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EnteroMedics Inc. Reports Operating Results (10-Q)

November 16, 2009 | About:
10qk

10qk

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EnteroMedics Inc. (ETRM) filed Quarterly Report for the period ended 2009-09-30.

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 $20.13 million; its shares were traded at around $0.67 .

Highlight of Business Operations:

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $2.7 million for the three months ended September 30, 2009, compared to $1.9 million for the three months ended September 30, 2008. The increase of $833,000, or 44.6%, is primarily due to increases of $510,000 and $356,000 in stock-based compensation and professional services, respectively. The increase in stock-based compensation is primarily due to options granted to employees on June 22, 2009 resulting in $152,600 in additional expense and stock options granted to consultants resulting in $255,000 in additional expense. The increase in professional services is the result of $208,000 for commercialization activity in anticipation of the unblinding of the EMPOWER trial and increases of $88,000 in legal fees and $57,000 in audit fees.

Interest Income. Interest income was $7,000 for the three months ended September 30, 2009, compared to $205,000 for the three months ended September 30, 2008. The decrease of $198,000, or 96.6%, 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 $31.9 million during the third quarter of 2008 to $31.0 million during the third quarter of 2009. The decreased average cash, cash equivalents and short-term investments balance is the result of $43.2 million in net cash used in operating and investing activities from January 1, 2008 through September 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 $918,000 for the three months ended September 30, 2009, compared to $347,000 for the three months ended September 30, 2008. The increase of $571,000, or 164.3%, 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 $3.8 million for the three months ended September 30, 2009, compared to zero for the three months ended September 30, 2008. This is the result of adopting the provisions of ASC 815-40 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. On September 29, 2009, Silicon Valley Bank completed a cashless exercise of 956,522 common stock warrants with an exercise price of $1.15 per share. The related warrant liability was marked-to-market to $4.8 million from $3.0 million on the date of exercise and reclassified to equity. The fair market value of the remaining 822,850 warrants, with a weighted-average exercise price of $1.34, was $4.7 million as of September 30, 2009. The fair market value was calculated using the Black-Scholes valuation model, which resulted in a $2.1 million increase for the three months ended September 30, 2009. The increase was primarily the result of an increase of our stock price from a closing price of $3.33 on June 30, 2009 to $4.79 on September 30, 2009.

Interest Income. Interest income was $79,000 for the nine months ended September 30, 2009, compared to $987,000 for the nine months ended September 30, 2008. The decrease of $908,000, or 92.0%, 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 $32.2 million and $41.5 million for the nine months ended September 30, 2009 and 2008, respectively. The decreased average cash, cash equivalents and short-term investments balance is the result of $43.2 million in net cash used in operating and investing activities from January 1, 2008 through September 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.

We have incurred losses since our inception in December 2002 and, as of September 30, 2009 we had a deficit accumulated during the development stage of $130.3 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. On February 24, 2009, we completed the sale of 13,110,393 shares of our common stock, together with warrants to purchase an aggregate of 6,555,197 shares of our common stock, in a private placement transaction with several accredited investors. We received gross proceeds of $15.9 million less a placement agent fee of $617,000 and certain other expenses. On October 7, 2009, we completed the sale of 6,161,068 shares of our common stock in a registered direct offering, at a purchase price of $0.80 per share. We received gross proceeds of $4.9 million before deducting estimated offering expenses.

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