Encorium Group a Going Concern for Investors

Encorium Group, which trades below $5 a share, has seen its share price fluctuate wildly due to ongoing capital concerns.
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WAYNE, Pa. (

TheStreet

) --

Encorium Group's

(ENCO)

share price has fluctuated wildly over the last year, falling recently on weak first-quarter results and capital concerns, although the company's CEO asserts that Encorium can return to pre-recession form.

Encorium Group

on Tuesday said it had a first-quarter net loss from continuing operations of $1.9 million, or 56 cents a share, widening from a year-ago loss of $582,000, or 23 cents a share. Revenue dropped 34% to $3 million as Encorium saw fewer business awards and increased contract cancellations.

Encorium Group Volatility a Risk to Investors

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For investors in the clinical research company, it appears to get worse. There is danger that Encorium Group could be delisted from the

Nasdaq

for failing to comply with the exchange's minimum stockholder's equity requirement. In addition, Encorium Group said it may be required to obtain additional capital or significantly reduce operating costs if it is unable to win and maintain customer contracts.

Encorium Group also was slapped once again with the dreaded "going concern" qualification by its auditors as they prepared the latest financial report. Encorium said in its first-quarter release that there is "substantial doubt about its ability to continue as a going concern," which means that the threat of liquidation exists if the business cannot function properly.

Despite this confluence of bad news, Encorium Group CEO Kai Lindevall is optimistic about the company's future, arguing that it has emerged from the recession and will benefit in the rebound of the market for small- to medium-sized biopharmaceutical companies.

"For a small company, this is not so unusual," Lindevall said during in a phone interview, referring to the recent spate of headlines for Encorium Group. "Everything comes down to what the company will do about it in the future."

Lindevall, who reassumed the CEO position on Jan. 8, says that Encorium's board of directors will do what it has to do "to correct all of these aspects. We see a clear need to recapitalize the company, and I'm sure the board will do something about it in the near future."

While a majority of the troubles Encorium Group is facing stem from the recession, Lindevall says, the acquisition of Encorium Oy in November 2006 has resulted in goodwill that has been a burden on the company.

"The reason why this is all happening was pretty much due to the recession and our stock price falling under $1," Lindevall asserts. "Then we had to write down the values of goodwill of the merger, which prompted this whole problem."

However, Lindevall argues that Encorium Group is positioned to become a niche company in the vaccine field, where there is great opportunity and potential for a medium-sized company specializing in the vaccine field in this growth market.

"We can combine the flexibility of a medium-sized company with the expertise in vaccines and future extended geographic reach," Lindvall says. "If you do things right, you have a tremendous growth potential."

In its goal to be the first vaccine-specialized global company, Encorium Group has worked to stretch beyond the more than 30 countries it operates in. Earlier this month, Encorium Group said that it was awarded $6.8 million of new business awards, primarily consisting of two phase III studies for a major Asian technology company that is diversifying its operations into the pharmaceutical industry.

When compared to Encorium Group's market cap of $10 million, the new business awards totaling $6.8 million appear even more crucial to the company.

"No doubt about it, from a financial point of view it is very, very important for us," Lindevall says. "It is a very important opening in Asia, where we have been actively pursuing business developments since 2005. Now it seems to come to fruition. It's also important for us in the sense that these two studies are multinational studies. It's a good challenge for us to manage these kind of large-scale studies."

While the business awards announcement is certainly good news, there are still many obstacles Encorium Group must overcome in the near future to make it more attractive to risk-averse investors.

As previously mentioned, Encorium is in violation of the Nasdaq's minimum stockholder equity requirement. At the end of the March quarter, total stockholder equity dropped to a mere $48,543 from more than $2.27 million at the end of 2009.

Encorium's cash position has also been a concern. The company ended the first quarter with about $165,594 in cash and cash equivalents, down from $196,583 at the end of the fourth quarter of 2009 and more than $2.32 million at the end of the first quarter of 2009.

Another major red flag for investors should be the increasing number of Encorium shares sold short. As of April 30, more than 17% of Encorium's float was sold short, an indication that traders are betting the stock price will decline.

The wild movements in Encorium's stock price have occurred on share volume that exceeds the company's 2.21 million float, which could be a sign that traders are pumping up the stock before dumping it.

For instance, the stock surged more than 57% on May 10 on volume that topped 2.54 million shares. Similarly, when Encorium shares surged more than 55% on March 30, a whopping 9.7 million shares changed hands, nearly five times greater than Encorium's float.

In addition, Encorium has warned it may lose business opportunities as a result of health care reform in the U.S. The company said it also could be impacted by its substantial exposure to currency risks, a risk that has been amplified by the recent

debt crisis in Europe

"This crisis has once again shown that if you are too dependent on geography, you become more vulnerable," Lindevall says. "We are lucky in the sense that we have a good mix of large and smaller companies."

Lindevall adds that Encorium's position in the vaccine field has real strength, "and if we can materialize that in the future by, for instance, expanding our geography so that we're truly global, then the market will value that."

For investors who have watched the rollercoaster action in Encorium shares from a low of $1.33 on March 11 to an intraday high of $6.38 on April 16 back down to below $3, where the stock sits now, it's hard to say where exactly the market values Encorium Group.

-- Written by Robert Holmes in Boston

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