Tuesday, August 11, 2015

Hemacare's transformation

A better investor than I told me about this company.  Hemacare (HEMA) is a $3.5M market cap company that has transformed their business in the darkness, outside the view of Wall Street.  HEMA started life decades ago as a blood bank.  Realizing the limitations of that business, leadership started down a new path several years ago.  They have refocused the company and are experiencing strong growth in the bioresearch space.  They are valued as if they are dying and herein lies the opportunity.  The investment community does not know of their transformation...yet...


First a few quick stats:
  • 10.7M shares outstanding
  • recent share price of $0.30
  • market cap of ~$3.2M
  • no debt
  • high insider ownership (33% as of last 10-K)
Let's dive into the history.  HEMA got its start as a blood bank in 1978.  Peter van der Wal became CEO in Feb 2010.  Their red blood cell collection business was sold off to the American Red Cross in July 2011.  In Oct 2013 they sold off their Coral Blood Services Division then ceased operations in the Platelet Division in Dec 2013.  In Mar 2015 HEMA sold off their final expendable division, Apheresis.  They now have sold off everything they used to be.

Why did they sell off all their divisions and what are they doing now?  Bioresearch.  The company now describe themselves as:
"HemaCare Corporation (“HemaCare” or the “Company”) is a blood products and services company serving healthcare providers and the scientific community. The Company provides a variety of primary human cells and blood components collected from donors and patients."
What does that mean?   They sell cells and other donor products to people doing research.  Need cells to research a disease, HEMA is your place.  Need cells from some specific subset of the polulation, they can do that too.  Donors come in, HEMA takes what they need for whatever order, then they ship it out.   They say they are "the only supplier with a true, validated, global reach."

Filing status:
The company filed the FY2011 10-k with the SEC in Apr 2012 and immediately afterward stopped filing.  The company said they would file financials twice annually on their website and generally have done so.  They are behind though, having only filed the 2013 annual report in Apr 2015.

2015 annual meeting:
The HEMA yahoo message board contains a description of what was discussed at the May 2015 annual meeting and it sounds very good for the bioresearch division:

  • 2013: Entry into bioresearch.  8 months.  Added 109 customers.  $1.4M revenue.
  • 2014: Added 99 customers.  $4.5M revenue.
  • 2015: YTD in May: added 34 customers.  On pace for "near double" in revs and "substantial progress toward profitability in 2016."


2013 annual report:
There are a handful of items I'd like to highlight.  There are positives and we have to keep in mind the financial information is a year and a half old.

Financials
Book value of $5.5M = $0.51 per share.  $3.2M cash = $0.30 per share.  0 debt.  Had about $4.2M in cash + receivables at the end of 2012 and 2013 ($0.39 per share).  NCAV = $0.29 per share.  Gross margin for Bioresearch division of 55%.

Apheresis Division sale:
This was announced in Mar 2015 with no details.  The 2013 annual report gave more information: HEMA sold the division for somewhere between $3M and $5M.  They already have $3M and the final $2M is dependent on transferring accounts over to the new buyer which they say is going well.  Today, Aug 10, they should know the final price.

NOLs:
$7M Federal.  $6.9M State.  Expire between 2018-2033.

Divisions:
They very nicely break out all the various divisions to help focus you on the Bioresearch business.  Apheresis made $1.1M gross but the company as a whole lost money as a result of their fixed costs.

Stock Options:
The company has an option plan and they use it.  They granted 140k options at a weighted average exercise price of $0.44 in 2012.  They granted 365k at $0.15 in 2013.  I don't like the granting of so many options at that low price in 2013 but maybe it's just due to timing and the share price.  This is one item to watch in the future but it's worth noting that the number of options is in line with what the company has traditionally done.  The 2011 10-K shows 290k granted in 2010 at $0.61 and 260k granted in 2009 at $0.42.


2011 10-K:
Unfortunately the company does not disclose inside ownership in their non-SEC filings.  Of course we don't know what has happened since then but there is high ownership as of the last 10-K.

Insider Ownership:
The CEO owns 3.44%.  The officers and directors as a whole own 32.87%.  Together with other 5% holders that jumps up to 62%.

Stock Options:
The CEO's options exercise between $0.29 and $0.59.  Overall they exercise between $0.26 and $2.40.

Competitive advantage:
When HEMA started out they had to have FDA approval as a blood bank.  This is something they have kept up throughout their operation despite the high associated costs.  I don't know too much about this area but I believe at some point in the FDA approval process a company has to use FDA approved research products.

The other thing is HEMA's donor list.  They tout this as a big advantage.  As they sold off divisions over the years they kept the donor list that goes back decades.  They can match donors to customer needs.

Why did they go dark?:
I don't know for sure.  I bet they save a few hundred grand per year.  I think they likely did this for a combination of saving money and transforming the company in the dark.  One reason I'd really like to see insider ownership disclosed in their annual reports is I wonder how many shares they've all bought while the share price was languishing the past few years.

I don't think they did it to start robbing the company while no one is looking but I suppose they could be doing this.  They hold annual meetings.  They do file results, though not always on time.  They are granting options in line with what they did in the past as an SEC filing company.  They do not report officer salaries in the latest non-SEC filed reports.

Risks:
Obviously the lack of information presents a risk.  The latest filing is an annual report from FY2013 that came out about 16 months after the filing period ended.  So we don't know for sure what is going on now.

The company also has not been in the bioresearch space for long.  They are growing well and with that comes risk.  Can they keep up the growth?  How will growth be funded in the future?  What challenges lie ahead in this new endeavor?

Why is it cheap:
Whenever I see what looks to be a good deal my first thought is why is this cheap.  If I can't figure out why it's cheap then it probably isn't and I should move on.  With HEMA I think there are a number of reasons:
  • $3.5M market cap
  • Does not file with the SEC
  • Poor communication
  • Not up to date on filings
  • Not currently profitable
Conclusion and Valuation:
Let's tie all these little tidbits together.  What we have here is a startup which emerged from a similar business.  They have paid for expansion into this new business by selling off unnecessary assets.  They are experienced in the blood products space.  The market views HEMA as the old money losing blood bank business, unaware of the fundamental change that has taken place.  

Look at the Bioresearch numbers again from the annual meeting.  They've gone from $0 revs in 2011 to $1.4M to $4.5M to ~$9M in 2015.  What would you pay for a company growing revenue like this without taking on debt or dilution?  Let's say TTM sales is about $6M then this company is selling for 0.5 sales right now.  I don't now the bioresearch market size but I imagine it's pretty much infinite versus the size of this company.  

So what are we buying when we purchase shares at the current price of $0.30?  Well first you get a debt free company growing revs like crazy at 0.5 TTM sales.  At year end 2013 the company had NCAV of $0.29 per share and cash of $0.30 per share.  They just sold off the Aphaeresis division for between $3M and $5M = $0.28-$0.46 per share.  

They said they've made "substantial progress toward profitability in 2016" with around $9M in revenue so I imagine their $4M in SG&A will be staying.  If in 2015 they get to $9M in revenue and keep the 55% gross margin plus the $4M SG&A then we'll have $0.09 EBITDA per share.  If the revenue growth keeps up in 2016 while margin and SG&A stay similar then EBITDA will shoot through the roof.  

Overall I think it's hard to say exactly what will happen a year or two from now and at the same time I think the future looks bright.  We have a smart management team that has taken a flat or shrinking company and turned it into cash plus a growing company.  The market is not aware of this change as there is no coverage anywhere.  The stock price has come up from all time lows over the past year and is still below that which it was as a money losing blood bank a few years ago.  Buying has picked up somewhat since the annual meeting in May but volume is still tiny.  It might take a year or two to really know what we have and hopefully it'll be worth the wait.  

When will the market wake up?  The company should be filing 2014 reports at some point as well as reporting on the final Apheresis sale results.  If we're lucky perhaps they'll start communicating more with the investment community.  They own a lot of stock so I have to think that'll come at some point.  Maybe that'll do it.  


Disclosure: Long HEMA

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