Attached files
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2015
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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COMMISSION FILE NUMBER 001-35218
ECHO THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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41-1649949
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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99 Wood Avenue South, Suite 302, Iselin, NJ
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08830
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(Address of principal executive offices)
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(Zip Code)
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(Registrant’s telephone number, including area code)
732-201-4189
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes £ Noþ
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 þ No o
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 (Sec.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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. £
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. (Check one):
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Large accelerated filer £
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Accelerated filer £
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Non-accelerated filer £
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Smaller reporting company R
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes £ No R
The approximate aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2015, based upon the $1.70 closing price of such stock on that date, was approximately $16,047,016.
The number of shares of the registrant’s common stock outstanding as of March 21, 2016 was 11,124,496.
DOCUMENTS INCORPORATED BY REFERENCE
Part III (Items 10-14)
Registrant’s definitive proxy statement to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934
ECHO THERAPEUTICS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2015
TABLE OF CONTENTS
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In this report, the “Company,” “Echo,” “we,” “us,” and “our” refer to Echo Therapeutics, Inc. “Common Stock” refers to Echo’s Common Stock, $0.01 par value.
We own or have rights to various copyrights, trademarks and trade names used in our business.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
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 in “Risk Factors’ and 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.
ITEM 1. BUSINESS.
Overview
We are developing our non-invasive, wireless continuous glucose monitoring (CGM) system with potential use in the diabetes outpatient market. A significant opportunity may also exist in the wearable-health consumer market and 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.
Products
Continuous Glucose Monitoring
Our lead product is a non-invasive (needle-free), wireless, continuous glucose monitoring system designed to provide reliable, real-time glucose data conveniently, continuously and cost-effectively. The CGM System includes a skin preparation device, transdermal glucose sensor, battery and wireless transmitter.
The transdermal skin preparation component of the system has been developed to be a safe, effective and easy-to-use device to enhance access to the interstitial fluids and enhance the flow of molecules across the protective membrane of the stratum corneum. The skin preparation device incorporates our patented micro-abrasion technology into a hand-held device used to prepare a small area of the skin. The non-invasive sensor is applied to this prepared area in order to measure the interstitial glucose levels.
The key feature of our skin preparation device is our patented feedback mechanism, which we believe allows us to achieve optimal skin preparation for our transdermal sensing technologies. The device’s proprietary, patented feedback control mechanism consists of software, a microprocessor controlled circuit and measuring electrodes. While the device is in operation, the circuit measures the real-time electrical conductivity of the prepared skin site compared with the subject’s intact skin site. The micro-abrasion device turns off automatically when the conductivity measurement reaches the effective output as established by the software, thus producing individualized and optimized skin preparation. As a result, the micro-abrasion device only removes a portion of the outermost layer of the epidermis, the stratum corneum, which is about 0.01 mm thick and consists of only dry, dead skin cells. With the advantages of our proprietary feedback control mechanism, we believe the skin permeation process is safe, effective and pain-free.
After the skin is prepared, the electro-chemical glucose sensor is placed on the prepared site. The glucose sensor uses glucose oxidase to generate a continuous current that is proportional to the concentration of blood glucose in the vessels beneath the epidermis. Glucose data is then wirelessly transmitted in numerical and/or graphical form every minute to any remote device.
Drug Delivery
We believe our skin preparation device may also have application in the transdermal drug delivery market in addition to markets for other treatments. The localized removal of the stratum corneum created by the device may potentially provide a safe and cost effective skin permeation process for the delivery of various topical pharmaceuticals and to facilitate other applications. We believe our skin permeation process has the potential to increase skin permeation up to 100 times greater than untreated skin, perhaps making it possible to deliver a wide array of large molecule drugs.
Partnerships
Ferndale Pharma Group, Inc.
During 2009, we entered into a licensing agreement with Ferndale Pharma Group, Inc., a group of companies that specialize in the development, manufacture, distribution and marketing of various dermatologic products. Under the terms of the agreement, we granted Ferndale the right to develop, market, sell and distribute our skin preparation device for skin preparation prior to the application of topical anesthetics or analgesics prior to a wide range of needle-based medical procedures. In addition to the original territory of North America and the United Kingdom, the license agreement was amended in 2012 to cover South America, Australia, New Zealand, Switzerland and portion of the European Community. This partnership allows our skin permeation technology platform to be combined with Ferndale’s leadership in the topical anesthetic market.
Handok, Inc.
During 2009, we entered into a license agreement with Handok Inc., a pharmaceutical/healthcare company in Korea with a core business focus in diabetes, cardiovascular, oncology, human vaccines, medical devices, diagnostics and consumer health. Under the terms of the agreement, we granted Handok the right to develop, market, sell and distribute our CGM to medical facilities and individuals in South Korea.
In December 2013, in connection with a capital raising transaction, we entered into a license, development and commercialization agreement (the “MTIA License”) with Medical Technologies Innovation Asia, Ltd. (MTIA). Pursuant to the MTIA License, we granted MTIA rights to (i) exclusively research, develop, manufacture, and use our CGM in connection with the development activities needed for regulatory approval in the People’s Republic of China, Hong Kong, Macau and Taiwan (the “Territory”), and (ii) exclusively make, have made, use, sell, have sold, offer for sale and import our CGM in the Territory once regulatory approval has been received. Additionally, subject to the terms and conditions set forth in the MTIA License, MTIA received the right to grant certain distribution rights to its affiliates or third parties. MTIA is responsible for conducting all required clinical trials and for all development costs relating to regulatory approval of our CGM in the Territory, as well as manufacturing and marketing costs relating to commercialization of our CGM in the Territory. MTIA is also responsible for obtaining and maintaining all regulatory approvals from applicable authorities in the Territory.
Upon the earlier of regulatory approval of Echo’s CGM by the China Food and Drug Administration or our termination of the agreement, as defined, we are required, subject to certain terms and conditions, to reimburse MTIA up to $1,500,000 for development costs incurred by MTIA. The reimbursement will be in the form of our Common Stock, valued at $2.71 per share, which was the NASDAQ closing price on December 9, 2013, the date prior to the date the parties entered into the MTIA License. Additionally, we will share with MTIA future net sales of our CGM generated within the Territory. We have the option, at our sole discretion, to enter into negotiations with MTIA for supply of our CGM in territories that are not licensed to MTIA under the MTIA License. The MTIA License has a term of ten years, subject to earlier termination rights including, but not limited to, for breach of the agreement, change of control events, and certain performance obligations.
Clinical Results
We have conducted several human feasibility clinical studies with our CGM System in healthy subjects, diabetics and critically ill patients, as well as a clinical study at several leading U.S. hospitals in 2013. In the studies, accuracy was evaluated using the Mean Absolute Relative Difference (MARD). The average MARD in our studies was 11.9%, which is comparable to CGMs currently on the market. In addition, these data highlighted the safety profile of the system with no unanticipated adverse device effects detected in 114 patients.
We believe that these clinical study results demonstrate that the system can be used to measure real-time interstitial glucose in a way that accurately represents blood glucose levels.
Segment Information
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions regarding resource allocation and assessing performance. To date, we consider our operations and manage our business as principally one operating segment, which is the development of transdermal skin permeation and diagnostic medical devices. As of December 31, 2015 and 2014, all of our assets were located in the United States.
Market Opportunities
Diabetes Outpatient Market
Diabetes is a chronic and life-threatening disease caused by the body’s inability to produce or properly use insulin, a key hormone the body uses to manage glucose, which fuels the cells in the body. According to the American Diabetes Association (ADA), about 29 million people in the United States, or approximately nine percent (9%) of the population, had diabetes in 2012, including over 8 million people who remain unaware that they have the disease. In addition, before people develop type 2 diabetes, they usually have “pre-diabetes,” or blood glucose levels that are higher than normal but not yet high enough to be diagnosed as diabetes. According to the ADA, there are 86 million people in the United States who have pre-diabetes.
When blood glucose levels are high, diabetes patients often administer insulin to reduce their blood glucose level. This is particularly critical for the approximately 1.25 million people in the U.S. with type 1 diabetes who are incapable of creating insulin on their own to metabolize glucose and hence are in greater need for more intensive insulin management. Unfortunately, insulin administration can reduce blood glucose levels below the normal range, causing hypoglycemia. In cases of severe hypoglycemia, diabetes patients risk severe and acute complications, such as loss of consciousness or death due to the drastic nature of acute complications associated with hypoglycemic state, exposing themselves to long-term complications of that condition.
According to the most recent data available from the ADA, the cost of diabetes care in the United States in 2012 was $245 billion, including $176 billion in excess medical expenditures attributed to diabetes and $69 billion in reduced national productivity. The ADA estimates that people with diabetes, on average, have medical expenditures that are approximately 2.3 times higher than the expenditures would be in the absence of diabetes and that approximately one in ten healthcare dollars spent is attributed to diabetes. A significant portion of overall diabetes care costs, which are approximately $10 billion according to industry sources, is attributable to costs associated with monitoring blood glucose levels. That market segment is projected to grow substantially as patients and their physicians seek ways to manage glucose levels more effectively.
We believe that continuous blood glucose monitoring can be an important part of a diabetes patient’s daily disease management program. Continuous blood glucose monitoring can help plan diabetes treatment, guide day-to-day choices about diet, exercise and insulin use, and avoid unwanted low blood glucose (hypoglycemia) and high blood glucose (hyperglycemia) events and the complications that they can cause. Blood glucose levels are affected by many factors such as the carbohydrate and fat content of food, exercise, stress, illness, and variability in insulin absorption. Therefore, it is often challenging for diabetes patients to avoid frequent and unpredictable excursions above or below normal glucose levels. Patients are often unaware that their glucose levels are either too high or too low; resulting in their inability to tightly control their glucose levels and prevent the complications associated with unwanted glucose excursions.
In an attempt to achieve and maintain blood glucose levels within a desired range, diabetes patients must measure their glucose levels. The ADA recommends that patients test their blood glucose levels three or more times per day; however, despite evidence that intensive glucose management reduces the long-term complications associated with diabetes, industry sources estimate that people with diabetes test, on average, less than twice per day. We believe our CGM has the potential to improve patient compliance with frequent glucose testing, achieve better glucose control and make a positive impact on overall day-to-day diabetes management.
Wearable Health Technology Market
Wearable health companies have been increasingly interested in incorporating glucose data into their health and wellness applications, which is of particular interest to athletes and health-conscious users. To date, attempts at accurate non-invasive glucose measurement have not been successful.
We believe that our real-time glucose data can seamlessly fit within health and wellness data services to provide an invaluable and currently untapped piece of the health algorithm that can impact health before a medical condition arises. Continuous glucose data transmitted by our sensor may be further analyzed alongside other health and wellness indications for personalized health objectives, which may include weight loss and sports training.
We believe an opportunity for a mutually beneficial partnership exists as a key provider of glucose data and that data from Echo’s glucose sensor can become a new and critical input to health and wellness data service providers’ health algorithms. According to IDTechEx, the wearable technology market surpassed $14 billion in 2014 and is expected to grow to over $70 billion by 2024 with healthcare applications remaining the dominant driver.
Competition
The industry in which we operate is extremely competitive. We expect that any products that we develop will compete primarily on the basis of product efficacy, safety, patient convenience, reliability, availability and price; however, there can be no assurance that we will successfully develop technologies and products that are more effective, safer, more convenient, more reliable, more readily available or more affordable than those being developed by our current and future competitors.
The diabetes market for glucose monitoring devices is particularly competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. The outpatient diabetes testing market is largely composed of blood glucose meters and test strips. Products from Roche, Johnson & Johnson, Bayer and Abbott Laboratories comprise approximately 90% of the diabetes testing market. These competitors’ products read blood glucose levels via a small blood sample placed on a test strip that is inserted into a glucose meter. We believe single-point finger stick devices provide limited information because patients only get single blood glucose values. Furthermore, these devices can be painful, difficult to use, and inconvenient. These limitations create an opportunity for a painless, continuous glucose monitoring system that can provide blood glucose trends and is easy to use.
Several companies are developing or currently marketing continuous glucose monitoring products for people with diabetes in the outpatient setting that will compete directly with our system. To date, Abbott Laboratories, DexCom, Inc., and Medtronic, Inc. have received FDA and CE Mark approvals for their continuous glucose monitors for people with diabetes. To our knowledge, the product originally developed and marketed by Abbott is no longer actively marketed in the United States. Roche Diagnostics U.S. and Senseonics are among those companies also developing CGM systems for people with diabetes in the outpatient setting. Researchers are currently working to combine continuous glucose monitoring devices and insulin pumps to form a closed-loop system in which people with diabetes continuously receive insulin through an infusion pump based on the glucose measurements provided by CGM.
Edwards Lifesciences Corporation, Optiscan Biomedical Corp., Maquet Critical Care AB, Medtronic, Inc. and A. Menarini Diagnostics S.r.l. have obtained CE Mark approvals which permit them to market their continuous or near-continuous glucose monitoring systems in a hospital setting in the European Union; however, no company has received FDA approval for a device for CGM in a hospital setting. Glysure is also developing a CGM system for use in a hospital setting.
Additionally, several mobile technology companies, including Apple Inc., Samsung Electronics Co. and Google Inc., intend to incorporate or have incorporated glucose tracking into their non-medical health applications for their wearable device platforms.
We believe our CGM system has the following competitive advantages against other currently marketed CGM systems:
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Non-invasive. There are currently no CGM products on the market that are non-invasive;
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Accuracy. Particularly if comparing the day 1 accuracy of other CGM systems to that of our system; and
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Wireless transmission of data up to 50 feet away. Some other products on the market are wired or have shorter ranges.
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Government Regulation
Government authorities in the United States, at the federal, state and local level, the European Union, and other countries extensively regulate the research, development, testing, manufacture, labeling, promotion, advertising, distribution, marketing, export and import of products such as those we are developing. In the United States, pharmaceuticals, biologics and medical devices are subject to rigorous FDA regulation under the Federal Food, Drug, and Cosmetic Act (FD&CA). Federal and state statutes and regulations govern, among other things, the testing, manufacture, safety, efficacy, labeling, storage, import, export, record keeping, approval, marketing, advertising, promotion and post-market surveillance of our potential products. Product development and approval within this regulatory framework takes a number of years and involves significant uncertainty combined with the expenditure of substantial resources.
General Wellness: Policy for Low Risk Devices (Draft Guidance for Industry and Food and Drug Administration Staff)
In January 2015, the Food and Drug Administration (FDA) issued draft guidance to provide clarity to industry and FDA staff on the Center for Devices and Radiological Health’s (CDRH’s) compliance policy for low risk products that promote a healthy lifestyle (general wellness products).
According to the guidance, CDRH does not intend to examine low risk general wellness products to determine whether they are devices within the meaning of the FD&CA or, if they are devices, whether they comply with the premarket review and post-market regulatory requirements for devices under the FD&CA and implementing regulations, including, but not limited to: registration and listing and premarket notification requirements (21 CFR Part 807); labeling requirements (21 CFR Part 801 and 21 CFR 809.10); good manufacturing practice requirements as set forth in the Quality System regulation (21 CFR Part 820); and Medical Device Reporting (MDR) requirements (21 CFR Part 803).
A general wellness product, for the purposes of this guidance, has (1) an intended use that relates to a maintaining or encouraging a general state of health or a healthy activity, or (2) an intended use claim that associates the role of healthy lifestyle with helping to reduce the risk or impact of certain chronic diseases or conditions and where it is well understood and accepted that healthy lifestyle choices may play an important role in health outcomes for the disease or condition.
It is our general belief that for the application of our technology in the non-medical, wearable health market, our continuous glucose monitoring product falls within the guidance outlined by the FDA in the January 20, 2015 Draft Guidance for Industry and Food and Drug Administration Staff.
The FDA classifies medical devices as Class I, II, or III, according to the level of patient risk associated with the device. Class I devices represent the lowest risk devices, Class II devices include moderate risk devices, and Class III devices include the highest risk devices. The classification of a device determines the degree of FDA regulation applicable to the device, including premarket review requirements.
Nearly all Class I and some Class II devices are exempt from FDA premarket review requirements. Most Class II medical devices require the submission and FDA clearance of a 510(k) premarket notification before they can be legally marketed in the United States. Class III devices generally require the submission and FDA approval of a premarket approval application (“PMA”) before they may be marketed in the United States.
510(k) Clearance
Class II devices generally require the submission of a 510(k) premarket notification to the FDA, prior to marketing. In the 510(k) submission, the applicant must demonstrate to the FDA’s satisfaction that the subject device is substantially equivalent to a legally marketed “predicate” device. A predicate device is a device that has previously been cleared by FDA through the 510(k) premarket notification process or that pre-dates the 1976 Medical Device Amendments to the FD&CA. A device is considered substantially equivalent to the predicate device if it has the same intended use as the predicate, and it also has either the same technological characteristics as the predicate or, if the product has different technological characteristics, the information submitted in the premarket notification demonstrates that the differences do not affect safety or effectiveness. Marketing may not commence unless and until the FDA issues a 510(k) premarket notification clearance letter. Under the FD&CA, the FDA has 90 days to review a 510(k) premarket notification. However, actual review time for a 510(k) may be longer, as the FDA may issue a request for additional information from the 510(k) applicant, which stops the review clock.
PMA
If a medical device is a Class III device, the FDA must approve a PMA before marketing can begin. PMA applications must demonstrate, among other matters, that there is reasonable assurance that the medical device is safe and effective for its intended use. The PMA approval process is more onerous and comprehensive than the 510(k) process and usually requires pre-clinical, animal, and extensive clinical study data, and manufacturing information. The target review period for a PMA is 180 days, although actual review time may be longer if, for example, the FDA requests additional information from the applicant. FDA requests for additional studies during the review period are not uncommon and can significantly delay approvals. The FDA may also convene an advisory panel to review the PMA and provide a recommendation, which would further extend the review period. Further, before the FDA will approve a PMA, the manufacturer must pass a pre-approval inspection demonstrating its compliance with the requirements of the FDA’s quality system regulations. Even if the FDA approves a PMA, the FDA may impose post-market requirements, such as a post-market clinical study or patient registry, which may be costly.
In order to obtain approval for marketing clearance for medical use of our CGM system in the U.S., we will be required to file a PMA that demonstrates the safety and effectiveness of the product.
Clinical Studies
The FDA requires that clinical studies involving investigational devices (i.e., devices that do not yet have 510(k) clearance or PMA approval) be conducted in accordance with its Investigational Device Exemption (IDE) regulations. These regulations include requirements for sponsor oversight and monitoring, record-keeping, reporting, informed consent, and investigational device labeling. Clinical studies on “significant risk” devices (as that term is defined in the IDE regulations) require the submission and FDA approval of an IDE application before the study can begin. In addition, clinical studies generally require prior approval from an institutional review board (“IRB”) and are subject to continuing IRB oversight.
Additional FDA Regulations
A number of other FDA requirements apply to medical device manufacturers and importers. Device manufacturers and importers must register and list their device products with the FDA. In addition, device manufacturers and importers are required to report to the FDA certain adverse events and product malfunctions, as well as device recalls and other field actions conducted to reduce a risk to health. The FDA also prohibits an approved or cleared device from being marketed for unapproved or uncleared uses. Our product labeling, promotion and advertising will be subject to continuing FDA regulation. Manufacturers must comply with the FDA’s quality system regulations, which establish extensive requirements for quality control, design controls, and manufacturing procedures.
A device manufacturer must ensure compliance with all of the above requirements prior to marketing its medical device in the United States. The FDA periodically inspects facilities to ascertain compliance with these and other requirements. Thus, manufacturers and distributors must continue to spend time, money and effort to maintain compliance. Failure to comply with the applicable regulatory requirements may subject us to a variety of administrative and judicially imposed sanctions, including withdrawal of an approval or clearance, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, and civil and criminal penalties against us or our officers, directors or employees. Failure to comply with regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.
From time to time, federal legislation is drafted, introduced and passed in the United States that could significantly change the statutory provisions governing the approval, manufacturing and marketing of products regulated by the FDA. In addition, FDA regulations and guidance documents are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted, or FDA regulations, guidance or interpretations changed, or what the impact of such changes, if any, may be.
We must also comply with numerous federal, state and local laws relating to these matters. We cannot be sure that we will not be required to incur significant costs to comply with these laws and regulations in the future or that these laws or regulations will not hurt our business, financial condition and results of operations.
International Regulation
In addition to regulations in the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of our CGM system for medical use. Whether or not we obtain FDA approval for our system, we must obtain approval of our system by the comparable regulatory authorities of foreign countries before we can commence marketing our CGM in those countries. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country. There is a trend toward harmonization of quality system standards among the European Union, United States, Canada, and various other industrialized countries.
The primary regulatory environment in Europe is that of the European Union which includes most of the major countries in Europe. Companies are required to obtain CE Mark prior to sale of some medical devices within the European Union and in other countries that recognize the CE Mark. Before we can sell our medical device in Europe, we must obtain CE Marking certification and place a CE Mark on our product. The CE Marking for medical devices is not a quality mark nor is it intended for consumers. It is a legally binding statement by the manufacturer that their product has met all of the requirements of the Medical Devices Directive (MDD 93/42/EEC). We expect to CE Mark our CGM system for medical use as a Class IIb device.
The steps to CE Marking as a Class IIb device are as follows:
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Compile a medical device CE Marking Technical File with evidence of compliance to the Medical Devices Directive;
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· Receive a medical device CE Mark certificate from a Notified Body; and
· Appoint a European Authorized Representative if the company has no physical location in Europe.
Only after these CE Marking requirements are satisfied are we allowed to place the CE Marking on our medical device.
Echo has obtained ISO 13485:2003 certification in order to demonstrate compliance with the International Organization for Standardization’s manufacturing and quality standards. In order for us to market our products outside of the European Union, regulatory approval needs to be sought on a country-by-country basis. Failure to obtain necessary foreign government approvals or successfully comply with foreign regulations could hurt our business, financial condition and results of operations.
Medical devices manufactured or marketed by the company in China are subject to regulations by the China Food and Drug Administration (“CFDA”). The CFDA regulates the clinical testing, manufacture, labeling, distribution and promotion of medical devices. Under the CFDA Regulations, medical devices are classified into three classes (class I, II or III), the basis of the controls deemed necessary by the CFDA to reasonably assure their safety and efficacy. Under the CFDA's regulations, class I devices are subject to general controls and class II devices are subject to general and special controls. Generally, class III devices are those, which must receive premarket approval by the CFDA to ensure their safety and efficacy. Echo’s strategic partner in China, MTIA, is responsible for conducting all required clinical trials and for all development costs relating to regulatory approval of our CGM in China, as well as obtaining and maintaining all regulatory approvals from applicable authorities in China. MTIA believes that Echo’s locally produced needle-free CGM products will be designated as a Class II medical device. Class II medical devices have a review period of 90 working days after filing submission with the CFDA. A formal and final designation from the CFDA is determined only at the time of submission.
We believe that ongoing research and development 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, product engineering and contract manufacturing. In addition, R&D costs include regulatory consulting, feasibility product testing (internal and external) and conducting nonclinical and clinical studies. R&D expenses were $2,788,938 and $4,634,287 for the years ended December 31, 2015 and 2014, respectively. We intend to maintain our commitment to R&D as an essential component of our product development efforts. Licensed or acquired technology developed by third parties may be an additional source of potential products; however, our ability to raise sufficient financing may impact our level of R&D spending.
Manufacturing
We have contracted with several engineering and product design firms related to the final product development of our CGM system. We believe that qualified suppliers and manufacturers for our CGM system will continue to be available in the future, at a reasonable cost to us, although there can be no assurance that this will be the case. At this time, our policy is to use third-party manufacturers that comply with the FDA’s GMP requirements and other rules and regulations prescribed by domestic and foreign regulatory authorities.
We are currently manufacturing our system at third-party manufacturers and suppliers to meet the research, testing and clinical study volume requirements. We rely on outside suppliers for most of the components, sub-assemblies, and various services used in the manufacture of our CGM system. Many of these suppliers are sole-source suppliers. We may not be able to quickly establish additional or replacement suppliers for our single-source components, especially after our products are commercialized, in part because of the regulatory body approval process and because of the custom nature of certain components. Any supply interruption from our suppliers or failure to obtain alternate suppliers for any of the components could limit our ability to manufacture our systems, and could have a material adverse effect on our business.
Pursuant to the MTIA License, we granted MTIA rights to manufacture our CGM System in the People’s Republic of China, Hong Kong, Macau and Taiwan. We also have the option, at our sole discretion, to enter into negotiations with MTIA for supply of our products in territories that are not licensed to MTIA under the MTIA license.
Generally, all outside suppliers produce the components and finished devices to our specifications and, in many instances, to our designs. Our suppliers are audited periodically by our Quality Department to ensure conformity with our policies and procedures and the specifications for our CGM system. We anticipate that our Quality Department will be integrated into our suppliers’ manufacturing processes, enabling them to inspect or test our devices at various steps in the manufacturing cycle to facilitate compliance with our CGM’s stringent specifications. Our Quality management system has been certified to the ISO 13485 requirements by TUV SUD, our notified body. As we continue to pursue marketing approval for our CGM system, certain processes utilized in the manufacture and test of our devices will be verified and qualified as required by the FDA and other regulatory bodies. As a medical device manufacturer and distributor, our manufacturing facilities and the facilities of our suppliers will be subject to periodic inspection by the FDA and other applicable regulatory bodies.
We periodically evaluate opportunities to develop an effective global supply chain that is compliant, stable and able to accommodate projected product demands in an efficient and cost-effective manner. We assess these opportunities to best meet the needs of our future customers, products and company objectives. We intend to engage in an ongoing assessment process to ensure that we maintain the manufacturing resources necessary to successfully execute our business strategy.
Intellectual Property
Our success depends in part on our ability to establish and maintain the proprietary nature of our technology through a combination of patent, copyright and other intellectual property laws, trade secrets, non-use and non-disclosure agreements and other measures to protect our proprietary rights. We maintain a comprehensive U.S. and international portfolio of intellectual property that we consider to be of material importance in protecting our technologies. As of March 4, 2016, we have 9 issued U.S. patents and 38 issued foreign patents, and we have 23 patent applications pending worldwide. We believe it may take up to five years, and possibly longer, for our pending U.S. patent applications to result in issued patents.
Through our patents and patent applications, we seek to protect our product concepts for continuous glucose monitoring. The intellectual property surrounding our CGM system focuses on, among other things, the hydrogel for glucose sensing, our methods and materials related to the measurement of body fluids using the hydrogel and the associated biosensor, and skin permeation control. We believe that these patents provide considerable protection from new entrants, and we focus our patent coverage only on aspects of our technologies that we feel will be significant and that could provide barriers to entry for our competition worldwide. Our success depends to a significant degree upon our ability to develop proprietary products and technologies and to obtain patent coverage for such products and technologies. As a result, we intend to continue our practice of filing patent applications covering newly developed products and technologies.
We believe that our patent portfolio provides us with sufficient rights to develop and market our proposed commercial products; however, our patent applications may not result in issued patents, and any patents that have been issued or may issue in the future may not adequately protect our intellectual property rights. In addition, our patents may not be upheld. Any patents issued to us may be challenged by third parties as being invalid or unenforceable, or third parties may independently develop similar or competing technology that does not infringe upon our patents.
In addition to our patent portfolio, we also rely upon trade secrets, technical know-how and continuous innovation to develop our competitive position in the CGM, transdermal drug delivery and specialty pharmaceutical markets. We strive to protect our proprietary information by requiring our employees, consultants, contractors, and scientific and medical advisors to execute non-disclosure, non-use and assignment of invention agreements before beginning their employment or engagement with us. We also typically require confidentiality or material transfer agreements from third parties that receive our confidential information or materials. Despite these measures to protect our intellectual property, we are unable to provide any assurance that employees and third parties will abide by the terms of these agreements. Accordingly, third parties might copy portions of our products or obtain and use our proprietary information without our consent.
Employees
As of December 31, 2015 we had 19 full-time employees, and as of March 1, 2016, we had 17 full-time employees. In addition to these individuals, we utilize outside contract engineering and contract manufacturing firms to support our operations.
Company Information
Our principal executive offices are located at 99 Wood Avenue South, Suite 302, Iselin, NJ 08830 and our main telephone number is 732-201-4189.
We were incorporated in Delaware in September 2007 under the name Durham Pharmaceuticals Acquisition Co. In June 2008, we completed a merger with our parent company, Echo Therapeutics, Inc., a Minnesota corporation formerly known as Sontra Medical Corporation, for the purpose of changing its state of incorporation from Minnesota to Delaware. We were the surviving corporation in the merger, and all outstanding common stock of Echo Therapeutics, Inc., a Minnesota corporation, was exchanged for our Common Stock.
We file with or furnish to the SEC our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports. We make these documents available through our website, free of charge, as soon as reasonably practicable after we file such material with, or furnish it to, the SEC. Any document we file with or furnish to the SEC is available to read and copy at the SEC's Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. Further information about the public reference facilities is available by calling the SEC at (800) SEC-0330. These documents also may be accessed on the SEC’s website, http://www.sec.gov. Our NASDAQ Capital Market trading symbol is “ECTE” and our corporate website is located at www.echotx.com. The contents of our website are not part of this report and our internet address is included in this document as an inactive textual reference only.
Executive Officers and Directors
Our current executive officers and directors are as follows:
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Scott W. Hollander
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President, Chief Executive Officer and Director
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Michael M. Goldberg, M.D.
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Chairman of the Board
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Shepard M. Goldberg
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Director
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Elazer R. Edelman, M.D. Ph.D.
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Director
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Alan W. Schoenbart
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Chief Financial Officer
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Set forth below is the principal occupation or employment of each executive officer or director and the name and principal business of any organization by which such person is employed.
Scott W. Hollander. Mr. Hollander has been our President and Chief Executive Officer since December 2014.
Michael M. Goldberg, M.D. Dr. Goldberg has been a Managing Partner of Montaur Capital Partners from February 2007. From May 2007 until December 2013 Dr. Goldberg managed a healthcare portfolio for Platinum. Dr. Goldberg also serves on the board of directors of Navidea Biopharmaceuticals and Urigen, a private company.
Shepard M. Goldberg. As a Principal at SMG Consulting, Mr. Goldberg currently provides management consulting for small and medium size businesses since January 2008. Mr. Goldberg recently served as chief executive officer and a director at Cordex Pharma, Inc., a specialty pharmaceutical company developing new cardiovascular medicines, from February 2010 to March 2012. Mr. Goldberg currently serves on the board of directors of Forticell Bioscience, Inc., a biotechnology company.
Elazer R. Edelman, M.D. Ph.D. Dr. Edelman is the Thomas D. and Virginia W. Cabot Professor of Health Sciences and Technology at MIT, Professor of Medicine at Harvard Medical School, and a coronary care unit cardiologist at the Brigham and Women's Hospital in Boston. He and his laboratory have pioneered basic findings in vascular biology and the development and assessment of biotechnology. Dr. Edelman directs the Harvard-MIT Biomedical Engineering Center (BMEC), dedicated to applying the rigors of the physical sciences to elucidate fundamental biologic processes and mechanisms of disease.
Alan W. Schoenbart, CPA. Mr. Schoenbart has been our Chief Financial Officer since December 2014.
ITEM 1A. RISK FACTORS.
Our business is subject to substantial risks and uncertainties. Any of the risks and uncertainties described below, either alone or taken together, could materially and adversely affect our business, financial condition, results of operations or prospects. These risks and uncertainties could also cause actual results to differ materially from those expressed or implied by forward-looking statements that we make from time to time. The risks and uncertainties described below are not the only ones we face. Risks and uncertainties of general applicability and additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, financial condition, results of operations or prospects and could cause actual results to differ materially from those expressed or implied by our forward-looking statements.
When used herein, the “Company,” “Echo,” “we,” “us” and “our” refer to Echo Therapeutics, Inc.
Risks Related to Our Financial Results, Financial Reporting and Need for Financing
We have a history of operating losses and we expect our operating losses to continue for the foreseeable future.
We have generated limited revenue and have had operating losses since inception, including a net loss of ($22,197,867) for the year ended December 31, 2015. As of December 31, 2015, we had cash of approximately $56,210 and an accumulated deficit of ($150,129,933). We have no current sources of material ongoing revenue, other than potential future milestone payments and royalties under our current license and collaboration agreements. Our losses have resulted principally from costs incurred in connection with our research and development activities and from general and administrative costs associated with our operations. We also expect to have negative cash flows for the foreseeable future as we fund our operating losses and capital expenditures. This will result in decreases in our working capital, total assets and stockholders’ equity, which may not be offset by future funding.
If we are not able to commercialize our product candidates, we may never generate sufficient revenue to achieve profitability, and even if we achieve profitability, we may not be able to sustain or increase it on a quarterly or annual basis. We expect our operating losses to continue and increase for the foreseeable future as we continue to expend substantial resources to conduct research and development, seek to obtain regulatory approval for our continuous glucose monitoring system (CGM or CGM System), identify and secure collaborative partnerships, and manage and execute our obligations in current and possible future strategic collaborations.
Continued operating losses would impair our ability to continue operations. We have operating and liquidity concerns due to our significant net losses and negative cash flows from operations. Our ability to continue as a going concern is dependent upon generating sufficient cash flow to conduct operations or obtaining additional financing. Continuation as a going concern is dependent upon achieving profitable operations and positive operating cash flows sufficient to pay all obligations as they come due. Historically, we have had difficulty in meeting our cash requirements. Our failure to become and remain profitable may depress the market price of our common stock and could impair our ability to raise capital, expand our business, diversify our product offerings or continue our operations. There can be no assurances that we will obtain additional funding, reduce the level of historical losses and achieve successful commercialization of any of our product candidates. Any financing activity is likely to result in significant dilution to current stockholders.
We continue to require substantial amounts of capital, without which we will be unable to develop or commercialize our product candidates.
Our development efforts to date have consumed and will continue to require substantial amounts of capital in connection with the research and development of our next generation CGM System. As we conduct more advanced development of our CGM System, we will need significant funding to complete our product development program and to pursue commercialization. Our ability to conduct our research, development and planned commercialization activities associated with our CGM System is highly dependent on our ability to obtain sufficient financing.
There are factors, a number of which are outside our control, that may accelerate our need for additional financing, including:
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the costs, timing and risks of delay of obtaining regulatory approvals;
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the expenses we incur in developing, selling and marketing our CGM;
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the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
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the revenue generated by future sales of our CGM and any other future products that we may develop;
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the rate of progress and cost of our clinical trials and other development activities;
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the success of our research and development efforts;
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the emergence of competing or complementary technological developments;
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the terms and timing of any collaborative, licensing and other arrangements that we may establish;
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the acquisition of businesses, products and technologies, although we currently have no commitments or agreements relating to any of these types of transactions;
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the inability to access existing financing sources, if any; and
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the costs associated with potential legal proceedings.
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We expect to seek funding through public or private financings or from existing or new licensing and collaboration agreements; however, the market price of our common stock is highly volatile. Due to market conditions and the development status of our CGM, additional funding may not be available to us on acceptable terms, or at all.
If we are unable to obtain additional financing or we are unable to access financing from existing or future financing sources in a timely fashion, we may not be able to meet our research, development and commercialization goals, which in turn would adversely affect our business.
Failure to receive stockholder approval for share issuances related to a transaction or series of transactions where the common stock to be issued in the offering, or underlying convertible securities to be issued in the offering, will, upon issuance, equal or exceed 20 percent of the number of shares of our common stock outstanding before such issuance (see Nasdaq Rule 5635), could adversely affect our cash flows or otherwise cause our stock price to decline.
Under Rule 5635 of the Nasdaq Listing Rules, stockholder approval is generally required for situations covered by the “20 percent rule,” i.e., transactions (other than public offerings) involving:
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the sale or issuance (or potential issuance) by the company of stock (or securities convertible or exercisable for stock) at a price below the greater of book or market value, which together with sales by officers, directors or substantial stockholders, is at least 20 percent of the outstanding shares or at least 20 percent of the voting power prior to the issuance; or
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the sale or issuance (or potential issuance) of stock (or securities convertible or exercisable for stock) equal to 20 percent or more of the outstanding shares or voting power before the issuance for less than the greater of book or market value (see Nasdaq Rule 5635(d)).
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On January 29, 2016, in connection with a Securities Purchase Agreement, we received net cash proceeds of $832,000 from a $5,145,000 financing through the issuance of 10% senior secured convertible notes and warrants. If stockholder approval for the balance of the offering pursuant to Nasdaq Listing Rule 5635 is not obtained, we will need to seek an alternative source of financing. We may not be able to secure such other financing on favorable terms, or at all. If we are unable to obtain alternative necessary financing, we may be required to substantially reduce the scope of our operations.
Failure to receive stockholder approval for the offering of notes and warrants pursuant to our January 29, 2016 Security Purchase Agreement will cause certain rights contained within the notes and warrants to be ineffective.
Certain rights of the purchasers of notes and warrants in this offering are subject to the receipt of stockholder approval. Failure to obtain stockholder approval for the offering will cause certain rights contained within the notes and warrants to be ineffective and may adversely affect the value of an investment in the notes and warrants. Further, even if stockholder approval is obtained, certain rights contained within the notes will be inapplicable if a purchaser fails to fund the second tranche of the offering for which such purchaser committed.
We no longer comply with the minimum stockholders’ equity requirement or the requirement to hold an annual stockholders meeting for continued listing on the Nasdaq Stock Market. Failure to comply with the Nasdaq requirements may affect our ability to trade on the Nasdaq market, raise further working capital and continued operations could be adversely impacted.
On January 6, 2016, we received a letter from The Nasdaq Stock Market (“Nasdaq”) that, as a result of the Company’s failure to hold an annual meeting of stockholders no later than one year after the end of its fiscal year as required by Nasdaq Listing Rule 5620(a), and the Company’s failure to meet the minimum $2.5 million stockholders’ equity requirement set forth in Nasdaq Listing Rule 5550(b)(1), Nasdaq had determined to initiate procedures to delist the Company’s securities from The Nasdaq Stock Market. The Company was advised that, unless the Company requested an appeal of this determination, trading in the Company’s common stock would be suspended at the opening of business on January 15, 2016 and a Form 25-NSE would be filed with the SEC to remove the Company’s securities from listing and registration on Nasdaq. The Company appealed Nasdaq’s determination. The suspension of trading was stayed during the pendency of such appeal.
On March 9, 2016, the Company was informed that the Nasdaq Listing Panel (“the Panel”) determined to grant our request to remain listed on the Nasdaq Stock Market, subject to the following conditions:
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On or before May 31, 2016, the Company shall have its Annual Shareholder Meeting for fiscal year ended 2015.
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On or before July 5, 2016, the Company shall publicly announce and inform the Panel that it has stockholders’ equity above $2.5 million.
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The Company shall also, by that date, provide the Panel with updated projections demonstrating its ability to maintain its stockholders’ equity above $2.5 million through June 30, 2017. These projections shall detail the underlying assumptions, including any required capital raises or conversions of debt or preferred to common stock. The Panel will consider at that time whether a Panel Monitor is appropriate.
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The Company was advised that July 5, 2016 represents the full extent of the Panel’s discretion to grant continued listing while it is non-compliant. Should the Company fail to demonstrate compliance with that rule by that date, the Panel will issue a final delist determination and the Company will be suspended from trading on the Nasdaq Stock Market. In order to fully comply with the terms of this exception, the Company must be able to demonstrate compliance with all requirements for continued listing on The Nasdaq Stock Market. In the event the Company is unable to do so, its securities may be delisted from The Nasdaq Stock Market. It is a requirement during the exception period that the Company provide prompt notification of any significant events that occur during this time. This includes, but is not limited to, any event that may call into question the Company’s historical financial information or that may impact the Company’s ability to maintain compliance with any Nasdaq listing requirement or exception deadline. The Panel reserves the right to reconsider the terms of this exception based on any event, condition or circumstance that exists or develops that would, in the opinion of the Panel, make continued listing of the Company’s securities on The Nasdaq Stock Market inadvisable or unwarranted. In addition, any compliance document will be subject to review by the Panel, which may, in its discretion, request additional information before determining that the Company has complied with the terms of the exception.
There can be no assurances whether the Company will be able to regain or maintain compliance with the Nasdaq listing rules. In the event of delisting, the Company expects that its stock would trade on the OTC Markets.
Changes in financial accounting standards or practices or taxation rules or practices may cause adverse unexpected revenue and/or expense fluctuations and affect our reported results of operations.
Changes in accounting standards or practices or in existing taxation rules or practices could have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and taxation rules and varying interpretations of accounting pronouncements and taxation practices have occurred and may occur in the future. The methods by which we intend to market and sell our product candidates, if commercialized, may have an impact on the manner in which we recognize revenue. In addition, changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. Changes in taxation rules related to stock options and other forms of equity compensation could also have a significant negative effect on our reported results. Additionally, changes to accounting rules or standards, such as the potential requirement that U.S. registrants prepare financial statements in accordance with International Financial Reporting Standards, may adversely impact our reported financial results and business, and may further require us to incur greater accounting fees.
Valuation of share-based payments, which we are required to perform for purposes of recording compensation expense under authoritative guidance for share-based payments, involves significant assumptions that are subject to change and difficult to predict.
We record compensation expense in the consolidated statement of operations for share-based payments, such as employee stock options, using the fair value method. The requirements of the authoritative guidance for share-based payments have had and will continue to have a material effect on our future financial results reported under GAAP and make it difficult for us to accurately predict the impact on our future financial results.
For instance, estimating the fair value of share-based payments is highly dependent on assumptions regarding the future exercise behavior of our employees and changes in our stock price. Our share-based payments have characteristics significantly different from those of freely traded options, and changes to the subjective input assumptions of our share-based payment valuation models can materially change our estimates of the fair values of our share-based payments. In addition, the actual values realized upon the exercise, expiration, early termination or forfeiture of share-based payments might be significantly different than our estimates of the fair values of those awards as determined at the date of grant. Moreover, we rely on third parties that supply us with information or help us perform certain calculations that we employ to estimate the fair value of share-based payments. If any of these parties do not perform as expected or make errors, we may inaccurately calculate actual or estimated compensation expense for share-based payments.
The authoritative guidance for share-based payments could also adversely impact our ability to provide accurate guidance on our future financial results as assumptions that are used to estimate the fair value of share-based payments are based on estimates and judgments that may differ from period to period. We may also be unable to accurately predict the amount and timing of the recognition of tax benefits associated with share-based payments as they are highly dependent on the exercise behavior of our employees and the price of our stock relative to the exercise price of each outstanding stock option.
For those reasons, among others, the authoritative guidance for share-based payments may create variability and uncertainty in the share-based compensation expense we will record in future periods, which could adversely impact our financial results and, in turn, our stock price and increase our expected stock price volatility as compared to prior periods.
We have identified material weaknesses in our internal control over financial reporting. If our remedial measures are insufficient to address the material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements, which could adversely affect our stock price and could negatively impact our results of operations.
As a public company, we are required to maintain internal control over financial reporting, and our management is required to evaluate the effectiveness of our internal control over financial reporting as of the end of each fiscal year. As of December 31, 2015, we concluded that there were material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses have been identified and included in management’s assessment.
While we are committed to remediating the control deficiencies that gave rise to the material weaknesses, there can be no assurances that our remediation efforts will be successful or that we will be able to prevent future control deficiencies (including material weaknesses) from happening that could cause us to incur unforeseen costs, negatively impact our results of operations, cause our consolidated financial results to contain material misstatements, cause the market price of our common stock to decline, damage our reputation or have other potential material adverse consequences.
Risks Related to Our Operations, Business Strategy and Development of Our Product Candidates
Our CGM may not be successfully developed or achieve market acceptance.
We have evaluated our CGM System in a clinical setting for the continuous monitoring of glucose. The future development of the next generation CGM System will require substantial expenditures, including additional product development, feasibility studies, preclinical studies and clinical testing. Projected costs of this development are difficult to estimate, and they may change and increase frequently.
Our success is also dependent on further developing new and existing products and obtaining favorable results from preclinical studies and clinical trials, as well as satisfying regulatory standards and approvals required for the market introduction of our product candidates. There can be no assurance that we will not encounter unforeseen problems in the development of our CGM, or that we will be able to successfully address problems that do arise. There can be no assurance that any of our potential products will be successfully developed, be proven safe and efficacious in clinical trials, meet applicable regulatory standards, be capable of being produced in commercial quantities at acceptable costs, or be eligible for third-party reimbursement from governmental or private insurers. Even if we successfully develop new products, there can be no assurance that those products will be successfully marketed or achieve market acceptance, or that expected markets will develop for such products. The degree of market acceptance will depend in part on our ability to:
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establish and demonstrate the clinical efficacy and safety of our current product candidates and any other product candidates we may develop;
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create products that are superior to alternatives currently on the market; and |
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establish the potential advantage of our product candidates over alternative available products. |
In addition, because our product candidates are based on new technologies, they may be subject to lengthy sales cycles and may take substantial time and effort to achieve market acceptance. If any of our development programs are not successfully completed, required regulatory approvals or clearances are not obtained, or potential products for which approvals or clearances are obtained are not commercially successful, our business, financial condition and results of operations would be materially adversely affected.
Our success will depend on our ability to attract and retain our key personnel.
We are highly dependent on our senior management team and the senior members of our product development team. Our success will depend on our ability to attract and retain qualified personnel to continue development of our CGM and operate our business, including senior management, scientists, clinicians, engineers and other highly-skilled personnel. Competition for senior management personnel, as well as scientists, clinicians and engineers, is intense, and we may not be able to attract or retain qualified personnel. The loss of the services of members of our senior management team, scientists, clinicians or engineers could prevent the implementation and completion of our objectives, including the completion of development and commercialization of our CGM. The loss of a member of our senior management team or our professional staff would require the remaining executive officers to divert immediate and substantial attention to seeking a replacement. Each of our officers may terminate their employment at any time without notice and without cause or good reason. Additionally, volatility or a lack of positive performance in our stock price may adversely affect our ability to retain key employees.
We rely on third parties to develop, commercialize and manufacture our CGM.
We depend on collaborators, partners, licensees, contract research organizations, manufacturers and other third parties to support our efforts to develop and commercialize our CGM, to manufacture prototypes and clinical and commercial scale quantities of our CGM and we expect to rely on such third parties to market, sell and distribute any products we successfully develop.
We rely on clinical investigators and clinical sites to enroll patients in our clinical trials and other third parties to manage the trials and to perform related data collection and analysis; however, we may not be able to control the amount and timing of resources that clinical sites may devote to our clinical trials. If these clinical investigators and clinical sites fail to enroll a sufficient number of patients in our clinical trials, fail to ensure compliance by patients with clinical protocols or fail to comply with regulatory requirements, we will be unable to successfully complete these trials, which could prevent us from obtaining regulatory approvals for our CGM. Our agreements with clinical investigators and clinical sites for clinical testing place substantial responsibilities on these parties and, if these parties fail to perform as expected, our trials could be delayed or terminated. If these clinical investigators, clinical sites or other third parties do not carry out their contractual duties or obligations or fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to our clinical protocols, regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated, or the clinical data may be rejected by the applicable regulatory authorities, and we may be unable to obtain regulatory approval for, or successfully commercialize, our CGM.
We cannot guarantee that we will be able to successfully negotiate agreements for, or maintain relationships with, collaborators, partners, licensees, clinical investigators, manufacturers and other third parties on favorable terms, if at all. If we are unable to obtain or maintain these agreements, we may not be able to clinically develop, formulate, manufacture, obtain regulatory approvals for or commercialize our CGM, which will in turn adversely affect our business. We expect to expend substantial management time and effort to enter into relationships with third parties and, if we successfully enter into such relationships, to manage these relationships. In addition, substantial amounts of our expenditures may be paid to third parties in these relationships. We cannot control the amount or timing of resources our contract partners will devote to our research and development programs, product candidates or potential product candidates, and we cannot guarantee that these parties will fulfill their obligations to us under these arrangements in a timely fashion, if at all. In addition, our contract partners may abandon research projects and terminate applicable agreements prior to or upon the expiration of agreed-upon contract terms.
Disputes under key agreements or conflicts of interest with our scientific advisors, clinical investigators or other third-party collaborators could delay or prevent development or commercialization of our product candidates.
Any agreements we have or may enter into with third parties, such as collaborators, licensees, suppliers, manufacturers, clinical research organizations, clinical investigators or clinical trial sites, may give rise to disputes regarding the rights and obligations of the parties. Disagreements could develop over rights to ownership or use of intellectual property, the scope and direction of research and development, the approach for regulatory approvals or commercialization strategy. We intend to conduct research programs in a range of therapeutic areas, but our pursuit of these opportunities could result in conflicts with the other parties to these agreements that may be developing or selling products or conducting other activities in the same therapeutic areas. Any disputes or commercial conflicts could lead to the termination of our agreements, delay progress of our product development programs, compromise our ability to renew agreements or obtain future agreements, lead to the loss of intellectual property rights or result in costly litigation.
We collaborate with outside scientific advisors and collaborators at academic and other institutions that assist us in our research and development efforts. Our scientific advisors and collaborators are not our employees and may have other commitments that limit their availability to us. If a conflict of interest between their work for us and their work for another entity arises, we may lose their services and have difficulty in developing relationships with alternative scientific advisors and collaborators.
If future clinical studies or other articles are published, or diabetes or other medical associations announce positions that are unfavorable to our CGM, our efforts to obtain additional capital and our ability to obtain regulatory approval for our CGM may be negatively affected.
Future clinical studies or other articles regarding our CGM or any competing products may be published that either support a claim, or are perceived to support a claim, that a competitor’s product is clinically more effective or easier to use than our CGM, or that our product candidates are not as effective or easy to use as we claim. Additionally, diabetes or other medical associations that may be viewed as authoritative could endorse products or methods that compete with our CGM or otherwise announce positions that are unfavorable to our CGM. Any of these events may negatively affect our efforts to obtain additional capital and our ability to obtain regulatory approval for our CGM, which would result in a delay in our ability to obtain revenue from sales of our CGM.
In one aspect of our business we operate in the highly competitive medical device market and face competition from large, well-established companies with significantly more resources and, as a result, we may not be able to compete effectively.
The industry in which we operate is extremely competitive. Many companies, universities and research organizations developing competing product candidates have greater resources and significantly greater experience in financial, research and development, manufacturing, marketing, sales, distribution and regulatory matters than we have. In addition, many competitors have greater name recognition and more extensive collaborative relationships. Our competitors could commence and complete clinical testing of their product candidates, obtain regulatory approvals, and begin commercial-scale manufacturing of their products faster than we are able to for our CGM. They could develop products that would render our CGM obsolete and noncompetitive. Our competitors may develop more effective or more affordable products or achieve earlier patent protection or product commercialization than we do. If we are unable to compete effectively against these companies, we may not be able to commercialize our CGM effectively or achieve a competitive position in the market. This would adversely affect our ability to generate revenues.
The market for glucose monitoring devices is particularly competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. Several companies are developing or currently marketing continuous glucose monitoring products for people with diabetes in the outpatient setting that will compete directly with our CGM. To date, Abbott Laboratories, DexCom, Inc., and Medtronic, Inc. have received FDA and CE Mark approvals for their continuous glucose monitors for people with diabetes. Roche Diagnostics U.S. and Senseonics are among those companies also developing CGM systems for people with diabetes in the outpatient setting. Many of the companies developing or marketing competing glucose monitoring devices enjoy several competitive advantages, including:
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greater financial and human resources for product development, sales and marketing, and patent litigation;
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significantly greater name recognition;
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established relationships with healthcare professionals, customers and third-party payors;
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established distribution networks;
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additional lines of products and the ability to offer rebates or bundle products to offer higher discounts or incentives to gain a competitive advantage; and
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greater experience in conducting research and development, manufacturing, clinical trials, obtaining regulatory approval for products and marketing approved products.
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As a result, we may not be able to compete effectively against these companies or their products, which may adversely affect our operating results.
We may have significant product liability exposure, which may harm our business and our reputation.
We may face exposure to product liability and other claims if our CGM is alleged to have caused harm. Although we expect to obtain product liability insurance when we begin marketing our product, we may not have sufficient insurance coverage, and we may not be able to obtain sufficient coverage at a reasonable cost, if at all. Our inability to obtain product liability insurance at an acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of any products or product candidates that we develop. If we are sued for any injury caused by our products, product candidates or processes, our liability could exceed our product liability insurance coverage and our total assets. Claims against us, regardless of their merit or potential outcome, would divert management resources and may also generate negative publicity or hurt our ability to obtain physician endorsement of our products or expand our business.
Our inability to adequately protect our intellectual property could allow our competitors and others to produce products based on our technology, which could substantially impair our ability to compete.
Our success and ability to compete are dependent, in part, upon our ability to establish and maintain the proprietary nature of our technologies. We rely on a combination of patent, copyright and trademark law, trade secrets and nondisclosure agreements to protect our intellectual property; however, such methods may not be adequate to protect us or permit us to gain or maintain a competitive advantage. Our patent applications may not issue as patents in a form that will be advantageous to us, or at all. Our issued patents, and those that may issue in the future, may be challenged, invalidated or circumvented, which could limit our ability to stop competitors from marketing products that are similar to our product candidates.
We may in the future need to assert claims of infringement against third parties to protect our intellectual property. The outcome of litigation to enforce our intellectual property rights in patents, copyrights, trade secrets or trademarks is highly unpredictable, could result in substantial costs and diversion of resources, and could have a material adverse effect on our financial condition and results of operations regardless of the final outcome of the litigation. In the event of an adverse judgment, a court could hold that some or all of our asserted intellectual property rights are not infringed, or are invalid or unenforceable, and could award attorney fees to the other party. Despite our efforts to safeguard our unpatented and unregistered intellectual property rights, we may not be successful in doing so, or the steps taken by us in this regard may not be adequate to detect or deter misappropriation of our technology or to prevent an unauthorized third party from copying or otherwise obtaining and using our products, technology or other information that we regard as proprietary. Additionally, third parties may be able to design around our patents. Furthermore, the laws of foreign countries may not protect our proprietary rights to the same extent as the laws of the United States. Our inability to adequately protect our intellectual property could allow our competitors and others to produce products based on our technology, which could substantially impair our ability to compete.
We may be subject to claims of infringement or misappropriation of the intellectual property rights of others, which could prohibit us from commercializing our product candidates, require us to obtain licenses from third parties or to develop non-infringing alternatives, and subject us to substantial monetary damages and injunctive relief.
As is generally the case in the medical device industry in which we operate, third parties may, in the future, assert infringement or misappropriation claims against us with respect to our current product candidates or any future products that we may develop. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain; therefore, we cannot be certain that we will not be found to have infringed the intellectual property rights of third parties or others. Our competitors may assert that they hold U.S. or foreign patents that cover our product candidates, technologies and/or the methods we employ in the use of our CGM. This risk is exacerbated by the fact that there are numerous issued patents and pending patent applications relating to self-monitored glucose testing systems. Because patent applications may take years to issue, there may be applications now pending of which we are unaware that may later result in issued patents that our products infringe. There could also be existing patents of which we are unaware that one or more components of our system may inadvertently infringe. As the number of competitors in the market for continuous glucose monitoring and drug delivery systems grows, the possibility of inadvertent patent infringement by us, or a patent infringement claim against us, increases.
Any infringement or misappropriation claim could cause us to incur significant costs, place significant strain on our financial resources, divert management’s attention from our business and harm our reputation. If the relevant patents were upheld as valid and enforceable and we were found to infringe, we could be prohibited from selling our product that is found to infringe unless we obtain the right to use the technology covered by the patent or are able to design around the patent. We may be unable to obtain such rights on terms acceptable to us, if at all, and we may not be able to redesign our products to avoid infringement.
Even if we are able to redesign our products to avoid an infringement claim, we may not receive regulatory authority approval for such changes in a timely manner or at all. A court could also order us to pay compensatory damages and prejudgment interest for the infringement and could, in addition, treble the compensatory damages and award attorney fees. These damages could be substantial and could harm our reputation, business, financial condition and operating results. A court also could enter orders that temporarily, preliminarily or permanently enjoin us and our customers from making, using, selling or offering to sell our products, or could enter an order mandating that we undertake certain remedial activities. Depending on the nature of the relief ordered by the court, we could become liable for additional damages to third parties.
Risks Related to Regulatory Approvals and Government Regulation
For one aspect of our business if we are unable to obtain regulatory approval to market our CGM, our business will be adversely affected.
We cannot market any product candidate until we have completed all necessary preclinical studies and clinical trials and have obtained the necessary regulatory approvals from the FDA. Outside the United States, our ability to market any of our potential products is dependent upon receiving marketing approval from the appropriate regulatory authorities. These foreign regulatory approval processes include all of the risks associated with the FDA approval or CE Marking process. If we are unable to receive regulatory approval, we will be unable to commercialize our product candidates, and we may need to cease or curtail our operations.
For one aspect of our business the regulatory approval process is costly and lengthy and we may not be able to successfully obtain all required regulatory approvals.
The preclinical development, clinical trials, manufacturing, marketing and labeling of medical devices are all subject to extensive regulation by numerous governmental authorities and agencies in the United States and other countries. We or our collaborators must obtain regulatory approval for our CGM before marketing or selling it. It is not possible to predict how long the approval processes of the FDA or any other applicable federal or foreign regulatory authority or agency for any of our products will take or whether any such approvals ultimately will be granted. The FDA and foreign regulatory agencies have substantial discretion in the medical device approval process, and positive results in preclinical testing or early phases of clinical studies offer no assurance of success in later phases of the approval process. Generally, preclinical and clinical testing of products can take many years and require the expenditure of substantial resources, and the data obtained from these tests and trials can be susceptible to varying interpretations that could delay, limit or prevent regulatory approval. Even if we obtain the necessary preclinical, clinical, and other data, regulatory approval applications are complex and extensive submissions that require significant time, resources, and expertise to put together. If we encounter significant delays in the regulatory process that result in excessive costs, it may prevent us from continuing to develop our CGM. Any delay in obtaining, or failure to obtain, approvals would adversely affect the marketing of our CGM and our ability to generate product revenue. The risks associated with the approval process include:
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failure of our CGM to meet a regulatory entity’s requirements for safety, efficacy and quality;
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limitations on the indicated uses for which our CGM may be marketed;
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imposition of post-market clinical studies or other post-market requirements;
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pre-approval inspections of our clinical trial data may uncover problems with the conduct of the clinical trials or the resulting data;
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preapproval inspections of our contract manufacturing facilities may require us to undertake corrective actions;
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unforeseen safety issues or side effects;
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governmental or regulatory delays and changes in regulatory requirements and guidelines; and
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post-marketing surveillance and studies.
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If we are unable to successfully complete the preclinical studies or clinical trials necessary to support an application for regulatory approval, we will be unable to commercialize our CGM, which could impair our financial position.
Before submitting an application for regulatory approval for our products, we or our collaborators must successfully complete preclinical studies and clinical trials that we believe will demonstrate that our product is safe and effective for its intended use. Product development, including preclinical studies and clinical trials, is a long, expensive and uncertain process and is subject to delays and failure at any stage. Furthermore, the data obtained from the studies and trials may be inadequate to support approval of an application for regulatory approval. With respect to our medical device programs, we must obtain an Investigational Device Exemption (“IDE”) prior to commencing additional clinical trials for our CGM. FDA approval of an IDE application permitting us to conduct testing does not mean that the FDA will consider the data gathered in the trial to be sufficient to support regulatory approval, even if the trial’s intended safety and efficacy endpoints are achieved.
In addition to regulations in the United States, we will be subject to a variety of foreign regulations governing clinical trials of our products that vary from country to country.
The commencement or completion of any of our clinical trials may be delayed or halted, or be inadequate to support regulatory approval for numerous reasons, including the following:
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the FDA or other regulatory authorities do not approve a clinical trial protocol or a clinical trial, or place a clinical trial on hold;
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patients do not enroll in clinical trials at the rate we expect;
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patients do not comply with trial protocols;
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patient follow-up is not at the rate we expect;
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patients experience adverse side effects;
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patients die during a clinical trial, even though their death may not be related to treatment using our product candidates;
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institutional review boards (“IRBs”) and third-party clinical investigators may delay or reject our trial protocols;
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third-party clinical investigators decline to participate in a trial or do not perform a trial on our anticipated schedule or consistent with the investigator agreements, clinical trial protocol, good clinical practices or other FDA, foreign regulatory authority or IRB requirements;
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third-party organizations do not perform data collection, monitoring and analysis in a timely or accurate manner or consistent with the clinical trial protocol or investigational or statistical plans;
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regulatory inspections of our clinical trials or contract manufacturing facilities may, among other things, require us to undertake corrective action or suspend or terminate our clinical trials;
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changes in governmental regulations or administrative actions;
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the interim or final results of the clinical trial are inconclusive or unfavorable as to safety or efficacy; and
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the FDA or foreign regulatory authority concludes that our trial design, conduct or results are inadequate to demonstrate safety and efficacy.
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The results of preclinical studies do not necessarily predict future clinical trial results, and predecessor clinical trial results may not be repeated in subsequent clinical trials. Additionally, the FDA or foreign regulatory authority may disagree with our interpretation of the data from our preclinical studies and clinical trials. If the FDA or foreign regulatory authority concludes that the clinical trial design, conduct or results are inadequate to prove safety and efficacy, it may require us to pursue additional preclinical studies or clinical trials, which could further delay the approval of our products. If we are unable to demonstrate the safety and efficacy of our product candidates in our clinical trials, we will be unable to obtain regulatory approval to market our products. The data we collect from our current clinical trials, our preclinical studies and other clinical trials may not be sufficient to support FDA or foreign regulatory authority approval.
If we, our contract manufacturers, or our component suppliers fail to comply with the FDA’s quality system regulations, the manufacturing and distribution of our products could be interrupted, and our operating results could suffer.
We, our contract manufacturers and our component suppliers are required to comply with the FDA’s and foreign regulatory authority’s quality system regulations, as applicable, which is a complex regulatory framework that covers the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our products. For our products that require FDA premarket approval prior to marketing, a successful preapproval inspection of the manufacturing facility will be required. For marketed products, the regulatory authorities enforce their quality system regulations through periodic unannounced inspections. We cannot assure anyone that our facilities or our contract manufacturers’ or component suppliers’ facilities would pass any future quality system inspection. If our or any of our contract manufacturers’ or component suppliers’ facilities fails a quality system inspection, the approval of our product candidates could be delayed and/or the manufacturing or distribution of marketed products could be interrupted and our operations disrupted. Failure to take adequate and timely corrective action in response to an adverse quality system inspection could force a suspension or shutdown of our packaging and labeling operations or the manufacturing operations of our contract manufacturers, or a recall of our products. If any of these events occur, we may not be able to provide our customers with the products they require on a timely basis, our reputation could be harmed and we could lose customers, any or all of which may have a material adverse effect on our business, financial condition and results of operations.
Our products could be subject to recall, cessation of marketing, or other corrective action even if we receive regulatory clearance or approval, which would harm our reputation, business and financial results.
The FDA and similar governmental bodies in other countries have the authority to require a product recall, cessation of marketing, or other corrective action if we or our contract manufacturers fail to comply with relevant regulations pertaining to manufacturing practices, labeling, advertising or promotional activities, or if new information is obtained concerning the safety or efficacy of these products. A government-mandated recall, cessation of marketing, or other corrective action could occur if the regulatory authority finds that there is a reasonable probability that the device would cause serious, adverse health consequences or death. A voluntary recall, cessation of marketing, or other corrective action by us could occur as a result of manufacturing defects, labeling deficiencies, packaging defects or other failures to comply with applicable regulations. Any recall, cessation of marketing, or other corrective action would divert management attention and financial resources, harm our reputation with customers and adversely affect our business, financial condition and results of operations.
We conduct business in a heavily regulated industry, and if we fail to comply with applicable laws and government regulations, we could suffer penalties or be required to make significant changes to our operations.
The healthcare and related industries are subject to extensive federal, state, local and foreign laws and regulations, including those relating to:
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billing for services; |
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financial relationships with physicians and other referral sources; |
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inducements and courtesies given to physicians and other health care providers and patients;
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labeling products; |
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quality of medical equipment and services; |
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confidentiality, maintenance and security issues associated with medical records and individually identifiable health information;
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medical device reporting; |
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false claims; and |
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professional licensure. |
These laws and regulations are extremely complex and, in some cases, still evolving. In many instances, the industry does not have the benefit of significant regulatory or judicial interpretation of these laws and regulations. If our operations are found to be in violation of any of the laws and regulations that govern our activities, we may be subject to the applicable penalty associated with the violation, including civil and criminal penalties, damages, fines or curtailment of our operations. The risk of being found in violation of these laws and regulations is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any action against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s time and attention from the operation of our business.
In addition, healthcare laws and regulations may change significantly in the future. Any new healthcare laws or regulations may adversely affect our business. A review of our business by courts or regulatory authorities may result in a determination that could adversely affect our operations. Also, the healthcare regulatory environment may change in a way that restricts or adversely impacts our operations.
We are not aware of any governmental healthcare investigations involving our executives or us; however, any future healthcare investigations of our executives, our managers or us could result in significant liabilities or penalties to us, as well as adverse publicity.
If we are found to have violated laws protecting the confidentiality of patient health information, we could be subject to civil or criminal penalties, which could increase our liabilities and harm our reputation or our business.
There are a number of federal and state laws protecting the confidentiality of certain patient health information, including patient records, and restricting the use and disclosure of that protected information. In particular, the U.S. Department of Health and Human Services promulgated patient privacy rules under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as supplemented by the Health Information Technology for Economic and Clinical Health Act. These privacy rules protect medical records and other personal health information by limiting their use and disclosure, giving individuals the right to access, amend and seek accounting of their own health information and limiting most use and disclosures of health information to the minimum amount reasonably necessary to accomplish the intended purpose. If we are found to be in violation of the privacy rules under HIPAA, we could be subject to civil or criminal penalties, which could increase our liabilities, harm our reputation and have a material adverse effect on our business, financial condition and results of operations.
As a public company, we are required to incur substantial expenses.
We are subject to the periodic reporting requirements of the Exchange Act, which requires, among other things, review, audit, and public reporting of our financial results, business activities, and other matters. SEC regulations, including regulations enacted as a result of the Sarbanes-Oxley Act of 2002, have also substantially increased the accounting, legal, and other costs related to compliance with SEC reporting obligations. If we do not have current information about our Company available to market makers, they will not be able to trade our stock. The public company costs of preparing and filing annual and quarterly reports, and other information with the SEC will cause our expenses to be higher than they would be if we were privately-held. These increased costs may be material and may include the hiring of additional employees and/or the retention of additional advisors and professionals. Our failure to comply with the federal securities laws could result in private or governmental legal action against us and/or our officers and directors, which could have a detrimental effect on our business and finances, the value of our stock, and the ability of stockholders to resell their stock.
Risks Related to Our Common Stock
Our principal stockholders own a significant percentage of our stock and will be able to exercise significant influence over our affairs.
Our executive officers, directors and principal stockholders hold at least 5% of our outstanding shares of common stock and, assuming the exercise and conversion of all currently outstanding exercisable and convertible securities, own approximately 40% of our outstanding capital stock on an as-converted basis. Accordingly, these stockholders may continue to have significant influence over our affairs. Additionally, this significant concentration of share ownership may adversely affect the trading price of our common stock, because an investor could perceive disadvantages in owning stock of a company with a concentration of ownership. This concentration of ownership could also have the effect of delaying or preventing a change in our control.
Substantial sales of shares, or the perception that such sales may occur, could adversely affect the market price of our common stock and our ability to issue equity securities in the future.
If stockholders sell substantial amounts of our common stock, or the market perceives that any such sales may occur, the market price of our common stock could decline.
Our stock price is volatile and may fluctuate in the future, and stockholders could lose all or a substantial part of their investment.
The trading price of our common stock may fluctuate significantly in response to a number of factors, many of which we cannot control. For example, between June 30, 2015 and December 31, 2015, our common stock has closed between a low price of $1.29 and a high price of $1.88. Among the factors that could cause material fluctuations in the market price for our common stock are:
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our ability to successfully raise capital to fund our continued operations; |
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our ability to license and/or sell our assets, including Intellectual Property; |
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potential necessity of Echo to seek out and/or receive the protection of the U.S. Bankruptcy Code; |
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our financial condition, performance and prospects; |
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changes in the regulatory status of our CGM; |
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the success or failure of the development and clinical testing of our CGM; |
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our ability to successfully raise capital to fund our continued operations; |
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our ability to enter into and maintain successful collaborative arrangements with strategic partners for research and development, clinical testing, and sales and marketing;
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additions or departures of key personnel; |
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our ability to avoid delisting of the Common Stock from the Nasdaq Capital Market; |
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the depth and liquidity of the market for our common stock; |
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sales of large blocks of our common stock by officers, directors or significant stockholders; |
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investor perception of us and the industry in which we operate;
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changes in securities analysts’ estimates of our financial performance or product development timelines;
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general financial and other market conditions and trading volumes of similar companies; and |
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domestic and international economic conditions. |
The broad market fluctuations may adversely affect the market price of our common stock. In addition, fluctuations in our stock price may make our stock attractive to momentum traders, hedge funds or day-trading investors who often shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction.
Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders, and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our Certificate of Incorporation and Bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, or for a change in the composition of our Board or management to occur, even if doing so would benefit our stockholders. These provisions include:
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dividing our Board into three classes, only one of which is elected at each annual meeting of stockholders;
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limiting the removal of directors by the stockholders; and |
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limiting the ability of stockholders to call a special meeting of stockholders. |
In addition, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder, unless such transactions are approved by our Board. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders.
We have never paid dividends and we do not anticipate paying any dividends in the foreseeable future and, as a result, our investors’ sole source of gain, if any, will depend on capital appreciation, if any.
We do not intend to declare any dividends on our shares of common stock in the foreseeable future and currently intend to retain any future earnings for funding growth. As a result, investors should not rely on an investment in our securities if they require the investment to produce dividend income. Capital appreciation, if any, of our shares may be investors’ sole source of gain for the foreseeable future. Moreover, investors may not be able to resell their shares of our common stock at or above the price they paid for them.
Compliance with regulations relating to public company corporate governance matters and reporting is time-consuming and expensive.
The laws and regulations affecting public companies, including the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and rules adopted or proposed by the SEC, have resulted, and may in the future result, in increased costs to us as we evaluate the implications of any new rules and regulations and respond to new requirements under such rules and regulations. We are required to comply with many of these rules and regulations, and will be required to comply with additional rules and regulations in the future. As a pre-commercialization stage company with limited capital and personnel, we will need to divert management’s time and attention away from our business in order to ensure compliance with these regulatory requirements.
Our outstanding options, warrants and preferred stock and the availability for resale of the underlying shares may adversely affect the trading price of our common stock and cause substantial dilution.
As of December 31, 2015, there were outstanding stock options to purchase 1,667,233 shares of our common stock at a weighted-average exercise price of 2.01 per share, outstanding warrants to purchase 4,530,428 shares of common stock at a weighted-average exercise price of $3.68 per share, and preferred stock convertible into 7,224,793 shares of common stock. Our outstanding options, warrants and preferred stock could adversely affect our ability to obtain future financing or engage in certain mergers or other transactions, since the holders of options, warrants and preferred stock can be expected to exercise or convert them at a time when we may be able to obtain additional capital through a new offering of securities on terms more favorable to us than the terms of outstanding options, warrants and preferred stock. For the life of the options, warrants and preferred stock, the holders have the opportunity to profit from a rise in the market price of our common stock without assuming the risk of ownership. The issuance of shares upon the exercise of outstanding options and warrants will also dilute the ownership interests of our existing stockholders.
If we issue additional shares in the future, it will likely result in the dilution of our existing stockholders.
Our certificate of incorporation authorizes the issuance of up to 150,000,000 shares of Common Stock and up to 40,000,000 Preferred Shares, each with a par value of $0.01, of which 11,124,496 Common Shares and 8,025,793 Convertible Preferred Shares were issued and outstanding as of December 31, 2015.
The sale, exchange or issuance of a significant number of additional shares may result in a reduction of the book value and market price of the outstanding shares of our Common or Convertible Preferred Stock. If we issue any such additional shares, such issuance will cause a reduction in the proportionate ownership and voting power of all current stockholders. Further, such issuance may result in a change in control of our Company. Lastly, the sale of a substantial number of shares of our common stock to investors, or anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales.
The amendment of the conversion ratio with respect to our Series F Convertible Preferred Stock may result in the issuance of additional shares of our Common Stock.
Pursuant to the Securities Purchase Agreement we entered into on January 29, 2016 (2016SPA), the Company is seeking stockholder approval to amend the Company’s Certificate of Designations governing the Series F Convertible Preferred Stock (“Series F”), which will, among other items, amend the Company’s Certificate of Designations governing the Series F, which is required pursuant to the Consent, Waiver and Amendment Agreement (the “Consent and Waiver Agreement”) between the Company and the holders of the Series F. The Consent and Waiver Agreement waived certain registration rights that the holders of the Series F had with respect to such stock, in exchange for the amendment to the Company’s Certificate of Designations governing the Series F which will, among other things, grant the holders of the Series F comparable anti-dilution and price reset provisions to the secured convertible notes issued pursuant to the 2016SPA. The holders of the Series F will be entitled to an adjustment in the conversion ratio in the event that the Company issues Common Stock (or Common Stock equivalents) for consideration of less than $1.50 a share. In addition, in the event that the closing price per share of the Common Stock is less than $1.50 for ten or more days during the 90 days immediately following the first effective date of a registration statement filed pursuant to the Registration Rights Agreement, the conversion ratio of the Series F will be adjusted from its current 1:1 ratio to one determined by dividing (i) $1.50 by (ii) 80% of the average of such ten lowest closing prices less than $1.50, subject to a floor of $.80.
This amendment of the Certificate of Designations may result in additional shares of our Common Stock being issuable above the number of shares that would have otherwise been issuance pursuant to the Certificate of Designations prior to such amendment.
Our ability to realize potential value from our Net Operating Loss carryforwards is highly speculative and subject to numerous material uncertainties.
Our Net Operating Loss (“NOL”) carryforwards permit us the opportunity to offset net operating losses from prior years to taxable income in future years in order to reduce our tax liability. As we have incurred losses since our inception and do not currently expect to turn a profit in the near future, we are currently unable to realize value from our net operating loss carryforwards unless we generate future taxable income, either through the acquisition of a profitable company or otherwise. There can be no assurance that we will have sufficient taxable income, if any, in future years to use the net operating loss carryforwards before they expire. The Internal Revenue Service could challenge the amount of our net operating loss carryforwards.
In order to preserve our NOL carryforwards, we must ensure that there has not been a “change of control” of our Company. A “change of control” includes a more than 50 percentage point increase in the ownership of our company by certain equity holders who are defined in Section 382 of the Internal Revenue Code as “5 percent shareholders”. Calculating whether an ownership change has occurred is subject to uncertainty, both because of the complexity of Section 382 of the Code and because of limitations on a publicly-traded company’s knowledge as to the ownership of, and transactions in, its securities. Therefore, the calculation of the amount of our NOL carryforwards may be changed as a result of a challenge by a governmental authority or our learning of new information about the ownership of, and transactions in, our securities. Our ability to fully utilize our NOL could be limited if there have been past ownership changes or if there are future ownership changes resulting in a change of control for Code Section 382. Additionally, future changes in tax legislation could negatively affect our ability to use the tax benefits associated with our net operating losses. Therefore, we can provide no assurance that a change in ownership of Echo would allow for the transfer of our existing NOL’s to the surviving entity.
Not applicable.
ITEM 2. PROPERTIES.
We conducted our business operations in 2015 from our corporate headquarters where we leased 2,800 square feet in Iselin, New Jersey for $7,350 per month.
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 $50,000 after 24 months of timely lease payments.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we are subject to legal proceedings, claims, investigations, and proceedings in the ordinary course of business. In accordance with generally accepted accounting principles, we make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss or range of loss can be reasonably estimated. These provisions, if any, are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. At December 31, 2015, no litigation loss is deemed probable or reasonably estimated.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our Common Stock is currently traded through the NASDAQ Capital Market (NASDAQ) and is quoted under the trading symbol “ECTE”.
The following table sets forth the range of high and low closing sale prices per share for our Common Stock for the periods indicated as reported by NASDAQ in 2015 and 2014.
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2015 Quarters:
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Low
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$ | 2.95 | $ | 1.48 | ||||
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$ | 2.20 | $ | 1.23 | ||||
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$ | 1.80 | $ | 1.39 | ||||
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$ | 1.88 | $ | 1.29 | ||||
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2014 Quarters:
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$ | 4.02 | $ | 2.94 | ||||
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$ | 3.27 | $ | 1.58 | ||||
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Third
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$ | 2.28 | $ | 0.71 | ||||
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Fourth
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$ | 1.56 | $ | 0.51 | ||||
There were 129 common stockholders of record as of March 1, 2016.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain our future earnings, if any, for use in our business and therefore do not anticipate paying cash dividends in the foreseeable future. Payment of future dividends, if any, will be at the discretion of our Board after taking into account various factors, including our financial condition, operating results, and current and anticipated cash needs.
ITEM 6. SELECTED FINANCIAL DATA.
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Not applicable.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
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 diabetes outpatient market. We believe other significant opportunities exist in the wearable-health consumer market and the hospital setting. 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.
After joining Echo in late December 2014 Management commenced a systematic review of the Company’s strategy, vision, organization, facilities, and existing obligations. Management evaluated the current status of the Company’s historic development programs and determined that they would suspend prior development and refocus on a product and a market that Management believed better suited the attributes and benefits of its technology, was more accessible, and would provide a greater return to shareholders. In order to execute the Company’s strategy, in early January 2015, key members of the R&D organization were rehired, and soon after documented key strategic goals, budgets and timelines. Management reengaged Medical Technologies Innovation Asia, Ltd., who had previously entered into a definitive agreement with the Company in December 2013, with the objective of restarting development work, initiating and completing a technology transfer and establishing in-country manufacturing. A formal development effort was initiated that was focused on achieving the accuracy, consistency, convenience and cost effectiveness of the Company’s CGM technology. The Company started the modification of its’ current technology focusing on the root causes of prior consistency issues. With the development of new analytic tests the Company made material progress addressing the historic issues. Along with new sensor chemistry, the Company believes it eliminated a number of prior issues. The Company terminated its ICU standalone monitor product, and successfully achieved communications from the sensor unit to a mobile device; developed a first generation API (application program interface) enabling third party application development, and redesigned a new low cost sensor with reusable components, along with a new exfoliator and tip. Meetings were held with MTIA and the China Food and Drug Administration with the belief that once submitted the regulators will grant a Class II designation. Further, the Company completed the technology transfer with MTIA and sensors are now being produced in China. Additionally, management concluded that the recent emergence of wearables fitness devices will provide a near term opportunity for the Company. Based on preliminary guidance from the FDA (General Wellness: Policy for Low Risk Devices” Document 1300013) it is the Company’s belief that a version of our technology will be applicable in this non-regulated market. The ability to integrate continuous glucose data into new and existing algorithms available from third parties is a compelling value proposition for both Echo and a potential partner. The Company is actively pursuing completion of a modified version of our existing technology and is activity engaged in business development discussions. In order maximize financial resources the Company terminated two leases and relocated to more economical choices resulting in an annual savings of $400,000. The Company settled the litigation with its former CEO Patrick Mooney, for $150,000, and payment from the company’s insurers. The Company is now focused on completing its product development so it can achieve its goal of bringing a non-invasive CGM to the US market.
We believe that ongoing research and development 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, product engineering and contract manufacturing. In addition, R&D costs include regulatory consulting, feasibility product testing (internal and external) and conducting nonclinical and clinical studies. R&D expenses were $2,788,938 and $4,634,287 for the years ended December 31, 2015 and 2014, respectively. We intend to maintain our strong commitment to R&D as an essential component of our product development efforts. Licensed or acquired technology developed by third parties may be an additional source of potential products; however, our ability to raise sufficient financing may impact our level of R&D spending.
Critical Accounting Policies and Estimates
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of December 31, 2015, we had cash of $56,210, a working capital deficit of $2,934,684, and an accumulated deficit of approximately $150,129,933. Through December 31, 2015, we have not been able to generate sufficient revenues from our operations to cover our costs and operating expenses. Although we have been able to raise capital through a series of debt and equity offerings in order to fund our operations, it is not known whether we will be able to continue this practice, or be able to obtain other types of financing to meet our future cash operating expenses. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Subsequent to 2015, we have received net cash proceeds of $832,000 from a $5,145,000 secured convertible note financing we closed on January 29, 2016. Should stockholder approval be obtained at a Special Shareholder Meeting to be held on April 14, 2016, the gross aggregate balance of $3,358,000 will be received from this financing. Additional financing is necessary to fund operations in 2016 and beyond. Additionally, management believes, if necessary, certain expenditures can be deferred until additional financing is obtained.
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 stock-based compensation expense, intangible assets, other long-lived assets, 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.
Our significant accounting policies are described in Note 3 to the Consolidated Financial Statements in Part II, Item 8 of this Report on Form 10-K. We believe the critical accounting policies discussed below are those most important for an understanding of our financial condition and results of operations and require our most difficult, subjective or complex judgments.
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.
Intangible Assets and Other Long-Lived Assets — We record acquired intangible assets at the acquisition date fair value. Intangible assets related to technology are expected to be amortized over the period of expected benefit and will commence upon revenue generation.
Accounting for Impairment and Disposal of Long-Lived Assets — We review intangible assets subject to amortization at least annually to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. Conditions that would indicate impairment and trigger an impairment assessment include, but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset, or an adverse action or assessment by a regulator. If the carrying value of an asset exceeds its undiscounted cash flows, we write-down the carrying value of the intangible asset to its fair value in the period identified.
Share-based Payments — We record share-based payments at fair value. The grant date fair value of awards to employees and directors, net of expected forfeitures, is recognized as expense in the statement of operations over the requisite service period. The fair value of options is calculated primarily using the Black-Scholes option pricing model. This option valuation model requires input of assumptions including, among others, the volatility of our stock price, the expected life of the option and the risk-free interest rate. We estimate the volatility of our stock price using historical prices. We estimate the expected life of our option using the average of the vesting period and the contractual term of the option. The estimated forfeiture rate is based on historical forfeiture information as well as subsequent events occurring prior to the issuance of the financial statements. Because our stock options have characteristics significantly different from those of traded options, and because changes in the input assumptions can materially affect the fair value estimate, the existing model may not necessarily provide a reliable single measure of fair value of our stock options.
Derivative Instruments — We generally do not use derivative instruments to hedge exposures to cash-flow or market risks; however, certain warrants to purchase Common Stock that do not meet the requirements for classification as equity are classified as liabilities. In such instances, net-cash settlement is assumed for financial reporting purposes, even when the terms of the underlying contracts do not provide for a net-cash settlement. Such financial instruments are initially recorded at fair value with subsequent changes in fair value charged (credited) to operations in each reporting period. If these instruments subsequently meet the requirements for classification as equity, we reclassify the fair value to equity.
Revenue Recognition — To date, we have generated revenue primarily from licensing agreements, including upfront, nonrefundable license fee. We recognize revenue when the following criteria have been met:
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persuasive evidence of an arrangement exists;
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delivery has occurred and risk of loss has passed;
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the price to the buyer is fixed or determinable; and
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collectability is reasonably assured.
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In the past, we have received upfront, nonrefundable payments for the licensing of our intellectual property upon the signing of a license agreement. We believe that these payments generally are not separable from the payments we receive for providing research and development services because the license does not have stand-alone value separate from the research and development services we provide under these agreements. Accordingly, we account for these elements as one unit of accounting and recognize upfront, nonrefundable payments as revenue on a straight-line basis over our contractual or estimated performance period. Revenue from the reimbursement of research and development efforts is recognized as the services are performed based on proportional performance adjusted from time to time for any delays or acceleration in the development of the product. We estimate the performance period based on the contractual requirements of our collaboration agreements. At each reporting period, we evaluate whether events warrant a change in the estimated performance period.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.
In July 2015, the Financial Accounting Standards Board (the "FASB") finalized a one year delay in the effective date of this standard, which will now be effective for us on January 1, 2018, however early adoption is permitted any time after the original effective date, which for us is January 1, 2017. We have not yet selected a transition method and are currently evaluating the impact of ASU 2014-09 on our consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, which revises the guidance in ASC 740, Income Taxes, to simplify the presentation of deferred income taxes and require that deferred tax liabilities and assets be classified as non-current in the statement of financial position. The guidance is to be applied either prospectively or retrospectively, and is effective for reporting periods (interim and annual) beginning after December 15, 2016 for public companies. Early adoption is permitted. The implementation of this ASU is not expected to have a material impact on our consolidated financial position or results of operations.
In January 2016, the FASB issued ASU 2016-01, which revises the guidance in ASC 825-10, Recognition and Measurement of Financial Assets and Financial Liabilities, and provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities. The guidance is effective for reporting periods (interim and annual) beginning after December 15, 2017, for public companies. We are currently assessing the potential impact of this ASU on our consolidated financial position and results of operations.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. The new standard establishes a right-of use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.
The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.
Results of Operations
Comparison of the Years ended December 31, 2015 and 2014
Net loss — As a result of the factors described below, we had a net loss of $22,197,867 for the year ended 2015 compared to $15,312,654 for the year ended 2014.
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 — This represents revenue which we are recognizing relative to our $500,000 non-refundable payment we received from our 2009 Handok Licensing Agreement. We have recognized this revenue over our contractual or estimated performance period. Periodically, we have adjusted our amortization period for revenue recognition to reflect a revision in the estimated timing of regulatory approval. Accordingly, we determined that approximately $0 and $57,000 of licensing revenue was recognizable in years ended 2015 and 2014, respectively.
Research and Development Expenses — Research and development expenses decreased by approximately $1,845,000, or 40%, to $2,788,938 for the year ended 2015 from $4,634,287 for the year ended 2014. R&D represented 16% and 37% of total operating expenses during the years ended 2015 and 2014, respectively. R&D decreased as a result of the amount of operating cash available to management. Declines for the year primarily occurred in the following categories - $655,000 in salaries and benefits, $234,000 in consulting, $192,000 in materials, tools, supplies and prototypes, $366,000 in contracted services, and $93,000 in information technology costs. Rent and utilities declined by $230,000 due to our research facility relocation from Franklin to Littleton, Massachusetts.
For 2015, we concentrated our limited funding on continuing the transformation of our prior Intensive Care Unit product 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 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:
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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.
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Sensor: Completed industrial design of new flexible sensor, which will be higher performing, lower cost, smaller and will have a re-usable Bluetooth transmitter.
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Application Programming Interface (API): Designed an API that allows software developers to easily write software applications, or apps, that use data from our sensors.
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Selling, General and Administrative Expenses — We are not engaged in selling activities and, accordingly, general and administrative expenses relate principally to salaries and benefits for our executive, financial and administrative staff, public company costs, investor relations, legal, accounting, public relations, capital-raising costs and facilities costs. Selling, general and administrative expenses decreased by $3,024,586, or 41%, to $4,325,645 for the year ended 2015 from $7,350,231 for the year ended 2014. SG&A represented 24% and 59% of total operating expenses during the years ended 2015 and 2014, respectively. Declines for the year occurred in the following categories - $1,155,000 in proxy related fees, $384,000 in board fees, $348,000 in reorganization costs, $325,000 in salaries and benefits, $338,000 in consulting fees, $150,000 in recruiting fees, $144,000 in investor relations, $6,000 in legal fees, $45,000 in rent, and $130,000 in franchise taxes. In 2014 the Company was enveloped in a proxy fight which resulted in a temporary shutdown of its operations. The board at the time took a large role in running the company as the CEO had been dismissed as well and was involved in a lawsuit with the Company. Numerous consultants also advised the board in 2014. 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. In 2015 the lawsuit with the former CEO was settled, and the Company’s headquarters were relocated to less expensive facilities. In addition, the overall corporate administrative staff was significantly downsized from prior years to allow for better utilization of available funding for R&D milestones.
Loss (gain) on disposal of property and equipment —The loss on disposal of $278,816 for 2015 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 in addition to losses on furniture and fixtures sold when we relocated from Philadelphia, PA to Iselin, NJ in the first quarter of 2015.
Financing gain (loss) — This represents 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 $4,720,000 in 2015, related to these investors.
Amortization of deferred financing costs — $3,549,328 for the year 2014 represented amortization of the fair value total of deferred financing costs from the Commitment Warrants issued pursuant to the 2012 Credit Facility.
Gain (Loss) on Revaluation of Derivative Warrant Liability — Changes in the fair value of the derivative financial instruments are recognized 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 on revaluation of the derivative warrant liability for the year ended 2015 and 2014 was $81,155 and $911,000, respectively.
Deemed Dividend on Beneficial Conversion Feature of Convertible Preferred Stock — In connection with the issuance of convertible preferred stock, the conversion feature was considered beneficial, or “in the money”, at issuance due to a conversion rate that allows the investor to obtain the Common Stock at below market price. During the years ended 2014, we recorded a deemed dividend on the beneficial conversion feature of $350,000.
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 our 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 December 31, 2015, we had $56,210 of cash and cash equivalents, with no other short term investments.
Net cash used in operating activities was $5,079,864 for the year ended 2015. The use of cash in operating activities was primarily attributable to the net loss of $22,197,867 offset by non-cash expenses of $9,625,000 for an impairment charge, $4,720,000 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, $521,860 for depreciation and amortization, $910,884 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, 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. Offsetting the net loss further is a non-cash gain of $81,155 as a result of the change in fair value during the year of the Common Stock underlying the derivative warrants related to the 2012 Credit Facility which expired in October 2014. Increases in accounts payable and accrued expenses resulted in a net increase in cash available for operations of approximately $840,509, while decreases in prepaid expenses and other current assets decreased cash available for operations by $25,911.
Net cash used in investing activities was $113,692 for the year ended 2015. $55,836 was used to purchase property and equipment. The Company utilized $183,938 to secure letters of credit for its new corporate headquarters and its new research facility in Littleton, Massachusetts. This was offset by proceeds of $126,082 from the sales of certain property and equipment in connection with our office and research facility relocations.
Net cash provided by financing activities was $3,970,825 for the year ended 2015. We received approximately $3,581,500 in net proceeds from the sale of our equity, $330,000 in bridge financing, and a capital contribution of approximately $59,325.
Secured Convertible Note Financing
On January 29, 2016, we entered into a securities purchase agreement (the “Purchase Agreement”) with certain institutional and other accredited investors (the “Investors”) pursuant to which we agreed to issue up to $5,145,000 principal amount of 10% senior secured convertible notes (the “Notes”) and related common stock purchase warrants (the “Warrants”) in two tranches. The Notes are secured by substantially all of our assets pursuant to a Security Agreement, dated January 29, 2016 (the “Security Agreement”). The initial closing of $1,787,000 which yielded net proceeds of $832,000 occurred on January 29, 2016. Bridge notes in the principal amount of $680,000 were surrendered to us as payment by certain Investors. Fees aggregating approximately $275,000 were paid out of the proceeds of the initial closing to the placement agent and others. Additional fees will be paid, primarily to the placement agent, for the second closing when funded. The second closing of $3,358,000 is subject to our obtaining shareholder approval at a Special Shareholders Meeting to be held on April 14, 2016. The Notes are initially convertible into 1,191,333 shares of common stock, par value $.01 per share, of the Company (the “Common Stock”), at $1.50 per share. We have the right to redeem the Notes under certain circumstances. Interest is payable quarterly or, subject to receipt of stockholder approval, at our option, in shares of Common Stock. In connection with the initial closing, we issued five-year Warrants to purchase 1,191,333 shares of Common Stock at an exercise price of $1.50 per share, which are not exercisable for six months. Upon receipt of shareholder approval to be obtained at a special meeting of our shareholders to be held on April 14, 2016, we expect to issue Notes in an aggregate principal amount of $3,358,000 initially convertible into 2,238,667 shares of Common Stock at $1.50 per share and 1-1/2 year warrants to purchase 2,238,667 shares of Common Stock at $1.50 per share. The Notes and Warrants are subject to customary antidilution provisions. If stockholder approval is obtained, the conversion price for the Notes is subject to a reset to eighty percent (80%) of the average of the ten lowest closing prices of the Common Stock less than $1.50 (subject to equitable adjustment), if any, as reported by Bloomberg LP for the principal market on which the Common Stock then trades during the ninety (90) days following the first effective date of a registration statement filed pursuant to the Registration Rights Agreement, but in no event less than $.80, subject to equitable adjustment.
The Purchase Agreement contains customary representations, warranties and affirmative and negative covenants. The Purchase Agreement also requires management and certain shareholders to lock-up certain of their shares for the earlier of six months after the effective date of a registration statement, the first anniversary of the initial closing (January 29, 2017), or the date, if applicable, such holder of securities is no longer an officer or directors of the Company, subject to certain exceptions. In addition, for up to one year following the effective date of a registration statement, the Investors have the right to participate, on a pro rata basis, in certain subsequent financings by us, subject to certain limitations. In connection with the transaction, we entered into a registration rights agreement (the “Registration Rights Agreement”) that requires us to file one or more registration statements in respect of the shares of Common Stock underlying the Notes and Warrants. If we fail to make its filing deadlines or fails to maintain the registration statement for required periods of time, we will be subject to certain liquidated damages provisions. Newbridge Securities Corporation/Life Tech Capital (the “Placement Agent”) acted as the sole placement agent for the financing. The Placement Agent will receive five-year warrants to purchase approximately 120,000 shares of Common Stock at $1.50 per share upon the completion of the full offering.
Bridge Note Financings
On February 4, 2016, we issued a promissory note to Beijing Yi Tang Bio Science & Technology, Ltd. (BYT) in the aggregate principal amount of $300,000 in respect of a bridge loan made by such party. The promissory note, which bears interest at the prime rate, may, at BYT’s option, be exchanged for securities issued in a subsequent financing by the Company, including the second tranche financing described above.
On February 11, 2016, we issued a promissory note to Platinum Partners Value Arbitrage Fund L.P. (PPVA) in the aggregate principal amount of $100,000 in respect of a bridge loan made by such party. The promissory note, which bears interest at the prime rate, may, at PPVA’s option, be exchanged for securities issued in a subsequent financing by the Company, including the second tranche financing described above.
We continue to aggressively pursue additional financing from existing relationships (current and prior shareholders, investors and lenders), identify and secure capital from new investors through placement agents and investment banking relationships to support operations, including our product and clinical development programs.
We endeavor to manage our costs aggressively and increase our operating efficiencies while advancing our medical device product development and clinical programs. In the past, we have relied primarily on raising capital or issuing debt in order to meet our operating budget needs and to achieve our business objectives, and we plan to continue that practice in the future. Although we have been successful in the past with raising sufficient capital to conduct our operations, we will continue to vigorously pursue additional financing as necessary to meet our business objectives; however, there can be no guarantee that additional capital will be available in sufficient amounts on terms favorable to us, if at all.
Our ability to fund our future operating requirements will depend on many factors, including the following:
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our ability to obtain funding from third parties, including any future collaborative partners, on reasonable terms;
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our progress on research and development programs;
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the time and costs required to gain regulatory approvals;
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the costs of manufacturing, marketing and distributing our products, if successfully developed and approved;
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the costs of filing, prosecuting and enforcing patents, patent applications, patent claims and trademarks;
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the status of competing products; and
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the market acceptance and third-party reimbursement of our products, if successfully developed and approved.
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We have generated limited revenue and have had operating losses since inception, including a net loss of $22,197,867 for the year ended December 31, 2015. As of December 31, 2015, we had an accumulated deficit of ($150,129,933). We have no current sources of material ongoing revenue, other than the recognition of revenue from upfront license fees and potential future milestone payments and royalties under our current license and collaboration agreements. Our losses have resulted principally from costs incurred in connection with our research and development activities and from general and administrative costs associated with our operations. We also expect to have negative cash flows for the foreseeable future as we fund our operating losses and capital expenditures. This will result in decreases in our working capital, total assets and stockholders’ equity, which may not be offset by future funding.
Continued operating losses would impair our ability to continue operations. We have operating and liquidity concerns due to our significant net losses and negative cash flows from operations. Our ability to continue as a going concern is dependent upon generating sufficient cash flow to conduct operations or obtaining additional financing. Historically, we have had difficulty in meeting our cash requirements for operations. There can be no assurances that we will obtain the necessary funding, reduce the level of historical losses and achieve successful commercialization of any of our drug product candidates. If we cannot obtain additional funding, we may be required to revise our operating plans, and there can be no assurance that we will be able to change our operating plan successfully.
Subsequent to December 31, 2015, the Company initially received net cash proceeds of $832,000 from a $5,145,000 Secured Convertible Note financing it entered on January 29, 2016. The balance of the funding is subject to shareholder approval on April 14, 2016. Additional financing is necessary to fund operations in 2016 and beyond. Additionally, management believes, if necessary, certain expenditures can be deferred until additional financing is obtained.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, including unrecorded derivative instruments that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. We have a large number of warrants and stock options outstanding but we do not expect to receive sufficient proceeds from the exercise of these instruments unless and until the trading price of our Common Stock is significantly greater than the applicable exercise prices of the options and warrants for a sustained period of time.
Effect of Inflation and Changes in Prices
Management does not believe that inflation and changes in prices will have a material effect on our operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
The information required by this item is contained on Pages F-1 through F-25 of this Annual Report and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of 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 Annual Report on Form 10-K, 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 material weaknesses described below. Our management also has identified material weaknesses in our internal controls over financial reporting relating to (i) our failure to effectively implement comprehensive entity-level internal controls, (ii) our lack of a sufficient complement of personnel with an appropriate level of knowledge and experience in the application of U.S. GAAP commensurate with our financial reporting requirements and, (iii) our lack of the quantity of resources necessary to implement an appropriate level of review controls to properly evaluate the completeness and accuracy of the transactions into which we enter. Our management believes that these weaknesses are due in part to the small size of our staff, which makes it challenging to maintain adequate disclosure controls. To remediate the material weaknesses in disclosure controls and procedures, we plan to hire additional experienced accounting and other personnel to assist with filings and financial record keeping and to take additional steps to improve our financial reporting systems and implement new policies, procedures and controls.
Management’s Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange. Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
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pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
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provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
|
|
|
·
|
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
|
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2015. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of these controls. Based on this assessment, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that as of December 31, 2015, our internal control over financial reporting was not effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles as a result of the material weaknesses identified in our disclosure controls and procedures.
Our Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 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.
(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.
Remediation of Internal Control Deficiencies and Expenditures
It is reasonably possible that, if not remediated, one or more of the material weaknesses described above could result in a material misstatement in our reported financial statements that might result in a material misstatement in a future annual or interim period.
Changes in Internal Control Over Financial Reporting
We did not change our internal control over financial reporting during our fourth quarter that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this item is incorporated herein by reference to our Company’s definitive proxy statement for the 2015 Annual Meeting of Stockholders, to be filed with the SEC pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein by reference to our Company’s definitive proxy statement for the 2015 Annual Meeting of Stockholders, to be filed with the SEC pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS.
The information required by this item is incorporated herein by reference to our Company’s definitive proxy statement for the 2015 Annual Meeting of Stockholders, to be filed with the SEC pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
The information required by this item is incorporated herein by reference to our Company’s definitive proxy statement for the 2015 Annual Meeting of Stockholders, to be filed with the SEC pursuant to Regulation 14A.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this item is incorporated herein by reference to our Company’s definitive proxy statement for the 2015 Annual Meeting of Stockholders, to be filed with the SEC pursuant to Regulation 14A.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
|
(1)
|
Consolidated Financial Statements
|
The financial statements required to be filed by Item 8 of this Annual Report on Form 10-K and filed in this Item 15 are as follows:
|
Page
|
|
|
Consolidated Balance Sheets as of December 31, 2015 and 2014
|
F-2
|
|
Consolidated Statements of Operations for the years ended December 31, 2015 and 2014
|
F-3
|
|
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2015 and 2014
|
F-4
|
|
Consolidated Statements of Cash Flows for the years ended December 31, 2015 and 2014
|
F-5
|
|
Notes to Consolidated Financial Statements
|
F-6
|
|
Report of Independent Registered Public Accounting Firm
|
F-25
|
|
(2)
|
Financial Statement Schedules
|
Schedules are omitted because they are not applicable, or are not required, or because the information is included in the consolidated financial statements and notes thereto.
|
(3)
|
Exhibits
|
The Exhibits listed in the Exhibit Index starting on page A-1 are filed with or incorporated by reference in this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. | ||
| By: | /s/ Scott W. Hollander | |
| Scott W. Hollander | ||
| President and Chief Executive Officer | ||
| Principal Executive Officer | ||
Date: March 30, 2016
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Scott W. Hollander and Alan W. Schoenbart, and each of them, as such person’s true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for such person and in such person’s name, place and stead, in any and all capacities, to sign, execute and file any amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and all documents required to be filed in connection therewith, with the Securities and Exchange Commission or any regulatory authority, granting unto such attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith and about the premises in order to effectuate the same as fully to all intents and purposes as such person might or could do if personally present, hereby ratifying and confirming all that such attorneys-in-fact and agents or any substitute or substitutes therefor, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 30, 2016.
|
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)
|
||
|
By:
|
/s/ Michael M. Goldberg | |
|
Michael M. Goldberg, M.D.
|
||
|
Director
|
||
|
By:
|
/s/ Shepard M. Goldberg | |
|
Shepard M. Goldberg
|
||
|
Director
|
||
|
By:
|
/s/ Elazer R. Edelman | |
|
Elazer R. Edelman, M.D., Ph.D.
|
||
|
Director
|
||
ECHO THERAPEUTICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Page
|
|
F-2
|
|
|
F-3
|
|
|
F-4
|
|
|
F-5
|
|
|
F-6
|
|
|
F-25
|
CONSOLIDATED BALANCE SHEETS
|
December 31,
|
||||||||
|
2015
|
2014
|
|||||||
|
ASSETS
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 56,210 | $ | 1,278,941 | ||||
|
Prepaid and other
|
244,534 | 490,824 | ||||||
|
Total current assets
|
300,744 | 1,769,765 | ||||||
|
Property and equipment, net
|
267,671 | 1,138,593 | ||||||
|
Other assets:
|
||||||||
|
Intangible assets, net
|
- | 9,625,000 | ||||||
|
Cash restricted pursuant to letters of credit
|
236,425 | 52,488 | ||||||
|
Other assets
|
250 | 9,990 | ||||||
|
Total other assets
|
236,675 | 9,687,478 | ||||||
|
Total assets
|
$ | 805,090 | $ | 12,595,836 | ||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
||||||||
|
Current liabilities:
|
||||||||
|
Accounts payable
|
$ | 2,176,083 | $ | 1,801,469 | ||||
|
Accrued and other
|
602,345 | 968,392 | ||||||
|
Bridge loans payable
|
330,000 | - | ||||||
|
Derivative warrant liability
|
127,000 | 208,155 | ||||||
|
Total current liabilities
|
3,235,428 | 2,978,016 | ||||||
|
Deferred revenue from licensing arrangements, net of current portion
|
95,535 | 95,535 | ||||||
|
Total liabilities
|
3,330,963 | 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
5,276,180 and 840,336 shares, respectively
|
52,762 | 8,403 | ||||||
|
Common stock, $0.01 par value, 150,000,000 shares authorized; issued and
outstanding 11,124,496 and 12,629,695 shares, respectively
|
111,243 | 126,295 | ||||||
|
Additional paid-in capital
|
147,412,559 | 137,292,157 | ||||||
|
Accumulated deficit
|
(150,129,933 | ) | (127,932,066 | ) | ||||
|
Total stockholders’ equity (deficit)
|
(2,525,873 | ) | 9,522,285 | |||||
|
Total liabilities and stockholders’ equity (deficit)
|
$ | 805,090 | $ | 12,595,836 | ||||
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
Year Ended December 31,
|
||||||||
|
2015
|
2014
|
|||||||
|
Licensing revenue
|
$ | - | $ | 57,321 | ||||
|
Operating expenses:
|
||||||||
|
Research and development
|
2,788,938 | 4,634,287 | ||||||
|
Selling, general and administrative
|
4,325,645 | 7,350,231 | ||||||
|
Impairment charge
|
9,625,000 | - | ||||||
|
Loss on disposal of property and equipment
|
278,816 | 1,114 | ||||||
|
Depreciation and amortization
|
521,860 | 392,727 | ||||||
|
Total operating expenses
|
17,540,259 | 12,378,359 | ||||||
|
Loss from operations
|
(17,540,259 | ) | (12,321,038 | ) | ||||
|
Other income (expense):
|
||||||||
|
Financing loss
|
(4,720,000 | ) | - | |||||
|
Amortization of deferred financing costs
|
- | (3,549,328 | ) | |||||
|
Interest expense
|
(15,343 | ) | (1,176 | ) | ||||
|
Other income
|
- | 1,888 | ||||||
|
Gain on revaluation of derivative warrant liability
|
81,155 | 911,000 | ||||||
|
Other income (expense), net
|
(4,654,188 | ) | (2,637,616 | ) | ||||
|
Net loss before taxes
|
(22,194,447 | ) | (14,958,654 | ) | ||||
|
State income taxes
|
3,420 | 4,000 | ||||||
|
Net loss
|
(22,197,867 | ) | (14,962,654 | ) | ||||
|
Deemed dividend on beneficial conversion feature of convertible preferred stock
|
- | (350,000 | ) | |||||
|
Net loss applicable to common shareholders
|
$ | (22,197,867 | ) | $ | (15,312,654 | ) | ||
|
Net loss per common share, basic and diluted
|
$ | (1.98 | ) | $ | (1.24 | ) | ||
|
Basic and diluted weighted average common shares outstanding
|
11,231,418 | 12,308,254 | ||||||
See accompanying notes to the consolidated financial statements.
ECHO THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
|
Preferred Stock
|
Common Stock
|
Additional
Paid-in
|
Accumulated | Total
Stockholders’
Equity
|
||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
(Deficit)
|
||||||||||||||||||||||
|
Balance at December 31, 2013
|
2,749,613 | $ | 27,496 | 11,776,578 | $ | 117,764 | $ | 132,192,648 | $ | (112,969,412 | ) | $ | 19,368,496 | |||||||||||||||
|
Proceeds from issuances of Common Stock and warrants, net of cash issuance costs of $50,000
|
— | — | 872,728 | 8,727 | 2,341,273 | — | 2,350,000 | |||||||||||||||||||||
|
Fair value of Common Stock issued for services
|
— | — | 2,636 | 26 | 8,378 | — | 8,404 | |||||||||||||||||||||
|
Proceeds from issuance of Common Stock, Series F Preferred Stock and warrants, net of cash issuance costs of $56,604
|
840,336 | 8,403 | — | — | 934,993 | — | 943,396 | |||||||||||||||||||||
|
Capital contribution
|
— | — | — | — | 440,675 | — | 440,675 | |||||||||||||||||||||
|
Share-based compensation, net of restricted stock cancellations
|
— | — | (22,247 | ) | (222 | ) | 1,374,190 | — | 1,373,968 | |||||||||||||||||||
|
Net loss
|
— | — | — | — | — | (14,962,654 | ) | (14,962,654 | ) | |||||||||||||||||||
|
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
|
2,387,667 | 23,877 | — | — | 7,353,623 | — | 7,377,500 | |||||||||||||||||||||
|
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
|
— | — | (5,199 | ) | (52 | ) | 910,936 | — | 910,884 | |||||||||||||||||||
|
Net loss
|
— | — | — | — | — | (22,197,867 | ) | (22,197,867 | ) | |||||||||||||||||||
|
Balance at December 31, 2015
|
8,025,793 | $ | 80,258 | 11,124,496 | $ | 111,243 | $ | 147,412,559 | $ | (150,129,933 | ) | $ | (2,525,873 | ) | ||||||||||||||
See accompanying notes to the consolidated financial statements.
ECHO THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Year ended December 31,
|
||||||||
|
|
2015
|
2014
|
||||||
|
Cash flows from operating activities:
|
||||||||
|
Net loss
|
$ | (22,197,867 | ) | $ | (14,962,654 | ) | ||
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
||||||||
|
Depreciation and amortization
|
521,860 | 392,727 | ||||||
|
Amortization of deferred financing costsAmortization of deferred financing costs
|
— | 3,549,328 | ||||||
|
Share-based compensation, net
|
910,884 | 1,373,968 | ||||||
|
Fair value of common stock issued for services
|
— | 8,404 | ||||||
|
Gain on revaluation of derivative warrant liability
|
(81,155 | ) | (911,000 | ) | ||||
|
Warrant repricing charged to legal expense
|
328,000 | — | ||||||
|
Loss on disposal of assets
|
278,816 | 1,114 | ||||||
|
Impairment charge
|
9,625,000
|
—
|
||||||
|
Financing loss
|
4,720,000 |
—
|
||||||
|
Changes in assets and liabilities:
|
||||||||
|
Prepaid expenses and other
|
(25,911 | ) | (441,603 | ) | ||||
|
Accounts payable
|
656,556 | 765,149 | ||||||
|
Deferred revenue from licensing arrangements
|
—
|
(57,321 | ) | |||||
|
Accrued and other
|
183,953 | (442,715 | ) | |||||
|
Net cash used in operating activities
|
(5,079,864 | ) | (10,724,603 | ) | ||||
|
Cash flows from investing activities:
|
||||||||
|
Purchase of property and equipment
|
(55,836 | ) | (36,627 | ) | ||||
|
(Increase) decrease in restricted cash
|
(183,938 | ) | 250,000 | |||||
|
Decrease in security deposit
|
— | 2,076 | ||||||
|
Proceeds on disposal of property and equipment
|
126,082 | — | ||||||
|
Net cash (used in) provided by investing activities
|
(113,692 | ) | 215,449 | |||||
|
Cash flows from financing activities:
|
||||||||
|
Proceeds from equity issuances
|
3,581,500 | 3,293,397 | ||||||
|
Proceeds from bridge loans
|
330,000 | — | ||||||
|
Principal payments on capitalized lease obligations
|
— | (1,362 | ) | |||||
|
Capital contribution
|
59,325 | 440,675 | ||||||
|
Net cash provided by financing activities
|
3,970,825 | 3,732,710 | ||||||
|
Net decrease in cash and cash equivalents
|
(1,222,731 | ) | (6,776,444 | ) | ||||
|
Cash and equivalents:
|
||||||||
|
Beginning of year
|
1,278,941 | 8,055,385 | ||||||
|
End of year
|
$ | 56,210 | $ | 1,278,941 | ||||
|
Supplemental disclosure of cash flow information:
|
||||||||
|
Cash paid during the year for:
|
||||||||
|
Interest
|
$ | 15,522 | $ | 2,154 | ||||
|
Income taxes
|
$ | 4,110 | $ | — | ||||
|
Supplemental disclosure of non-cash financing transactions:
|
||||||||
|
Deemed dividend on beneficial conversion feature of convertible preferred stock
|
$ | — | $ | 350,000 | ||||
|
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 | $ | — | ||||
See accompanying notes to the consolidated financial statements.
ECHO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 diabetes outpatient 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 consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Sontra Medical, Inc., a Delaware corporation (and all significant intercompany balances have been eliminated by consolidation) and have been prepared on a basis assuming that the Company is a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. Certain amounts in prior periods have been reclassified to conform to current presentation.
On June 7, 2013, the Company effected a 1-for-10 reverse stock split of its common stock. All share and per share information was retroactively restated to reflect this reverse stock split.
(2) LIQUIDITY AND MANAGEMENT’S PLANS
As of December 31, 2015, the Company had cash of $56,210, working capital deficit of $2,934,684, and an accumulated deficit of $150,129,933. The Company continues to incur recurring losses from operations. Our losses have resulted principally from costs incurred in connection with our research and development activities and from general and administrative costs associated with our operations. We also expect to have negative cash flows for the foreseeable future as we fund our operating losses and capital expenditures. This will result in decreases in our working capital, total assets and stockholders’ equity, which may not be offset by future funding. The Company will need to obtain proceeds under its current financing arrangement and 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 intends to utilize its current financing arrangement once approved by stockholders on April 14, 2016, and will continue to pursue additional financing to fund its operations. Management believes that it will be successful in obtaining proceeds from their current financing arrangement and raising additional capital. 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.
Subsequent to December 31, 2015, the Company initially received cash proceeds of $832,000 from a $5,145,000 Secured Convertible Note financing it entered on January 29, 2016. See Note 8.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared in accordance with the Financial Accounting Standards Board (“FASB”) “FASB Accounting Standard Codification(TM)” (the “Codification”) which is the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities reported and 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. Management's estimates are based on historical experience, facts and circumstances available at the time, and various other assumptions that are believed to be reasonable under the circumstances. Significant estimates include accounting for the valuation of intangible assets, derivatives, share based compensation and valuation allowances related to deferred income taxes. The Company periodically reviews these matters and reflects changes in estimates as appropriate. Actual results could materially differ from those estimates.
The Company considers all highly liquid investments with maturities of ninety days or less to be cash equivalents. Cash equivalents consisted of money market funds at a major banking institution as of December 31, 2015 and 2014. The Company maintains its cash in bank deposit accounts which, at times, may exceed the federally insured limits. The Company has never experienced any previous losses related to these uninsured balances. Restricted cash consists of letters of credit in favor of its two landlords as of December 31, 2015.
Intangible Assets and Other Long-Lived Assets
The Company records acquired intangible assets at the acquisition date fair value. Intangible assets related to technology are expected to be amortized over the period of expected benefit and will commence upon revenue generation.
The Company reviews intangible assets at least annually and whenever events or circumstances change that indicated impairment may have occurred to determine if any adverse conditions exist that would indicate impairment or a change in the remaining useful life of any intangible asset. Conditions that would indicate impairment and trigger an impairment assessment include, but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset, or an adverse action or assessment by a regulator. While the Company uses available information to prepare estimates and to perform impairment evaluations, actual results could differ significantly from these estimates or related projections, resulting in impairment related to recorded balances. If the estimate of an intangible asset’s remaining useful life is changed, the Company amortizes the remaining carrying value of the intangible asset prospectively over the revised remaining useful life. The Company performs a regular review of the underlying assumptions, circumstances, time projections and revenue and expense estimates to decide if there is a possible impairment. As a result, the Company reviewed its intangibles for impairment and recorded a $9.625 million impairment charge, or the full value of its intangibles, on the consolidated statement of operations in the second quarter of 2015.
For other long-lived assets, the Company evaluates quarterly whether events or circumstances have occurred that indicate that the carrying value of these assets may be impaired. If the carrying value of an asset exceeds its undiscounted cash flows, the Company writes down the carrying value of the intangible asset to its fair value in the period identified.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets. The Company expenses normal maintenance and repair costs as incurred. Gain and loss on disposal of property and equipment is recognized in the period incurred. Leasehold improvements are amortized over the life of the lease or the related asset, whichever is shorter.
Share-Based Payments
The Company recognizes compensation costs, net of estimated forfeitures, resulting from the issuance of stock-based awards to employees and directors as an expense in the statement of operations over the service period based on a measurement of fair value for each stock award. The Company’s policy is to grant employee and director stock options with an exercise price equal to or greater than the fair value of the Common Stock at the date of grant.
Forfeitures are initially estimated based on historical information and subsequently updated over the life of the awards to ultimately reflect actual forfeitures. As a result, changes in forfeiture activity can influence the amount of stock compensation cost recognized from period to period.
The Company recognizes compensation costs resulting from the issuance of stock-based awards to non-employees as an expense in the statement of operations over the service period based on a measurement of fair value for each stock award.
The fair value of options is calculated primarily using the Black-Scholes option pricing model. This option valuation model requires input of assumptions including, among others, the volatility of our stock price, the expected life of the option and the risk-free interest rate. We estimate the volatility of our stock price using historical prices. We estimate the expected life of our option using the average of the vesting period and the contractual term of the option. The estimated forfeiture rate is based on historical forfeiture information as well as subsequent events occurring prior to the issuance of the financial statements. Because our stock options have characteristics significantly different from those of traded options, and because changes in the input assumptions can materially affect the fair value estimate, the existing model may not necessarily provide a reliable single measure of fair value of our stock options.
In calculating the compensation expense for certain more complex stock options granted, we utilize a binomial lattice-based valuation model. Lattice-based option valuation models incorporate ranges of assumptions for inputs and those ranges are disclosed in the preceding table. Expected volatilities are based on a combination of historical volatility of our stock and implied volatilities of call options on our stock. We use historical data to estimate option exercise and employee termination patterns within the valuation model. The expected life of options granted is derived from the output of the option valuation model and represents the average period of time that options granted are expected to be outstanding. The interest rate for periods within the contractual life of the options is based on the U.S. Treasury yield curve in effect at the time of grant.
Fair Values of Assets and Liabilities
The Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
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Level 1:
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Valuation is based on quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
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Level 2:
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Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. For example, Level 2 assets and liabilities may include debt securities with quoted prices that are traded less frequently than exchange-traded instruments.
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Level 3:
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Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private equity investments and long-term derivative contracts.
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The Company's financial liabilities measured at fair value on December 31, 2015 and 2014 consists solely of a derivative warrant liability which is classified as Level 3 in fair value hierarchy (see Note 7). The Company uses a valuation method, the Black-Scholes option pricing model, and the requisite assumptions in estimating the fair value for the warrants considered to be derivative instruments. These assumptions include the fair value of the underlying stock, risk-free interest rates, volatility, expected life and dividend rates. The Company has no financial assets measured at fair value.
The Company may also be required, from time to time, to measure certain other financial assets at fair value on a nonrecurring basis. The Company wrote off its intangible asset in 2015; however this is the only such adjustment in the years ended December 31, 2015 and 2014.
Derivative Instruments
The Company generally does not use derivative instruments to hedge exposures to cash-flow or market risks; however, certain warrants to purchase Common Stock that do not meet the requirements for classification as equity are classified as liabilities. In such instances, net-cash settlement is assumed for financial reporting purposes, even when the terms of the underlying contracts do not provide for a net-cash settlement. Such financial instruments are initially recorded at fair value with subsequent changes in fair value charged (credited) to operations in each reporting period. If these instruments subsequently meet the requirements for classification as equity, the Company reclassifies the fair value to equity.
Concentration of Credit Risk
The Company has no significant off-balance-sheet risk. Financial instruments, which subject the Company to credit risk, principally consist of cash and cash equivalents. The Company mitigates its risk by maintaining the majority of its cash and equivalents with high-quality financial institutions.
The estimated fair value of the Company’s financial instruments, which include cash and cash equivalents, restricted cash, accounts payable and capital lease obligation, approximates their carrying value due to the short-term nature of these instruments and their market terms.
Net Loss per Common Share
Basic and diluted net loss per share of Common Stock has been computed by dividing the net loss applicable to common stockholders in each period by the weighted average number of shares of Common Stock outstanding during such period. For the periods presented, options, warrants and convertible securities were anti-dilutive and therefore excluded from diluted loss per share calculations.
Segment Information
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions regarding resource allocation and assessing performance. To date, the Company has viewed its operations and manages its business as principally one operating segment, which is the development of transdermal skin permeation and diagnostic medical devices. As of December 31, 2015 and 2014, all of the Company’s assets were located in the United States.
Research and Development Expenses
The Company charges research and development expenses to operations as incurred. Research and development expenses primarily consist of salaries and related expenses for personnel and outside contractor and consulting services. Other research and development expenses include the costs of materials and supplies used in research and development, prototype manufacturing, clinical studies, related information technology and an allocation of facilities costs.
Income Taxes
The Company is primarily subject to U.S. federal, Massachusetts and New Jersey state income tax. Tax years subsequent to 2011 remain open to examination by U.S. federal and state tax authorities.
For federal and state income taxes, deferred tax assets and liabilities are recognized based upon temporary differences between the financial statement and the tax basis of assets and liabilities. Deferred income taxes are based upon prescribed rates and enacted laws applicable to periods in which differences are expected to reverse. A valuation allowance is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Accordingly, since the Company cannot be assured of realizing the deferred tax asset, a full valuation allowance has been provided.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. There were no uncertain tax position liabilities recorded at December 31, 2015 and 2014.
The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. As of December 31, 2015 and 2014, the Company had no accruals for interest or penalties related to income tax matters.
Licensing and Other Revenue Recognition
To date, the Company has generated revenue primarily from licensing agreements, including upfront, nonrefundable license fees, with collaborators and licensees. The Company recognizes revenue when the following criteria have been met:
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·
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persuasive evidence of an arrangement exists;
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·
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delivery has occurred and risk of loss has passed;
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the price to the buyer is fixed or determinable; and
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collectability is reasonably assured.
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From time to time, the Company receives upfront, nonrefundable payments for the licensing of its intellectual property upon the signing of a license agreement. The Company believes that these payments generally are not separable from the payments it receives for providing research and development services because the license does not have stand-alone value from the research and development services it provides under its agreements. Accordingly, the Company accounts for these elements as one unit of accounting and recognizes upfront, nonrefundable payments as revenue on a straight-line basis over its contractual or estimated performance period. Revenue from the reimbursement of research and development efforts is recognized as the services are performed based on proportional performance adjusted from time to time for any delays or acceleration in the development of the product and is included in Other Revenue. The Company determines the basis of the estimated performance period based on the contractual requirements of its collaboration agreements. At each reporting period, the Company evaluates whether events warrant a change in the estimated performance period.
Distinguishment of Liabilities from Equity
The Company relies on the guidance provided by ASC Topic 480, Distinguishing Liabilities from Equity, to classify convertible instruments, such as the Company’s preferred stock. The Company first determines whether a financial instrument should be classified as a liability. The Company will determine the liability classification if the financial instrument is mandatorily redeemable, or if the financial instrument, other than outstanding shares, embodies a conditional obligation that the Company must or may settle by issuing a variable number of its equity shares. Once the Company determines that a financial instrument should not be classified as a liability, the Company determines whether the financial instrument should be presented between the liability section and the equity section of the balance sheet (“temporary equity”). The Company will determine temporary equity classification if the redemption of the preferred stock or other financial instrument is outside the control of the Company (i.e. at the option of the holder). Otherwise, the Company accounts for the financial instrument as permanent equity.
Initial Measurement
The Company records its financial instruments classified as liability, temporary equity or permanent equity at issuance at the fair value, or cash received. For warrants that are recorded as equity, the Company uses a Black Scholes model.
Subsequent Measurement
The Company records the fair value of its financial instruments classified as liabilities at each subsequent measurement date. The changes in fair value of its financial instruments classified as liabilities are recorded as other expense/income. The Company uses the Black Scholes pricing method, which is not materially different from a binomial lattice valuation methodology utilizing Level 3 inputs, to determine the fair value of derivative liabilities resulting from warrants that are recognized as liabilities.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.
In July 2015, the Financial Accounting Standards Board (the "FASB") finalized a one year delay in the effective date of this standard, which will now be effective for us on January 1, 2018, however early adoption is permitted any time after the original effective date, which for us is January 1, 2017. We have not yet selected a transition method and are currently evaluating the impact of ASU 2014-09 on our condensed consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, which revises the guidance in ASC 740, Income Taxes, to simplify the presentation of deferred income taxes and require that deferred tax liabilities and assets be classified as non-current in the statement of financial position. The guidance is to be applied either prospectively or retrospectively, and is effective for reporting periods (interim and annual) beginning after December 15, 2016 for public companies. Early adoption is permitted. The implementation of this ASU is not expected to have a material impact on our consolidated financial position or results of operations.
In January 2016, the FASB issued ASU 2016-01, which revises the guidance in ASC 825-10, Recognition and Measurement of Financial Assets and Financial Liabilities, and provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities. The guidance is effective for reporting periods (interim and annual) beginning after December 15, 2017, for public companies. We are currently assessing the potential impact of this ASU on our consolidated financial position and results of operations.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. The new standard establishes a right-of use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.
The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.
(4) PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and equipment at December 31 were:
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2015
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2014
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Estimated
Useful Lives
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Computer equipment
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$ | 332,764 | $ | 334,865 | 3 | |||||||
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Office and laboratory equipment
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628,726 | 740,177 | 3-5 | |||||||||
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Furniture and fixtures
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228,099 | 755,444 | 7 | |||||||||
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Manufacturing equipment
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61,998 | 111,980 | 5 | |||||||||
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Leasehold improvements
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41,968 | 825,589 | 3-7 | |||||||||
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Total property and equipment
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1,293,555 | 2,768,055 | ||||||||||
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Less accumulated depreciation and amortization
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1,025,884 | 1,629,462 | ||||||||||
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Property and equipment, net
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$ | 267,671 | $ | 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. Additionally, each move required the Company to write-off its leasehold improvements. See Note 6.
(5) IMPAIRMENT OF INTANGIBLES
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, in the consolidated statement of operations in the second quarter of 2015.
(6) 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 $50,000 after 24 months of timely lease payments.
The Company leased a corporate apartment in Franklin, Massachusetts through September 2014 and a corporate apartment in Philadelphia, Pennsylvania on a month-to-month basis, also in 2014.
Future minimum lease payments for each of the next five years under these operating leases at December 31, 2015 are approximately as follows:
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Amount
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||||
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Year Ending December 31,
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||||
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2016
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$ | 208,531 | ||
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2017
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237,797 | |||
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2018
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204,515 | |||
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2019
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154,513 | |||
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2020
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143,959 | |||
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Total
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$ | 949,315 | ||
The Company’s facilities lease expense was approximately $293,000 and $514,000 for the years ended
December 31, 2015 and 2014, respectively.
(7) DERIVATIVE WARRANT LIABILITY
In August 2012, the Company and Platinum-Montaur Life Sciences, LLC (PM) entered into a Loan Agreement whereby PM agreed to provide a credit facility (CF) to the Company of up to $20,000,000 dependent on the achievement of certain clinical and regulatory milestones set forth in the Loan Agreement, with an initial available principal amount of $5,000,000 (the “Maximum Draw Amount”). The draws under the agreement bore interest at 10% per annum. In connection with the CF, the Company issued PM a warrant to purchase 400,000 shares of its Common Stock, with a term of five years and an exercise price of $20.00 per share (the “Commitment Warrant” or “CW”). The CW was valued at $4,840,000 and recorded as a deferred financing asset and a derivative warrant liability. The Loan Agreement called for each $1,000,000 of funds borrowed pursuant to the Credit Facility, the Company will would issue PM a warrant to purchase 100,000 shares of Common Stock, with a term of five years and an exercise price equal to 150% of the market price of the Common Stock at the time of the draw, but in no event less than $20.00 or more than $40.00 per share (together with the Commitment Warrant, the “Warrants”). All of the Warrants were immediately exercisable and had a term of five years from the issue date. Obligations under the CF were guaranteed by the Company’s subsidiary, Sontra Medical, Inc. The deferred financing cost was then amortized over the life of the CF. Over a three month period beginning in September 2012, three separate draws totaling $3,000,000 were taken under the CF and five year warrants to purchase 300,000 shares of Common Stock were issued at prices ranging from $21.10 to $22.70. The warrants were valued at $3,455,000, and accreted to interest expense over the life of the draws. The CF was terminated on October 30, 2014. $3,549,325 was charged to interest expense in 2014.
On February 12, 2015, the Company agreed to re-price the warrants to $7.50 per share in connection with the Reimbursement Agreement (see Note 8). The Company recorded a non-cash charge to legal expense for $328,000 representing the cost of re-pricing the Derivative Warrants. As a result of having warrants to purchase 700,000 shares of our Common Stock at $7.50 outstanding, issued in connection with a 2012 Credit Facility (which was terminated in October 2014), we are required to record the changes in the value of these derivative warrants through their expirations in November 2017. The table below presents the changes in the derivative warrant liability, which is measured at fair value on a recurring basis and classified as Level 3 in fair value hierarchy:
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2015
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2014
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Derivative warrant liability as of January 1
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$ | 208,155 | $ | 1,119,155 | ||||
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Gain on revaluation
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(81,155 | ) | (911,000 | ) | ||||
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Derivative warrant liability as of September 30
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$ | 127,000 | $ | 208,155 | ||||
None of the derivative warrants were exercised in 2015 or 2014 pursuant to cashless exercise provisions.
(8) FINANCINGS
In December 2013, in connection with a licensing transaction, the Company entered into (i) a Securities Purchase Agreement with Platinum Partners Value Arbitrage Fund L.P. (PPVA) and Platinum Partners Liquid Opportunity Master Fund L.P. (PPLO, and together with PPVA, the “Platinum Partners”) (the “Platinum Securities Purchase Agreement”) and (ii) a Securities Purchase Agreement with Medical Technologies Innovation Asia, LTD. (“MTIA”) and Beijing Sino Tau Shang Pin Tech and Development Corp. (“MTIA Affiliate”, and together with MTIA, the “China Purchasers”) (the “MTIA Securities Purchase Agreement”, and together with the Platinum Securities Purchase Agreement, the “Securities Purchase Agreements” or “SPA”). Pursuant to the Platinum SPA and subject to certain conditions, the Company agreed to nominate and use its reasonable best efforts to cause to be elected and cause to remain as a director on the Company’s board of directors (the “Board”) until the Company’s 2014 annual meeting of stockholders, one individual designated by the Platinum Partners (“Platinum Partners Designee”). Additionally, subject to certain conditions, the Company agreed to nominate, and solicit for election by the stockholders, the Platinum Partners Designee at the Company’s 2014 annual meeting of stockholders. Under the terms of the MTIA Securities Purchase Agreement, as amended, upon the Company’s receipt of all of the proceeds from the China Purchasers, the Company will allow one individual designated by the China Purchasers to attend meetings of the Board as an observer until the date of the 2015 annual meeting of stockholders.
So long as the Platinum Partners hold at least ten percent (10%) of the outstanding Common Stock, they have a right, subject to certain conditions, to purchase debt or equity securities of any kind that the Company may determine to issue in the future. The China Purchasers have the same right. This subscription right terminates upon a consolidation, merger, restructuring, reorganization, recapitalization or other form of acquisition of or by the Company that result in a change of control.
The Platinum Partners and the China Purchasers are also entitled to certain piggy-back registration rights.
Pursuant to the MTIA Securities Purchase Agreement in December 2013, the Company had intended to sell 1,818,182 shares of its Common Stock and issue Warrants to purchase 181,818 shares of its Common Stock to MTIA for an aggregate purchase price of $5,000,000.
As of June 30, 2014, the Company had not received the full proceeds of the sale of the securities from MTIA with the parties having previously extended the due date for the receipt of all such proceeds to March 27, 2014, from the original closing date of December 12, 2013. MTIA failed to provide funds in a timely manner, resulting in its material breach of the MTIA Stock Purchase Agreement.
Instead, the Company issued 872,728 shares of Common Stock and Warrants to purchase 87,274 shares of Common Stock in exchange for $2,400,000 in gross proceeds which were received between February and April 2014, of which the last installment was paid to the Company on April 15, 2014. The Company incurred issuance costs of $50,000. The relative fair value of Warrants issued to MTIA to purchase 87,274 shares of Common Stock was determined to be approximately $174,396 and was recorded as a debit and a credit to Additional Paid in Capital.
On December 18, 2014, Platinum Partners Value Arbitrage Fund L.P. (PPVA) agreed to purchase together with two other entities, and one individual, 840,336 shares of Series F Convertible Preferred Stock (Series F) for an aggregate purchase price of $1,000,000, net of $56,604 of deferred financing costs. Five year Series F warrants to purchase the same number of shares of our common stock with an exercise price of $3.00 per share were issued to the investors. Pursuant to a Letter of Agreement, settling certain board related matters under dispute, the investors further agreed to fund an additional $3,000,000 in 2015. The investors determined that the purchase price of the Series F shall be equal to the dollar amount of each investment divided by the lesser of (i) the closing bid price of the Common Stock immediately preceding each Installment, as the case may be, or (ii) $1.50, provided that the Series F and the Series F Warrants will not be convertible to the extent the conversion would result in the holder beneficially owning more than 19.9% of the then outstanding shares of the Issuer, unless stockholder approval has been obtained for the issuance of the shares of Common Stock issuable upon conversion of the Series F Preferred Stock or Warrants in accordance with Nasdaq rules. The Series F also contains customary provisions as well as an additional restriction on conversion such that the Series F or Series F Warrants will not be convertible if the conversion would result in the holder beneficially owning more than 9.9% of the then outstanding shares of the Issuer.
In connection with the issuance of this Series F, the conversion feature of Series F was considered beneficial, or “in the money”, at issuance due to a conversion rate that allows the investor to obtain the Common Stock at below market price. The Company recorded a deemed dividend on the beneficial conversion feature of $350,000 at December 31, 2014.
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 our directors received a non-recourse loan for $500,000 from PPVA. The purpose of the loan 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 monies received in 2015, equivalent to the original $500,000 the two directors had received, was repaid by the Company to PPVA through the issuance of Series F and five-year Series F Warrants to purchase 333,333 shares of Common Stock at $3 per share. In connection with this repayment, we recorded a $924,000 non-cash charge representing the excess market value of the preferred stock and warrants above the $500,000 capital contribution. Such amount is included in the financing loss reflected on the consolidated statement of operations.
Stock Issued in Exchange for Services
During the year ended December 31, 2014, the Company issued 2,636 shares of Common Stock, with a fair value $8,404, to vendors in exchange for their services. The Company recorded expense related to these issuances, which represents the fair value of the related stock.
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.
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.
During 2015, the Company received $3,581,500 , from its $4,000,000 December 2014 financing and follow-on subscriptions on similar terms of $581,500 in the aggregate, and issued 2,387,667 shares of Series F Preferred Stock and warrants to purchase the same number of shares of Common Stock at an exercise price of $3.00. The Company recorded financing expense of $3,796,000 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. 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 $581,500 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.
During December 2015, we received bridge loans aggregating $330,000; $180,000 from Beijing Yi Tang Bio Science & Technology, Ltd. and $150,000 from Platinum Partners Value Arbitrage Fund L.P., which were later rolled with interest into our Secured Convertible Note Financing in January 2016. See Note 18. The notes earned interest at the prime rate.
Series C
Each share of Series C is convertible into 100 shares of Common Stock, subject to adjustment for stock splits, combinations or similar events. Series C holders are entitled to dividends equivalent to those of common shareholders should a dividend be declared by the Board of Directors. Each holder who receives Series C may convert its Series C at any time following its issuance. The conversion of Preferred Stock into shares of Common Stock, however, is subject to a restriction, which prohibits the conversion of shares of Preferred Stock if the number of shares of Common Stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of Common Stock owned by such holder at such time, in excess of 9.99% beneficial ownership of all of the Company’s Common Stock outstanding at such time. In the event of any Liquidation Event (as defined in the Series C Certificate), the holders of Series C will be entitled to receive (subject to the rights of any securities designated as senior to the Series C) a per share liquidation preference equal to an amount calculated by taking the total amount available for distribution to holders of all the Company’s outstanding Common Stock before deduction of any preference payments for the Series C, divided by the total of (x) all of the then outstanding shares of Common Stock, plus (y) all of the shares of Common Stock into which all of the outstanding shares of the Series C can be converted, in each case prior to any distribution to the holders of Common Stock or any other securities designated as junior to the Series C.
On December 23, 2013, an investor converted 8,974.185 shares of Series C into 897,419 shares of Common Stock.
Series D
Each share of Series D is convertible into 0.10 share of Common Stock subject to adjustments for stock splits, combinations, or similar events. The Series D does not pay a dividend and is not redeemable. Each holder who receives Series D may convert it at any time following its issuance. The conversion of Preferred Stock into shares of Common Stock, however, is subject to a restriction, which prohibits the conversion of shares of Preferred Stock if the number of shares of Common Stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of Common Stock owned by such holder at such time, would cause such holder to beneficially own in excess of 4.99% of all of the Company’s Common Stock outstanding at such time. The preference in liquidation is $1 per share, or $1,000,000 at December 31, 2014.
On December 19, 2013, an investor converted 2,006,000 shares of Series D into 200,600 shares of Common Stock.
Series E
Each share of Series E is initially convertible into one share of Common Stock, subject to adjustment for stock splits, combinations or similar events. The Series E does not pay a dividend and is not redeemable. Each holder who receives Series E may convert its Series E at any time following its issuance. The conversion of Preferred Stock into shares of Common Stock, however, is subject to a restriction, which prohibits the conversion of shares of Preferred Stock if the number of shares of Common Stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of Common Stock owned by such holder at such time, would cause such holder to beneficially own in excess of 19.99% of all of the Company’s Common Stock outstanding at such time. There is no liquidation preference with respect to Series E shares.
Series F
On September 3, 2015, Echo Therapeutics, Inc. (the “Company”) filed a Certificate of Increase of Shares Designated as Series F Convertible Preferred Stock (“Certificate of Increase”) 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.
Each share of Series F is initially convertible into one share of Common Stock, subject to adjustment for stock splits, combinations or similar events. The Series F does not pay a dividend and is not redeemable. Each holder who receives Series F may convert its Series F at any time following its issuance. The conversion of Preferred Stock into shares of Common Stock, however, is subject to a restriction, which prohibits the conversion of shares of Preferred Stock if the number of shares of Common Stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of Common Stock owned by such holder at such time, would cause such holder to beneficially own in excess of 9.99% of all of the Company’s Common Stock outstanding at such time. There is no liquidation preference with respect to Series F shares.
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 December 31, 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 (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. In May 2013, the Company’s shareholders approved an amendment to the 2008 Plan to fix the maximum number of shares available under the 2008 Plan at 10,000,000 shares. As of December 31, 2015, there were 16,357 restricted shares of Common Stock issued and options to purchase an aggregate of 1,640,733 shares of Common Stock outstanding under the 2008 Plan and 8,329,910 shares available for future grants.
The tables below show the remaining shares available for future grants for each plan and the outstanding shares.
|
Equity Compensation Plans
|
|||||||||||||
|
2003 Plan
|
2008 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 | ) | (16,357 | ) | |||||||||
|
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 December 31, 2015
|
— | 8,329,910 | |||||||||||
|
Not Pursuant to a Plan
|
|||||||||||||
|
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 | 16,357 | 6,485 | ||||||||||
|
Outstanding shares at December 31, 2015
|
31,500 | 1,657,090 | 6,485 | ||||||||||
(11) STOCK OPTIONS
For options issued and outstanding during the years ended December 31, 2015 and 2014, the Company recorded additional paid-in capital and non-cash compensation expense of $853,429 and $1,046,454, respectively, each net of estimated forfeitures.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table. 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 consolidated financial statements, to estimate option exercise and employee termination within the valuation model. The expected term of options granted under the Company’s stock plans, all of which qualify as “plain vanilla,” is based on the average of the contractual term (generally 10 years) and the vesting period (generally 24 to 42 months) as permitted under SEC Staff Accounting Bulletin Nos. 107 and 110. The risk-free rate is based on the yield of a U.S. Treasury security with a term consistent with the option. Restricted stock grants are valued based on the closing market price for the Company’s Common Stock on the grant date.
The assumptions used principally for options granted to employees in the years ended December 31, 2015 and 2014 were as follows:
|
|
2015
|
2014
|
||||||
|
Risk-free interest rate %
|
1.46 - 1.90 | 1.45 - 1.90 | ||||||
|
Expected dividend yield
|
— | — | ||||||
|
Expected term in years
|
5 - 5.5 | 4.5 - 6.5 | ||||||
|
Forfeiture rate % (excluding fully vested options)
|
7.5 - 15 | 7.5 - 15 | ||||||
|
Expected volatility %
|
92 - 93 | 81 - 121 | ||||||
In December 2014, the Company issued stock options to purchase 475,000 shares of our Common Stock to its new CEO and CFO that contain certain stock price level attainment conditions that must be achieved before the stock options are permitted to vest. In calculating the compensation expense for these stock option grants, we utilize a binomial lattice-based valuation model. Assumptions utilized in the model, which are evaluated and revised, as necessary, to reflect market conditions and experience, were as follows:
|
2014
|
||||
|
Interest rate %
|
2 | |||
|
Weighted average interest rate
|
— | |||
|
Dividend yield
|
— | |||
|
Expected volatility
|
1.05 | |||
|
Weighted Average volatility
|
— | |||
|
Expected life in years
|
6.5 | |||
A summary of option activity under the Company’s stock plans and options granted to officers of the Company outside any plan as of December 31, 2015 and changes during the year then ended is presented below:
|
|
Shares
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Remaining
Contractual
Term
|
Aggregate
Intrinsic
Value
|
||||||||||||
|
Outstanding at January1, 2014
|
1,455,432 | $ | 4.40 | — | — | |||||||||||
|
Granted
|
662,950 | 1.94 | — | — | ||||||||||||
|
Forfeited or expired
|
(1,078,482 | ) | 4.92 | — | — | |||||||||||
|
Outstanding at December 31, 2014
|
1,039,900 | $ | 3.00 |
8.82 years
|
— | |||||||||||
|
Granted
|
895,000 | 1.47 | — | — | ||||||||||||
|
Forfeited or expired
|
(267,667 | ) | 4.06 | — | — | |||||||||||
|
Outstanding at December 31, 2015
|
1,667,233 | $ | 2.01 |
8.74 years
|
$ | — | ||||||||||
|
Exercisable at December 31, 2015
|
900,750 | $ | 2.22 |
8.68 years
|
$ | — | ||||||||||
The weighted-average grant-date fair value of options granted during the years ended December 31, 2015 and 2014 was $1.03 and 1.42 per share, respectively. As of December 31, 2015, there was approximately $681,000 of total unrecognized compensation expense related to non-vested share-based option arrangements. During 2015, 300,000 of the options granted to two members of our board of directors contain certain stock price level attainment conditions that must be achieved before the stock options are permitted to vest. 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 United States Food and Drug Administration (FDA) approval for our CGM system or the sale of the Company, unrecognized compensation is expected to be recognized over the next four years.
Share-Based Compensation – Restricted Stock
For restricted stock issued and outstanding during the years ended December 31, 2015 and 2014, the Company incurred non-cash compensation expense of $57,455 and $335,918, respectively, each net of estimated forfeitures.
As of December 31, 2015, the Company had outstanding restricted stock grants of 27,842 shares with a weighted-average grant-date value of $13.06. A summary of the status of the Company’s non-vested restricted stock grants as of December 31, 2015, and changes during the year ended December 31, 2015 is presented below:
|
Shares
|
Weighted-
Average
Grant-Date
Fair Value
|
|||||||
|
Non-vested shares at January 1, 2015
|
47,958 | $ | 9.74 | |||||
|
Vested
|
(17,786 | ) | $ | 5.02 | ||||
|
Forfeited
|
(2,330 | ) | $ | 6.05 | ||||
|
Non-vested shares at December 31, 2015
|
27,842 | $ | 13.06 | |||||
Of the 27,842 shares of non-vested restricted stock, the vesting criteria are as follows:
|
|
·
|
14,185 shares of restricted stock vest upon the FDA approval of our CGM system or the sale of the Company;
|
|
|
·
|
13,657 shares of restricted stock vest over 4 years, at each of the anniversary dates of the grants; and
|
As of December 31, 2015, there was approximately $334,234 of total unrecognized compensation expense related to non-vested share-based restricted stock arrangements granted under the Company’s equity compensation plans that vest over time in the foreseeable future. As of December 31, 2015, the Company cannot estimate the timing of completion of the 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.
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:
|
2015
|
2014
|
|||||||
|
Risk-free interest rate %
|
1.26 - 1.75 | 1.57 - 1.77 | ||||||
|
Expected dividend yield
|
— | — | ||||||
|
Expected term in years (contractual term)
|
5 | 5 | ||||||
|
Forfeiture rate %
|
— | — | ||||||
|
Expected volatility %
|
89 - 99 | 78 - 102 | ||||||
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.
In the year ended December 31, 2015 and 2014, the Company issued warrants with a relative fair value of $3,386,895 and $350,000, respectively in connection with private placements of the Company’s Preferred Stock, as well as in connection with the Reimbursement Agreement more fully described in Note 8.
The following table summarizes data about outstanding warrants at December 31, 2015:
|
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 | 1.72 | $ | 7,70 | 700,000 | ||||||||||||
|
Equity:
|
|||||||||||||||||||
| $ | 2.75 - $3.00 |
12/10/18 to 10/30/20
|
3,830,428 | 4.19 | $ | 2.98 | 3,830,428 | ||||||||||||
|
Total outstanding
|
4,530,428 | 4,530,428 | |||||||||||||||||
A summary of warrant activity in the year ended December 31, 2015 is as follows:
|
Warrants
|
Shares
|
Weighted-
Average
Exercise
Price
|
||||||
|
Outstanding at December 31, 2013
|
1,209,211 | $ | 17.92 | |||||
|
Granted
|
927,610 | $ | 2.98 | |||||
|
Forfeited or expired
|
(289,755 | ) | $ | 20.33 | ||||
|
Outstanding at December 31, 2014
|
1,847,066 | $ | 10.04 | |||||
|
Granted
|
2,721,000 | $ | 3.00 | |||||
|
Forfeited or expired
|
(37,638 | ) | $ | 22.50 | ||||
|
Outstanding at December 31, 2015
|
4,530,428 | $ | 3.68 | |||||
The derivative warrants to purchase 700,000 shares of our Common Stock, at exercise prices ranging from $20 to $22.70 and expiring in 2017, are included in the outstanding warrants at December 31, 2015 and 2014. 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 Note 8.
Exercise of Common Stock Warrants
During 2015 and 2014, there were no warrants exercised.
(14) INCOME TAXES
No provision or benefit for federal or state income taxes has been recorded because the Company has incurred a net loss for all periods presented and has provided a valuation allowance against its deferred tax assets. A provision for minimum state income taxes of $3,420 has been recorded for the year ended December 31, 2015.
At December 31, 2015 and 2014, the Company had gross federal net operating loss carryforwards of approximately $105,024,000 and $98,462,000, respectively, which begin expiring in 2018. The Company had gross state net operating loss carryforwards of approximately $59,243,000 and $52,684,000, respectively which began to expire in 2015. The Company also had federal and state research and development tax credit carryforwards of approximately $3,122,000 which will begin to expire in 2018. The United States Tax Reform Act of 1986 contains provisions that may limit the Company’s net operating loss carryforwards available to be used in any given year in the event of significant changes in the ownership interests of significant stockholders, as defined in Internal Revenue Section 382. The effect of an ownership change would be the imposition of an annual limitation on the use of NOL carryforwards attributable to periods before the change. The amount of the annual limitation depends upon the value of the Company immediately before the change, changes to the Company’s capital during a specified period prior to the change, and the federal published interest rate. The Company has not completed an evaluation of whether Section 382 would impact the gross NOLs.
Significant components of the Company’s net deferred tax asset are as follows:
|
December 31,
|
||||||||
|
|
2015
|
2014
|
||||||
|
Deferred Tax Assets/(Liabilities):
|
||||||||
|
Net operating loss carryforwards
|
$ | 38,836,000 | $ | 34,500,000 | ||||
|
Research credit carryforwards
|
3,122,000 | 3,048,000 | ||||||
|
Acquired intangible assets, net
|
— | (3,697,000 | ) | |||||
|
Restricted stock and warrants
|
479,000 | 731,000 | ||||||
|
Other temporary differences
|
92,000 | 50,000 | ||||||
|
Total deferred tax assets, net
|
42,529,000 | 34,632,000 | ||||||
|
Valuation allowance
|
(42,529,000 | ) | (34,632,000 | ) | ||||
|
Net deferred tax asset
|
$ | — | $ | — | ||||
The Company has maintained a full valuation allowance against its deferred tax items in both 2015 and 2014. A valuation allowance is required to be recorded when it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Since the Company cannot be assured of realizing the net deferred tax asset, a full valuation allowance has been provided. In the years ended December 31, 2015 and 2014, the valuation allowance increased by $7,897,000 and $2,773,000, respectively.
The Company has no uncertain tax positions as of December 31, 2015 and 2014 that would affect its effective tax rate. The Company does not anticipate a significant change in the amount of unrecognized tax benefits over the next twelve months. Because the Company is in a loss carryforward position, the Company is generally subject to US federal and state income tax examinations by tax authorities for all years for which a loss carryforward is available. If and when applicable, the Company will recognize interest and penalties as part of income tax expense.
Income taxes computed using the federal statutory income tax rate differs from the Company’s effective tax rate primarily due to the following:
|
Years Ended December 31,
|
||||||||
|
|
2015
|
2014
|
||||||
|
%
|
%
|
|||||||
|
Income taxes benefit (expense) at statutory rate
|
34.00 | 34.00 | ||||||
|
State income tax, net of federal benefit
|
(0.01 | ) | 2.76 | |||||
|
Permanent Differences:
|
||||||||
|
Financing loss
|
(7.23 | ) | — | |||||
|
Non-cash interest expense warrant
|
(0.50 | ) | (8.07 | ) | ||||
|
Gain/loss or revaluation of derivative warrant liability
|
0.12 | 2.07 | ||||||
|
Stock-based compensation expense
|
(2.40 | ) | (0.88 | ) | ||||
|
Other
|
(0.04 | ) | 0.01 | |||||
|
R&D credits
|
0.49 | 1.21 | ||||||
|
Change in valuation allowance
|
(24.45 | ) | (31.13 | ) | ||||
| (0.02 | ) | (0.03 | ) | |||||
(15) LITIGATION
In February 2014, Patrick T. Mooney, M.D., our former President and Chief Executive Officer, and his wife, Elizabeth Mooney, filed a complaint against the Company and certain of its directors and officers in the Court of Common Pleas in Philadelphia County. The complaint, which alleges (i) that Dr. Mooney’s termination was without cause so that he is entitled to certain severance benefits under his employment agreement and associated statutory remedies; (ii) that certain legally required disclosures by us and our General Counsel defamed Dr. Mooney; and (iii) that Dr. Mooney’s wife is entitled to damages under a theory of loss of consortium, seeks in excess of $20 million in damages. The Company has denied the allegations of the complaint and asserted counterclaims against Dr. Mooney based upon the same conduct which provided the cause for his termination. Thereafter, the Company restructured the counterclaims and affirmative defenses.
In July 2014, Dr. and Mrs. Mooney filed another complaint in the Court of Common Pleas in Philadelphia County against the Company, certain of its directors and Officers and a former Director and officer alleging (i) wrongful use of civil proceedings and (ii) abuse of process in the original filing of the counterclaims withdrawn in the earlier action. Mrs. Mooney also asserted another claim for loss of consortium. This complaint sought in excess of $30 million in damages.
In August 2014, Dr. Mooney filed a complaint in Delaware Chancery Court against the Company for advancement of defense costs related to his February 2014 complaint, many of which the Company had paid to date and the remainder of which were subject to a good faith dispute that counsel for the Company and Dr. Mooney had been attempting to amicably resolve. Dr. Mooney also demanded that the Company pay for his attorneys fees related to his July 2014 complaint against the Company, amongst other 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 December 31, 2015, no litigation loss is deemed probable or reasonably estimated.
Ferndale License of Skin preparation device — In May 2009, the Company entered into a License Agreement with Ferndale Pharma Group, Inc. (“Ferndale”) pursuant to which the Company granted Ferndale a license in North America and the United Kingdom to develop, assemble, use, market, sell and export it’s skin preparation device prior to the application of a topical analgesic or anesthetic cream for local dermal anesthesia or analgesia prior to a needle insertion or IV procedure (the “Ferndale License”). The Ferndale License has a minimum term of 10 years from the date of the first commercial sale of the skin preparation product components in North America or the United Kingdom.
The Company received a non-refundable licensing fee of $750,000 upon execution of the Ferndale License which was recognized as revenue through December 31, 2011. In addition, the Company will receive a payment of $750,000 within ninety (90) days after receipt of the FDA’s medical device clearance of its skin preparation device. Ferndale will pay the Company an escalating royalty on net sales of skin preparation product components. The Company is entitled to receive milestone payments based on Ferndale’s achievement of certain net sales targets of the product components, as well as guaranteed minimum annual royalties.
Handok License of CGM — In June 2009, the Company entered into a License Agreement with Handok Pharmaceuticals Co., Ltd. (“Handok”) pursuant to which the Company granted Handok a license to develop, use, market, sell and import our CGM for continuous glucose monitoring for use by medical facilities and/or individual consumers in South Korea (the “Handok License”). The Handok License has a minimum term of 10 years from the date of the first commercial sale of our CGM in South Korea.
The Company received a non-refundable licensing fee of approximately $500,000 upon execution of the Handok License. In addition, the Company will receive milestone payments upon receipt of the FDA’s clearance of our CGM and upon the first commercial sale of our CGM in South Korea. Handok will also pay the Company a royalty on net sales of CGM. The Company is entitled to receive milestone payments based on Handok’s achievement of certain other targets.
$0 and $57,321 of the non-refundable license revenue was recognized in the years ended December 31, 2015 and 2014, respectively, and $95,535 is currently included in deferred revenue.
MTIA License, Development and Commercialization Agreement — In December 2013, in connection with a capital raising transaction, the Company entered into a license, development and commercialization agreement with Medical Technologies Innovation Asia, Ltd. (“MTIA”). In this agreement the Company granted MTIA rights, under certain intellectual property and know-how that relate to our CGM, to (i) exclusively research, develop, manufacture, and use our CGM in connection with the development activities needed for regulatory approval in the People’s Republic of China, Hong Kong, Macau and Taiwan (the “Territory”), and (ii) exclusively make, have made, use, sell, have sold, offer for sale and import our CGM in the Territory once regulatory approval has been received. Additionally, subject to the terms and conditions set forth in the agreement, MTIA received the right to grant certain distribution rights to its affiliates or third parties. MTIA is responsible for conducting all required clinical trials and all development costs relating to regulatory approval of our CGM in the Territory, as well as manufacturing and marketing costs relating to commercialization of our CGM in the Territory. MTIA is also responsible for obtaining and maintaining all regulatory approvals from applicable authorities in the Territory.
Upon the earlier of regulatory approval of our CGM by the China Food and Drug Administration or Echo’s termination of the agreement, Echo is required, subject to certain terms and conditions, to reimburse MTIA up to $1,500,000 for development costs incurred by MTIA. The reimbursement will be in the form of Common Stock, valued at $2.71 per share, which was the NASDAQ closing price on December 9, 2013, the date prior to the date the parties entered into the agreement. Additionally, the Company and MTIA will share future net sales of our CGM generated within the Territory. The Company has the option, at its sole discretion, to enter into negotiations with MTIA for supply of our CGM in territories that are not licensed to MTIA under the agreement. The agreement has a term of ten years, subject to earlier termination rights including, but not limited to, for breach of the agreement, change of control events, and certain performance obligations.
On December 29, 2014 the MTIA agreement was amended to include an affiliate, Beijing Yi Tang Bio Technology, Ltd as a party to the Agreement. The Amendment also provides that MTIA may, without Echo’s consent: (i) sublicense any of the licenses and rights granted to MTIA under the Agreement to any of its Affiliates, and (ii) subcontract any of its obligations under the Agreement to any of its Affiliates.
NASDAQ Compliance
On January 6, 2016, the Company received a letter from The Nasdaq Stock Market (“Nasdaq”) that, as a result of the Company’s failure to hold an annual meeting of stockholders no later than one year after the end of its fiscal year as required by Nasdaq Listing Rule 5620(a), and the Company’s failure to meet the minimum $2.5 million stockholders’ equity requirement set forth in Nasdaq Listing Rule 5550(b)(1), Nasdaq had determined to initiate procedures to delist the Company’s securities from The Nasdaq Stock Market. The Company was advised that, unless the Company requested an appeal of this determination, trading in the Company’s common stock would be suspended at the opening of business on January 15, 2016 and a Form 25-NSE would be filed with the Securities and Exchange Commission to remove the Company’s securities from listing and registration on Nasdaq. The Company appealed Nasdaq’s determination. The suspension of trading was stayed during the pendency of such appeal.
On March 9, 2016, the Company was informed that the Nasdaq Listing Panel (“the Panel”) determined to grant our request to remain listed on the Nasdaq Stock Market, subject to the following conditions:
|
|
·
|
On or before May 31, 2016, the Company shall have its Annual Shareholder Meeting for fiscal year ended 2015.
|
|
|
·
|
On or before July 5, 2016, the Company shall publicly announce and inform the Panel that it has stockholders’ equity above $2.5 million.
|
|
|
·
|
The Company shall also, by that date, provide the Panel with updated projections demonstrating its ability to maintain its stockholders’ equity above $2.5 million through June 30, 2017. These projections shall detail the underlying assumptions, including any required capital raises or conversions of debt or preferred to common stock. The Panel will consider at that time whether a Panel Monitor is appropriate.
|
The Company was advised that July 5, 2016 represents the full extent of the Panel’s discretion to grant continued listing while it is non-compliant. Should the Company fail to demonstrate compliance with that rule by that date, the Panel will issue a final delist determination and the Company will be suspended from trading on the Nasdaq Stock Market. In order to fully comply with the terms of this exception, the Company must be able to demonstrate compliance with all requirements for continued listing on The Nasdaq Stock Market. In the event the Company is unable to do so, its securities may be delisted from The Nasdaq Stock Market. It is a requirement during the exception period that the Company provide prompt notification of any significant events that occur during this time. This includes, but is not limited to, any event that may call into question the Company’s historical financial information or that may impact the Company’s ability to maintain compliance with any Nasdaq listing requirement or exception deadline. The Panel reserves the right to reconsider the terms of this exception based on any event, condition or circumstance that exists or develops that would, in the opinion of the Panel, make continued listing of the Company’s securities on The Nasdaq Stock Market inadvisable or unwarranted. In addition, any compliance document will be subject to review by the Panel, which may, in its discretion, request additional information before determining that the Company has complied with the terms of the exception.
There can be no assurances whether the Company will be able to regain or maintain compliance with the Nasdaq listing rules. In the event of delisting, the Company expects that its stock would trade on the OTC Markets.
On January 29, 2016, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with certain institutional and other accredited investors (the “Investors”) pursuant to which the Company agreed to issue up to $5,145,000 principal amount of 10% senior secured convertible notes of the Company (the “Notes”) and related common stock purchase warrants (the “Warrants”) in two tranches. The Notes are secured by substantially all of the assets of the Company pursuant to a Security Agreement, dated January 29, 2016 (the “Security Agreement”). The initial closing of $1,787,000 occurred on January 29, 2016. Bridge notes in the principal amount of $680,000 were surrendered to the Company as payment by certain Investors. Fees aggregating approximately $275,000 were paid out of the proceeds of the initial closing to the placement agent and others. Additional fees will be paid, primarily to the placement agent, for the second closing when funded. The second closing of $3,358,000 is subject to the Company obtaining shareholder approval at a Special Shareholders Meeting to be held on April 14, 2016. The Notes are initially convertible into 1,191,333 shares of common stock, par value $.01 per share, of the Company (the “Common Stock”), at $1.50 per share. The Company has the right to redeem the Notes under certain circumstances. Interest is payable quarterly or, subject to receipt of stockholder approval, at the Company’s option, in shares of Common Stock. In connection with the initial closing, the Company issued five-year Warrants to purchase 1,191,333 shares of Common Stock at an exercise price of $1.50 per share, which are not exercisable for six months. Upon receipt of shareholder approval to be obtained at special meeting of our shareholders to be held on April 14, 2016, the Company expects to issue Notes in an aggregate principal amount of $3,358,000 initially convertible into 2,238,667 shares of Common Stock at $1.50 per share and 1-1/2 year warrants to purchase 2,238,667 shares of Common Stock at $1.50 per share. The Notes and Warrants are subject to customary antidilution provisions. If stockholder approval is obtained, the conversion price for the Notes is subject to a reset to eighty percent (80%) of the average of the ten lowest closing prices of the Common Stock less than $1.50 (subject to equitable adjustment), if any, as reported by Bloomberg LP for the principal market on which the Common Stock then trades during the ninety (90) days following the first effective date of a registration statement filed pursuant to the Registration Rights Agreement, but in no event less than $.80, subject to equitable adjustment.
The Purchase Agreement contains customary representations, warranties and affirmative and negative covenants. The Purchase Agreement also requires management and certain shareholders to lock-up certain of their shares for the earlier of six months after the effective date of a registration statement, the first anniversary of the initial closing (January 29, 2017), or the date, if applicable, such holder of securities is no longer an officer or directors of the Company, subject to certain exceptions. In addition, for up to one year following the effective date of a registration statement, the Investors have the right to participate, on a pro rata basis, in certain subsequent financings by the Company, subject to certain limitations. In connection with the transaction, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) that requires the Company to file one or more registration statements in respect of the shares of Common Stock underlying the Notes and Warrants. If the Company fails to make its filing deadlines or fails to maintain the registration statement for required periods of time, the Company will be subject to certain liquidated damages provisions. Newbridge Securities Corporation/Life Tech Capital (the “Placement Agent”) acted as the sole placement agent for the financing. The Placement Agent will receive five-year warrants to purchase approximately 120,000 shares of Common Stock at $1.50 per share upon the completion of the full offering.
Bridge Note Financings
On February 4, 2016, the Company issued a promissory note to Beijing Yi Tang Bio Science & Technology, Ltd. (BYT) in the aggregate principal amount of $300,000 in respect of a bridge loan made by such party. The promissory note, which bears interest at the prime rate, may, at BYT’s option, be exchanged for securities issued in a subsequent financing by the Company, including the second tranche financing described above.
On February 11, 2016, the Company issued a promissory note to Platinum Partners Value Arbitrage Fund L.P. (PPVA) in the aggregate principal amount of $100,000 in respect of a bridge loan made by such party. The promissory note, which bears interest at the prime rate, may, at PPVA’s option, be exchanged for securities issued in a subsequent financing by the Company, including the second tranche financing described above.
On March 21, 2016, the Company issued a promissory note to Platinum Partners Value Arbitrage Fund L.P. (PPVA) in the aggregate principal amount of $150,000 in respect of a bridge loan made by such party. The promissory note, which bears interest at the prime rate, may, at PPVA’s option, be exchanged for securities issued in a subsequent financing by the Company, including the second tranche financing described above.
Issuance of Restricted Stock and Stock Options under the 2008 Incentive Stock Plan
On February 16, 2016, management issued an annual grant of stock options pursuant to the 2008 Plan to employees aggregating 320,500 shares at an exercise price of $0.90. Such options will vest over a three year period. In addition they received a special grant of stock options on the same date and exercise price aggregating 56,834, for allowing the Company additional time to pay them. Such options vest over a period of one year.
On March 3, 2016, the Compensation Committee of the Board of Directors approved an aggregate issuance of 280,000 shares of common stock: 150,000, 100,000, and 30,000 to each of our CEO, CFO, and VP of Operations and Product Development (VPOPD), respectively. Such shares shall vest over an eighteen month period. The grant was for deferring their pay over the last approximate six month period whilst the Company sought financing. The CEO and CFO are still owed a total of approximately $160,000. The CEO, CFO and VPOPD additionally received an annual grant of stock options to purchase common shares as follows: 175,000, 150,000, and 125,000 are exercisable at $1.12 to each of the CEO, CFO and VPOPD, respectively. Such options will vest over a two year period.
On March 1 2016, the Compensation Committee of the Board of Directors issued to non-employee board members pursuant to the 2008 Plan an annual grant of stock options to purchase an aggregate 450,000 shares of common stock, or 150,000 to each of the three directors at an exercise price of $1.12 for the Company’s new director, and $2.00 for the remaining directors. 150,000 of such options will vest over a one year period for the Company’s new director and over a two year period for the remaining directors.
Report of Independent Registered Public Accountants
Board of Directors
Echo Therapeutics, Inc.
Iselin, New Jersey
We have audited the accompanying consolidated balance sheets of Echo Therapeutics, Inc. and subsidiary as of December 31, 2015 and 2014, and the related consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows for the years ended December 31, 2015 and 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financials reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Echo Therapeutics, Inc. and subsidiary as of December 31, 2015 and 2014, and the results of their operations, and their cash flows for the years ended December 31, 2015 and 2014, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and has an accumulated deficit of $150.1 million. This factor, among others, as discussed in Note 2 to the consolidated financial statements, raises substantial doubt about the Company’s ability to continue a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ BDO USA, LLP
Woodbridge, New Jersey
March 30, 2016
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Exhibit
Number
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Description of Document
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| 3.1 |
Amended and Restated Certificate of Incorporation dated June 20, 2012 is incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q filed November 8, 2012.
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| 3.2 |
Certificate of Amendment to the Amended and Restated Certificate of Incorporation dated June 7, 2013 is incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed June 7, 2013.
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| 3.3 |
Bylaws of the Company as amended and restated as of July 24, 2014 are incorporated herein by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed July 29, 2014.
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| 3.4 |
Certificate of Designation, Preferences and Rights of Series C Preferred Stock dated July 19, 2012 is incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q filed November 8, 2012.
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| 3.5 |
Certificate of Designation, Preferences and Rights of Series D Convertible Preferred Stock dated July 19, 2012 is incorporated by reference to Exhibit 3.3 of the Company’s Quarterly Report on Form 10-Q filed November 8, 2012.
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| 3.6 |
Certificate of Designation, Preferences and Rights of Series E Convertible Preferred Stock dated December 10, 2013 is incorporated by reference to Exhibit 4.8 of the Company’s Annual Report on Form 10-K filed March 28, 2014.
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| 3.7 |
Certificate of Designation, Preferences and Rights of Series F Convertible Preferred Stock is incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed February 18, 2015.
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| 3.8 |
Certificate of Increase of Shares Designated as Series F Convertible Preferred Stock of Echo Therapeutics Inc., dated September 3, 2015, is incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed September 9, 2015.
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| 4.1 |
Specimen certificate for Common Stock is incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-1 filed December 2, 2013.
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| 4.2 |
Form of Warrant to Purchase Shares of Common Stock is incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed November 18, 2009.
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| 4.3 |
Form of Warrant to Purchase Shares of Common Stock is incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed December 3, 2009.
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| 4.4 |
Form of Warrant to Purchase Shares of Common Stock is incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed February10, 2010.
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| 4.5 |
Form of Warrant to Purchase Shares of Common Stock is incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed December 6, 2011.
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| 4.6 |
Commitment Fee Warrant issued to Platinum-Montaur Life Sciences, LLC on August 31, 2012 is incorporated by reference to Exhibit 4.1 of the Company’s Quarterly Report on Form 10-Q filed November 8, 2012.
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| 4.7 |
Form of Draw Warrant issued to Platinum-Montaur Life Sciences, LLC is incorporated by reference to Exhibit 4.2 of the Company’s Quarterly Report on Form 10-Q filed November 8, 2012.
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| 4.8 |
Form of Warrant to Purchase Common Stock dated December 10, 2013 is incorporated by reference to Exhibit 4.8 of the Company’s Annual Report on Form 10-K filed March 28, 2014.
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| 4.9 |
Form of Warrant to Purchase Common Stock is incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed February 18, 2015.
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| 10.1 |
Lease Agreement between the Company and Forge Park Investors LLC dated January 24, 2003 is incorporated herein by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
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| 10.2* |
Form of Restricted Stock Agreement for use under the Company’s 2003 Stock Option and Incentive Plan is incorporated herein by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed September 6, 2006.
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| 10.3* |
2003 Stock Option and Incentive Plan, as amended, is incorporated herein by reference to Appendix I to the Company’s Definitive Proxy Statement on Schedule 14A filed April 17, 2007.
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Exhibit
Number
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Description of Document
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| 10.4* |
Form of Nonqualified Stock Option Agreement is incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 31, 2007.
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| 10.5 |
First Amendment to Lease dated February 11, 2008 by and between the Company and CRP-2 Forge, LLC, as successor in interest to Forge Park Investors LLC, is incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 13, 2008.
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| 10.6*† |
Nonqualified Stock Option Agreement by and between the Company and Vincent D. Enright dated as of March 25, 2008 is incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 27, 2008.
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| 10.7† |
Form of Restricted Stock Agreement is incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed May 27, 2008.
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| 10.8** |
License Agreement by and between the Company and Handok Pharmaceuticals Co., Ltd. dated as of June 15, 2009 is incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed June 19, 2009.
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| 10.9*† |
2008 Equity Incentive Plan is incorporated herein by reference to Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A filed April 30, 2010.
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| 10.10 |
Lease between the Company and 8 Penn Center Owner, L.P. filed as of March 9, 2011, is incorporated herein by reference to Exhibit 10.43 to the Company’s Annual Report on Form 10-K filed March 18, 2011.
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| 10.11*† |
Incentive Stock Option Agreement by and between the Company and Christopher P. Schnittker dated as of May 16, 2011 is incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 20, 2011.
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| 10.12 |
Form of Indemnification Agreement by and among the Company and each of Patrick Mooney, Kimberly Burke and Christopher Schnittker, dated as of November 15, 2011, is incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed November 18, 2011.
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| 10.13 |
Common Stock and Warrant Purchase Agreement by and among the Company and the Investors named therein, dated as of December 5, 2011, is incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 6, 2011.
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| 10.14* |
Fifth Amendment to Lease by and between the Company and CRP-2 Forge, LLC, dated as of April 3, 2012 is incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 9, 2012.
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| 10.15* |
Amendment to Lease Agreement by and between the Company and 8 Penn Center Owner, L.P., dated as of April 2, 2012 is incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 11, 2012.
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| 10.16** |
At Market Issuance Sales Agreement with MLV & Co. dated May 9, 2012 is incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed May 10, 2012.
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| 10.17 |
Letter agreement between the Company and Platinum-Montaur Life Sciences, LLC dated August 8, 2012 is incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed August 14, 2012.
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| 10.18** |
Amended and Restated License Agreement between the Company and Ferndale Pharma Group, Inc. dated July 3, 2012, is incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q filed August 9, 2012.
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| 10.19 |
Letter agreement between the Company and Platinum-Montaur Life Sciences, LLC dated as of August 24, 2012 is incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed August 30, 2012.
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| 10.20 |
Letter Agreement between the Company and Platinum-Montaur Life Sciences, LLC dated August 8, 2012 is incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q filed November 8, 2012.
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| 10.21 |
Letter Extension Agreement between the Company and Platinum-Montaur Life Sciences, LLC dated August 28, 2012 is incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q filed November 8, 2012.
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|
Exhibit
Number
|
Description of Document
|
|
| 10.22* |
Loan Agreement between the Company and Platinum-Montaur Life Sciences, LLC dated August 31, 2012 is incorporated by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q filed November 8, 2012.
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| 10.23 |
Promissory Note between the Company and Platinum-Montaur Life Sciences, LLC dated August 31, 2012 is incorporated by reference to Exhibit 10.6 of the Company’s Quarterly Report on Form 10-Q filed November 8, 2012.
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| 10.24 |
Default Security Agreement between the Company and Platinum-Montaur Life Sciences, LLC dated August 31, 2012 is incorporated by reference to Exhibit 10.7 of the Company’s Quarterly Report on Form 10-Q filed November 8, 2012.
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| 10.25 |
Revenue Security Agreement between the Company and Platinum-Montaur Life Sciences, LLC dated August 31, 2012 is incorporated by reference to Exhibit 10.8 of the Company’s Quarterly Report on Form 10-Q filed November 8, 2012.
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| 10.26 |
Guaranty Agreement between the Company and Platinum-Montaur Life Sciences, LLC dated August 31, 2012 is incorporated by reference to Exhibit 10.9 of the Company’s Quarterly Report on Form 10-Q filed November 8, 2012.
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| 10.27 |
Registration Indemnity Agreement between the Company and Platinum-Montaur Life Sciences, LLC dated August 31, 2012 is incorporated by reference to Exhibit 10.10 of the Company’s Quarterly Report on Form 10-Q filed November 8, 2012.
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| 10.28† |
Amendment to 2008 Equity Incentive Plan is incorporated herein by reference to Annex B to the Company’s Definitive Proxy Statement on Schedule 14A filed April 12, 2013.
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| 10.29† |
Consulting Agreement between the Company and Robert F. Doman dated August 26, 2013 is incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed August 29, 2013.
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| 10.30† |
First Amendment to the Consulting Agreement between the Company and Robert F. Doman dated October 3, 2013 is incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed November 7, 2013.
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| 10.31** |
License Development and Commercialization Agreement by and between the Company and Medical Technologies Innovations Asia, Ltd. dated December 9, 2013 is incorporated by reference to Exhibit 4.8 of the Company’s Annual Report on Form 10-K/A filed May 1, 2014.
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| 10.32 |
Securities Purchase Agreement by and between the Company and Medical Technologies Innovations Asia, Ltd and Beijing Sino Tau Shang Pin Tech and Development Corp. dated December 10, 2013 is incorporated by reference to Exhibit 4.8 of the Company’s Annual Report on Form 10-K filed March 28, 2014.
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| 10.33 |
Securities and Purchase Agreement by and between the Company and Platinum Partners Value Arbitrage Fund L.P. and Platinum Partners Liquid Opportunity Master Fund L.P. dated December 10, 2013 is incorporated by reference to Exhibit 4.8 of the Company’s Annual Report on Form 10-K filed March 28, 2014.
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| 10.34 |
Second Amendment to the Consulting Agreement by and between the Company and Robert F. Doman dated December 26, 2013 is incorporated by reference to Exhibit 4.8 of the Company’s Annual Report on Form 10-K filed March 28, 2014.
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| 10.35 |
First Amendment to the Securities Purchase Agreement and License, Development and Commercialization Agreement by and between the Company and Medical Technologies Innovations Asia, Ltd and Beijing Sino Tau Shang Pin Tech and Development Corp., dated January 30, 2014 is incorporated by reference to Exhibit 4.8 of the Company’s Annual Report on Form 10-K filed March 28, 2014.
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| 10.36 |
Form of Director and Officer Indemnification Agreement dated as of June 24, 2014, is incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed June 27, 2014.
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| 10.37 |
Offer Letter between the Company and Charles Bernhardt dated July 16, 2014 is incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 16, 2014.
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|
Exhibit
Number
|
Description of Document
|
|
| 10.38 |
Third Amendment to the Consulting Agreement by and between the Company and Robert F. Doman dated April 3, 2014 is incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed August 14, 2014.
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| 10.39 |
Letter Agreement dated December 18, 2014, by and between the Company, Platinum Partners Value Arbitrage Fund L.P., Platinum Long Term Growth VII, LLC, Platinum Partners Liquid Opportunity Master Fund L.P., Platinum-Montaur Life Sciences, LLC, Platinum Management (NY) LLC, Platinum Liquid Opportunity Management (NY) LLC, Mark Nordlicht and Uri Landesman incorporated by reference to Exhibit 10.39 to the Company’s Annual Report on Form 10-K filed April 15, 2015.
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| 10.40 |
Securities Purchase Agreement dated December 18, 2014, by and between the Company, Platinum Partners Value Arbitrage Fund L.P., Beijing Yi Tang Bio Science & Technology Ltd., RPSMSS, LLC and Richard Stadtmauer incorporated by reference to Exhibit 10.40 to the Company’s Annual Report on Form 10-K filed April 15, 2015.
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| 10.41 |
Employment Agreement between the Company and Scott Hollander dated December 22, 2014 is incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 30, 2014.
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| 10.42 |
Employment Agreement between the Company and Alan Schoenbart dated December 29, 2014 is incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 30, 2014.
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| 10.43 |
Amendment to License, Development and Commercialization Agreement between Echo Therapeutics, Inc. and Medical Technologies Innovation Asia, Ltd. Dated December 29, 2014 incorporated by reference to Exhibit 10.43 to the Company’s Annual Report on Form 10-K filed April 15, 2015..
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| 10.44 |
Standard Office Lease, dated January 20, 2015, between the Company and The Realty Associates Fund X, L.P., is incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10Q filed May 15, 2015.
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| 10.45 |
Reimbursement Agreement, dated as of February 12, 2015, is incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed February 18, 2015.
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| 10.46 |
Lease, dated May 5, 2015, between the Company and Ferris Development 352 Turnpike Rd, LLC, is incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10Q filed May 15, 2015.
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| 10.47 |
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 Form 8-K filed July 20, 2015.
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| 10.48 |
Form of Subscription Agreement for Series F Preferred Stock and Warrants, dated August 27 and 28, 2015, is incorporated by reference to Exhibit 10.1 on Form 8-K filed September 2, 2015.
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| 10.49 |
Form of Subscription Agreement for Series F Preferred Stock and Warrants, dated September 24, 2015, is incorporated by reference to Exhibit 10.1 on Form 8-K filed September 30, 2015.
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| 10.50 |
Form of Promissory Note to Platinum Partners Value Arbitrage Fund, L.P., dated December 31, 2015, is incorporated by reference to Exhibit 10.1 on Form 8-K filed January 6, 2016.
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| 10.51 |
Form of Promissory Note to Medical Technologies Innovation Asia, Ltd., dated January 7, 2016, is incorporated by reference to Exhibit 10.1 on Form 8-K filed January 12, 2016.
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| 10.52 |
Form of Promissory Note to Beijing Yi Tang Bio Science & Technology, Ltd., dated January 26, 2016, is incorporated by reference to Exhibit 10.1 on Form 8-K filed February 1, 2016.
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| 10.53 |
Securities Purchase Agreement, dated January 29, 2016, is incorporated by reference to Exhibit 10.1 on Form 8-K filed February 3, 2016.
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| 10.54 |
Form of Note, dated January 29, 2016, is incorporated by reference to Exhibit 10.2 on Form 8-K filed February 3, 2016.
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| 10.55 |
Form of Warrant, dated January 29, 2016, is incorporated by reference to Exhibit 10.3 on Form 8-K filed February 3, 2016.
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| 10.56 |
Registration Rights Agreement, dated January 29, 2016, is incorporated by reference to Exhibit 10.4 on Form 8-K filed February 3, 2016.
|
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| 10.57 |
Security Agreement, dated January 29, 2016, is incorporated by reference to Exhibit 10.5 on Form 8-K filed February 3, 2016.
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|
Exhibit
Number
|
Description of Document
|
|
| 10.58 |
Form of Promissory Note to Beijing Yi Tang Bio Science & Technology, Ltd., dated February 4, 2016, is incorporated by reference to Exhibit 10.1 on Form 8-K filed February 10, 2016.
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| 10.59 |
Form of Promissory Note to Platinum Partners Value Arbitrage Fund, L.P., dated February 11, 2015, is incorporated by reference to Exhibit 10.1 on Form 8-K filed February 12, 2016.
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| 16.1 |
Letter of Wolf & Company, P.C. dated December 9, 2014 to the Securities and Exchange Commission is incorporated by reference to Exhibit 16.1 to the Company’s Current Report on Form 8-K filed December 12, 2014.
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| 21.1 |
Subsidiaries of the Company.
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| 23.1 |
Consent of BDO USA LLP, independent registered public accounting firm.
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| 24.1 |
Power of Attorney (included in the signature to this Annual Report on Form 10-K).
|
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| 31.1 |
Certification of Principal Executive Officer pursuant to Rule 13a-14 (a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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| 31.2 |
Certification of Principal Financial Officer pursuant to Rule 13a-14 (a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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| 32.1 |
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
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| 32.2 |
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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101.INS
|
XBRL Instance Document
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|
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101.SCH
|
XBRL Taxonomy Extension Schema
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|
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101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase
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101.DEF
|
XBRL Taxonomy Extension Definition Linkbase
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|
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101.LAB
|
XBRL Taxonomy Extension Label Linkbase
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|
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101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase
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____________
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||
| * |
Schedules and attachments have been omitted but will be provided to the Commission upon request.
|
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| ** |
Confidential treatment has been requested as to certain portions, which portions have been omitted and filed separately with the Commission.
|
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| † |
Management contract or compensatory plan or arrangement.
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-37-