Inspira Financial is in the 9th inning of a liquidation of its assets -- now with over $0.20 per share in cash -- but has been abandoned by investors and as a result trades for only $0.115 per share. With the stock trading at more than a 50% discount to its NAV (that vast majority of which is cash) and additional upside optionality from a potential transaction, the risk / reward at current prices is skewed favorably, making it a very attractive investment opportunity.
The company has all of the ingredients necessary for a successful wind-up:
Assets that are significantly in excess of the share price: an $0.115 share price relative to a NAV of around $0.25 per share, $0.20 of which is in cash.
No cash burn -- management has aggressively cut costs which has allowed cash balances to continually increase each quarter.
Management that has acted rationally -- they’ve opted to liquidate rather than re-invest into the company’s struggling core business, and they even already paid a $0.075 special dividend in November 2016.
The company’s size and liquidity make it more suitable for personal accounts. Shares trade as LND on the TSX Venture Exchange in Canada and LNDZF on OTC Markets in the US.
The business was formed to capitalize on opportunities created in the US mental health and addiction services market due to the Parity Act. The passage of the Parity Act required insurers to cover mental health services, which in turn understandably created a surge in demand for these services.
In June 2016 the company bought RBP Healthcare Technologies, a mental health revenue cycle management business, for $8.5 million. The company essentially offered billing and collection services to rehab clinics in order to process claims.
Alongside the billing and collections business the company also built an asset-based lending business where they financed the receivables of their clinic customers.
Unfortunately for the company, industry fundamentals deteriorated significantly over the last few years, bringing into question the viability of both businesses. Average length of stays have decreased, pricing of mental health services have decreased, and pricing in the collections business specifically has deteriorated by 50-70%. I believe that when the Parity Act was more recent and the claims process more complicated the company was able to command much higher pricing; and with the process becoming less complicated over time, this has exaggerated the pricing declines in this business.
The good news for the company is that they recognized that the business was no longer an attractive one to invest in, and essentially put the business into run-off. They put the billing and collections business up for sale, stopped making new loans, and started to notice the borrowers to collect on their loans.
Sum of the Parts
The company has $9.3 million in cash, or $0.20 per share, and no debt.
The company’s remaining loan book is now down to only $0.9 million, or $0.02 per share.
I believe that there is additional value in the loan book, however. When the company wants to collect on one of their loans, they notice the borrower and put them on a payment plan. It can take over a year to be repaid. When they do this, under most circumstances their accounting policy requires them to provision the entire loan for a loss. As they then collect upon that loan, they gradually reverse the loan allowance. The company has a history of realizing these reserve reversals, so I suspect this trend should continue. It’s obviously very difficult to estimate how much additional value they can realize this way, but I believe that 25% of the current allowance is a conservative estimate. With a $4.8 million allowance, that works out to $1.2 million, or $0.03 per share.
As for the billing and collections business, given the deterioration in the industry, I do not think it possesses much value. They technically had an LOI from someone to buy the business for $9 million in October 2017 but that evidently fell through. To be conservative I’ve placed zero value on this business although management apparently is trying to sell it.
Adding up the parts gets you to $0.25 per share in net asset value.
Once the billings and collections business has been sold or disposed of, and the loan book fully collected upon, all that will be left is cash. As such, with no remaining operating business, it’s likely that the company will eventually want to invest some or all of those funds into a new business, so as to derive additional value from the corporate entity (i.e. “shell”). In April 2019 they appointed a new director who is a senior fund adviser at Mesa Verde Venture Partners. In that press release the company stated: “We are excited to have Randy join the board at Inspira, as we seek to identify profitable transactions for our shareholders," said Dr. Jaime Gerber, interim chief executive officer and chairman of Inspira. "Randy's extensive experience operating and investing in health care and life science companies is the kind of experience that Inspira needs moving forward. His skill set as a venture capitalist, corporate development and legal professional, complements our existing board composition and will help Inspira expand on its current corporate strategy.”
It’s impossible to predict how the corporate entity would be valued in such an M&A transaction, as values can vary widely, but ~$2 million would not be unreasonable, which would add another $0.04-0.05 per share in value. As it’s impossible to predict how it might be valued or whether a transaction will even occur at all, I’ve modelled no additional value from the corporate entity.
The main risk is that the company retains all of its cash and invests it poorly. The company will likely need to get shareholder approval for any transaction that they enter into which helps to somewhat mitigate this risk. The size of the discount to NAV also helps to provide a large margin of safety should the company invest its cash poorly.
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise hold a material investment in the issuer's securities.
The company makes an attractive investment with its cash.
Potential payment of a special dividend.
Additional collections on the loan book that have already been fully reserved for.