Mitesco Inc. (OTCMKTS: MITI) may not be getting credit for their clinics from wall street, but health insurance providers are on the hunt for them. The stock is under pressure ahead of its planned uplisting to NASDAQ as the shorts pile into names looking for capital in this environment. Last week MITI bottomed out after the market cap hit a point lower than all the money the insiders put into the company. While the company has zero or negative enterprise value, investors will be pleased to learn that the sale of clinics in the private market is many multiples over its current market cap. ($2.0 million vs. $20.0 million)Investors recently saw this type of arbitrage play out in Digital Brands Inc (NASDAQ: DBGI), where a looming reverse split coupled with a financing attracted an army of shorts and short busters. The shorts may have gotten a short-term reprieve in DBGI covering the S-1 financing, but with MITI, they may be in real trouble because the economics of selling the clinics to an insurer makes more sense than raising money at the current level. Investors shouldn’t discount the value of insider ownership and their desire to limit dilution. A go-private strategy could be in the cards if market conditions don’t improve.
Strong Deal Flow for Clinics
Recently there have been a number of large-scale acquisitions in the healthcare marketplace, with Signify (NYSE: SGFY) being acquired by Aetna/CVS for $8 billion, and One Medical (Nasdaq: ONEM) folding into Amazon to allow them to continue their march into healthcare. In both cases, these acquirers saw the construction of a healthcare provider network as the key to their profitability. They need to drive revenues and reduce costs, and the clinics offer both the recruitment and retention of clients but also help them maintain cost controls. The profitability of any insurance provider rests on its ability to keep its costs for services in check. When outside providers are used by clients, the cost is often much higher than those incurred if the providers are in-house.United Healthcare (NYSE: UNH) is the undisputed behemoth of the industry with 54.6 million customers, not including its technology health services business Optum, which serves 101 million clients. There are reports that over 55% of US physicians work for United directly or through subsidiary operations. Given the shortage of doctors in the US, it is not a surprise that insurance providers are bidding up the prices of healthcare provider practices. This favorably positions companies like MITI that have nurse practitioners on their rosters.While these are the most prominent transactions, other smaller healthcare provider groups are being acquired as well. Skylight Health (TSXV: SLHG), a much smaller Canadian company, recently picked up two smaller Medicare Advantage-focused clinic groups in Florida. AMB Wealth was an advisor in one of the transactions and reports 12 other similar transactions over the last two years.
Clinics – Capital Intensive with High Valuations
A cursory review of the providers in the primary care space shows that many are not cash flow positive and continue to consume cash as they build the size of their client base. Oak Street Health (NYSE: OSH) reported a $130 million loss in the third quarter of 2022, operating 161 sites in 20 states. Their market cap is $5.1 billion or $31 million per site.One Medical (Nasdaq: ONEM) has a $3.4 billion market cap with 182 offices and recorded a loss of $312 million in the trailing 12 months. Yet they are being acquired by Amazon for $3.9 billion, $21 million per site.When valuing a clinic, it’s not necessarily about earnings per share but the value of the underlying clinic network. So much like commercial property investment, you invest X and then measure the value of the effort based on industry metrics at a multiple of X.Mitesco whose market cap is around $10 million, with its six (6) clinics, shows around $2 million per clinic, clearly has upside potential for a large gain using its assets for valuation, versus earnings or stock price. Will the market see the potential value in the clinic network they have built? If the market gave it half the value others see in the clinics alone, there could be a move up to $60 million or $120 million for full value. That is at least five (5) times the current market cap, and maybe 12 times!
Mitesco AKA - Healthcare Clinic REIT
The team at Mitesco has spent the last two years entering the market through creating The Good Clinic based in Minneapolis, with six (6) units in place and another two (2) under development. A review of their financials shows an investment of around $12 million through their wholly-owned subsidiary, using a combination of bridge debt and equity financing. They have been waiting for admission into the Nasdaq market for the last 12 months, where the capital for expansion is more available than in their current OTC Markets environment. They report significant success in the quality of care with hundreds of five-star ratings, though the revenue levels have been short of expectations.While they are undertaking a detailed review and planning an adjustment with a revamp into “The Good Clinic 2.0” where revenues and client expansion within existing sites will be the lead direction, several insurance providers in the Midwest might find the subsidiary to be an interesting investment opportunity. With some transactions reported as high as $20 million per clinic site, the investment in The Good Clinic sites seems to be around $2 million for each clinic location, leaving plenty of room for a substantial gain on an investment basis. Granted, their revenues are light as they have not spent on marketing, so maybe the valuation per site could be half, $10M? With six (6) locations in gear, that’s $60 million, five (5) times gain over the investment.
Mitesco Management – Seasoned Clinic Operators
The team building out The Good Clinic is the same that built the Minute Clinic business and sold it to CVS for $180 million, and it was operating at a loss at the time of the sale. It was not an easy task, and the shifting needs of the healthcare marketplace are no less challenging today.
The Good Clinic could be “MinuteClinic 2.0”
Many might not be familiar with QuickMedX Inc., but it was a clinic business started in 2000, over 20 years ago. Harvard Business School reported on the clinic because it was a revolutionary new concept at the time. Most people go to the clinic because they need a simple diagnosis that requires a test or a prescription for treatment. QuickMedX was a fast and convenient testing center that did rapid testing, diagnosis, and issued prescriptions. At the time, hospitals were the only game in town for a quick diagnosis of common maladies. The owners thought they could do a business out of a fast and convenient service that allowed patients to order simple tests administered by certified medical professionals. For example, strep throat was a simple illness to diagnose and treat but required a 2-hour ER visit. Their business model revolved around the concept that there had to be a better way. They ended up with a kiosk design in a wholesale store, taking advantage of the foot traffic.The company continued to tweak its business model until 2006, when CVS eventually acquired them. They introduced the idea of the nurse practitioner and transitioned from 100% cash pay to reduced copays for one of their strategic health insurance customers, Blue Cross. They also expanded their product offering to 26 conditions, from strep throat to pregnancy testing to flu shots.In 2006 they sold the business, which was now known as Minute Clinic to CVS for $178 million. CVS acquired 83 Minute Clinics located in 10 states. This worked out to $2.14 million per clinic. Michael Howe one of the four founders of QuickMedX is currently the CEO of The Good Clinic. For all intents and purposes, The Good Clinic is MinuteClinic 2.0. Howe has personally loaned over $2 million to the Company over the last year, and every senior manager has followed him with their own investments.
Adapting to Changing Healthcare Landscape
The healthcare market requires providers to adjust how they provide access and staff their clinics. The Good Clinic uses a small format (3,000 sf clinics) located in or around density houses, apartments, and condos. Easy to reach from home and thousands of potential clients down the hall or across the street. They use readily available and fully licensed nurse practitioners to perform the same job as a physician in 28 states at a fraction of the cost.The Good Clinic has six clinics in the Minneapolis area and more planned in Colorado and Arizona. While they are a primary care practice, getting an appointment doesn't take forever. Their core strategy deals with the 4 “Cs” of primary care. The first contact with the individual needs to focus on care; it needs to be comprehensive, continuous, and coordinated. In the final analysis, they are trying to improve healthcare delivery.
Scaling Operations
The company plans to roll out 50 clinics by the end of 2023. They have invested around $12 million using bridge debt while they await uplisting to the NASDAQ. Recent filings about changing the bylaws are a likely product of the uplisting process. Investment bankers are notorious for spilling the beans to their hedge fund buddies who might short the stock in advance of the offering. We believe there is a sizeable short position, and they even hit it with a hatchet article.
Short Attack
This hatchet piece was written by a local Minneapolis paper, by wall street veteran Neal St. Anthony who previously worked for investment banker Dain Rauscher. He knows his way around the balance sheet and purposely painted a dire picture of financial health. He mentions $6K in cash on September 30 to create panic, despite the company having well over $123K in Accounts Receivable, and a review of its 8-K filings shows over $1 million in new investments in the 4th quarter already. The telltale sign of a short is when they cite required SEC disclosure language about that it has a “going concern.” It's been on their books for seven years. This was not a balanced report of the financial health of Mitesco, but there may have been a personal motivation instead of a short motivation. He reported company furloughs and only would have access to that information from a furloughed employee. It didn’t take long to figure out that this could have been personal. His friend must have had a spouse working there to provide him with the information.Regardless of the motivation, the company now has a market cap of barely over $10 million. Management is highly motivated to make this work and agreed to convert approximately $4.5 million of their debt at the uplist pricing. There is no conceivable justification for such a low market cap except the shorts gaming the system. The company is viable, and the recent furloughs during the revamp were planned as they paid staff until the end of the month. The shorting games may backfire because this is an experienced management team.
Short Counterpunch = Insurance Joint Venture
Money is needed to continue the clinic expansion plans, and they chose to raise this with a preferred stock offering. What's missing in the analysis is their access to private financing, which might allow the Company to uplist without the need for investment bankers.Management is savvy enough to find a way to partner with one of the regional insurance companies and give them access to their clinics. This would be a non-dilutive way to build out and finance the business. Insurance companies desperately need access to clinics, and Mitesco has grown into a regional player and proved its prowess in the space. Management understands that building a clinic for resale could be quite profitable. All they are missing is a financial backer.The typical costs per site are about $1 million, and another $1 million for startup costs, so call it $2 million to be conservative. Once the clinic has customers, it can be sold for upwards of $20 million if you can hit the right healthcare provider. What if the company sold a 50% stake in its existing clinics for $10 million each? They could raise $60 million and continue their expansion plans without Maxim's money. Given the very high short interest, this has massive squeeze potential if this strategy comes to pass.
Investment Summary
The executives here have put their personal money into the deal at a valuation far greater than the current market capitalization. The insider buying on this deal happened at a $63 million market cap level. Right now, this is an asset play with very little downside. The $2 million startup cost per site is the company's liquidation value. That means in a worst-case scenario, the company has $12 million in assets. The company debt is getting converted on uplisting, creating even more balance sheet strength. The $10 million valuation is ridiculous and could quickly correct course.Management can execute a non-dilutive joint venture or minority interest sale. It's very clear that management was expecting to do the NASDAQ deal at $25 million or better market cap. Wall Street cronies had other plans hoping for a repricing. This management team is just too experienced to accept market manipulation to this extent. The stock may be poised for a New Years’ rebound. Investors should consider heavy accumulation because the stock could be very close to squeezing.
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Disclosure: Insider Financial and its owners have NOT been compensated for this article. This article was written by a guest contributor and solely reflects his opinions.
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