Thursday, October 7, 2021

ECIA: Dominoes and the Guessing Game

I like to buy stocks at the bottom, when the narrative has broken down and masses have left.  This is when it gets interesting.  Stock_price = company_value + public_perception so how can you buy on the cheap unless the sky is filled with doom and gloom.  

I first bought ECIA around $0.30 and wrote up the stock a couple years ago at $0.39.  It had dropped to support, near the all time low.  With an exciting medical business and tons of potential I bought with dollar signs in my eyes.  

What I do is buy tiny, low, sleepy stocks with potential then wait and watch.  Potential comes from both business and stock.  I like a business with room to grow.  The stock should be low with capital structure tight, and bonus points for a theme that can be meme'd to the moon.  

After the buy starts a years long process of optimistically following along.  I can see the rise in my mind.  If things don't go my way I wait longer and as the situation warrants I buy more.  This is the story of puzzle pieces falling into place.  

This whole stock thing is a gambling game.  We all try to stack the odds in our favor but in the end no one knows what will happen next.  I believe my edges are size, patience, comfort away from the crowd, and optimism.  

As time moves along I read filings and watch the chart.  I wait.  Every press release is another piece of the puzzle, every filing a clue.  What will happen next?  What does the volume and chart say about public perception. Where might the company be in 5 or 10 years?  I err on the side of optimism because you just never know what's going to happen.  Given enough time in enough of these tiny stocks you will see life changing movement, the question is can you hang on for the ride.  

I have read pieces about people selling stocks once they reach fair value and to that I say you are clamping a ceiling on your investment.  I buy what is low and small with potential; I sell what is over priced.  In between those points I wait and watch.  If you sell when a stock reaches your previous definition of fair value you are missing out on the future.  You are throwing away innovation and potential and chance.  I aim for life-changing returns every time I buy a stock and for that I need optimism over a long time horizon.  The big moves are made over years.  Just open up a long term chart and you'll see it.  

Oh you don't have a long term chart handy, well let me help you out.  Below are charts from a couple stocks my mentor has told me about for motivation and history.  Note I don't own NOTV or BIOQ.  His style is my style and these charts reinforce the strategy.  

He's held NOTV about a decade.   

BIOQ held for decades and bought for pennies.

That's what I'm after.  That's why I buy low and spread out the bets.  This is where the optimism and patience comes in.  What if the future is brighter?  

As a stock rises the situation gets complicated.  Selling is hard because it's forever a guessing game.  How high might it go and how far could it fall?  No one knows.  That unpredictability is why I don't sell "fairly valued" stocks.  All we can do is try our best and that's why I am constantly watching.  Predicting the future is why I look at the chart and check bid/ask 50 times a day.  As the pieces fall into place we have to determine how big the puzzle is and which direction we're headed.  Around here you don't get to start your puzzle by forming that nice square edge, but rather must wait for it to be filled in by the future and the business and the public.  

I hold through the rise not out of greed, but curiosity and optimism.  Always watching the scales tip back and forth, thinking about what might happen and trying to hit that home run.  It's a gambling game after all.  Incredible stock rises happen every year, just a matter of time before it's one of yours.  

Of course it doesn't always work out.  I watched HYDI rise from $0.50 to $3 and back, without capturing any gains.  

I've held on the sideline as PCYN rise from $0.20 up to a buck and now almost all the way down.  

That's part of the game and part of the gamble.  The risk with any rise is waking up one day to realize everyone else left the party.  But I'm always thinking back to HEMA.  I rode that lightning once and looking for the next.  You don't need too many of these.  

ECIA has come up to around a dollar now from the $0.30s a couple years ago.  I've been buying along the way.  The rise is not luck, it's potential coming into focus and as always the real question is what does the future bring.  

A brief description from ECIA's investor presentation.  When I read this I am surprised ECIA doesn't have a larger share of what they view as a $500 million annual market.  

Some ECIA stats: 
  • TTM rev 8.8M 
  • earnings nothing
  • BV 2.8M
  • 11.6M shares common
  • no preferred or warrants
  • stock has been hanging around a dollar recently giving market cap ~$12M

I would not call ECIA cheap on those numbers but the stock market is not focused on the past.  Look at the chart.  Covid has not helped and yet with revenue flat the stock rises.  Sure I could sell for a nice gain but I'm not here for nice.  It's textbook stair-stepping up.  Prior ceiling becoming the new floor; it happened at 0.50, 0.60, 0.80 and now forming support at $1.  

The reason is puzzle pieces coming together.
  • "In May 2020, the Food and Drug Administration issued a Safety Communication that stated that, "In addition to serving as an ignition source, monopolar energy use can directly result in unintended patient burns from capacitive coupling and intra-operative insulation failure.”" (from recent 10-k)
    • "During our March 31, 2020 quarter, we received a letter from the FDA. The letter contained a questionnaire regarding Stray Energy and how to prevent patient injuries from Stray Energy during laparoscopic procedures. We provided the FDA with extensive information on burns and our program for eliminating them. A Safety Communication was released by the FDA on May 29, 2020" (from recent 10-k, see FDA letter here)
    • ECIA put out a press release here, stating, "To the best of our knowledge, AEM® Technology is the only technical solution to this issue"
  • "During the year ended March 31, 2020, our proprietary patient safety technology was recognized by the U.S. Department of Veterans Affairs and provides us with the opportunity to market our instruments and monitors into VA Medical Centers. The VA is the largest medical system in the U.S. providing service to more than nine million veterans across more than 1,200 facilities." (from recent 10-k)
  • "during the year ended March 31, 2020, we were awarded a prestigious Vizient Innovative Technology Contract for monopolar surgical instruments and monitors. Vizient represents a diverse membership base that includes academic medical centers, pediatric facilities, community hospitals, integrated health delivery networks and non-acute health care providers and represents approximately $100 billion in annual medical devices and supplies purchasing volume." (from recent 10-k)
  • in Mar 2020 ECIA "entered into a Master Services Agreement (“MSA”) with Auris Health, Inc. (“Auris Health”), which is based in Redwood City, CA and a part of Johnson & Johnson Medical Devices Companies. Under the MSA, Encision and Auris Health will collaborate on the development of equipment designed to enable the compatibility of Encision’s AEM technology with monopolar instruments produced by Auris Health"
  • heavy insider buying in summer 2020 from $0.47-$0.64. 
  • In August 2020 ECIA "announced the introduction of Its AEM 2X enTouch® Scissors (“2X Scissors”). 2X Scissors bring new levels of performance and economy to the surgical scissor market by combining the best in class performance of Encision enTouch Disposable Scissors with the value and economy of a multi-use device."
    • "2X Scissors are a game-changing product that will have a significant impact on the disposable laparoscopic scissor market"
    • "We expect 2X Scissors to have an attractive sales trajectory and will become a significant part of our portfolio of products"
  • In August 2021 ECIA "announced that Encision has signed a Supply Agreement ("Agreement") with Auris Health, Inc. ("Auris"), part of the Johnson & Johnson Medical Devices Companies.  The Agreement will have an initial term of three years. During the term, Auris has agreed to buy certain AEM® Technology enabled products exclusively from Encision. Encision will receive an upfront payment and upon achieving certain milestones, a milestone payment in addition to revenues from proprietary product sales to Auris per the terms of the Agreement."
    • Auris must really like what ECIA has to offer because they blew through the phase 1 service agreement then phase 2 and onto a supply agreement.  Auris signed the service agreement in Mar 2020 with an initial term of 6 months at $320k.  ECIA then got quarterly revenue from Auris of $23.4k, $99.1k, $163.6k, $363.6k, $290k before announcing the formal supply agreement.   
Taken individually most of those bullet points are not something to base an investment upon. What they do is form the puzzle and clarify the future. Each positive press release is another step in the right direction.

But that last one I feel could be a game changer.   ECIA now has a supply agreement with Auris Health which is a subsidiary of Johson & Johnson, acquired in 2019 for a few billion dollars. Makes me wonder if ECIA tech is going into Auris's new Monarch platform of surgical robots.  

You see the traditional ECIA model is selling to hospitals.  A quote from the most recent 10k, "When a hospital decides to use our AEM technology, we make recurring sales to such hospital for replacement instruments. Sales from reusable and disposable AEM products in hospitals represented over 90% of our sales in the fiscal year ended March 31, 2021, and we expect this sales stream to grow as new hospitals increasingly adopt AEM technology and existing hospitals increase usage of AEM instrumentation."  

I emailed back and forth with the CEO a bit recently and mostly it was me trying to get an answer on that specific point, if this new Auris deal is the result of a marketing or business shift.  And if they are working on anyone else.  Unfortunately he's not one to give out any information so all I got were the following quotes.  He would not detail the milestone payments or any projections.  
  • "Encision is always looking for partnering opportunities to make laparoscopic surgery safer with AEM® Technology. What we may or may not be working on and with whom is insider information."
  • when I asked what it took to get the deal signed with Auris, "It took a mutual appreciation for the objective and the differentiating potential. "
If you look at the 10k, ECIA names 5 competitors and 2 of them are Johnson & Johnson.  Now they are in bed with a J&J subsidiary and this has me wondering if Auris is the first domino to fall.  ECIA has always seemed to be one of those technologies where once a few big players take a bite then the rest of the market would fall in line.  The company feels the same way: "We believe that AEM technology is following a similar path as previous technological developments in surgery. Throughout the history of electrosurgery, companies that have developed significant technological breakthroughs in patient safety have seen their technologies become widely used. As with “Isolated” electrosurgical generators in the 1970s and with “REM” technology in the 1980s, AEM technology is receiving the broad endorsements that drove these previous new technologies to becoming a standard of care. We believe that it is possible to follow a course similar to that of pulse oximetry in becoming a standard of care."

One thing I've wondered is why ECIA doesn't have a bigger share of the market, after all these years.  Seems crazy to have this safer solution not become standard.  One comment from a blog reader on my last article brought up a good point, "I think the problem has been that buying ECIA's products is tantamount to doctors/hospitals admitting that they injured/killed patients when there was an alternative. Switching could open them up to greater liability in my non-legal opinion."  If ECIA puts together deals with other equipment providers that would be a way around this concern.  

Here is where the guessing and gambling come into play.  How clear is your crystal ball?  With the stock rising we definitely have this new Auris service agreement priced in to some degree before getting a dollar in revenue.  If Auris turns out to be immaterial the stock will probably fall back down to support at 0.30.  

But what if there are more dominoes lined up behind Auris?  You have to wonder what the Auris deal means for the other J&J subsidiary and the rest of the competitors. 

This long term chart says there's room to run.  You decide

disclosure: long ECIA


  1. Another excellent article, but why have their sales remained pretty flat year after year for 10 years? Any idea of the total potential of this agreement with J & J?

    1. you have just highlighted the risk and reward. I don't know those answers. All I can say is ECIA says the market is about $500M annually and maybe the J&J purchase prove for Auris of several Billion gives some idea of the potential.

      we should see the initial payment hopefully in the next Q but the CEO would not give me any more info unfortunately

    2. I don't feel I have a good grasp on the range of potentials here but I think the ceiling is much higher than current market cap

  2. Fantastic article.
    Patience, patience and potencial.
    Thanks Dan.

  3. What I can't figure out is why doesn't J&J/Auris just buy ECIA? For less than $50m they could have the whole thing...

  4. That has been one of outcomes I've been counting on. At the time of the most recent announcement, the market cap was ~12M. Have to think they could have bought the business for $25M at the most. In this case, it makes me think the new supply agreement isn't going to be that large or it would have made much more sense to buy them out. Hope to be wrong, but even something like 500k/qtr minimum could make a big difference.

  5. Do you have any thoughts related to Franklin Wireless Corp? Interesting is that this company (MC of 46M) is debt free and the market cap is almost covered by the cash on their balance sheet.

    1. oh wow I didn't realize it had come so far back down. what a crazy rise and fall

  6. I noticed that their audit firm resigned. Have you ever seen that on any other company you follow? I have seen plenty of times where the company replaces the audit firm, but I don't think I've ever noticed one resigning before. The 8k does say there were no disagreements, just found it to be odd.

    1. does seem weird but I don't know. if I google "Eide Bailly LLP resigned as the independent registered public accounting firm" I can see a few instances of firms resigning to it does happen at least sometimes.

  7. The 10Q didn't bring any further clarity. I went back to read the supply agreement and it does reference a ramp up period, so it is quite likely that there wasn't a lot going on during the quarter. The one item that surprised me is that the agreement references an up front payment due within 30 days of signing. I would expect this to show up on the balance sheet as unearned revenue and then recognized over the period. The balance sheet does not show any unearned revenue, and the other liabilities didn't have any significant movement.

    I am guessing that the upfront payment was immaterial. I doubt it was accounted for incorrectly (or I am wrong about how it should be)...and if it was taken straight to revenue, I would have expected to see a much better quarter. Let's hope it is weighted more towards the milestone payment and ongoing revenue.

    Unfortunately it will be another long wait for the next filing. I was surprised there wasn't movement in the stock yesterday, but we definitely saw it today.

    1. I agree the latest numbers are not exciting. I think the upfront payment was immaterial which is too bad. Still the question is the future. more waiting

  8. Obviously hasn't gone well with the cancellation of the supply agreement and the Q4 results were underwhelming. I did find the wording on the Q4 earnings release to be strange where they said "towards the end of Q4 business needs took a different direction." as they described the cancellation of the supply agreement. It is odd that they would add that commentary without providing additional information. After a quick spin through the supply agreement, I don't really see anything that would be an obvious explanation for it being canceled so soon after it was signed.

    I am not entirely surprised by the delay in the 10-K with them changing auditors, but it also wouldn't surprise me if there was something significant dropped in the subsequent events....they are a pretty small company, I can't imagine there are any items that are too challenging in the presentation of their financial statements. Their balance sheet is strong enough that they shouldn't have a going concern disclosure. Maybe it is nothing though.

    Still holding but not seeing a reason to buy more right now.