Tuesday, November 27, 2018

The Good and Bad Sides of ESMC

Some people look for great companies with unbreakable competitive advantages.  Some will only buy if the history of profitability is secure and guaranteed to continue.  Others reject an accumulated deficit or buy only what is growing.

I steer clear of the masses in a search for the least competition.  I look for the beaten down...the hated, forgotten, and lonely.  In this area of the market only some companies will survive.  My bet is the winners will rise enough to cancel out the dead.  Most stocks I look at have problems.  There is always potential and there is always something wrong.  That's why we have opportunity.  All is not rosy and for sure there is a real risk of loss.

There are always two sides to the coin and ESMC is no different.  If you accept the truth you may see the opportunity.

Escalon Medical (ESMC) operates in the ophthalmology space.  They have many products through their Sonomed subsidiary.  Ophthalmology is a branch of medicine that deals with the anatomy, physiology and diseases of the eyeball and orbit. An ophthalmologist is a specialist in medical and surgical eye disease.  One area of growth would be an aging population with growing eye care needs.

I don't know about the ophthalmology space or market.  The company is developing new products.  The market isn't going away.  It sounds cutting edge to me.

Some product descriptions from the most recent 10k:
The A-Scan provides information about the internal structure of the eye by sending a beam of ultrasound along a fixed axis through the eye and displaying the various echoes reflected from the surfaces intersected by the beam. 
The B-Scan is primarily a diagnostic tool that supplies information to physicians where the media within the eye are cloudy or opaque.

The UBM is a high frequency/high resolution ultrasound device, designed to provide highly detailed information about the anterior segment of the eye.

The pachymeter uses the same principles as the A-Scan, but the system is tailored to measure the thickness of the cornea. 
The CFA (Color/Fluorescein Angiography) digital imaging system is designed specifically for ophthalmology. This diagnostic tool, ideal for use in detecting retinal problems in diabetic and elderly patients, provides a high-resolution image,

The Company distributes two intraocular gas products C3F8 and SF6, which are used by vitreoretinal surgeons as a temporary tamponade in detached retina surgery. Under a non-exclusive distribution agreement with AirGas, Inc. (AirGas"), the Company distributes packages of AirGas gases in canisters containing up to 25 grams of gas. Along with the intraocular gases, the Company manufactures and distributes a patented disposable universal gas kit, which delivers the gas from the canister to the patient. 
The Company markets disposable surgical packs used in vitreoretinal surgery, including packs which aid surgeons in the process of injecting and extracting silicone oil 
The Company markets viscous fluid transfer systems and related disposable syringe products, which aid surgeons in the process of injecting and extracting silicone oil.

The AXIS Image Management system easily manages ophthalmic diagnostic images via a web browser from any device regardless of modality, manufacturer or location.
The charts below show you much of what you need to know.  A few things jump out.  At the latest stock price of $0.12, we are sitting near the all time low.  The stock has been building a base for almost two years and we sit at support.  As long as the company stays in business it's difficult to imagine it staying this low.

ESMC trades OTC and can you guess when they got demoted from the NASDAQ?   Look for the sharp drop in sentiment and share price.  You guessed it, late 2016.  In March 2016 the company was notified they did not meet the NASDAQ listing requirements.  In Aug 2016 they put out an 8K talking about an extension to delay the inevitable and the share price started dropping hard.  In Nov 2016 they finally moved to OTCQB.  The stock had been near $0.75 for about 6 months yet plummeted to ~$0.10 by the end of 2016.  Do you think a NASDAQ listing is worth 87% of this company?

I also see opportunity.  This stock rose 20x to over $20 in 2014.  Go back far enough and it was over $100.  Only a few years ago it traded at $2 while we now sit at nothing.  Just think of the possibilities.

And then of course you see the risk.  This thing has been dropping for years.  It could continue.

Let's add some color to those price charts.  The main thing I use to gauge company performance is revenue.  That is the best measuring stick I know of for both the company and the stock.  Stagnant revenue that surprises to the upside will shoot a stock to the moon.  Rising revenue with a stale stock shows you opportunity.  

Below are charts with quarterly revenue (blue) and stock price (green).  Again we see a few things.  It seems the giant stock rise of 2004 did not come from revenue.  It could happen again.  Revenue took a dip in 2011 and has been pretty flat since then, jumping between $2-4M per quarter.  While sales have not changed much we've had a stock drop from over $2 down to $0.12.  That is severe perception change!  There is no way the company has become 94% worse than it was 4 years ago.  

My main view on this stock is we have dropped too far down due to NASDAQ delisting and a drop in revenue.  

The company is run by CEO Richard DePiano Jr with his father Richard DePiano Sr as Chairman of the Board.  You could say a positive aspect is their experience since Sr has been with the company since 1997 and Jr has been there since 2000.  On the negative side I question if the DePiano's have treated the company fairly.  

In 2017 DePiano Sr held only 1.9% of the company and there were 7.55M shares of common outstanding.  There was no preferred.  In Feb 2018 the company entered into a debt exchange agreement with DePiano Sr, giving him 2M preferred A shares to relieve a $645k debt.  These shares carry 13 votes each, giving DePiano 77.5% of the voting power.  Each pref is convertible to 2.15 shares of common which could increase the outstanding from 7.4 to 11.7M, a 58% dilution.  He could now own 38% of the common.  This guy took control of the company for $645k.  Using the 4.3M common share increase that is a valuation of only $0.15 per share = $1.76M market cap.  I suppose the company needed the money but that's robbery.  

$0.15 was the stock price so it's justified on the one hand but that's below the real company value.  Makes you wonder if they wanted, or allowed, the stock to delist from NASDAQ.  

Don't even get me started on DePiano Sr's retirement package.  The company agreed to pay him $8491 per month for life.  Maybe it's nice that he's deferring some payments but 98% of company debt is this retirement benefit.  A company with market cap of $1.4M should not owe their chairman $0.85M for retirement.  

For an idea of what it's like to work with management at ESMC you should read the Glassdoor reviews.  I'll save you a click:
DePianos know nothing about management or ophthalmology
Lie to all employees 
Gut the executive management and hire people that know what technology is. CEO is in his position because his daddy is the Director of the Board, nepotism is killing the company. 
Sell the company to someone that cares and has management skills
So there's your risk.  The dark side of the coin.  

On the bright side we have positives.  The stock is at an all time low and cheap for sure.  Share count is pretty low and the chart looks great.  A non-business related change (NASDAQ delist) has dropped the stock.  The company is spending on R&D and lives in an exciting space.  

The numbers:
  • 11.7M shares common full diluted 
    • assuming all pref converted
  • stock price 0.12
    • market cap fully diluted $1.4M
  • TTM revenue $11.03M
  • TTM net income $0.59M
  • BV $2.4M

How can you not buy those numbers!?  ESMC is trading at 13% of sales, 58% of BV, and 2.4x earnings.  Averaged over the longer term the company earns nothing but still that's cheap.  It sits at support.  Cheap by the numbers and cheap by the chart.  It's a buy.  

But management is no good.  I think the ideal situation is a sale by the DePianos.  This company is worth more than $1.4M

I'd say we have a couple possible scenarios.  In one the DePianos sell and the price would probably be more like $1 than $0.12.  Another is they keep running the show as they have been for the past two decades in which case I think we see a stock price materially higher than $0.12 at some point in the future.  Either way I think it's more likely to win than lose.  

disclosure: long ESMC


  1. Dan,

    you;re a smart guy obviously when it comes to analysing stocks. But you're just gambling here. When you find so many red flags (more than i would have probably detected). Speculating that the stock will go up when people are looting the company is just stupid.
    Additioinally, as usual your blog moves the stock price. it's up 30% off your post. And great you can exit once again, but that's not because of the company merits, more so your own in getting the word out.

    1. I do not sell into the volume created by my blog. That would be unethical

      Yesterday’s volume was only 12500 shares for $1600. The “up 30%” came from a single trade totaling $400, it means nothing. The stock is illiquid and jumps around a lot whether I write a post or not. It was at 0.20 two weeks ago and 0.30 a couple months ago. Such is life with these tiny stocks

    2. On the gambling comment, are you saying it’s priced correctly now? $1.4M is what this company is worth?

      If the DePianos decide to sell what price will it fetch?

      What I’m doing is just buying a cheap stock and waiting. I think more likely than not it will be priced materially higher than $0.12 at some point in the future. DePiano Sr is in his 80s, maybe he took control so he can easily sell the company. Maybe they announce a big contract. Maybe they have a few nice Qs. Who knows

    3. I first bought this one when the delisted, as low as about $0.09 I think. I’ve continued to buy throughout the year up to the 0.20s. I watched it run up to the 0.30s on the heals of a great 0.71 Q but I didn’t sell. I think it’ll get much higher

  2. I think annonimous reader did not understand the startegy That you Dan follow. You spread over 30 of these companies knowing some will fail. Buying only the ESMC stock without buying fulll basket of these might be gamble (or stupid gamble). TO succeed here in a way that is not just gamble (Apart from Hema maybe) is the basket approach. So u cannot follow this blog only to stock here and there without being jusst gammbler. Great blog

    1. Thanks and that’s for sure. I would not go heavy on ESMC or most of my other stocks. I own about 50 stocks and most are a percent of two of my portfolio

      Bert, you can see a snapshot of my portfolio allocation here: http://www.nonamestocks.com/2018/04/noname-annual-performance-2017-2018.html

  3. Thanks for sharing!
    IntrsIntere reading.

  4. I am wondering what your experience overall is: The smaller the stock, the higher is on average the return? Is this correct?

    1. Generally yes I think smaller stocks have higher returns than larger.

      Tweedy Browne did a study on different factors on returns. Their findings are more illiquid and smaller deliver better returns on average. See it here: https://www.tweedy.com/resources/library_docs/papers/WhatHasWorkedFundOct14Web.pdf

      One reason is less competition for you as an investor. Fewer people look at these tiny stocks. Fewer professionals, fewer institutions. The stocks are just too small to move the needle for a larger investor or an institution so they stay away. People are afraid of low liquidity so they stay away for that reason as well.

  5. However, it seems that these nano stocks fall strongly now - more than the total stock market. This may also show that the risk is higher.

  6. I would suggest that it's because of liquidity. Fewer people are interested in buying nano-cap stocks so when sellers appear they can push prices down dramatically. Some nano's are risky because of bad balance sheets or poor business models, but some have good business models and balance sheets and are caught up in indiscriminate selling.

  7. How do you buy such extremly illiquid stocks? Do you type in the bid or higher ask price or the last traded price (or average between bid and ask) and wait until the order is filled?

    1. First of all I always use limit orders. ALWAYS.

      Then it's just a feel for what price I want to pay along with a lot of patience. If shares are offered for what I think is a fair price then I'll just take what's offered. This is usually what I do but not always. For example right now ESMC has a high bid of $0.12 for 5k shares and a low ask/offer of $0.15 for 5k shares. I would just buy the shares at 0.15 because I think that's a good price to buy ESMC for.

      The other way I buy is putting in a limit order for what I want to pay and then just waiting. The risk here is you may never get filled. I'll look back at what the stock has been doing the past month or two and over the past year, the past 5 years. I'll pick my number then just wait. For example when I first bought MGTC it had last traded for about 0.10 and the offer was something like 0.10 but a year prior it was around 0.03. High bid was around 0.01 or 0.02. I thought it may fall back down so I put in a limit Good Till Cancelled (GTC) order for 0.03 and just waited. It took almost a year but eventually I got filled. Look at the chart and you can see my fills.

      You can read some more on how I buy in my Examples post here: http://www.nonamestocks.com/2018/10/examples.html

  8. Question: Do you have an explanation, why a low stock count (low amount of outstanding shares) could be a good indicator for futhure performance? Also other investors rely on it, e.g. see the article by Marc Reinganum, titled "Investment Characteristics of Stock Market Winners". In this article, a low stock count was defined as < 20 Mio. The factor was more important than e.g. a low Market Cap for the future stock performance.

    1. Mainly I look at it just as supply and demand. If there's a low share count then when the demand comes the price will move more.

      It's also a sign the company can manage life without diluting. Of course you have to look if they have preferred, warrants, etc. If a small company can exist for a long time without issuing stock and debt then it gives confidence they will be able to continue on like that