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Greenestone Healthcare - A Growth Story In A Niche Sector

The Specialty Health Services sector is very well developed in the US, but it still has a long way to go in neighboring Canada. Trying to build an early mover advantage is GreeneStone Healthcare Corporation (OTCBB: GRST). GreeneStone operates medical clinics in Ontario, Canada, and has carved out a niche for itself in health services and addiction treatment. The company operates two Endoscopy clinics in Ontario that offer services in Screening Colonoscopy for colon cancer, investigatory colonoscopy and performing endoscopy procedures if required. GreeneStone also operates a private 36 bed in-patient facility at Muskoka which serves as an addiction treatment center.

The table below shows a snapshot of the company's second quarter earnings for the past three years:

 

Three Month Period Ended June 30

 

2012

2011

2010

Revenues

1,348,582

286,925

5,964

Operating Expenses

1,467,168

842,060

113,313

Net loss to shareholders

(364,336)

(720,381)

(111,619)

The company has two fully equipped and operational clinics, and as the number of patients continues to increase, there will be an incremental impact on the bottom line. In economics, this is called building economies of scale. This is clearly visible in the table above and makes GreeneStone a prime growth story.

An analysis of the segment wise cost structure of the company further substantiates this proposition.

   

Q2, 2012

Endoscopy Clinics

Gross Revenue

446,339

Fixed Costs

Doctors fees

245,750

 

Staff Salaries

77,131

 

Rent

40,995

 

Total Fixed Exp

363,876

     

Addiction Center

Gross Revenue

902,243

Fixed Costs

Staff Salaries

744,023

 

Rent

168,789

 

Total Fixed Exp

912,812

In Q2, 2012, the company was able to cover its fixed costs and any increase in revenue from here on will add to the bottom line. The company reported positive operating cash flows of 195k in its latest quarter and it is very likely that the company will post a net profit for the last quarter of 2012.

Below is a timeline of the company's expansion:

Second Quarter, 2010 - Opening of the First Endoscopy Clinic.

Third Quarter, 2011 - Opening of the Addiction treatment center, Muskoka.

First Quarter, 2012 - Second Endoscopy clinic, downtown Toronto

Second Quarter, 2012 -Second Addiction treatment aftercare facility, downtown Toronto

Fall 2012 (planned) - Opening of an Eating disorder clinic, GreeneStone holds 33% stake in this venture

Outlining its strategy on October 10th, 2012, the company announced that it plans to increase the capacity of the addiction treatment center from 36 beds to 300 beds in the next two years. The management said that it intends to buy several underperforming operations both in the US and in Canada.

Below is segment wise revenue for the company:

 

Q2, 2012

Q1, 2012

Q4, 2011

Q3, 2011

Q2, 2011

Q1, 2011

Endoscopy

Clinics

446k

436k

372k

279k

286k

223k

Addiction Treatment Center

902k

824k

305k

213k

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When investing in growing companies, investors are primarily concerned about liquidity in the markets and the capital structure of the company. Let us address these issues here:

Liquidity: Market maker Wilson David & Co filed a 15C211 application to sponsor the company and undertake market making operations. This application was approved by FINRA and the stock has seen average volumes of 15,000 shares traded daily. The company announced on October 18th, 2012, that it will apply for a listing on the NYSE-Amex exchange which is anticipated to further enhance liquidity.

Capital Structure: As of June 30th, 2012, the company had a total of 23,767,535 shares outstanding. The company has notes payable outstanding that will be converted into 14,601,917 million shares at various dates until May 31st, 2014. Apart from this, there is no major planned equity dilution.

Given that this is a niche sector and GreeneStone services the Canadian market, there are no direct comparables. This limits our ability to perform a relative valuation. Since GreeneStone is still a growing company, it comes with inherent risks, and hence it may be an ideal choice only for investors who are comfortable with this kind of risk.