Chek-Cap (CHEK) is a small ($16M market-cap) clinical-stage medical diagnostics company engaged in the development of an ingestible imaging capsule that utilizes low-dose X-rays for the detection and imaging of colonic polyps and colorectal cancers. Earlier on March 21st, they had announced that their C-Scan clinical study did not meet their goal to further continue the program. Later on June 6th, they shared that the company is pursuing strategic alternatives and has hired Ladenburg Thalmann & Co. as an advisor. They also shared that they are laying-off 90% of their workforce after which they will have 8 remaining employees.

Last week, Chek announced that they are reverse merging with Keystone Dental. Proforma, CHEK shareholders will own 15% of the combined enterprise (KSD) at a valuation of $39.7 million and Keystone Dental security holders are expected to own approximately 85% of the combined company representing an equity valuation of $225 million. Now what synergies does a colon cancer research company have with a dental implants company? I dunno. However, it would make sense for Keystone to go public and save the underwriting cost by acquiring an almost cash-shell like company for a small premium.

The shareholder vote will be scheduled in Q3 and CHEK is expected to have a net-cash position of $22.3 million at closing of the transaction which implies a $17.4 million premium to the net cash target. Given that CHEK will issue around 33,750,000 shares to complete the transaction, at current prices (~$2.75/share) the implied value of KSD is around $93MM, that's less than 2x 2022 sales. The company being listed in the US should help with the multiple.

Given the outcome, I think the vote is likely to go through. However, in the worst case if the vote doesn’t pass, this is the back-of-the-envelope liquidation value I got to (using Q2 June 30th numbers):

Kind of bummed out I couldn’t purchase the shares when it dipped on the press-release announcement.

These are some risks I could think of:

• I couldn’t find much information on insider ownership here. The company is also based out of Israel so there could be an incentive misalignment here.

• CHEK also didn’t mention a liquidation scenario in their announcement. If the reverse-merger does not go through, cash burn could hurt the margin.

• The expected multiple will depend highly on Keystone’s revenue margins which is unknown. This is a risk but the gap here is wide enough to warrant a small position.

Disclosure: I own shares of CHEK