that there is very little downside.
Not cash flow positive, but the cash burn is low.Ideally I’m hoping for a cash flow positive situation, but current cash flow won’t really tell us much, given that the company will change significantly going forward. That being said, the cash burn rate for Q1 is ~ $220,000. While we know this will change significantly in the future, at least we can see that the company hasn’t been on the path of simply shoveling cash out the door. Additionally, to provide further perspective, as of the year end at February 28, 2018, the company actually had less cash ($6.0 MM) and more liabilities ($331,000), and that was over 2 years ago. While the company may have been in a holding pattern, they have managed to safeguard cash during a time when revenues were declining – without issuingmore shares.
The company has significant tax pools.Something that you won’t see on the balance sheet (see excerpt below) is the fact that the company has significant tax pools in its back pocket. While it’s unlikely the company will be profitable from day one, once it is, these can be used to shelter income for some time.
High Insider ownership.Two notable insiders, Roger Greene and Michael Dalsin, control 6.5 MM and 6.24 MM shares respectively, which in combination makes up 27% of the total outstanding shares. Both have been buyers at current prices ( ~ $0.12), and both have a history investing in the health sector. Given that they are buyers at these levels, it would be a fairly safe assumption to say that they have a significant interest in seeing the share price move well beyond the current price range. Additionally, given their prior activity investing in the health sector, they likely have developed relationships which should prove beneficial going forward.
No analyst coverage, but some institutional ownership.TerraNova Partners, a private equity firm, owns 4.07 MM shares of Brattle Street, which it acquired when the company was still operating as Inspira. At that time, the relationship between TerraNova and Inspira was rocky at best, as TerraNova had more than a few concerns with the actions of the Inspira board at the time. In any case, regardless of their concerns, TerraNova decided to hold, as they are still listed as a significant shareholder. If we fast forward to today, the company has no analyst or institutional coverage to speak of. With a significant transaction waiting in the wings, this means that this situation is likely to pivot hard in the relatively near term, which means new coverage (and a lot of other eyeballs) will likely be looking at the new entity soon.
No self promotion.The company has issued the bare minimum with respect to press releases over the last few years, so to say that there has been “no self promotion” is diplomatic. While this has been a bane for shareholders who have held (like me), it also means that the price hasn’t been inflated by any stretch of the imagination. This “minimalist” approach to communication only confirms what the chart has already communicated – that the shares have been bumping along the bottom for some time. We expect this lack of self promotion will come to an end once the proposed transaction closes.
No share buyback, but the future share structure will change.The number of shares outstanding has been virtually unchanged since late 2016, but the share structure will change going forward. Current shares will consolidate on a 7.37 for 10 basis, meaning that the 46.8 MM shares will consolidate to become 34.5 MM shares. Additionally, the company is proposing a private placement of 10 MM shares at $0.85 per subscription receipt, which is the most interesting part of this transaction. The pricing of the subscription receipts makes a very strong suggestion that the company is very bullish, at least in the near term.
The sector has interest. Normally I look for value in sectors that are out of favor, but in this case, I have found something of value in a sector (health care) that is arguably front and center. While the new entity doesn’t have a line of sight to COVID directly, the health care sector has seen an increase in interest due to the COVID pandemic. Given that the COVID situation is likely here for the longer haul, it stands to reason that this serves as a tailwind from an investment perspective, as both retail investors and professional money managers look to this sector for opportunities.
Long management tenure.In this section, there are clearly some unknowns. We cannot in good faith make any assertions about a brand new management team, other than to say that they have a blank slate to work with that is, as of yet, untarnished. While the proposed management team certainly has experience in the medical sector, we usually view the associated pronouncements with a grain of salt.
Potentially disruptive technology. We would suggest this section is neutral , as there is nothing to suggest that anything that they will be embarking on will be “game changing”. While they might be able to create a better (financial) mousetrap via some attractive acquisitions, the new entity likely won’t be changing the face of medicine overnight.
Clean earnings & differential between EBITDA and cash flow.Normally, we would look at these factors to determine quality of earnings, and to see if there was anything out of the ordinary with respect to EBITDA and cash flow. However, since past quarters are reflective of the former entity (Inspira) and have been wound down, they are of little use in this instance. With this in mind, we regard these as neutral factors in our assessment.
So – what does all of this mean for the small investor ? To summarize all of this into the proverbial “ball of wax”, the key takeaways are this:
The press release signals a very positive change: The September 17th press release is the catalyst that will start things moving again, as it confirms that “things have been brewing” in the background. It’s the initial whiff of oxygen to the embers of a slow burning fire.
The downside on the share price is limited: From a purely technical perspective, the shares have been forming what I call a “saucer bottom” for a long time. From a fundamental perspective, the shares, at their current price, are trading at “net-net” status, which further implies that risk is limited.
Bankruptcy is a non-issue: With lots of cash and no debt, the risk of short term insolvency is a non-starter.
New interest will move the share price: This company has been ignored for so long, that I would be surprised if anyone is aware of it. The proposed private placement will bring press releases and attention from both small and larger investors.
The trick will be to get in earlier rather than later: The shares are currently halted, so buying now isn’t possible. However, there should be some communication in the future as to the new symbol and when it will begin trading on the TSX Venture. This may come with a significant amount of fanfare, so the trick is to keep ones head and not overpay for shares.
Keep an eye on insider activity: Insiders are very good signals of what portends, especially in this case, as there is no “history” to draw on.
As I indicated previously, I am already long on Brattle Street shares, and have been a recent buyer at these levels, before the shares were halted. I believe, given the factors described above, 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.
