Enteromedics (NASDAQ:ETRM) investors started off the week with a nasty notice from the company. An 8-K was filed on Monday morning, stating that the company was in receipt of a de-listing notice from Nasdaq. Specifically, Enteromedics stock has fallen below the $1.00 mark for 30 consecutive days. Readers of mine who have been following ETRM are likely familiar with the process, since the company just went through it at the close of 2015 and beginning of 2016. This time, the de-listing process has two components. The second component is stockholder equity that is below Nasdaq requirements. The notice states:
(A) Minimum Bid Price Deficiency Letter
On May 9, 2016, EnteroMedics Inc. (the "Company") received a written notice (the "Bid Price Notice") from the Listing Qualifications department (the "Nasdaq Staff") of The Nasdaq Stock Market ("Nasdaq") indicating that the Company is not in compliance with the $1.00 Minimum Bid Price requirement set forth in Nasdaq Listing Rule 5550(2) for continued listing on the Nasdaq Capital Market.
The Nasdaq Listing Rules require listed securities to maintain a minimum bid price of $1.00 per share and, based upon the closing bid price for the last 30 consecutive business days, the Company no longer meets this requirement. The Bid Price Notice indicated that the Company will be provided 180 calendar days in which to regain compliance. If at any time during this period the bid price of the Company's common stock closes at or above $1.00 per share for a minimum of ten consecutive business days, the Nasdaq Staff will provide the Company with a written confirmation of compliance and the matter will be closed.
In the event the Company does not regain compliance with Rule 5550(2) prior to the expiration of the 180 calendar day period, the Nasdaq Staff will provide the Company with written notification that its securities are subject to delisting from the Nasdaq Capital Market. At that time, the Company may appeal the delisting determination to a Hearings Panel.
Alternatively, if the Company fails to regain compliance with Rule 5550(2) prior to the expiration of the 180 calendar day period, but meets the continued listing requirement for market value of publicly held shares and all of the other applicable standards for initial listing on The Nasdaq Capital Market, with the exception of the minimum bid price, and provides written notice of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary, then the Company may be granted an additional 180 calendar days to regain compliance with Rule 5550(2).
The Company intends to actively monitor its performance with respect to the listing standards and will consider available options to resolve the deficiency and regain compliance with the Nasdaq rules.
(B) Stockholders' Equity Deficiency
On May 10, 2016, the Company filed its Form 10-Q for the quarter ended March 31, 2016, which reported that the Company had stockholders' equity of $(1,259,287) as of March 31, 2016. Nasdaq Listing Rule 5550(1) requires the Company to have stockholders' equity of at least $2.5 million for continued listing on the Nasdaq Capital Market. As a result, the Company is not in compliance with Nasdaq Listing Rule 5550(1) and will soon receive a written notice (the "Equity Notice") from the Nasdaq Staff with respect to the Company's failure to comply with the stockholders' equity requirement.
In accordance with Nasdaq Listing Rule 5810, the Company expects the Equity Notice to inform the Company that it has until 45 days from the date of the Equity Notice to prepare and submit a plan to Nasdaq outlining how it intends to regain compliance. If the plan is accepted, the Company can be granted up to 180 calendar days from the date of the Equity Notice to evidence compliance. If the Company is unable to evidence compliance in that period, the Nasdaq Staff will provide the Company with written notification that its securities are subject to delisting from The Nasdaq Capital Market. At that time, the Company may appeal the delisting determination to a Hearings Panel. There can be no guarantee that the Company will be able to regain compliance with the continued listing requirement of Rule 5550(1) or that its plan will be accepted by Nasdaq.
The first thing investors need to do is to consider the hurdles that are in front of this company, and that any de-listing process makes navigating and clearing these hurdles much more difficult. You do not need to indict the vBloc product to make such an assessment. Separate your feelings about the product from your feelings about the equity. At this stage, vBloc could be a product that can deliver decent success, but the equity would still be hindered.
The last time the company received a de-listing notice, the solution was a 1-for-15 reverse split with the stock trading at $0.12 per share. That brought the stock up to $1.80 per share and got the company back into compliance. Since then, the stock has tumbled to $0.57 per share and has fallen out of compliance yet again.
To put this in perspective, consider that if the previous reverse split had not happened, this stock would be trading at less than $0.04 per share.
The same warnings that I have been giving about this sector and this company for months still exist. vBloc, while seemingly a great product, fits in a niche market. Being in a niche market hampers its ability to offer compelling growth. With very little cash to market the product, the odds of being the sole solution to fill the niche are small.
Many investors who remain in this equity have already written off the idea that current management can effectively market the product. These days, the mantra of the bull thesis is that the technology and products will be bought by another entity, and when that happens, the reward to shareholders will be substantial.
I hate to rain on positive feelings, but investors need to get real and do it quickly. Enteromedics carries a market cap of under $5 million. If another company was interested, it could take a majority position in Enteromedics for just a few million dollars. At that stage, the other company could demand control of the board and basically take over. Perhaps the most valuable asset that this company has is its net operating losses.
The fact is that Enteromedics is unlikely to trade above $1.00 for ten consecutive days between now and November. Even if insurance coverage improves, getting to the point of surgery takes time. There will not be enough sales to move the needle from dire to hopeful. In the entire Q1 the revenue was just $72,000. That level of revenue will not cut it. Heck, even 10 times that revenue will not deliver success!
Long-term investors may have already lost so much that they will simply let it ride. The losses to-date are unfortunate, but if your investment has essentially been wiped out, letting the balance ride may be the correct move. Where things get interesting and perhaps scary is when people decide to add to positions because the stock is so cheap.
When the last dilution happened, I warned that the stock price would fall, and that another de-listing notice was very possible. I had investors slam me and call me a basher. Only a few months later, the company is in the exact position I stated it would be in. You owe it to yourself to assess the situation in a very critical light now. At this stage, the odds of a turnaround are quite slim. Enteromedics has high debt and low revenue. Its ability to service the debt is questionable, and the debt holders have priority over shareholders. This story will not likely have a happy ending for very many people. 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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