Echo Therapeutics (ECTE)

Echo (ECTE) Update 09-02-14

downloadreportMaintaining Avoid/Sell Rating
No Permanent Management, No Game Plan, Low Cash
Recalcitrant Board Stokes Investor Animosity

Download Full 22-Page Update Report with Important Disclosures: ECTE Update 09-02-14

No Permanent Management: We note that Echo has not had a permanent CEO for the past 11 months and is now on their second interim CEO and more recently, an interim CFO. After a disastrous 3 years where Echo’s stock has declined 95% due to multiple poorly executed financings, an incredibly ill-timed 1 for 10 reverse-split, lawsuits, and losing two Board battles with Platinum, their largest shareholder, Echo finds itself with no product, low cash, a spooked Chinese partner, a split Board and a great deal of investor animosity.

Running Out of Cash: As of June 30, 2014, Echo had just $4.1M in cash. So far this year, Echo management has spent $560K in failed Board battles that were clearly unwinnable and represent a poor use of shareholder money. Echo is now warning about a potentially dilutive offering stating “The Company continues to explore a variety of funding alternatives which it believes, together with the cost reduction initiatives, is necessary to permit the Company to ultimately achieve its clinical trial and regulatory approval objectives.

Symphony Development Delayed? We note that Echo reduced headcount by 35% and stated “In the absence of a financing or strategic transaction, Echo’s ability to achieve its previously stated product development timelines will be negatively impacted by the Company’s effort to preserve cash and reduce expenses.” We believe the absence of specific development progress in their Q2 press release and 10-Q along with a lack of Q2 investor conference call indicates to us that little progress has been made on the GEN2 system needed for CE Mark and FDA approval. As a reminder, on May 9, 2014, Echo stated that their CE Mark notifying body requested additional data as a result of individual patient variability and that Echo stopped GEN1 development to work on a GEN2 system instead.

Chinese Partner Balks: Medical Technologies Innovation Asia (MTIA) had agreed to make a $5M equity investment in Echo in exchange for licensing the Symphony technology. After making an initial payment of $2.4M of the $5M earlier this year, MTIA still has not paid the remaining $2.6M, which we believe is likely due to lack of confidence in Echo management.

No Response to Alternative Game Plan: On July 18th, Echo’s largest shareholder, Platinum, held a shareholder forum and presented a credible product develop game plan including a fast-to-market strategy for the Symphony tCGM system in the rapidly growing wearable technology space for dieters, athletes and pre-diabetes markets. Also presented was a development plan for gestational diabetes, which currently affects 4% of all pregnant woman but new guidelines from the IADPSG (International Association of Diabetes Pregnancy Study Groups) could increase glucose monitoring for up to 20% of all pregnancies. The plan would also continue the current critical care pathway but focus on a more commercially-viable lower-cost system incorporating GEN2 features. Finally, an informal non-binding vote taken during the forum, estimated at representing >50% shareholders called for, among other things, the resignations of legacy directors, Mr. Enright, Mr. Grieco and Mr. Smith (see all voter referendums at http://prn.to/1neYSFy)

Reiterating Avoid/Sell Rating: Echo has been financially rewarding for management, the Board, their lawyers and proxy advisors but for shareholders, not so much. As a result of management’s actions, Echo now finds itself with no product, low cash, a spooked Chinese partner, a split Board and a great deal of investor animosity. We feel like the U.S. Major in the battle for Ben Tre during the Vietnam Tet Offensive who stated “‘It became necessary to destroy the town to save it“. We continue to believe Echo Therapeutics remains uninvestable unless dramatic changes are undertaken to refocus on developing the Symphony tCGM system and its Prelude and wireless biosensor components.

Download Full 22-Page Update Report with Important Disclosures: ECTE Update 09-02-14

Echo (ECTE) Note 07-24-14

downloadreportThe Gloves Come Off as Platinum Demands Echo’s Books & Records
Dissident Platinum Shows Solid Game Plan for Symphony tCGM Development


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Morning Note 07-24-14 ECTE

The Gloves Come Off: Echo’s largest shareholder Platinum Management (at 20% and 30% fully converted) is now invoking Section 220 of Delaware’s corporate law statutes demanding to inspect the books and records for Echo Therapeutics. Platinum stated they are specifically looking for possible mismanagement, breaches of fiduciary duty and wrongdoing by, among others, members of the Board and the current interim CEO. The letter states the documents are due on or before July 30, 2014. Platinum’s press release with comments are at: http://prn.to/1nEa3J1 and Section 220 Inspection of Books and Records can be found at: http://delcode.delaware.gov/title8/c001/sc07/

We continue to reiterate our Avoid/Sell rating as the company in its present condition is uninvestable in our opinion. We remain disappointed that almost a year has gone by since several senior management changes, countless board meetings combined with a successful dissident shareholder proxy battle, which have all have failed to compel Echo to fully unlock the value of the Symphony tCGM and its underlying technology. We believe the strategic game plan presented at the July 18th shareholder forum and supported by Platinum is a credible way forward for the company while we await Echo management’s response.

Download the Full 7-Page Note with Important Disclosures: Morning Note 07-24-14 ECTE

Echo (ECTE) Note 07-23-14

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Dissident Platinum Shows Solid Game Plan for Symphony tCGM Development
Reiterating Avoid/Sell as Echo “Enrages Rather than Engages Shareholders

Download Full 6-Page Note with Important Disclosures: Morning Note 07-23-14 ECTE

Echo’s largest shareholder Platinum (at 20% and 30% fully converted) held their shareholder forum on July 18th and we believe presented a credible product develop game plan including a fast-to-market strategy for the Symphony tCGM system in the rapidly growing wearable technology space for dieters, athletes and pre-diabetes markets. Also presented was a development plan for gestational diabetes, which currently affects 4% of all pregnant woman but new guidelines from the IADPSG (International Association of Diabetes Pregnancy Study Groups) could increase glucose monitoring for up to 20% of all pregnancies. The plan would also continue the current critical care pathway but focus on a more commercially-viable lower-cost system incorporating GEN2 features. Finally, an informal non-binding vote taken during the forum, estimated at representing >50% shareholders called for, among other things, the resignations of legacy directors, Mr. Enright, Mr. Grieco and Mr. Smith (see all voter referendums at http://prn.to/1neYSFy):

While it is understandable that Echo management would not attend the forum, we were disappointed that they did not release an updated development game plan for investors, as we feel the current plan fails to unlock enough shareholder value compared to the time and development costs required.

We continue to reiterate our Avoid/Sell rating as we continue to view the company as uninvestable. The cognitive dissonance between Echo’s disastrous 3-year performance and management’s willingness to continuously enrage, rather than engage, a passionate shareholder base is a red flag in our opinion. While we don’t have any insight into management’s current strategy, if any, we certainly hope it is worth any potential damage to their reputations within investment community.

Download Full 6-Page Note with Important Disclosures: Morning Note 07-23-14 ECTE

Echo (ECTE) Note 07-11-14

downloadreportPlatinum Tells Board “The Party’s Over” in Attempt to Take Away Punch Bowl
Platinum to Hold Special Shareholder Forum on July 18th
Reiterating Avoid/Sell – “It Became Necessary to Destroy the Town to Save It

Download Full 6-Page Note with Important Disclosures: Morning Note 07-11-14 ECTE

Platinum Tells Board “The Party’s Over” – Attempts to Take Away the Punch Bowl: Platinum Management, Echo’s largest shareholder at 20%, issued a public letter to Echo exercising Platinum’s contractual right under the December 10, 2013 Stock Purchase Agreement to call a meeting of stockholders to vote to lift the “blockers” limiting Platinum’s voting power. If the stockholders vote in favor of lifting the blockers, Platinum would wind up with the power to vote approximately 30.34% of Echo shares with the ultimate goal to remove, for cause, the legacy directors (or as Platinum calls them “lingering directors”) consisting of Mr. Enright, Mr. Grieco and Mr. Smith.

Platinum to Hold Shareholder Forum – Echo Board Invited: On Friday, July 18th at 10:00am, Platinum will be hosting a public forum for shareholders to express their views on the strategic direction of Echo. Platinum’s two recently elected board members will be presenting their plan and the existing legacy directors have been invited to present their plan. The meeting will take place in NYC at 152 West 57th Street, 54th Floor and will also be webcast at https://www3.gotomeeting.com/register/181404134 We strongly recommend that investors read Platinum’s public letter in its entirety at http://prn.to/VSKNTH 

Legacy Board’s Controversial Move to Block Investor Lawsuits was Tipping Point: As we mentioned last week, Echo amended their bylaws to provide financial indemnification, including cash advances, for all legal fees, judgments, fines and settlements for the directors and officers of Echo. For more background on this controversial change to the corporate bylaw, we recommend investors to read the following Reuters article at http://reut.rs/1oMOV1p where it was noted that “most companies are probably reluctant to adopt the bylaw because of the potential to harm investor relations” and that it may not hold up in court.

Reiterating Avoid/Sell Rating: Echo has been financially rewarding for management, the Board, their lawyers and proxy advisors but for shareholders, not so much. We feel like the U.S. Major in the battle for Ben Tre during the Vietnam Tet Offensive who stated “‘It became necessary to destroy the town to save it“. Echo has lost 95% of its value, terminated a permanent CEO and an interim CEO with the CFO heading for the exit, increased non-developmental cash expenditures and most recently changed their bylaws to protect themselves from investor lawsuits. We continue to believe Echo Therapeutics remains uninvestable unless dramatic changes are undertaken to refocus on developing the Symphony tCGM system and its Prelude and wireless biosensor components.

Download Full 6-Page Note with Important Disclosures: Morning Note 07-11-14 ECTE

Echo (ECTE) Note 07-03-14

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Reiterating Avoid/Sell Rating – Platinum Wins Battle But Issues Remain

Download Full 5-Page Note with Important Disclosures: Morning Note 07-03-14 ECTE

Reiterating Avoid/Sell Rating: While Platinum Management easily won the dissident proxy vote for their nominee (5,391,044 votes) over the existing Chairman Robert Doman (1,607,692 votes) at the June 19th shareholder meeting, we had noted at the time that more work remained to regain investor confidence before we considered Echo to be investible again and that Platinum (the largest shareholder at 20%) only has 2 board seats and can be outvoted by members of the legacy board. Unfortunately, we have only seen “business as usual” from the legacy Board since the shareholder vote.

Adding Insult to Injury: Echo presumably spent $450,000 of shareholder money for multiple proxy mailings and several telemarking efforts despite the evidence of an overwhelming margin of defeat (over 3 to 1 votes against). Immediately after the final vote count, Echo then amended their bylaws to provide financial indemnification, including cash advances, for all legal fees, judgments, fines and settlements for the directors and officers of Echo. It now appears that Echo wants to use shareholder money to pay personal legal fees for any future shareholder lawsuits arising from their use of shareholder money to wage a proxy battle against their largest shareholder. It appears they are concerned their actions are not covered under their existing Directors & Officers liability insurance. From their 8-K:

The indemnification provisions of the Amended Bylaws require the Company, among other things, to indemnify directors or executive officers against specified expenses and liabilities, such as attorneys’ fees, judgments, fines and settlements, reasonably incurred or suffered by the individual in connection with any action, suit or proceeding by reason of the fact that the individual was a director or executive officer of the Company, and to advance expenses incurred by the individual in connection with any proceeding against the individual with respect to which the individual may be entitled to indemnification by the Company.

Out with the Old and In with the Old: While Robert Doman’s contract for interim CEO expired on June 30th and was not renewed, the board appointed Echo’s general counsel Kimberly A. Burke as interim CEO. While Ms. Burke may be a fine attorney, we caution investors that she does not have any CEO experience. From her bio:

Ms. Burke joined Echo Therapeutics in 2008 after serving as General Counsel of privately-held Echo Therapeutics, Inc., which merged with Sontra Medical Corporation to form Echo Therapeutics in 2007. Prior to Echo, Ms. Burke was Director of Legal Affairs at Cato Research Ltd., a global contract research and development organization, and an Associate with Cato BioVentures. Ms. Burke has also held prior legal positions at Devine, Millimet and Branch, a New England law firm, Investors Title Company, a holding company engaged in title insurance and investment management services, and Hemodynamic Therapeutics, a pharmaceutical company. Ms. Burke received her B.A. from Mount Holyoke College and her J.D. from the College of William and Mary, Marshall-Wythe School of Law.

CFO Heads for the Exit: According to Echo’s latest 8-K, the CFO Christopher P. Schnittker was apparently looking for a new job and found one. His last day at Echo is July 15th. Investors should note that the multiple poorly executed financings, including an incredibly ill-timed 1 for 10 reverse-split, resulted in a decline of 95% in Echo’s stock price over the past 3 years.

Now What? As a result of all the management turmoil, we would not be surprised if development efforts on the GEN2 Symphony tCGM system have been impacted. We are also waiting for the remaining $2.6M of the $5M from Medical Technologies Innovation Asia (MTIA) for their 10-year strategic collaboration and license agreement. We note there is some risk of MTIA backing out due to the uncertainty surrounding Echo’s management. As we previously noted, we believe a strategic review of the game plan for the Symphony tCGM system is also needed. While the continuous glucose monitoring space is growing more attractive every day, we are not yet confident of the issues and timeline for the GEN2 system needed to begin U.S. FDA clinical trials. We are even less confident about the plan for a limited launch in Europe or even if a launch in Europe should be attempted during a U.S. FDA clinical trial. Time will tell and we are hopeful that Platinum Management will be allowed the freedom to influence Echo’s direction and to address these issues as well as the large China market vis-à-vis MTIA.

Download Full 5-Page Note with Important Disclosures: Morning Note 07-03-14 ECTE

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