Attached files

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EX-31.1 - CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002. - Echo Therapeutics, Inc.ex31-1.htm
EX-32.1 - CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002. - Echo Therapeutics, Inc.ex32-1.htm
EX-31.2 - CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002. - Echo Therapeutics, Inc.ex31-2.htm
EX-32.2 - CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002. - Echo Therapeutics, Inc.ex32-2.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
________________
 
FORM 10-Q
________________
 
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2015.
 
or

 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________ to __________.
 
Commission File Number: 000-35218
 
ECHO THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
________________
 
Delaware
41-1649949
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)

99 Wood Avenue South, Suite 302, Iselin, NJ
08830
(Address of principal executive offices)
(Zip Code)
 
732-549-0128
(Registrant’s telephone number, including area code)
________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R  No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R  No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer £
Accelerated filer £

Non-accelerated filer £ (Do not check if a smaller reporting company)
Smaller reporting company R

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No þ

As of November 10, 2015, 11,127,292 shares of the registrant’s Common Stock, $0.01 par value, were issued and outstanding.

 
 
 



 
 
 
ECHO THERAPEUTICS, INC.
 
 
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2015
 
     
 
TABLE OF CONTENTS
 
     
 
PART I - FINANCIAL INFORMATION
 
     
Item
 
Page
1.
 
 
1
 
2
 
3
 
4
 
5
2.
15
3.
18
4.
19
     
 
PART II - OTHER INFORMATION
 
     
1.
20
6.
20
21
22

 
i
 
 

 

PART I—FINANCIAL INFORMATION
 
ITEM 1.FINANCIAL STATEMENTS.
 
ECHO THERAPEUTICS, INC.
 
 
(Unaudited)
 
   
   
September 30,
   
December 31,
 
   
2015
   
2014
 
ASSETS
           
             
Current assets:
           
Cash and cash equivalents
  $ 3,230     $ 1,278,941  
Prepaid and other
    223,477       490,824  
Total current assets
    226,707       1,769,765  
                 
Property and equipment, net
    302,041       1,138,593  
                 
Other assets:
               
Intangibles, net
          9,625,000  
Cash restricted pursuant to letters of credit
    236,425       52,488  
Other
    250       9,990  
Total other assets
    236,675       9,687,478  
Total assets
  $ 765,423     $ 12,595,836  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
               
                 
Current liabilities:
               
Accounts payable
  $ 1,915,502     $ 1,801,469  
Accrued and other
    317,555       968,392  
Premium financing payable
    29,203        
Derivative warrant liability
    270,000       208,155  
Total current liabilities
    2,532,260       2,978,016  
Deferred revenue, net
    95,535       95,535  
Total liabilities
    2,627,795       3,073,551  
                 
Commitments and contingencies
               
                 
Stockholders’ equity (deficit):
               
Preferred Stock, $0.01 par value; 40,000,000 shares authorized:
               
Convertible Series
               
C - 10,000 shares authorized; issued and outstanding 1,000 shares
    10       10  
D - 3,600,000 shares authorized; issued and outstanding 1,000,000 shares
    10,000       10,000  
E - 1,748,613 shares authorized; issued and outstanding
    17,486       17,486  
            F - 6,000,000 shares authorized; issued and outstanding 5,209,513 (200,000 subscribed) and 840,336 shares, respectively
    52,095       8,403  
 Common stock, $0.01 par value; 150,000,000 shares authorized; issued and outstanding 11,127,292 and 12,629,695 shares, respectively
    111,270       126,295  
 Additional paid-in capital
    147,100,565       137,292,157  
 Subscriptions receivable: Series F - 200,000 shares
    (300,000 )      
 Accumulated deficit
    (148,853,798 )     (127,932,066 )
Total stockholders’ equity (deficit)
    (1,862,372 )     9,522,285  
Total liabilities and stockholders’ equity (deficit)
  $ 765,423     $ 12,595,836  
 
See accompanying notes to the condensed consolidated financial statements.

 
-1-

 
 
ECHO THERAPEUTICS, INC.
(Unaudited)
 
   
For the Three Months Ended
September 30,
   
For the Nine Months Ended
September 30,
 
 
 
2015
   
2014
   
2015
   
2014
 
Licensing revenue
  $     $ 19,107     $     $ 57,321  
Total revenues
          19,107             57,321  
                                 
Operating Expenses:
                               
Research and development
    640,584       1,204,231       2,269,678       4,097,204  
Selling, general and administrative
    739,073       1,630,333       3,582,134       5,161,965  
Impairment charge
                9,625,000        
Loss (Gain) on disposal of property and equipment
    39,382             278,816       (1,500 )
Depreciation and amortization
    39,171       97,894       487,491       296,686  
Total operating expenses
    1,458,210       2,932,458       16,243,119       9,554,355  
                                 
Loss from operations
    (1,458,210 )     (2,913,351 )     (16,243,119 )     (9,497,034 )
                                 
Other Income (Expense):
                               
Interest expense
    (212 )     (240,908 )     (4,938 )     (727,242 )
(Loss) Gain on revaluation of derivative warrant liability
    (54,000 )     473,000       (61,845 )     1,006,000  
Financing (loss)
    (263,000 )           (4,620,000 )      
Other
                8,170        
Other income (expense), net
    (317,212 )     232,092       (4,678,613 )     278,758  
                                 
Net loss
  $ (1,775,422 )   $ (2,681,259 )   $ (20,921,732 )   $ (9,218,276 )
Net loss per common share, basic and diluted
  $ (0.16 )   $ (0.21 )   $ (1.86 )   $ (0.76 )
Basic and diluted weighted average common shares outstanding
    11,127,475       12,660,182       11,266,571       12,199,476  
 
See accompanying notes to the condensed consolidated financial statements.

 
-2-

 
 
ECHO THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015
(Unaudited)
 
   
Preferred Stock
   
Common Stock
   
Additional Paid-in
Capital
   
Subscriptions Receivable
   
Accumulated Deficit
   
Total Stockholders’
Equity
(Deficit)
 
   
Shares
   
Amount
   
Shares
   
Amount
                 
                                                                 
Balance at December 31, 2014
    3,589,949     $ 35,899       12,629,695     $ 126,295     $ 137,292,157     $     $ (127,932,066 )   $ 9,522,285  
Exchange - Common Stock for Series F
    1,500,000       15,000       (1,500,000 )     (15,000 )                        
Proceeds from issuance of Series F and warrants
    2,121,000       21,210                   6,663,290                   6,684,500  
Series F subscribed
    200,000       2,000                       491,000       (300,000 )             193,000  
Capital contribution
                            59,325                   59,325  
Issuance of Series F pursuant to Reimbursement Agreement
    548,177       5,482                   1,796,518                   1,802,000  
Share-based compensation, net of restricted stock cancellations
                (2,503 )     (25 )     798,275                   798,250  
Net loss
                                        (20,921,732 )     (20,921,732 ))
Balance at September 30, 2015
    7,959,126     $ 79,591       11,127,192     $ 111,270     $ 147,100,565     $ (300,000 )   $ (148,853,798 )   $ (1,862,372 )

See accompanying notes to the condensed consolidated financial statements.

 
-3-

 
 
ECHO THERAPEUTICS, INC.
(Unaudited)
 
 
   
For the Nine Months Ended
September 30,
 
 
 
2015
   
2014
 
Cash Flows From Operating Activities:
           
Net loss
  $ (20,921,732 )   $ (9,218,276 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    487,491       296,686  
Share-based compensation, net
    798,250       1,056,915  
Fair value of common stock issued for services
          8,404  
Loss (gain) on revaluation of derivative warrant liability 
    61,845       (1,006,000 )
Warrant repricing charged to legal expense
    328,000        
Loss (gain) on disposal of assets
    278,816       (1,500 )
Impairment charge
    9,625,000        
Financing loss
    4,620,000        
Amortization of deferred financing costs
          726,003  
Changes in assets and liabilities:
               
Prepaid and other
    267,769       (184,986 )
Other assets
          2,076  
Accounts payable
    395,973       (130,748 )
Deferred revenue from licensing arrangements
          (57,321 )
Accrued and other
    (100,836 )     (641,133 )
Net cash used in operating activities
    (4,159,424 )     (9,149,880 )
Cash Flows from Investing Activities:
               
Purchase of property and equipment
    (55,836 )     (36,626 )
(Increase)  decrease  in restricted cash
    (183,938 )     250,000  
Proceeds on disposal of property and equipment
    126,082       1,887  
Net cash (used in)  provided by investing activities
    (113,692 )     215,261  
Cash Flows From Financing Activities:
               
Proceeds from issuances of equity, net
    3,181,500       2,350,000  
Capital contribution
    59,325        
Principal payments on premium financing
    (243,420 )     (1,361 )
Net cash provided by financing activities
    2,997,405       2,348,639  
Net decrease in cash and cash equivalents
    (1,275,711 )     (6,585,980 )
Cash and cash equivalents:
               
Beginning of period
    1,278,941       8,055,385  
End of period
  $ 3,230     $ 1,469,405  
                 
Supplemental disclosure of  cash flow information:
               
Cash paid during the year:
               
Interest
  $ 5,043     $ 2,154  
Income taxes
  $     $  
                 
Supplemental disclosure of non-cash financing transactions:
               
Prepaid insurance financed
  $ 272,623     $  
Director’s fees payable offset against prepaid insurance
  $ 272,200     $  
Accrued legal fees settled with stock
  $ 550,000     $  
Security deposit offset against accounts payable
  $ 9,740     $  
Conversion of Convertible Preferred Stock into Common Stock at par value
  $ 15,000     $  
Subscriptions receivable for Series F Preferred Stock
  $ 300,000     $  

See accompanying notes to the condensed consolidated financial statements.


Echo Therapeutics, Inc.
 (Unaudited)

(1)
ORGANIZATION AND BASIS OF PRESENTATION

Echo Therapeutics, Inc. (the "Company") is a medical device company with expertise in advanced skin permeation technology. The Company is developing its non-invasive, wireless continuous glucose monitoring (CGM) system with potential use in the wearable-health consumer market and the outpatient diabetes market. A significant longer-term opportunity may also exist in the hospital setting. Echo has also developed its needle-free skin preparation device as a platform technology that allows for enhanced skin permeation enabling extraction of analytes, such as glucose, enhanced delivery of topical pharmaceuticals and other applications.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Sontra Medical, Inc., a Delaware corporation. All significant intercompany balances and transactions have been eliminated in consolidation. These financial statements have been prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States consistent with those applied in, and should be read in conjunction with, the Company’s audited consolidated financial statements and related footnotes for the year ended December 31, 2014 included in the Company’s Annual Report on Form 10-K as filed with the United States Securities and Exchange Commission (“SEC”) on April 15, 2015. Certain amounts in prior periods have been reclassified to conform to the current presentation. These financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the Company’s financial position as of September 30, 2015 and its results of operations and cash flows for the interim periods presented and are not necessarily indicative of results for subsequent interim periods or for the full year. These interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements as allowed by the relevant SEC rules and regulations; however, the Company believes that its disclosures are adequate to ensure that the information presented is not misleading.

(2)      LIQUIDITY AND MANAGEMENT’S PLANS

The accompanying financial statements have been prepared on a basis that assumes that the Company will continue as a going concern and that contemplates the continuity of operations, the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.  As of September 30, 2015, the Company had cash of $3,230, working capital deficit of ($2,305,553) and an accumulated deficit of ($148,853,798). The Company continues to incur recurring losses from operations. The Company will need to secure additional capital to fund its product development, research, manufacturing and clinical programs in accordance with its current planned operations. The Company has funded its operations in the past primarily through debt and equity issuances. Management will continue to pursue financing to fund its operations. No assurances can be given that additional capital will be available on terms acceptable to the Company. The accompanying financial statements do not include any adjustments that might result from the outcome of the uncertainty.

On November 2, 2015, we received $100,000 from Beijing Yi Tang Bio Science & Technology Ltd. ("BYT"), an affiliate of our Chinese partner, Medical Technologies Innovation Asia, Ltd. ("MTIA"), in exchange for 66,667 shares of Series F Convertible Preferred Stock and five year warrants to purchase the same amount of Common Stock with an exercise price of $3.00.


(3)  PROPERTY AND EQUIPMENT

  The principal categories and estimated useful lives of property and equipment were:

   
 
9/30/15
   
 
12/31/14
   
Estimated Useful
Lives
 
Computer equipment
  $ 332,764     $ 334,865       3  
Office and laboratory equipment
    628,726       740,177       3-5  
Furniture and fixtures
    228,099       755,444       7  
Manufacturing equipment
    61,999       111,980       5  
Leasehold improvements
    41,968       825,589       3-7  
Total property and equipment
    1,293,556       2,768,055          
Less accumulated depreciation and amortization
    991,515       1,629,462          
Property and equipment, net
  $ 302,041     $ 1,138,593          
 
  The Company recorded a loss on disposal of $278,816, primarily in connection with its corporate office and research facility relocations to Iselin, New Jersey and to Littleton, Massachusetts, respectively. In connection with its relocation from its Franklin, Massachusetts to Littleton, Massachusetts research facility, the Company sold excess furniture to the incoming tenant and this resulted in an increase in the loss on disposal. Additionally, each relocation required the Company to write-off its leasehold improvements. See Note 5.

(4)      IMPAIRMENT OF INTANGIBLES

The Company reviews its intangibles for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company conducts its asset impairment analyses by grouping assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.

In connection with the preparation of the financial statements in the second quarter of fiscal 2015, the Company concluded it had a triggering event requiring assessment of impairment for its intangibles in conjunction with an expected out-licensing strategy that new management had hoped to pursue. Extremely limited financial resources coupled with the remaining short patent lives, discussions with previous consultants regarding their progress with bringing value to the intangibles, a review of competitive formulations and discussions with new consultants to explore out-licensing strategies, led newly-hired corporate management to conclude it was best to abandon its initial hope to garner value from its intangibles. Accordingly, due to this change in strategy, no monies are now expected to be obtained relating to the Azone Drug Master File, the Durhalieve and MAZ Investigational New Drug applications and the MAZ Orphan Drug application (collectively, the AzoneTS-based technology acquired in 2007) intangibles. As a result, the Company reviewed the intangibles for impairment and recorded a $9.625 million impairment charge, or the full value of the intangibles, on the consolidated statement of operations in the second quarter of 2015.


(5)      OPERATING LEASE COMMITMENTS

The Company leased approximately 7,900 square feet of corporate office space in a multi-story building located in Philadelphia, Pennsylvania under a lease expiring May 31, 2017. The company terminated this lease early and moved to Iselin, New Jersey on January 15, 2015 where the Company has leased 2,800 square feet of office space for 38 months at a monthly effective base rental of approximately $7,300. The Company posted a $77,000 Letter of Credit to secure the lease which is reduced to $38,500 after nineteen months of occupancy, assuming no defaults, as defined.

The Company leased approximately 37,000 square feet of manufacturing, laboratory and office space in a single-story building located in Franklin, Massachusetts under a lease expiring October 31, 2017. On July 17, 2015, the Company entered into a Lease Termination Agreement (the “Termination Agreement”), whereby the Company paid a fee of $150,000 to terminate this lease. The lease termination was effective as of May 31, 2015.

 On May 5, 2015, the Company signed a lease for approximately 10,000 square feet for a research and development facility in Littleton, Massachusetts. The lease is for 65 months. Effective base monthly rent over the lease term will be $11,470.  The Company moved to the new facility from its Franklin, Massachusetts location on July 3, 2015. The Company agreed to post a $50,000 Letter of Credit until July 1, 2015 while the Littleton facility was being improved. Such amount was increased to $150,000 on July 1, 2015. The Letter of Credit is expected to be reduced to $50,000 after 24 months of timely lease payments.

(6)  DERIVATIVE LIABILITY

Derivative warrant liability:

As a result of having warrants which are outstanding, issued in connection with a 2012 Credit Facility (which was terminated in October 2014), we are required to record the changes in the value of these derivative warrants through their expirations in November 2017. The table below presents the changes in the derivative warrant liability, which is measured at fair value on a recurring basis and classified as Level 3 in fair value hierarchy:

   
9/30/14
   
12/31/14
 
Derivative warrant liability as of January 1
  $ 208,155     $ 1,119,155  
Loss (gain) on revaluation
    61,845       (911,000 )
Derivative warrant liability as of September 30
  $ 270,000     $ 208,155  

  None of the derivative warrants were exercised in 2015 or 2014 pursuant to cashless exercise provisions.

(7)  EQUITY TRANSACTIONS

Restart of Operations and related option grants

  On January 2, 2015, in conjunction with restarting the operations of the Company, stock option grants to purchase 400,000 shares of Common Stock at an exercise price of $1.35 were issued to various employees primarily at our Franklin, Massachusetts research and development facility. On January 5, 2015, an additional stock option grant was made to purchase 50,000 shares of our Common stock at an exercise price of $1.48 to our new Manager of Business Development in Iselin, New Jersey. On March 2, 2015, we issued another stock option grant to purchase 20,000 shares of our Common Stock at $2.34 to a senior technician hired for our Franklin facility. On May 11, 2015 option grants to purchase 55,000 shares at $1.31 were issued to newly hired software and electrical engineers. On May 15, 2015, an option grant to purchase 40,000 shares at $1.29 was issued to a systems engineer. On May 26, 2015 an option grant to purchase 30,000 shares at $1.62 was issued to a newly hired software engineer. All grants vest over three years with one-third vesting immediately and the balance vesting equally at each of the two respective anniversary periods. All grants were made pursuant to the 2008 Equity Compensation Plan.


Board Matters

  On January 7, 2015, the Board realigned annual compensation at $30,000 per annum per director. Each director, other than our CEO whose employment agreement precluded him from receiving director compensation the first year, received a stock option to purchase 150,000 shares of our Common Stock at an exercise price of $1.62 vesting 25% immediately and then 25% at the beginning of each quarter thereafter. These options contain a condition where they are only exercisable after the average closing price of the Company’s common stock for the ten (10) days prior to exercise, equals or exceeds $7.50 per share. Such amount was valued using a binomial lattice model and included in share-based compensation expense.

Exchange of Common Stock for Series F Preferred Stock

  On January 9, 2015 and again on March 31, 2015, Platinum Partners Value Arbitrage Fund, L.P. (PPVA) and Platinum Partners Liquid Opportunity Fund, L.P. exchanged 843,526 and 208,884 and 356,474 and 91,116, respectively of their common shares held for Series F Preferred Stock. Based on the terms of the Series F (e.g. conversion ratio of 1:1 and no liquidation preference) the Company determined that the value of the Series F is equivalent to the common shares.

Capital Contribution

Late in the third quarter of 2014, the research and development operations of the Company were suspended and key personnel were laid off. In October 2014, two of the Company’s directors received a non-recourse loan for $500,000 from PPVA. The purpose of this contribution was to provide the directors monies to advance their plan for the Company and attempt to maintain its viability during the suspension of operations. $440,675 was expended in the fourth quarter of 2014 by these directors primarily for salaries of key employees and targeted technology efforts focused on the wearable technology sector. The Company considered this expenditure by two of its directors a capital contribution since the funds were spent on matters specifically related to the operations of the Company. In February 2015, the $440,675 capital contribution together with the balance of monies received in 2015 of $59,325, equivalent to the original $500,000 the two directors had received, was settled in Series F shares by the Company to PPVA. See discussion below.

Settlement of Amounts Owed for Series F Preferred Stock and Warrants

  On September 23, 2014, the Company announced that, as it believed that its current liquidity was insufficient to fund its needs beyond September 30, 2014, it was suspending its product development, research, manufacturing and clinical programs and operations to conserve its liquidity and capital resources. The workforce reduction due to the suspension of operations comprised approximately 70% of Echo’s workforce, leaving only administrative personnel.  Affected employees were notified on September 23, 2014. The employees whose employment was terminated as part of the workforce reduction were not offered severance pay. The Company indicated that they could possibly incur additional costs not currently contemplated due to events that may occur as a result of, or that were associated with, the workforce reduction.

  At the time of the workforce reduction announcement, Platinum Management (NY) LLC (“Platinum”), together with its affiliates, a significant stockholder of the Company, was in the process of engaging in a proxy contest with the Company pursuant to which it sought to ultimately remove three of the then-current directors of the Company. In conjunction therewith, Platinum provided $500,000 on a non-recourse basis to two of the Company’s directors whose removal Platinum was not seeking, namely Michael Goldberg and Shepard Goldberg, which was recorded as a capital contribution (“Contribution”) in 2014. Proceeds of the Contribution were utilized for retaining certain key employees and for research and technology initiatives, all for the benefit of the Company. A small portion of the monies was not disbursed, which was transferred to the Company. At the time of the Contribution, Shepard Goldberg and Michael Goldberg agreed that, should the Contribution ultimately benefit the Company, they would use their best efforts to cause the Company to issue equity to Platinum as consideration for making the Contribution.


  In December 2014, as part of a negotiated settlement agreement, the three directors, whom Platinum sought to remove, resigned as directors and Platinum agreed to make a direct investment in the Company.  In connection with the proxy contest, Platinum expended $550,000 on legal representation and related expenses. In its proxy statement, Platinum advised stockholders that it would pay all the costs associated with the solicitation of proxies, but would seek reimbursement from the Company, and not submit such reimbursement to a vote of stockholders.

  On February 12, 2015, the Company agreed to reimburse Platinum for its Contribution and the Expenses it incurred in the proxy fight. In this regard, the Board of Directors of the Company determined that both the Contribution and Expenses together resulted in the Company being able to continue operations and put into place a strong management team.  Pursuant to a Reimbursement Agreement, dated February 12, 2015 (the “Reimbursement Agreement”), Platinum received 548,177 shares of Series F Convertible Preferred Stock (consisting of 333,333 shares of Series F for the $500,000 capital contribution and 214,844 shares of Series F for the $550,000 of legal expenses they incurred, for a Series F share total of 548,177) and Warrants to purchase 333,333 shares of common stock of the Company. These Warrants expire in five years and have a $3.00 per share exercise price. Additionally, the Company agreed to re-price 700,000 warrants, originally disbursed to Platinum in connection with its August 31, 2012 Loan Agreement, and referred to as the Derivative Warrants, then priced in the $20.00 to $22.70 range per share, to $7.50 per share. The Company recorded a non-cash charge to legal expense for $328,000 representing the cost of re-pricing the Derivative Warrants. Additionally, the Company recorded a charge to financing expense of $924,000 representing the additional value given to the investors as a result of the closing market price of $2.56 being above the deal price of $1.50 used for the reimbursement of the $500,000 capital contribution. The shares issued for the legal expenses were done at the market close of the Company’s Common Stock on the date of the Reimbursement Agreement.

Equity Raise

For the three and nine months ended September 30, 2015, the Company received $981,500 and $3,481,500, respectively, from its $4,000,000 December 2014 financing and follow-on subscriptions on similar terms of $481,500 in the aggregate and    issued 654,334 and 2,321,000 shares, respectively, of Series F Preferred Stock and warrants to purchase the same number of shares of Common Stock at an exercise price of $3.00 were issued to investors. The Company recorded financing expense of $3,696,000 with a corresponding credit to additional paid in capital since the average market price on the dates the financing was received was above the deal price of $1.50, representing excess value provided to the investors. The aforementioned amounts include 200,000 Series F shares and warrants to purchase common stock at $3.00 to be issued upon the collection of subscriptions receivable. In connection with the aforementioned follow-on subscription agreements, the Company provided the subscriber with the right for the period of one year, at the subscriber’s option, to convert all or any part of the shares of Series F Preferred Stock and warrants purchased into the securities issued in a future financing that yields gross proceeds to the Company of at least $2,000,000. This right will pertain to both the securities issued in those follow-on offerings aggregating $481,500 or for those obtained in the previous December 18, 2014, $4,000,000 aggregate offering, in which they participated. Additionally, for a period of two years, the subscriber will have the right to participate in all financings of the Company such that they maintain their current ownership percentage in the Company.

Certificate of Increase

  On September 3, 2015, the Company filed a Certificate of Increase of Shares Designated as Series F Convertible Preferred Stock with the Secretary of State of the State of Delaware to increase the number of shares designated as its Series F Preferred Stock from 5,000,000 to 6,000,000 shares.  

(8)  EQUITY COMPENSATION PLANS

In March 2003, the Company’s shareholders approved its 2003 Stock Option and Incentive Plan (the “2003 Plan”). Pursuant to the 2003 Plan, the Company’s Board of Directors (or its committees and/or executive officers delegated by the Board of Directors) may grant incentive and nonqualified stock options, restricted stock, and other stock-based awards to the Company’s employees, officers, directors, consultants and advisors.  As of September 30, 2015, there were 5,000 restricted shares of Common Stock issued and options to purchase an aggregate of 26,500 shares of Common Stock outstanding under the 2003 Plan and no shares are available for future grants due to the 2003 Plan’s expiration.

 
In May 2008, the Company’s shareholders approved the 2008 Equity Compensation Plan, as amended (the “2008 Plan”). The 2008 Plan provides for grants of incentive stock options to employees and nonqualified stock options and restricted stock to employees, consultants and non-employee directors of the Company. The maximum number of shares available under the 2008 Plan is 10,000,000 shares.  As of September 30, 2015, there were 18,106 restricted shares of Common Stock issued and options to purchase 1,640,733 shares of Common Stock outstanding under the 2008 Plan and 8,328,161 shares available for future grants.

The following table shows the remaining shares available for future grants for each plan and outstanding shares:
 
   
Equity Compensation Plans
   
Not Pursuant
 
   
2003 Plan
   
2008 Plan
   
to a Plan
 
Shares Available For Issuance
                 
Total reserved for stock options and restricted stock
    160,000       10,000,000        
Net restricted stock issued net of cancellations
    (5,000 )     (18,106 )      
Stock options granted
    (154,449 )     (3,070,883 )      
Add back options cancelled before exercise
    92,349       1,417,150        
Less shares no longer available due to Plan expiration
    (92,900 )            
Remaining shares available for future grants at September 30, 2015
          8,328,161        
       
Stock options granted
    154,449       3,070,883       310,000  
Less:      Stock options cancelled
    (92,349 )     (1,417,150 )     (243,333 )
     Stock options exercised
    (35,600 )     (13,000 )     (66,667 )
Net shares outstanding before restricted stock
    26,500       1,640,733        
Net restricted stock issued net of cancellations
    5,000       18,106       6,485  
Outstanding shares at September 30, 2015
    31,500       1,658,839       6,485  
 
(9)STOCK OPTIONS

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model with certain assumptions noted below. Expected volatilities are based on historical volatility of the Common Stock using historical periods consistent with the expected term of the options. The Company uses historical data, as well as subsequent events occurring prior to the issuance of the financial statements, to estimate option exercise and employee termination and forfeitures within the valuation model. The expected term of stock options granted under the Company’s stock plans is based on the average of the contractual term (generally 10 years) and the vesting period (generally 24 to 42 months). The risk-free rate is based on the yield of a U.S. Treasury security with a term consistent with the option.

For options issued and outstanding during the nine month periods ended September 30, 2015 and 2014, the Company recorded additional paid-in capital and non-cash compensation expense of $756,000 and $708,000, respectively, each net of estimated forfeitures.


The assumptions used principally for stock options granted to employees and members of the Company’s Board of Directors in the nine months ended September 30, 2015 and 2014 were as follows:

 
2015
 
2014
Risk-free interest rate %
1.46 – 1.90
 
1.75 – 2.08
Expected dividend yield
 
Expected term -  years
5 – 5.5
 
5.5 – 6.5
Forfeiture rate % (excluding fully vested stock options)
­­7.5 – 15
 
15
Expected volatility %
92 – 93
 
120 - 141
 
A summary of stock option activity for the nine months ended September 30, 2015 is as follows:

 
 
 
 
Stock Options
 
 
 
 
Shares
   
Weighted-
Average
Exercise
Price
   
Weighted-
Average
Remaining
Contractual
Term (years)
   
 
Aggregate
Intrinsic
Value
 
Outstanding options at January 1, 2015
    1,039,900     $ 3.00              
Granted
    895,000     $ 1.47              
Forfeited or expired
    (267,667 )   $ 4.06              
Outstanding options at September 30, 2015
    1,667,233     $ 2.01       8.99     $  
Exercisable options at September 30, 2015
    600,750     $ 2.55       8.77     $  

The weighted-average grant-date fair value of stock options granted for the nine month period ended September 30, 2015 was $1.47 per share.  As of September 30, 2015, there was approximately $779,000 of total unrecognized compensation expense related to non-vested share-based option compensation arrangements. With the exception of the unrecognized share-based compensation related to certain restricted stock grants to officers and employees that contain performance conditions related to FDA approval for the Company’s CGM system or the sale of substantially all of the stock or assets of the Company, unrecognized compensation is expected to be recognized over the next four years.

(10)            RESTRICTED STOCK

For restricted stock issued and outstanding during the nine month periods ended September 30, 2015 and 2014, the Company incurred non-cash compensation expense of approximately $42,000 and $349,000, respectively, each net of estimated forfeitures.

During the nine months ended September 30, 2015, the Company did not grant restricted shares of Common Stock to any officers, employees, directors and consultants of the Company.

A summary of non-vested restricted stock activity as of and for the nine months ended September 30, 2015 is as follows:

Restricted Stock
 
 
 
Shares
   
Weighted-
Average
Grant-Date
Fair Value
 
Non-vested shares at January 1, 2015
    47,958     $ 9.74  
Vested
    (16,037 )   $ 4.62  
Forfeited
    (2,330 )   $ 6.05  
Non-vested shares at September 30, 2015
    29,591     $ 12.80  

Among the 29,591 shares of non-vested restricted stock, the various vesting criteria include the following:

·
14,185 shares of restricted stock vest upon the FDA approval of our CGM system or the sale of the Company; and
 
·
15,406 shares of restricted stock vest over 4 years, at each of the anniversary dates of the grants.
 
As of September 30, 2015, there was approximately $349,000 of total unrecognized compensation expense related to non-vested share-based restricted stock arrangements granted pursuant to the Company’s equity compensation plans that vest over time in the foreseeable future. As of September 30, 2015, the Company cannot estimate the timing of completion of performance vesting requirements required by certain of these restricted stock grant arrangements. Compensation expense related to these restricted share grants will be recognized when the Company concludes that achievement of the performance vesting conditions is probable.

(11)       WARRANTS

In the three and nine months ended September 30, 2015, the Company issued warrants to purchase 454,334 and 2,121,000 shares of our common stock, respectively, in connection with a partial closing related to the private placement of the Company’s Preferred Stock as well as the 333,333 shares of our common stock in connection with a Reimbursement Agreement. See Notes 6 and 7.

The Derivative Warrants to purchase 700,000 shares of our Common Stock, at exercise prices ranging from $20.00 to $22.70, and expiring in 2017, are included in the outstanding warrants at January 1, 2015. On February 12, 2015, these warrants were re-priced to $7.50 to compensate PPVA in connection with the Reimbursement Agreement reached between the Company and PPVA. See Notes 6 and 7.

  A summary of warrant activity for the nine months ended September 30, 2015 is as follows:

 
 
 
Warrants
 
 
 
 
Shares
   
Weighted-
Average
Exercise
Price
 
Outstanding warrants at January 1, 2015
    1,847,066     $ 10.04  
Granted
    2,454,333     $ 3.00  
Forfeited
    (37,638 )   $ 22.50  
Outstanding warrants at September 30, 2015
    4,263,761     $ 3.72  

At September 30, 2015, the Company had the following outstanding warrants:

 
 
Type of Warrant/ Range of
Exercise Prices
 
 
 
 
 
Expirations
 
 
 
Number Outstanding
   
Weighted- Average Remaining Contractual Life (years)
   
Weighted- Average Exercise Price
   
 
 
Number Exercisable
 
Derivative:  
                               
  
    $7.50  
8/31/17 to 11/6/17
    700,000       1.98     $ 7.50       700,000  
Equity:
                                         
 
    $2.75 - $3.00  
12/10/18 to 09/24/20
    3,563,761       4.40     $ 2.98       3,563,761  
Total outstanding               4,263,761                       4,263,761  
 
 
The Company uses valuation methods and assumptions that consider among other factors the fair value of the underlying stock, risk-free interest rate, volatility, expected life and dividend rates in estimating fair value for the warrants considered to be derivative instruments. The following assumptions were utilized by the Company:

Risk-free interest rate
.70 %
Expected dividend yield
Expected term - years (contractual term)
2.5
Forfeiture rate
Expected volatility
92 %

Expected volatilities are based on historical volatility of the Common Stock using historical periods consistent with the expected term of the warrant. The risk-free rate is based on the yield of a U.S. Treasury security with a term consistent with the warrant.

(12)           LITIGATION & OTHER SIGNIFICANT MATTERS

On July 4, 2015, the Company resolved its legal disputes with Patrick Mooney, its former Chairman, President and Chief Executive Officer, on mutually-agreeable terms and all related litigation was dismissed with prejudice.  On July 27, 2015, the Company made a settlement payment of $150,000 to Dr. Mooney and additional payments were made to Dr. Mooney from the Company’s insurers. Such amount was recorded to legal expense in the second quarter of 2015.

From time to time, in addition to that which is identified above, we are subject to legal proceedings, claims, investigations, and proceedings in the ordinary course of business. In accordance with generally accepted accounting principles, we make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss or range of loss can be reasonably estimated. These provisions, if any, are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. At September 30, 2015, no litigation loss is deemed probable or reasonably estimated.

NASDAQ Compliance

Audit Committee Requirement

  On January 30, 2015, the Company received a letter from Nasdaq indicating that the Company no longer complies with Nasdaq’s audit committee requirements set forth in Nasdaq Listing Rule 5605.  Such rule requires that the Audit Committee of the Company have a minimum of three members and be composed only of independent directors.  On December 31, 2014, Vincent Enright, William Grieco and James Smith resigned from the Board of Directors of the Company, as well as its Audit Committee. As a result, the Audit Committee had no members as of Decembers 31, 2014.  On January 5, 2015, the Board of Directors appointed Shepard Goldberg and Michael Goldberg to the Audit Committee, both of whom are independent directors.  

  The Company intends to add at least one additional independent member to the Audit Committee by December 31, 2015 as required by Nasdaq Listing Rule 5605.

 
Requirement for Continued Listing

  On August 20, 2015, Echo Therapeutics, Inc. (the “Company”) received a letter from The Nasdaq Stock Market (“Nasdaq”) informing the Company that it is no longer in compliance with the minimum stockholders’ equity requirement for continued listing on the Nasdaq Capital Market. Nasdaq Listing Rule 5550(b)(1) requires listed companies to maintain stockholders’ equity of at least $2.5 million. Further, as of August 20, 2015, the Company did not meet the alternative compliance standards relating to the $35,000,000 market value of listed securities or $500,000 net income from continuing operations.
 
  This notification had no immediate effect on the Company’s listing on the Nasdaq Capital Market. Nasdaq provided the Company with 45 calendar days from the receipt of the Nasdaq letter to submit a plan to regain compliance with the minimum stockholders’ equity standard.
 
  On October 5, 2015, the Company submitted its plan to Nasdaq to regain compliance with the minimum stockholders’ equity standard. On October 26, 2015, based on the Company’s submission, Nasdaq granted the Company the maximum allowable 180 day extension to February 16, 2016 to evidence compliance with the listing standards.
 
  There can be no assurance that the Company will be able to regain compliance. If the Company does not regain compliance, or if the Company fails to satisfy another Nasdaq requirement for continued listing, Nasdaq staff could provide notice that the Company's common stock will become subject to delisting. In the event of delisting, the Company expects that its stock would trade on the OTC Markets.



The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 and elsewhere in this report. The matters discussed herein contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended, which involve risks and uncertainties. This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended, which involve risks and uncertainties. All statements other than statements of historical information provided herein may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects” and similar expressions are intended to identify forward-looking statements. Factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, those discussed elsewhere in this report and the risks discussed in our other filings with the Securities and Exchange Commission (the “SEC”). Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis, judgment, belief or expectation only as of the date hereof. Except as required by law, we undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof.

Business

We are a medical device company with expertise in advanced skin permeation technology. We are developing a non-invasive, wireless continuous glucose monitoring (CGM) system for initial use in the wearable-health consumer market and the outpatient diabetes market. The transdermal skin preparation component of our CGM system allows for enhanced skin permeation that will enable extraction of analytes such as glucose, enhanced delivery of topical pharmaceuticals and other applications.

Research and Development

We believe that ongoing research and development (“R&D”) efforts are essential to our success. A major portion of our operating expenses to date is related to our research and development activities. R&D expenses generally consist of internal salaries and related costs, and third-party vendor expenses for product design and development. In addition, R&D costs include regulatory consulting, feasibility product testing (internal and external) and conducting nonclinical and clinical studies. R&D expenses were approximately $2,270,000 for the nine months ended September 30, 2015. We intend to maintain our strong commitment to R&D as an essential component of our product development efforts. Our ability to raise sufficient financing may impact our level of R&D spending and progress towards milestones.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

On an ongoing basis, we evaluate our estimates and judgments for all assets and liabilities, including those related to intangible asset impairment, long-lived asset impairment, stock-based compensation expense and the fair value of stock purchase warrants classified as derivative liabilities. We base our estimates and judgments on historical experience, current economic and industry conditions and on various other factors that are believed to be reasonable under the circumstances. This forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no changes in our critical accounting policies and estimates subsequent to those disclosed in our Annual Report on Form 10-K as filed with the SEC on April 15, 2015.

We believe that full consideration has been given to all relevant circumstances that we may be subject to, and the consolidated financial statements accurately reflect our best estimate of the results of operations, financial position and cash flows for the periods presented.


Results of Operations

Comparison of the Three and Nine Months ended September 30, 2015 and 2014

Net Loss — As a result of the factors described below, we had a net loss of $1,775,422 and $20,921,732 for the three and nine months ended 2015, respectively, compared to $2,681,259 and $9,218,276 for the three and nine months ended 2014, respectively.

Impairment Charge The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analyses by grouping assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.

In connection with the preparation of the financial statements in the second quarter of fiscal 2015, the Company concluded it had a triggering event requiring assessment of impairment for its intangibles in conjunction with an expected out-licensing strategy that new management had hoped to pursue. Extremely limited financial resources coupled with the remaining short patent lives, discussions with previous consultants regarding their progress with bringing value to the intangibles, a review of competitive formulations and discussions with new consultants to explore out-licensing strategies led newly-hired corporate management to conclude it was best to abandon its initial hope to garner value from its intangibles. Accordingly, due to this change in strategy, no monies are now expected to be obtained relating to the Azone Drug Master File, the Durhalieve and MAZ Investigational New Drug applications and the MAZ Orphan Drug application (collectively, the AzoneTS-based technology acquired in 2007) intangibles. As a result, the Company reviewed its intangibles for impairment and recorded a $9.625 million impairment charge, or the full value of the intangibles, on the consolidated statement of operations in the second quarter of 2015.
 
Licensing Revenue — We signed two licensing agreements during fiscal year 2009, each with a minimum term of ten years, that required non-refundable license payments by the licensees. The non-refundable license payments received in cash totaled $1,250,000 across both transactions. Approximately $95,000 remained unrecognized at September 30, 2015. We had been recognizing the non-refundable payments as revenue on a straight-line basis over our contractual or estimated performance period.  Periodically, we had adjusted our amortization period for revenue recognition for each of our license arrangements to reflect a revision in the estimated timing of regulatory approval. We determined that $0 in 2015 and approximately $19,000 and $57,000 in 2014 of licensing revenue were recognizable for each of the respective three and nine month periods ended.

Research and Development Expenses — R&D expenses decreased by approximately $564,000, or 47%, to $640,584 for the three months ended 2015 from $1,204,231 for the same period in 2014. R&D expenses represented 44% and 41% during the three months ended, of total operating expenses in 2015 and 2014, respectively. Declines for the quarter were primarily attributable to approximate decreases in: salaries (including stock compensation) and benefits $218,000, contracted services $62,000, and rent and utilities $164,000.

R&D expenses decreased by approximately $1,828,000, or 45%, to $2,269,678 for the nine months ended 2015 from $4,097,204 for the same period in 2014. R&D expenses represented 34% and 43% during the nine months ended, of total operating expenses (excluding the impairment charge) in 2015 and 2014, respectively. Declines for the nine months were primarily attributable to approximate decreases in: salaries (including stock compensation) and benefits $790,000, contracted services $190,000, rent and utilities $167,000, consulting $263,000, and materials, tools, supplies and prototypes $266,000.

 R&D expenses decreased primarily as a function of the funding available to us in 2015 during the three and nine month periods.

For the nine months ended September 30, 2015, we concentrated our limited funding on continuing the transformation of our prior ICU product line for use in the wearable-health consumer and diabetes outpatient marketplaces. Specifically, we are developing a new generation of flexible, wearable, non-invasive technology with smartphone applicability.


Additionally, we devoted resources to assist our partner in China, Medical Technologies Innovation Asia Ltd. (MTIA), in meeting the stringent requirements set forth by the China Food and Drug Administration (CFDA).
 
For the nine months ended 2015, we improved our CGM consistency and reliability through improvements to the key components of the system. We successfully demonstrated a Smartphone App and glucose tracking comparison against an industry leading CGM.  With respect to specific components, our progress was as follows:

·
Skin Preparation Device: Completed industrial design of new self-exfoliating device and tips, which will be lower cost, easier to use and compatible with our new sensor.
 
·
Sensor: Completed industrial design of new flexible sensor, which will be higher performing, lower cost, smaller and will have a re-usable Bluetooth transmitter.
 
·
Application Programming Interface (API): Designed an API that allows software developers to easily write software applications, or apps, that use data from our sensors.
 
Selling, General and Administrative Expenses — S,G&A expenses decreased by approximately $891,000, or 55%, to $739,073 for the three months ended 2015 from $1,630,333 for the same period in 2014. S,G&A expenses represented 51% and 56% of total operating expenses during the three months ended 2015 and 2014, respectively. The decline for the three months was primarily attributable to approximate decreases in: board fees $143,000, salaries (including stock compensation), benefits and consultant fees of $260,000, and legal fees of $375,000.

S,G&A expenses decreased by approximately $1,580,000, or 31%, to $3,582,134 for the nine months ended 2015 from $5,161,965 for same period in 2014. S,G&A expenses represented 54% of total operating expenses (excluding the impairment charge) during the nine months ended 2015 and 2014, respectively. The decline for the nine months was primarily attributable to: approximate decreases in proxy solicitation $647,000, investor relations $125,000, board fees $316,000, recruiting fees $150,000, salaries (including stock compensation), benefits and consultant fees $450,000, and franchise taxes of $129,000, offset by an increase in legal fees of $315,000 primarily related to the Mooney matter which the Company settled in the second quarter of 2015.

S,G&A expenses for 2014 reflect the proxy battle that enveloped the Company in 2014 which caused outsized increases in proxy solicitation and investor relations costs. Board fees, which were reduced to $30,000 per director in 2015, from a fee arrangement in 2014 which consisted of $45,000 per director and $95,000 paid to the Lead Director, plus additional meeting fees to each director for attendance and subcommittee chair responsibilities, and reflect the cost of the numerous meetings held primarily by former directors in 2014 when the Company was without a permanent chief executive officer. Recruiting fees in 2014 reflect a large fee for an executive recruiter to conduct a search for a chief executive officer. Mr. Hollander was not sourced by this firm. Offsetting costs for the nine month period ended 2015 include legal fees primarily related to the Mooney matter which the Company settled in the second quarter of 2015.

Loss (gain) on disposal of property and equipment — The loss on disposal of $39,382 for the three months ended 2015 primarily reflects the write-down of furniture sold to the incoming tenant of the Franklin, MA facility which we moved out of in the third quarter. The loss on disposal of $278,816 for the nine months ended 2015 reflects the aforementioned loss in addition to losses on furniture and fixtures sold when we relocated from Philadelphia, PA to Iselin, NJ in the first quarter of 2015.

Depreciation and Amortization expense — Depreciation expense decreased by approximately $59,000, or 60%, to $39,171 for the three months ended 2015 from $97,894 for the same period in 2014. Depreciation expense increased by approximately $191,000, or 64%, to $487,491 for the nine months ended 2015 from $296,686 for the same period in 2014. The large increase over the nine months reflected an acceleration of the depreciation on the leasehold improvements which the Company abandoned in Franklin, Massachusetts in the second quarter of 2015. The Company had approximately $775,000 of leasehold improvements which it wrote-off in connection with its move to Littleton, Massachusetts.

Gain (loss) on Revaluation of Derivative Warrant Liability — Changes in the fair value of derivative financial instruments are recognized each period as a derivative gain or loss. The primary underlying risk exposure pertaining to the Warrants is the change in fair value of the underlying common stock. The gain (loss) on revaluation of the derivative warrant liability for the three months ended 2015 and 2014 was ($54,000) and $473,000, respectively, and ($61,845) and $1,006,000, respectively, for the nine months ended 2015 and 2014.

 
Financing gain (loss) — This is a non-cash charge representing the excess value given to investors in 2015, who received shares of Series F Stock and warrants to purchase the same number of shares of our common stock, when the closing market price was above the $1.50 purchase price they paid for their shares and warrants. We recorded a non-cash charge of $263,000 and $4,620,000 in the respective three and nine month 2105 periods, related to these investors.

Interest Expense — Interest expense decreased by approximately $241,000 to $212 from $240,908 for the three months ended 2015 and 2014, respectively.  Interest expense decreased approximately $722,000 to $4,938 from $727,242 for the nine months ended 2015 and 2014, respectively. The decrease in both periods represents the amortization in 2014 of deferred financing costs for the fair value of the Commitment Warrant issued pursuant to the Montaur Credit Facility established in August 2012. Such facility was terminated in October 2014.

Liquidity and Capital Resources

We have financed our operations since inception primarily through sales of our equity, the issuance of convertible promissory notes, draws from a non-revolving credit facility, unsecured and secured promissory notes, non-refundable payments received under license agreements and cash received in connection with exercises of Common Stock options and warrants. As of September 30, 2015, we had $3,230 of cash and cash equivalents, with no other short-term investments.

On November 2, 2015, we received $100,000 from Beijing Yi Tang Bio Science & Technology Ltd., an affiliate of our Chinese partner, Medical Technologies Innovation Asia, Ltd., in exchange for 66,667 shares of Series F Convertible Preferred Stock and five year warrants to purchase the same amount of Common Stock with an exercise price of $3.00.

Cash Flows for the Nine Months ended September 30, 2015

Net cash used in operating activities was approximately $4,159,000. The use of cash in operating activities was primarily attributable to the net loss of approximately $20,922,000 offset by non-cash expenses of $9,625,000 for an impairment charge, $487,000 for depreciation and amortization, $798,000 for share-based compensation expense, a $328,000 charge for a warrant re-pricing related to reimbursement for legal expenses of the 2014 proxy battle, a loss on revaluation of $62,000 related to derivative credit facility warrants, $4,620,000 non-cash charges to financing expense in connection with continuing installments from our December 2014 financing as well as the capital contribution repaid on the same terms,  and a $279,000 loss on the sale and disposal of property and equipment resulting from primarily the closing of our Philadelphia office and write-off of various leasehold improvements, offset by increases in prepaid and other, as well as a net increase in accounts payable and accrued expenses, of approximately $563,000.

Net cash used in investing activities was approximately $114,000. Cash of approximately $126,000 was provided by the sales of certain property and equipment in connection with our office and research facility relocations. Also, cash of approximately $56,000 was used to purchase property and equipment during the same 2015 period. The Company used $184,000 to secure letters of credit for its new corporate headquarters and its new research facility in Littleton, Massachusetts.

Net cash provided by financing activities was approximately $2,997,000. We received $3,181,500 in proceeds from the sales of our Series F Preferred Stock with warrants and a capital contribution of $59,325. Principal payments on premium financing used $243,420.

Effect of Inflation and Changes in Prices

We do not believe that inflation and changes in prices will have a material effect on our operations.


Not applicable.



Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation and the material weaknesses described below, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as a result of the material weaknesses.

Our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2015 the following material weaknesses existed:

(1)   We lacked a sufficient complement of personnel with an appropriate level of knowledge and experience in the application of U.S. generally accepted accounting principles, or GAAP, commensurate with our financial reporting requirements. The monitoring of our accounting and reporting functions were either not designed and in place or not operating effectively, and

(2)   We lacked the quantity of resources to implement an appropriate level of review controls to properly evaluate the completeness and accuracy of transactions entered into by our Company.

Our management believes that these weaknesses are due in part to the small size of our staff and limited funding which makes it challenging to maintain adequate disclosure controls. To remediate the material weaknesses in disclosure controls and procedures, we will attempt to seek assistance with complex filing matters and to take additional steps to improve our financial reporting systems and implement new policies, procedures and controls.

Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the fiscal quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


PART II—OTHER INFORMATION


On July 4, 2015, we resolved our legal disputes with Patrick Mooney, our former Chairman, President and Chief Executive Officer, on mutually-agreeable terms and all related litigation was dismissed with prejudice. On July 27, 2015, we made a settlement payment of $150,000 to Dr. Mooney and additional payments were made to Dr. Mooney from our insurers.


The Exhibits listed in the Exhibit Index immediately preceding such Exhibits are filed with or incorporated by reference in this report, except as noted.



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
ECHO THERAPEUTICS, INC.
 
Date: November 16, 2015    
  By: /s/ Scott W. Hollander
    Scott W. Hollander
    President and Chief Executive Officer
    (Principal Executive Officer)
     
  By: /s/ Alan W. Schoenbart
    Alan W. Schoenbart
    Chief Financial Officer
    (Principal Financial and Accounting Officer)
 

Exhibit No.
 
Description
3.1
 
Certificate of Increase of Shares Designated as Series F Convertible Preferred Stock of Echo Therapeutics, Inc. is incorporated by reference to Exhibit 3.1 on the Company’s Current Report on Form 8-K filed September 9, 2015.
10.1
 
Lease Termination Agreement, dated July 17, 2015, between Exeter 10 Forge Park, LLC and Echo Therapeutics, Inc., is incorporated by reference to Exhibit 10.1 on the Company’s Current Report on Form 8-K filed July 20, 2015.
10.2
 
Form of Subscription Agreement for Series F Preferred Stock and Warrants is incorporated by reference to Exhibit 10.1 on the Company’s Current Report on Form 8-K filed September 2, 2015.
10.3
 
Form of Subscription Agreement for Series F Preferred Stock and Warrants is incorporated by reference to Exhibit 10.1 on the Company’s Current Report on Form 8-K filed September 30, 2015.
31.1
 
Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
 
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
 
Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
 
Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
 
The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, formatted in XBRL (Extensible Business Reporting Language), (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements.
 
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