Salona Global Medical Device Corp 2 $SGMD.V $0.40 CAD

A brief update on Salona Global.

Salona Global published an update on their pending transaction and Q3 financials on Thursday, January 21.

Before we begin, I need to correct a few mistakes from my first Salona Global post. Thank you Chip and Jacob for pointing them out. The whole Valuation and Price section is wrong… shit. Cash After the Transaction should be $16mm, not $24.5mm. Net Assets are now roughly $22mm, not $30mm. There is also an $11mm tax credit from their previous Annual Report, but we’ll leave that aside for now. Luckily, pro forma financials are coming soon and we won’t have to guess as much.

Salona received approval from the TSX Venture exchange Wednesday, January 20th. They will hold a shareholder vote on Tuesday, March 2nd. With Mr.’s Dalsin and Greene owning roughly 1/4 of the company, and poor stock performance of BRTL, I believe shareholders will vote the deal through. But, what are the rules for these types of meetings? How many votes are required for approval? I don’t actually know, and should probably find out.

Meeting materials (management information circular and pro forma financials, among other exciting things) will be released around Tuesday, February 9th.

I’m (perhaps naively) excited about this whole situation. I bought stock as a net-net, figuring Mr. Dalsin and Greene would just do something interesting. A healthcare roll-up with a potential Nasdaq uplisting is interesting, to say the least. Time to stop patting myself on the back, though. I should get back to work.

Disclosure: Long SGMD.V (I can’t sell it! It’s halted).


Colony Capital Inc

Theft, but it’s OK (…right?).

I stole this idea. A lot of what I’m doing here is paraphrasing the work of my friend. OK? OK. With that out of the way… let’s dive in.

Big Picture

People, businesses and communities continue to increase their use and dependence of technology. More and more people shop online, stream content and make Zoom calls, every day. We know this. The story isn’t new. covid accelerated these phenomena, etc.

Interestingly, this growing use and dependence on digital stuff… results in massive changes in the physical world. More specifically, it’s having a profound effect on digital assets.

Little Picture

Colony Capital is undergoing significant change. It’s transforming from a diversified REIT to a digital asset-focused asset manager. During 2020, Colony hired Marc Ganzi as CEO (after acquiring his company) and shed some non-digital assets, like their hospitality and bulk industrial assets, while acquiring digital assets like data centers, fiber businesses and cellular towers.

In short, they use OPM (other people’s money) and a bit of their own, to acquire and operate digital assets.

Valuation and Price

I need to improve on this section, as I’m totally relying on my friend, but here we go…

CLNY has about a $2.5 billion market cap and is trading close to its 2021 NAV of $5.00 per share. The belief is that Colony will be worth $8.00 per share in 2023.

Margin of Safety

The stock price has come up to 2021 estimated NAV, but there’s still a pretty big redundancy with an $8.00 2023 price target.

Marc Ganzi is an absolute stud with a great track record.

I need to work hard and do more of my own work on this one, to see if I can develop conviction, otherwise the margin of safety doesn’t even matter.

Et cetera

Need to learn more about Marc Ganzi, digital assets, and 5G.

Some interview of Marc. He kind of talks like Bruce Flatt, but perhaps all polished executives speak similarly. https://www.youtube.com/watch?v=UGrJEPFVATw, https://www.youtube.com/watch?v=bSV8_d15O74, https://www.youtube.com/watch?v=oY8CJ23bPs0.

I own shares of CLNY.

Acknowledgements

Thank you to my friend who wants to be anon.

Salona Global Medical Device Corp

Link to previous research here.

I kept checking under SEDAR to see if Santa left a gift. Surprise! He did.

The net-net formerly known as Brattle has… changed its name, its business model, completed an acquisition and a rollback (7.37 for 10), and completed their concurrent financing. Once the company re-lists its stock (maybe January), the Salona snowball will start to roll.

This healthcare roll-up has a long hill to roll-down. There are lots of small and profitable medical device companies that Salona could acquire. Company insiders have done a fairly successful (depends who you ask) roll-up before.

Valuation and Price

There are now 33,813,308 shares outstanding on a non-diluted basis and they raised $5,550,258 in their concurrent financing. That’s $0.164 cash per share. Management (current and acquired) participated in the latest financing. The CEO of the acquired company (South Dakota Partners) is also being paid in SGMD stock, not cash. Seems like management has big incentives to make a big snowball.

Using excerpts from their Sept 17, 2020 presser, we can do some hazy valuation work. Note their Sept 17, 2020 cash raise was advertised as $8.5mm, so we’ll adjust a few things by the $3.0mm difference (they “only” raised $5.55mm) below.

From Sept 17, 2020 presser. Acquired Company highlights, before costs and financing.
From Sept 17, 2020 presser. Acquired Company highlights, before costs and financing.

If I read that right, the company Brattle acquired has grown revenues at 150% (since 2016) to $15.9mm in 2019. Profitably? Maybe…

Further, Net Assets are now roughly $30mm ($25mm + $5.5mm financing) and Cash is $24.5mm ($19mm + $5.5mm financing).

They’ve also identified a few profitable acquisition targets.

Not bad.

The stock will likely get re-rated to an EPS multiple (which I think, but I’ll have to check, is what insiders Mr. Dalsin and Greene have communicated before). In the meantime, they currently have $0.71 cash per share on a non-diluted basis… it will be interesting to see where SGMD trades when the halt is lifted.

Let’s hang our valuation hat on 2019 revenue of $15.9mm, or $0.47 revenue per share. I’ll be buying around $0.50 and below (if my math is right).

Margin of Saftey

Mr. Dalsin and Greene own about 30% of the company and millions of stock options, management participated in the latest financing, and their first acquisition target CEO took SGMD shares instead of cash. Good signals and good incentives.

I think we may see selling pressure upon re-listing. It was a former net-net that’s now a healthcare roll-up story. Value guys and gals will probably sell because they got their net-net puff, while growth investors will start to buy… eventually.

The story (and promote) will take some time to be spread. It’s still early days. Mr. Dalsin and Greene have cranked a stock before. It seems likely they will succeed again.

Et cetera

How are roll-ups typically valued?

I’m going to study Patient Home Monitoring and Viemed. Two companies that Mr. Dalsin and Greene were involved in before. It will help place their new roll-up in context.

I own shares of SGMD (I couldn’t sell even if I tried!).

Acknowledgements

I know I missed stuff. Please do let me know.

Brookfield Asset Management Reinsurance Spin-Off

Brookfield Asset Management is going to spin-off its Reinsurance business (here’s their news release).

This one should be interesting because 1) BAM is interesting 2) there will probably be indiscriminate selling of BAM Re.

Details are scarce for now. Here’s what we know… BAM Re will be distributed to BAM shareholders through a special dividend of $500 million. The mothership (BAM) has about a $75 billion market cap. When there is a mismatch of this size, it’s usually worthwhile to look at the deal.

I don’t understand the structure of the spin-off. BAM is using a similar structure to that of a recent spin-off (Brookfield Renewables Corporation). Something about a “paired” entity and being “structured with the intention of being economically equivalent to the Class A shares of BAM.”

Expect it to be completed in the first-half of 2021. More to follow.

Brattle Street Investment Corp 3

Prologue
There’s more news about my pet net-net (Brattle Street Investment Corp.).

There’s been a modification to their previously announced deal.

I wrote before that Dalsin and Greene were in the early stages of a deal. As time has turned, the deal has changed.

Valuation and Price
The pre-trading halt valuation was $0.18 per share (NCAV) and the last closing price was $0.12 per share.

From last month:

What’s the deal? First, The TSX Venture Exchange has to approve the transactions that make up the deal. They are all pending. Big picture as of now: BRTL transforms into Salona Global, a healthcare roll-up. The first stage of this roll-up is acquiring SDP, hiring new management and doing a private placement. Here’s all the math from their recent filings: 1) a 7.37 shares for 10 rollback. 2) Issue 19mm shares to acquire SDP and get a pre-money valuation of $45.9mm. Now at 54mm shares out, that’s $0.85 per share. 3) Private placement for $8.5mm at $0.85 per unit (unit = 1 share and 1/4 warrants).

It will be interesting to see where the stock trades after The TSXV makes their decision. If they OK the transactions and the stock trades at $0.85, we’ve made about 5 times our money (math: $0.85 per share / ($0.12 * rollback (10/7.37))). Not bad for a net-net.

I didn’t write that the deal itself could change, which is what has recently occurred.

I think the “Consolidation” and “The First Transaction” are remaining the same, but the “Concurrent Financing” is changing. Instead of receiving $8.5mm in exchange for 10mm shares and 2.5mm warrants (1 share $1.25 strike for 24 months)… the New Concurrent Financing is in two blocks.

Block 1: I think this is a USD transaction because there’s an S-1 clause. Brattle would receive $3.12mm cash (less $155,000) for 6.633mm (plus 829k) shares. The “less” and “plus” are incentives for the investment bankers. Looks like they would be raising about $3mm at $0.40, after commissions. This block of shares have a four month initial hold and then some monthly restrictions on further sales.

Block 2: Brattle receives $1.89mm (less $95k) for 2.21mm (plus 276k) shares and 2.21mm warrants (1 share $1.25 strike for 24 months) at 0.85 per unit (same price as before).

Putting it all together… that’s about $5mm CAD raised in a USD and CAD block and 12.15mm shares issued. The previous deal was $8.5mm CAD and 12.25mm shares issued.

If my math is right, I don’t agree with Les that “the Board has re-evaluated and improved the structure of the planned financing” because they’ve raised less cash and will be issuing about the same amount of shares. The four-month hold and trading restrictions may help a bit. Time will tell.

10-year chart.

Margin of Safety
Evaluate risk first. The deal could fall through, or get changed again, or BRTL goes back to the net-nets wasteland. If the deal goes through, it’s likely the stock will become more liquid and have a higher valuation – two things that make me a bit leery. My thinking will have to change and I’m sure my valuation approach will too as it will become a healthcare roll-up with lots of shares issuance and further private placements for acquisitions.

Et Cetera
It’s likely that Mr. Dalsin and Greene are trying to sell the deal to institutional investors that made money on their last roll-up called Patient Home Monitoring. More on that later, Salona Global is a good resource for now.

Why did they have to change the terms of the previous deal?

In the specific deal documents to acquire SDP, why are does it note they’re offering shares of stock for $8.5mm at $0.55 per share?

Why is Les Cross doing this for a “measly” 4.6 points. Does he own through a holding company, is he going to get lots of options, did he own part of SDP before the transaction?

I own shares of BRTL.

Acknowledgements
All mistakes are mine.

Brattle Street Investment Corp 2

Prologue
Look, people don’t like when things come fast. It makes them feel uncomfortable, weird questions are asked, and so on and so forth (you know what I’m talking about). On the other hand, when good news about your pet net-net (Brattle Street Investment Corp.) comes faster than expected… people rejoice.

Jokes aside, when I wrote about BRTL a month ago I (naturally) hoped that something interesting would happen immediately. I reckoned it could take a year or two though. I was happy to just sit and wait. The good news is a welcome surprise.

What good news? Mr. Dalsin and Greene appear to be in the early stages of an interesting deal.

Valuation and Price
The pre-trading halt valuation was $0.18 per share (NCAV) and the last price was $0.12 per share.

What’s the deal? First, The TSX Venture Exchange has to approve the transactions that make up the deal. They are all pending. Big picture as of now: BRTL transforms into Salona Global, a healthcare roll-up. The first stage of this roll-up is acquiring SDP, hiring new management and doing a private placement. Here’s all the math from their recent filings: 1) a 7.37 shares for 10 rollback. 2) Issue 19mm shares to acquire SDP and get a pre-money valuation of $45.9mm. Now at 54mm shares out, that’s $0.85 per share. 3) Private placement for $8.5mm at $0.85 per unit (unit = 1 share and 1/4 warrants).

It will be interesting to see where the stock trades after The TSXV makes their decision. If they OK the transactions and the stock trades at $0.85, we’ve made about 5 times our money (math: $0.85 per share / ($0.12 * rollback (10/7.37))). Not bad for a net-net.

10-year chart.

Margin of Safety
Evaluate risk first. The deal could fall through and BRTL goes back to the land of net-nets. If the deal goes through, it’s likely the stock will become more liquid and have a higher valuation – two things that make me a bit leery. My thinking will have to change and I’m sure my valuation approach will too as it will become a healthcare roll-up with lots of shares issuance and further private placements for acquisitions.

Et Cetera
It’s likely that Mr. Dalsin and Greene have sold the deal to institutional investors that made money on their last roll-up called Patient Home Monitoring. More on that later, Salona Global is a good resource for now

I’m still trying to wrap my head around how they kind of went whoosh that’ll be $0.85 per share please.

In the specific deal documents to acquire SDP, why are does it note they’re offering shares of stock for $8.5mm at $0.55 per share?

Why is Les Cross doing this for a “measly” 4.6 points. Does he own through a holding company, is he going to get lots of options, did he own part of SDP before the transaction?

I own shares of BRTL.

Acknowledgements
Thank you Chip, Dean, Paul, Saj, and, Trevor for your help.

Brattle Street Investment Corp

Prologue
Brattle Street Investment Corp (f.k.a. Inspira Financial) is a net-net stock controlled by Michael Dalsin and RogerGreene. Cash burn and share dilution are reasonable, and there is stock price inflection potential. Buy some shares, forget that Mr. Dalsin and Greene have been (unfairly) called “The Gruesome Twosome”, and be patient.

Valuation and Price
BRTL has cash and a small amount of securities (both USD) on its books. There’s no revenue, no PPE, and no debt. NCAV is $6.5 million USD and there are 49.75 million fully diluted shares out. At $0.131 per share NCAV and a $0.084 (both USD) stock price, this is a net-net! BRTL reports and trades in CAD. So that’s $0.18 per share NCAV and a $0.115 CAD stock price. BRTL’s market cap is 2/3’s of its NCAV. You’re buying $1.00 for $0.64. Not bad.

Stock price inflection potential. The stock is sitting near its all-time low, it’s priced as if dead, and it’s a penny stock. The owners of the company are apparently disliked, but they will probably do some good deals in the U.S. medical device industry within the next few years. If you can be patient, and dispassionate, you might make some good money.

10-year chart.

Margin of Safety
Evaluate risks first. Mr. Dalsin and Greene could never complete a transaction (melting ice cube), they could continue to issue options and dilute minority shareowners, or they could do bad a bad deal (or six). I view these scenarios as unlikely because of their track record and large insider position.

On the other hand, while you’re waiting to see what will happen, you’re buying a dollar for 64 cents, which is pretty good. You can accumulate a significant number of shares relatively cheaply. I do think the stock will continue to trade at a discount to NCAV until a deal is done. Without the inflection potential, I wouldn’t own the stock.

Et cetera

I own shares of CA: BRTL.

Friends, if you want to buy this stock, use limit orders and be careful. The bid-ask on equity order screens appears to be inaccurate (which I’m excited about because it throws people off) and the stock is fairly illiquid.

Thank you David Flood for bringing BRTL to my attention.

BRTL has been discussed on Value Investor’s Club. Read the write up because it’s good.

All mistakes are mine. Questions and comments: rn@rileynewport.com.