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LD Micro Small-Cap Activity for the Fourth Week of August: Index Up, Black Box Corporation Struggles, Obalon Therapeutics Makes Gains

From Chris Lahiji comes a new summary of the LD Micro newsletter covering microcap activity during the fourth week of August (August 19-26). The newsletter mentions that the LD Micro Index had the strongest week of the nation’s indices, ending up by close to 50 points higher than the next best performing index. Most indices hit all-time highs, despite the tense political climate, Lahiji adds.

Lahiji also takes a moment to remember the passing of Senator John McCain and entertainment reporter Robin Leach, both giants in their respective fields.

In the newsletter’s ‘Impact’ section highlighting the most notable anomalies among the biggest gainers and volume leaders, Phase 4 Research’s Christian Galatti focuses on Obalon Therapeutics and Black Box Corporation.

  • Obalon Therapeutics (OBLN) +63% – How Small Cap Managers Are Forced to Take More Risk

Small cap stocks are subject to a lot of volatility, and small cap managers need to be virtual experts at everything, especially in the health care sector, Galatti says, singling out Obalon Therapeutics, Inc. as a vivid example. The company has developed a gastric balloon that, when swallowed, helps overweight adults lose weight. This non-surgical balloon system is FDA-approved and has seen positive test results among adults 30 to 100 pounds overweight who have failed to lose weight through diet and exercise.

On January 22, 2018, Obalon was planning a secondary offering of its shares, to be priced at $5.50 per share. Canaccord Genuity gave the company a positive rating and a recommended share price of $11. However, the following day, Northland Securities issued a report valuing Obalon’s share price at $4 and giving the company a “sell” rating. Northland Securities’ report was based on allegations by a whistleblower, who contacted Obalon’s auditors KPMG and accused the company of improper revenue recognition. Obalon terminated the stock offering at the 11th hour. The company carried out investigations into the allegations, which were proved to have no merit.

Galatti mentions that Obalon was one of the biggest gainers during the third week of August, seeing its share price rise 63.3 percent after it announced plans to raise $10 million in private placement by selling 5.5 million shares of common stock at a price of $1.82.

It’s almost impossible to be an expert at everything. But, the Small Cap manager has to be. Forced to buy a weighting in Health Care is always fraught with inordinate risk. The story of Obalon is for the manager who has seen it all,” Galatti concludes.

  • Black Box (BBOX) Part II – When $75M Isn’t Enough Cash for a $20M Company

Also in the news was Black Box Corporation, which, as Galatti points out, had a rough trading week. Last month, the heavily indebted company announced a $10 million deal with “the most well-known social media company in the world,” upon which its share price doubled in one day.

The company last month amended its credit agreement with its lenders. As part of the new credit agreement, its creditors waived some potential defaults and events of default. Without these changes, the company would have been in default this quarter.

Last week, the digital solutions provider, worth $25 million on paper, managed to raise $75 million through the sale of its Federal Government IT Services Business. The funds are going toward paying off the company’s $150 million debt. Speaking of the sale, CEO Joel Trammell said, “This was a critical step to give the company options moving forward and reduces the debt to more manageable levels.”

Although Black Box’s shares rose following news of the sale, investors’ confidence suffered a hit when Black Box released its quarterly report, showing that revenue was down year on year. Galatti concludes that investors may be focusing on this, rather than the measures Black Box is taking to secure its future survival.

For more information on LD Micro, visit www.LDMicro.com

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