Enteromedics (NASDAQ:ETRM) makes an anti-obesity device called the vBloc Maestro that was approved in January of 2015. The company launched the product in mid 2015, and has seen very slow sales ever since. As it became clear that the pace of sales was not really enough to bring about positive cash flow, the equity tumbled. Eventually the stock got under $1.00 per share for over 30 days, and a NASDAQ de-listing process began. Ultimately, the company found $25 million worth of financing and signed a loan contingent upon shareholders approving a 1 for 15 reverse split to get into compliance with NASDAQ listing requirements . The $25 million in financing was payable in 24 months.
By the time the reverse split happened, the pre-split stock price was all the way down to $0.12. This made the post split stock price on January 7th $1.80. The company was now in NASDAQ compliance and began to tap into the $25 million in financing.
Within 20 days of the 1 for 15 reverse split, Enteromedics finds itself trading below $1.00 yet again. Investors should be rightly concerned about the prospects of yet another de-listing process beginning. If the stock trades below a closing bid of $1.00 for 30 consecutive trading days, Enteromedics will once again get a de-listing notice from NASDAQ. That will happen on March 9th of this year.
This company will, once again, find itself having to deal with another shareholder approval of a reverse split in order to gain compliance once again. Further, the action of the equity in 2016 will make it even more difficult to secure additional financing or even negotiate better terms on existing debt.
Simply stated, the fundamental problems at Enteromedics did not change with the reverse split earlier this year and the challenges are even more difficult just 20 days later.
The vBloc Maestro device works, but in my opinion the market for the device is much more narrow than many early speculative investors believed. The effectiveness of the Maestro device is not much higher than anti-obesity pills but requires insurance hurdles, surgery, and a lengthy process in coordinating an implant. When one considers that the pill market is seeing challenges, it is not hard to imagine that this device will be a tough sell.
While indeed, there are fewer complications that full gastric or bariatric surgery, the results of successes with more invasive surgery are well documented. Essentially, I have carried the opinion that the Maestro device exists in a niche market. Selling in a niche market is difficult enough even with the most well funded operations. Seeing Enteromedics trying to enter a niche market on a shoe-string budget makes the hurdles far higher.
In my opinion what investors need to strongly consider is that between a difficult market, a lack of cash, a debt issue that is due in less than two years, insurance difficulties, and a renewed de-listing concern, this company's odds of successfully getting through all of these is extremely difficult at best. Even if you consider the Maestro product as a very good product, the company lacks the real horses to get it in the marketplace. It is one thing to hope for a home run on an issue. It is another to need 4 or 5 home runs in a row and to hope that it can happen.
In my opinion, this equity is so speculative that is is almost dangerous to even consider a play. There will be some that toss money at it, but these people likely understand that the need a quick exit plan. I see this equity as one that will continue to decline and will actually find itself on the receiving end of yet another NASDAQ non-compliance letter in March. Stay Tuned!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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