EnteroMedics Inc. Reports Operating Results (10-Q)

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Aug 07, 2009
EnteroMedics Inc. (ETRM, Financial) filed Quarterly Report for the period ended 2009-06-30.

EnteroMedics Inc. was established to develop and commercialize a new therapeutic platform for treating a wide range of acute and chronic diseases that are mediated by the vagal nerves. Due to the large unmet need for more effective surgical management of obesity and following an in-depth analysis of how the vagus nerve affects food intake and processing EnteroMedics has selected obesity management as its primary focus. EnteroMedics Inc. has a market cap of $88 million; its shares were traded at around $2.93 .

Highlight of Business Operations:

Interest Income. Interest income was $24,000 for the three months ended June 30, 2009, compared to $286,000 for the three months ended June 30, 2008. The decrease of $262,000, or 91.6%, is primarily due to a decrease in the short-term interest rate environment and a decrease in the average cash, cash equivalents and short-term investment balance from $43.2 million during the second quarter of 2008 to $36.3 million during the second quarter of 2009. The decreased average cash, cash equivalents and short-term investments balance is the result of $37.4 million in net cash used in operating and investing activities from January 1, 2008 through June 30, 2009, offset by $15.0 million of debt funding received in November 2008, of which we received net proceeds of $7.1 million after transaction expenses, facility charges and existing debt pay off, $15.1 million of net private placement proceeds received February 24, 2009, and $5.0 million of additional debt funding received in April 2009.

Interest Expense. Interest expense was $874,000 for the three months ended June 30, 2009, compared to $389,000 for the three months ended June 30, 2008. The increase of $485,000, or 124.5%, was primarily the result of entering into a $20.0 million debt facility, of which $15.0 million was funded in November 2008 that resulted in net proceeds of $7.1 million after transaction expenses, facility charges and existing debt pay off and the funding of the remaining $5.0 million in April 2009. The effective rates on the $15.0 million and $5.0 million debt fundings are approximately 19% and 22%, respectively, compared to the old debt facility containing several outstanding loans with effective interest rates primarily ranging from approximately 15% to 17%.

Change in Value of Warrant Liability. The change in value of warrant liability was $3.3 million for the three months ended June 30, 2009, compared to zero for the three months ended June 30, 2008. This is the result of adopting EITF 07-5 on January 1, 2009, which resulted in warrants issued November 2008 with a recorded value of $1.4 million on December 31, 2008 being reclassified from equity to a liability. The fair market value of the 1,779,372 warrants, with a weighted-average exercise price of $1.24, was $5.7 million as of June 30, 2009. The fair market value was calculated using the Black-Scholes valuation model, which resulted in a $3.3 million increase for the three months ended June 30, 2009. The increase was primarily the result of our stock price increasing from a closing price of $1.36 on March 31, 2009 to $3.33 on June 30, 2009.

Interest Income. Interest income was $72,000 for the six months ended June 30, 2009, compared to $782,000 for the six months ended June 30, 2008. The decrease of $709,000, or 90.8%, is primarily due to a decrease in short-term interest rates and a reduction in total cash available to invest. The average cash, cash equivalents and short-term investment balance was $33.3 million and $47.8 million for the six months ended June 30, 2009 and 2008, respectively. The decreased average cash, cash equivalents and short-term investments balance is the result of $37.4 million in net cash used in operating and investing activities from January 1, 2008 through June 30, 2009, offset by $15.0 million of debt funding received in November 2008, of which we received net proceeds of $7.1 million after transaction expenses, facility charges and existing debt pay off, $15.1 million of net private placement proceeds received February 24, 2009, and $5.0 million of additional debt funding received in April 2009.

Interest Expense. Interest expense was $1.6 million for the six months ended June 30, 2009, compared to $836,000 for the six months ended June 30, 2008. The increase of $716,000, or 85.7%, was primarily the result of entering into a $20.0 million debt facility, of which $15.0 million was funded in November 2008 that resulted in net proceeds of $7.1 million after transaction expenses, facility charges and existing debt pay off and the funding of the remaining $5.0 million in April 2009. The effective rates on the $15.0 million and $5.0 million debt fundings are approximately 19% and 22%, respectively, compared to the old debt facility containing several outstanding loans with effective interest rates primarily ranging from approximately 15% to 17%.

We have incurred losses since our inception in December 2002 and, as of June 30, 2009 we had a deficit accumulated during the development stage of $118.3 million. We have financed our operations to date principally through the sale of capital stock, debt financing and interest earned on investments. Prior to our initial public offering (IPO) in November 2007, we had received net proceeds of $63.2 million from the sale of common stock and preferred stock and $30.8 million in debt financing, $746,000 to finance equipment purchases and $30.0 million to finance working capital. Through our IPO we received net proceeds of $39.1 million after expenses and underwriters discounts and commissions and including the partial exercise of the underwriters over-allotment option. In November 2008, we entered into a $20.0 million working capital debt facility, replacing the existing debt financing. We received net proceeds of $7.1 million from the first draw of $15.0 million after transaction expenses, facility charges and existing debt pay off. The debt facility provided that the additional $5.0 million draw was to be available and automatically fund under the terms of the loan agreement if and when the trading price of our common stock on the NASDAQ Global Market met or exceeded a target amount on or before June 30, 2009. The Companys trading price achieved this target and therefore, on April 28, 2009, the automatic funding of the additional $5.0 million was made to the Company under the debt facility. The $5.0 million loan requires monthly interest-only payments through June 30, 2009 at an annual percentage rate of 12.0% followed by 30 equal principal and interest installments beginning July 1, 2009 at an annual percentage rate of 11.0%. A final payment fee of $250,000 is due December 1, 2011, the maturity date. In conjunction with the funding, the Company issued 296,763 common stock warrants with an exercise price of $1.668 per share and a ten year life. The warrants give the Lender the option to purchase either (i) shares of the Companys common stock with a per share exercise price equal to $1.668, or (ii) shares of the Companys stock (including common stock) issued in an equity financing that

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