ChoiceTel, I mean Sontra, I mean Echo Therapeutics (ECTE)

Echo Therapeutics (ECTE):

Market Cap as of February 10, 2011:                 $190mm*
Sales for first three reported quarters of 2010:    $0.3mm
Cash at the end of the last reported Q:             $0.2mm
Debt at the end of the last reported Q:             $0.2mm
Financings since end of last reported Q:            $5.5mm
*Fully diluted taking into account the latest financings.

Humble Beginnings.

ECTE started life as lowly ChoiceTel, which IPO’d in 1997 through a bucket shop. ChoiceTel was a provider of payphones. Yes, with the explosion of cell phones, these hotshots thought payphones would be a great business.

Plymouth, Minnesota, Nov. 11 (Bloomberg) — ChoiceTel Communications Inc. sold 800,000 units at 7 in a $5.6 million initial public offering. Each unit consists of one common share and one warrant. The Plymouth, Minnesota-based provider of payphone service had expected to sell the units at 7, according to its registration statement filed with the Securities and Exchange Commission. The sale, led by Equity Securities Investments Inc, raised a total of $5.1 million after fees.

By 2002 what was left of ChoiceTel (not much) merged with a struggling Massachusetts outfit called Sontra Medical.

Sontra was founded in 1996, and licensed some ultrasonic skin permeation technology from MIT.  They manged to raise 10mm in venture funding during the boom years. Essex Woodlands Health Ventures, Vanguard Venture Partners, H & Q Healthcare Investors and H & Q Life Sciences Investors were all investors in Sontra.

But, by 2002, the company was left for dead, and instead of the big IPO dreams of all venture backed companies, Sontra ended up in the cesspool of reverse mergers. Sontra merged with the carcass of ChoiceTel, becoming SONT.

MINNEAPOLIS and CAMBRIDGE, Mass., June 24 /PRNewswire-FirstCall/ –ChoiceTel Communications, Inc. (Nasdaq: PHON) announced today that it has ompleted its merger with Sontra Medical, Inc., a development stage medical device company engaged in the research and development of transdermal diagnostic and drug delivery products. In connection with the merger, ChoiceTel Communications has changed its name to Sontra Medical Corporation and has begun operating in Sontra Medical’s line of business. Its stock will now trade under NASDAQ ticker symbol “SONT.” Prior to the consummation of the merger, ChoiceTel Communications was able to increase its net worth, in part by selling its Puerto Rican assets and by settling some disputes favorably. Accordingly, based on the adjusted exchange ratio in the merger agreement, Sontra Medical stockholders are entitled to receive 0.1927 shares of ChoiceTel Communications’ common stock for each share of Sontra common stock they own. ChoiceTel Communications expects to issue approximately 6.2 million shares of its common stock to the stockholders of Sontra Medical, representing approximately 67% of the outstanding shares of ChoiceTel Communications’ common stock following the merger.

So, the shell holders got 33% of the combined company. That is an expensive deal.

Fast forward exactly 1 year, and poor little SONT is about to be delisted.

FRANKLIN, Mass., June 24 /PRNewswire-FirstCall/– Sontra Medical Corporation (Nasdaq SC: SONT) announced today that on June 18, 2003 Sontra received a letter from Nasdaq stating the Company has failed to comply with the minimum $2.5 million stockholders’ equity requirement for continued listing set forth in Marketplace Rule 4310(c)(2)(B) and that as a result, its common stock is subject to delisting from the Nasdaq SmallCap Market.

Luckily, in July 2003 they do a deal with Bayer AG, Bayer gets exclusive distribution rights for SONT’s ultrasonic transdermal technology. My own feeling is that this is little more than a fancy way to really get that lotion into your skin!

But there was a little bit more to that deal than just the SonoPrep, they also start hyping the diabetes testing angle. Not needle-free delivery of insulin, mind you, just needle free glucose monitoring.

“Bayer and Sontra also anticipate a strategic collaboration between the companies to develop and commercialize a non-invasive glucose monitor that incorporates Sontra’s ultrasonic skin permeation and biosensor technologies. The collaboration will be structured as a product development program under which the parties expect to enter into future agreements covering the completion of product development and clinical trials necessary to obtain FDA approval. The parties anticipate that at the end of the first phase of collaboration, Bayer will make an additional milestone payment to Sontra.”

Keen readers may remember the one time high-flyer Cygnus, with their diabetes testing watch. Where is CYGN today? Delisted.

Moving to October 2003, SONT makes some big claims for annual sales of its topical anesthetic product. Big claims.

Oct. 7 (Bloomberg) — Sontra Medical Corp., an unprofitable developer of devices that deliver drugs through the skin using ltrasound, said its non-invasive glucose-monitoring test for diabetics won’t be on the market until late 2006 or early 2007. “We hope to be in the FDA studies in 2005,” and plan to enter the $5 billion-a-year market for diabetes test after that, Chief Financial Officer Sean Moran said in an interview. Bayer AG is giving Franklin, Massachusetts-based Sontra cash to develop a diabetes test using SonoPrep, the company’s skin permeation device. Patients would get glucose readings every second by wearing the product on the stomach. Business Week reported last week that the test would be ready in 2004 or 2005. Sontra, founded in 1996, expects to win FDA approval for what would be its first product, a device for topical anesthesia delivery, early next year. That market is estimated to be worth about $150 million a year, Moran said.

But SONT needs more money so in Oct 2003 they do a preferred stock deal with another junk outfit.

FRANKLIN, Mass., Oct. 15 /PRNewswire-FirstCall/ — Sontra Medical Corporation (NasdaqSC: SONTC) announced today that it has completed the third and final closing of its Preferred Stock financing, providing Sontra with approximately $3.1 million in additional proceeds, net of the placement agent fee, and bringing the aggregate net proceeds raised by the Company in the financing from individual investors, institutions and certain members of the Board of Directors to approximately $6.5 million. Dawson James Securities, a division of Viewtrade Financial, served as placement agent for the financing.

In 2003 SONT finally completes a Phase III study for their ultrasonic drug delivery system and 4% lidocaine.

FRANKLIN, Mass., Dec. 4 /PRNewswire-FirstCall/ — Sontra Medical Corporation (Nasdaq SC: SONT) announced today the completion of a Phase 3 clinical study demonstrating that skin anesthesia from topical 4% lidocaine was achieved in five minutes following treatment with the Company’s SonoPrep skin permeation device. SonoPrep applies low frequency ultrasound to the skin to create imperceptible, reversible micro channels through the stratum corneum thereby making the skin permeable to transdermal and topically applied drugs. In this study, pain was evaluated in patients undergoing intravenous (IV) cathetherization in the emergency room. The research team treated the skin of patients with the SonoPrep for approximately 15 seconds and then applied 4% topical lidocaine to the permeated skin site. After a five minute waiting period the IV catheters were inserted.

In Jan 2004 SONT gets the promised license payment from Bayer AG for the glucose monitoring technology.

Sontra Medical Corporation (SONT) announced that it received a $1.5M licensing payment from Bayer Diagnostics pursuant to a licensing agreement executed in July of 2003 with the Diagnostics Division of Bayer HealthCare LLC, a member of the Bayer Group (BAY). Under the terms of the licensing agreement, Bayer was granted exclusive worldwide intellectual property rights for Sontra’s SonoPrep(R) ultrasonic skin permeation technology for the glucose monitoring field.

And in Feb 2004 SONT gets the first of what are to be many FDA 510k clearances. For those who are not aware, a 510(k) clearance is virtually meaningless. The much tougher standard for medical devices is known as a PMA.

FRANKLIN, Mass., Feb. 6 /PRNewswire-FirstCall/ — Sontra Medical Corporation (Nasdaq SC: SONT) reported today that it has received 510(k) marketing clearance from the U.S. Food and Drug Administration (FDA) to market the SonoPrep ultrasonic skin permeation device and electrode system for use in electrophysiology testing. The SonoPrep device applies low frequency ultrasound to a patient’s skin for approximately 15 seconds to create imperceptible, reversible micro-channels through the stratum corneum. The skin permeation effect lasts for 24 hours and improves electrical conductivity (low skin impedance) during electrophysiology testing. SonoPrep increases skin permeability 100 fold versus untreated skin and the technology will enable further development of our transdermal drug delivery and non-invasive diagnostic products.

In Aug 2004 they announce another 510k clearance. Remember this one, as you will see something almost identical seven years later!

FRANKLIN, Mass., Aug. 18 /PRNewswire-FirstCall/ — Sontra Medical Corporation (Nasdaq SC: SONT) announced today that it has received 510(k) marketing clearance from the U.S. Food and Drug Administration (FDA) to market the SonoPrep ultrasonic skin permeation device and procedure tray for use with topical lidocaine. Sontra received its first 510(k) marketing clearance for SonoPrep for use in electrophysiology applications in February 2004.

Now the author could go on for AGES about what happened between 2004 and today, but here is the condensed version:

Bayer walks away, and SONT ends up owing Bayer a royalty!

SONT actually decides to shut down in late 2006, but is rescued by a very dilutive deal in early 2007.

SONT merges with another failed company, Echo, forming ECTE.

ECTE raises some money in February, 2008, in the form of debt that comes due in 3 years. That would be, let’s see, February 12, 2011. Only two days from today.

FRANKLIN, Mass., Feb. 12 /PRNewswire-FirstCall/ — Echo Therapeutics, Inc. (OTC Bulletin Board: ECTE), a specialty pharmaceuticals and diagnostics company, announced today that it had completed an approximately $2.3 million private financing with Montaur Capital through Platinum Long Term Growth VII, LLC and certain other select institutional and strategic investors of senior unsecured convertible notes and warrants. The $2,292,459 in aggregate principal amount of Senior Convertible Notes to be issued in the financing will bear interest annually at a rate of 8.0% per annum and will provide investors with the right to convert principal into shares of Echo Therapeutics common stock at $1.35 per share. The conversion price is subject to weighted average anti-dilution protection, excluding certain customary exceptions. The notes have a three-year term and Echo may elect to make payments of interest in cash, additional notes, or stock. Additionally, the investors received warrants to purchase 849,058 shares of common stock at an exercise price of $1.69 per share for a term of five years.

ECTE manages to sign a new licensing deal with Ferndale. Ferndale pays them 750k and will pay an additional 750k upon 510(k) approval for the Prelude SkinPrep System and 4% lidocaine cream. That does sound awfully familiar. So familiar, I think it is the “something virtually identical happened in 2004” kind of  familiar.

And bringing us to late 2010:

According to this press release the results should be heard from the FDA tomorrow, February 11, 2011.

FRANKLIN, Mass., Nov. 11, 2010 /PRNewswire/ — Echo Therapeutics, Inc. (OTC Bulletin Board: ECTE), a company developing its needle-free Symphony™ tCGM System as a non-invasive, wireless, transdermal continuous glucose monitoring system and its Prelude™ SkinPrep System for transdermal drug delivery, today announced that a 510(k) premarket notification has been submitted to the US Food and Drug Administration (FDA) for its Prelude SkinPrep System and 4% lidocaine cream.  Market clearance is expected to take ninety (90) days.

Now what were the cumulative product revenues for the company since the very first 510k approval so many years ago? Somewhere under $250k in total since 2004! What did they originally promise in 2003? 150mm per year!

But maybe ECTE is having problems with their 510(k) submission? According this press release there may have been a slight snag:

FRANKLIN, Mass., Feb. 8, 2011 /PRNewswire/ — Echo Therapeutics, Inc. (OTC Bulletin Board: ECTE), a company developing the Symphony™ tCGM System as a non-invasive, wireless, transdermal continuous glucose monitoring (tCGM) system and the Prelude™ SkinPrep System for  transdermal drug delivery, today announced that the Company’s partner, Ferndale Pharma Group, LLC, received comments from the U.S. Food  and Drug Administration (FDA) on the 510(k) submission of the Prelude SkinPrep System that were deemed minor and were consistent with both  companies’ expectations.  Echo anticipates that the comments will be addressed quickly and that the planned commercial launch date for the  product will remain on track, pending FDA clearance.

Good thing they recently raised $5.5mm, but is that good for holders of common shares?

Echo conducted a private placement of common stock and warrants with aggregate proceeds of approximately $2.5 million through a series of    closings held from November 2010 through January 2011.  Investors purchased units, or partial units, at a price per unit of $25,000, consisting  of (i) 25,000 shares of Echo common stock, (ii) Series 1 warrants to purchase 12,500 shares of Echo common stock with an exercise   price of $1.50 per share, and (iii) Series 2 warrants to purchase 12,500 shares of Echo common stock with an exercise price of $2.50 per share.

For every 25k you bought of ECTE stock in January an investor would receive 25,000 shares plus 25,000 warrants. Let’s do the math.

What cost an investor $25,000 last month is now worth:

25,000 shares @ 4.72 = $118,000

12,500 warrants worth a minimum of 3.22 each (4.72-1.50*12,500) = 40,250

12,500 warrants worth a minimum of 2.22 each (4.72-2.50*12,500) = 27,750

A grand prize package worth $186,000 on a 25k investment, in somewhere between 2 and 14 weeks!

On January 5, 2011, Echo also received a $3 million funding commitment from Montaur. Montaur will advance $1 million of the committed funds to Echo pursuant to a bridge note, which is intended to convert into convertible preferred stock no later than February 1, 2011.  Montaur   has agreed to invest an additional $2 million through the purchase of convertible preferred stock in monthly installments from February   through May 2011.  The financial terms of Montaur’s funding commitment are substantially similar to those of the private placement of common  stock with regards to the per share purchase price, warrant coverage and terms of the warrants issued to each purchaser.

By my count that is somewhere in the neighborhood of 11mm shares fully diluted on the $5.5mm investment. An average cost of 50c a share for those buyers. On Jan 5, for example, the date of the Platinum-Montaur investment, the stock was trading at $1.49 a share. The common stock portion of the units was already at a massive 33% discount to market, and that did not include the value of the warrants. Quality companies simply never need to raise money at such extreme terms (for that matter quality companies do not do reverse mergers).

So the common shares that are trading in the market today at $4.72 are certainly not something the author would buy, but something the author would buy to cover, lower. Much lower.*

*Yes, that means the author is short shares of ECTE.

The content contained in this blog represents only the opinions of the author. The author may hold either long or short positions in securities of various companies discussed in the blog. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. This blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.
Advertisements

3 comments

  1. I have no knowledge of ECTE’s situation, but a cursory glance suggests that they raised money in January to fund a potential product launch on approval of the device? Is that a situation you want to short before the actual approval notice is out? I would wait for a speculative bubble to form and the launch news to rocket the stock, then short there?

    @P1
    Thanks for the support! Based on the November 11, 2010 submission date, ECTE should have heard from the FDA by now. Perhaps Monday? The run up these past two weeks was probably in anticipation of that event, perhaps that is the bubble. There should be little question that the device will be approved, all ECTE must do is show that the new version of the device is “substantially equivalent” to the old version. A low hurdle indeed. But will the buyers of that cheap stock in January stick around after that, considering the enormous gains they have made?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s