ECHO THERAPEUTICS INC ECTE S
June 23, 2016 - 3:33pm EST by
jm671
2016 2017
Price: 1.80 EPS 0 0
Shares Out. (in M): 20 P/E 0 0
Market Cap (in $M): 36 P/FCF 0 0
Net Debt (in $M): 2 EBIT 0 0
TEV ($): 38 TEV/EBIT 0 0
Borrow Cost: Available 0-15% cost

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Description


Echo Therapeutics (ECTE) has no revenue, is losing money, is facing delisting from the Nasdaq
exchange, needs capital, recently filed a shelf offering (very late in the day on a Friday!) and
faces competition from much larger industry competitors. According to the latest 10Q, the
company had only $42k of unrestricted cash (not much cushion for a company that burns over
$1mm per quarter) yet boasts an equity market cap of almost $35 million (using the 20 million
shares, which includes convert pref,…most data sources like yahoo and Bloomberg use only 11
million shares outstanding). The company also expects to have negative cash flows for the
foreseeable future as it funds its operating losses and capital expenditures. ECTE is up 25%
YTD and up 100% from its 52 week low.
 
To make it an even more attractive short candidate, consider that its largest shareholder is
Platinum Partners, the fund that one of its executives has been accused of paying bribes to a
union boss in exchange for an investment and the same fund that yesterday the FBI raided on
reportedly as part of an investigation into Platinum’s valuation of its hard to value illiquid assets.
It has also been reported that Platinum will be liquidating some or all of its funds (which makes
the short even more interesting). Finally, it has been reported that Platinum failed to honor
redemption requests from investors and that Platinum has defaulted on a $30 million loan from
New Mountain Capital…in other words, Platinum appears to have some very serious problems
and their future is uncertain.
 
Furthermore, Platinum’s investment (and ECTE’s market cap) are larger than it might initially
appear as most of Platinum’s investment is in the form of convertible Preferred stock, so the
number of shares outstanding is, theoretically larger than it appears on the cover of the 10q. In
addition there are Blockers limiting the number of shares that the preferred can be converted
into, so the ownership table in the proxy table understates Platinum’s true ownership, although
the footnotes give more accurate information.
 
ECTE is trying to develop a non-invasive (aka no needles), wireless, continuous glucose
monitoring system. You can see the latest presentation at http://echotx.com/investors/investor-
relations/ . The company has been developing its products for several years now but still has no
commercially viable product. It probably doesn’t help that they spend more on SG&A than they
do on R&D and that they compete with companies with significantly greater resources. ECTE
does talk about getting approval from the Chinese FDA (we have our doubts) and the company
does put out press releases on things that we believe are of limited real value.
 
To avoid delisting from the Nasdaq, by the July 5, 2016 ECTE will need stockholders’ equity
above $2.5 million (last quarter it was negative $4.7 million) and to provide projections that it
can maintain that amount through June 30, 2017 (remember the company loses money and lost
$2.6 million last quarter). ECTE could, theoretically meet the Nasdaq requirements by doing
one of 2 things, neither of which would be good for current shareholders: 1) Raise equity
through a recently filed (but not yet effective) $25 million shelf, although it is unclear if ECTE
has enough time to pursue this option and who would buy the stock or 2) Have Platinum convert
some/all of its preferred stock into common stock, although given Platinum’s other problems I’m
not sure how focused they are on ECTE at the moment.
 
In addition to being ECTE’s largest shareholder, Platinum has the right to nominate one director
to ECTE’s Board. Platinum’s designee is ECTE’s Chairman, Michael M. Goldberg. Goldberg’s
previous biographies indicate he used to work for Platinum. However his employment by
Platinum is not mentioned in the bio listed in ECTE’s SEC filings and we wonder why. (Note:
 
Mr. Goldberg is also Board Director for ticker NAVB, another Platinum related company whose
stock has cratered recently.)
 
Besides Michael Goldberg, ECTE has 2 other non-employee directors, one of whom is Mr.
Goldberg’s first cousin. Couldn’t ECTE find a qualified director who was not related to an
existing Board member? To be clear, we don’t know either of the Goldbergs nor are we
suggesting they have done anything wrong. However, their ties to Platinum (and each other) are
red flags for us.
 
Not surprisingly, ECTE has failed to attract much interest from institutional investors. If ECTE
is such an interesting investment, why have so many sophisticated investors avoided it?
 
Based on the latest proxy as of April 2016 we estimate Platinum’s investment to consist of 783k
common shares, 5.6 mm shares (theorectically convertible from preferred stock) and 2.8 million
warrants. Clearly exiting its position will be challenging considering the company needs to sell
shares too to raise cash and the trading volume is limited.
 
ECTE is an overvalued stock where we believe both insiders and the company will need to sell
large numbers of shares and we don’t see how either can occur at these prices.
 
There is borrow available but we are paying about 11%.
 
 
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Company needs to raise capital to survive

Company needs to raise equity to avoid delisiting

Largest shareholder is likely liquidating

Adverse press

 

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