Unfortunately for investors, ReShape Lifesciences (NASDAQ:RSLS) seems much more effective at cash burning than fat burning. The weight loss devices company has fallen on hard times. RSLS stock has plunged more than 90% over the past month and has plummeted more than 99% over the past year.

Even with the stock worth less than 15 cents per share, there is little reason for optimism. Speculators who buy ReShape are likely to lose most or all of their money. Here is why you should sell and avoid RSLS stock, even after its massive decline.

Serial Dilution of RSLS Stock

ReShape used to be named EnteroMedics, and it traded under the ticker ETRM. One of the classic red flags for a speculative investment is when a company changes its name and ticker symbol. Generally, companies that do that want to clean up their reputations and hope that observers forget about the destruction of value that occurred when they were called by a different name. That is actually all the more reason not to forget what happened previously.

In this case, EnteroMedics, and now ReShape, has diluted shareholders to an almost unfathomable degree. Adjusting for reverse splits, RSLS stock traded for $800,000 per share prior to the financial crisis. As recently as 2013, RSLS stock was worth $40,000 per share. How does a company’s shares go down literally 99.99% in a decade? Issuing tons of shares does the trick

On a split-adjusted basis, there were only a few thousand shares of RSLS stock in existence in 2015. In 2016, there were 180,000 shares. By the end of 2017, the share count had multiplied another ten times to 2 million. In 2018, RSLS has already increased the share count by another 300%, bringing the total to more than 6 million. Just as a central bank can destroy a currency’s value by printing too much, RSLS stock has been watered down to virtually nothing through constant share offerings.

Shareholder Lawsuit

The company keeps selling new stock for a simple reason: it’s losing a tremendous amount of money. RSLS is, in a sense, the Helios & Matheson (NASDAQ:HMNY) of the health care industry; however, the product is an obesity treatment, instead of Moviepass.

In fact, ReShape sold so much stock that investors took action. In their most recent prospectus, ReShape disclosed that shareholders had brought a class action lawsuit against the company. The company explained that:

The complaint names as defendants ReShape Lifesciences, the board of directors and four members of our senior management, namely, Scott Youngstrom, Nick Ansari, Peter DeLange and Paul Hickey, and contains a purported class action claim for breach of fiduciary duty against the board of directors and derivative claims for breach of fiduciary duty against the board of directors and unjust enrichment against our senior management.

Notably, ReShape asked a court to dismiss the lawsuit. The court refused ReShape’s request. As a result, the company, while still claiming that it’s innocent, is now seeking a settlement. It states that it isn’t sure how much money it may lose as a result of the lawsuit. More recently, another lawsuit was filed against the company. In this lawsuit, Alpha Capital Anstalt claims breach of contract relating to a 2017 ReShape stock offering that it purchased which has since been diluted.

ReShape’s Huge Losses

Regardless of the exact amount, any additional loss of capital stemming from these lawsuits would be a major problem for ReShape. That’s because, despite all of its stock sales, it is perilously short of funds.

As of March 31st, ReShape had just $842,000 in cash. It subsequently raised $5.1 million in April, briefly replenishing its coffers. Alas, at the rate that the company is losing money, $5 million wouldn’t go far. The company anticipated that it would only remain solvent until July. As a result, it has undertaken additional fundraising efforts since then. Remarkably, the company has already raised (small amounts) of money three times since June, using additional direct share sales.

We’ll see how much money the company has when it files its next quarterly report. In any case, given that the company generates just $1 million per quarter or so in sales, while it burned through $9 million in the first quarter of this year alone, it is obviously not on a sustainable trajectory.

The Verdict on RSLS Stock: More Pain Ahead

It’s hard to come up with any justification for buying ReShape stock at this time. About the only case you could make is a potential short squeeze. Even then, though, why would shorts feel compelled to cover when the company is printing so many new shares every month?

The upcoming reverse stock split will juice the share price, making it easier and more attractive for short sellers to make new bets against RSLS stock.

The company’s next quarterly report should be most interesting. The pressing question will be how much cash it has left. ReShape plummeted yet again last week on news of another stock offering. In fact, following the announcement, the stock careened from 32 cents all the way down to 7 cents.

Taking notice of the market’s awful reaction, management canceled the proposed stock offering. Since then, the stock has bounced. But it is still far below where it was trading prior to the initial announcement of a new offering. And since the offering wasn’t successful, the company has been left with both a lowered share price and a cash shortage.

Throw in the various lawsuits, and management has plenty to distract it from running the business. Even if everything were to go well, the company’s situation is dire. Its losses are much higher than its revenues, and management’s cost-cutting efforts aren’t likely to help its sales going forward, either. It’s hard to see any future for RSLS stock that doesn’t involve more reverse stock splits and further share dilution. Stay far away.

At the time of this writing, Ian Bezek had no positions in the aforementioned securities.