Total Brain Limited: Cost Containment Evident in Q2 Result

Business model
Total Brain operates a subscription as a service (SaaS) model for its mental health and fitness platform. The science behind the platform has been developed over almost two decades with input from the leading academic institutions in the field. This has generated a proprietary neuroscientific database of scale which underpins the scientific validation that differentiates Total Brain from other brain training and wellness applications. The app assesses the 4 core brain capacities (emotion, feeling, cognition, self-control), pre-screens 7 common mental health conditions & delivers personalised brain & mind/body training.

Q2 FY21 reflects cost containment and IP investment
Cash receipts lifted 12.3% on the prior corresponding quarter and were essentially flat on Q1 FY21. The company (and market) is waiting for the contract finalisation for the IBM Mental Fitness 360 platform to progress its GRIT program with a US agency (likely to be US Veterans). Total Brain’s Mind Gym is a core component of this platform. The contract had been expected to be finalised in Q2 FY21 but this has stretched to the current quarter. Management kept its focus on cost containment in Q2, evident in a 21.5% decline in cash burn over Q1 FY21. This was due chiefly to a reduction in operating, administrative and marketing costs. The company invested in its product with a 46% increase in IP investment on Q1 FY21 and 263% increase on Q2 FY20 to $1.48m. This investment readies the company for the rollout of its platform to the opportunities it has identified across the corporate, affinity and clinical businesses. The company has also invested in several new product initiatives including a heart rate variability (HRV) monitor and Resonant Breathing application. Total Brain noted that its current cash position, receipts collected in January (including a $1.1m R&D grant) and additional collections scheduled for the next three months (but excluding the IBM deal) give the company a runway to June 2021.

Base case valuation is $1.28/share
Our base case DCF is $1.28/share (WACC of 15.0% and terminal growth rate of 2.2%). In our view, continued momentum with new contracts, in particular with the IBM Mental Fitness 360 platform, which accounts for $0.41/share of our valuation, and development of the clinical market, should underpin TTB’s near term share price performance.