More Trouble Ahead For Echo Therapeutics Inc (ECTE)?

  • Fails to raise equity after more than 6 months and is delisted from Nasdaq
  • Largest shareholder, Platinum Partners, discloses liquidation plans
  • Company and largest shareholder both likely need to sell lots of stock of this illiquid company

Since our last article (see links listed below) on Echo Therapeutics (ticker ECTE), things at the company have only gotten worse and we expect the company’s stock price to fall even more.

Since our last article there have been 2 significant developments

  • On July 8, ECTE was delisted from the Nasdaq for, among other reasons, failing to have stockholders’ equity above $2.5 million (last quarter it was negative $4.7 million). It appears the company failed to raise any equity in the over 6 month period it had to meet the Nasdaq requirement.  We estimate ECTE needed to raise only approximately $7 million, which shouldn’t have been that difficult considering the market is at all time highs and this (heavily hyped, pre revenue) company operates in a hot space.  So a logical questions is why was the company unable to raise money?  We believe the company failed to raise money because its technology is not very good, its stock is wildly overvalued and its largest investor is liquidating.
  • As mentioned in this article (http://www.reuters.com/article/us-hedgefunds-platinum-idUSKCN10029U ), ECTE’s largest shareholder, Platinum Partners, has indicated it will be liquidating its two main funds. It also appears there is an SEC investigation in addition to the Dept. of Justice investigation that had been previously reported.

From a valuation perspective it is difficult for us to see why anyone would buy ECTE stock.  The company has no revenue, its losing money, and it faces competition from much larger industry competitors.  Furthermore, according to the latest 10Q, the company had only $42k of unrestricted cash and lost $2.5 million last quarter.   Yet, ECTE has a market cap of almost $40 million (using the 32 million fully diluted share count the company notes in its latest presentation, not the 11 million shares outstanding that Yahoo, Bloomberg and other data services show).

We believe the company’s stock price will be further negatively impacted by the fact that a huge amount of stock likely needs to be sold in this highly illiquid company.  The stock sales would likely come from both the company (it needs cash to keep the lights on) and its largest shareholder (which is liquidating).

Let’s assume the company raises $7 million at 80c a share.  That would imply 8.8 million new shares need to be sold.  Let’s also assume Platinum sells its ECTE holdings of approximately 9 million shares (including convertible preferred and warrants).  In total that would be almost 18 million shares that need to be sold, which is 150% of the current shares outstanding. Who is going to buy all these shares, especially since the company has historically failed to attract much interest from institutional investors??

Our previous articles on this stock can be found at:

We remain short ECTE

Echo Therapeutics

Echo Therapeutics