e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2008.
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
.
Commission File Number: 000-23017
ECHO THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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41-1649949 |
(State or other jurisdiction of
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(I.R.S. Employer Identification Number) |
incorporation or organization) |
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10 Forge Parkway, Franklin, MA
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02038 |
(Address of principal executive offices)
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(Zip code) |
(508) 553-8850
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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 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 o |
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Accelerated filer
o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller reporting company
þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of November 10, 2008, 18,801,933 shares of the registrants Common Stock. $0.01 par value,
were issued and outstanding.
FORM 10-Q INDEX
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Page |
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Number |
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PART I. FINANCIAL INFORMATION |
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3 |
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Item 1. Consolidated Financial Statements |
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3 |
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Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007 |
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3 |
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Consolidated Statements of Operations for three and nine months ended September 30, 2008 and 2007 |
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4 |
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Consolidated Statements of Cash Flows for nine months ended September 30, 2008 and 2007 |
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5 |
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Notes to Consolidated Financial Statements (Unaudited) |
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7 |
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
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19 |
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Item 4T. Controls and Procedures |
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26 |
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PART II. OTHER INFORMATION |
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27 |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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27 |
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Item 6. Exhibits |
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27 |
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SIGNATURES |
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27 |
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PART IFINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
Echo Therapeutics, Inc.
(Formerly Sontra Medical Corporation)
Consolidated Balance Sheets
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As of, |
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September 30, |
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December 31, |
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2008 |
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2007 |
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(Unaudited) |
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(Audited) |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
399,680 |
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$ |
1,193,163 |
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Prepaid expenses and other current assets |
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60,900 |
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25,263 |
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Total current assets |
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460,580 |
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1,218,426 |
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Property and Equipment, at cost: |
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Computer equipment |
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242,495 |
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233,946 |
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Office and laboratory equipment |
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609,029 |
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588,498 |
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Furniture and fixtures |
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14,288 |
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14,288 |
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Manufacturing equipment |
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129,320 |
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197,888 |
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Leasehold improvements |
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177,768 |
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177,768 |
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1,172,900 |
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1,212,388 |
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Less-Accumulated depreciation and amortization |
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(1,090,542 |
) |
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(1,100,507 |
) |
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Net property and equipment |
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82,358 |
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111,881 |
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Other Assets: |
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Restricted cash |
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10,250 |
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10,250 |
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Intangible assets, net of accumulated amortization |
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9,856,737 |
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9,945,486 |
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Deferred financing costs, net of amortization |
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117,244 |
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Deposits and other assets |
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2,000 |
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2,000 |
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Total other assets |
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9,986,231 |
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9,957,736 |
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Total assets |
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$ |
10,529,169 |
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$ |
11,288,043 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current Liabilities: |
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Accounts payable |
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$ |
685,211 |
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$ |
382,308 |
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Current portion of notes payable, net of discounts |
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1,918,443 |
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386,458 |
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Accrued expenses |
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703,453 |
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451,136 |
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Total current liabilities |
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3,307,107 |
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1,219,902 |
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Notes Payable, net of current portion and discounts |
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283,832 |
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Commitments |
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Stockholders Equity: |
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Series A Convertible Preferred Stock, $0.01 par value, authorized 2,636,363 and
7,000,000 shares, issued and outstanding 1,539,161 shares and none
at September 30, 2008 and December 31, 2007, respectively |
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15,392 |
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Common stock, $0.01 par value, authorized 60,000,000 shares, issued and outstanding
18,801,933 shares and 17,870,804 shares at September 30, 2008 and December 31, 2007,
respectively |
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188,021 |
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178,710 |
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Additional paid-in capital |
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63,609,929 |
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57,575,593 |
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Accumulated deficit |
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(56,875,112 |
) |
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(47,686,162 |
) |
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Total stockholders equity |
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6,938,230 |
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10,068,141 |
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Total liabilities and stockholders equity |
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$ |
10,529,169 |
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$ |
11,288,043 |
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The accompanying notes are an integral part of these consolidated financial statements.
Echo Therapeutics, Inc.
(Formerly Sontra Medical Corporation)
Consolidated Statements of Operations
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenue: |
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Product revenue |
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$ |
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$ |
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$ |
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$ |
12,120 |
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Licensing revenue |
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12,500 |
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37,500 |
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Total revenue |
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12,500 |
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49,620 |
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Operating Expenses: |
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Cost of product revenue |
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1,556 |
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Research and development |
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883,916 |
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323,078 |
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2,425,822 |
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923,172 |
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Purchased research and development |
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6,556,048 |
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6,556,048 |
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Selling, general and administrative |
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875,138 |
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1,767,587 |
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3,279,522 |
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2,812,002 |
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Total operating expenses |
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1,759,054 |
|
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|
8,646,713 |
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|
5,705,344 |
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10,292,778 |
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Loss from operations |
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|
(1,759,054 |
) |
|
|
(8,634,213 |
) |
|
|
(5,705,344 |
) |
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|
(10,243,158 |
) |
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Other Income (Expense): |
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|
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Interest income |
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4,671 |
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|
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21,657 |
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21,746 |
|
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|
35,563 |
|
Interest expense |
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|
(303,473 |
) |
|
|
(64,131 |
) |
|
|
(861,863 |
) |
|
|
(70,289 |
) |
Loss on extinguishment of debt |
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|
(844,760 |
) |
|
|
|
|
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|
(2,056,773 |
) |
|
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|
Derivatives loss |
|
|
|
|
|
|
|
|
|
|
(586,716 |
) |
|
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|
|
|
|
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|
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Other income (expense), net |
|
|
(1,143,562 |
) |
|
|
(42,474 |
) |
|
|
(3,483,606 |
) |
|
|
(34,726 |
) |
|
|
|
|
|
|
|
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Net loss |
|
|
(2,902,616 |
) |
|
|
(8,676,687 |
) |
|
|
(9,188,950 |
) |
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(10,277,884 |
) |
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Accretion of dividend on Series A Convertible
Preferred Stock |
|
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|
|
|
|
|
|
|
|
|
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(483 |
) |
|
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Net loss applicable to common shareholders |
|
$ |
(2,902,616 |
) |
|
$ |
(8,676,687 |
) |
|
$ |
(9,188,950 |
) |
|
$ |
(10,278,367 |
) |
|
|
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|
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|
Net loss per common share, basic and diluted |
|
$ |
(0.15 |
) |
|
$ |
(0.70 |
) |
|
$ |
(0.50 |
) |
|
$ |
(1.05 |
) |
|
|
|
|
|
|
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|
Basic and diluted weighted
average common shares
outstanding |
|
|
18,771,460 |
|
|
|
12,438,201 |
|
|
|
18,544,093 |
|
|
|
9,771,183 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Echo Therapeutics, Inc.
(Formerly Sontra Medical Corporation)
Consolidated Statements of Cash Flows
(Unaudited)
|
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Nine Months Ended September 30, |
|
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2008 |
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2007 |
|
Cash Flows From Operating Activities: |
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Net loss |
|
$ |
(9,188,950 |
) |
|
$ |
(10,277,884 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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|
Depreciation and amortization |
|
|
147,352 |
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|
88,390 |
|
Share-based compensation |
|
|
1,429,688 |
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|
1,677,374 |
|
Purchased research and development |
|
|
|
|
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|
6,556,048 |
|
Fair value of common stock and warrants issued for services |
|
|
418,610 |
|
|
|
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|
Derivative loss |
|
|
586,716 |
|
|
|
|
|
Loss on extinguishment of debt |
|
|
2,056,773 |
|
|
|
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|
Non-cash interest expense |
|
|
845,225 |
|
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|
55,208 |
|
Changes in assets and liabilities: |
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|
|
|
|
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|
Inventory |
|
|
|
|
|
|
1,556 |
|
Prepaid expenses and other current assets |
|
|
(35,637 |
) |
|
|
(61,490 |
) |
Accounts payable |
|
|
302,903 |
|
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|
282,065 |
|
Deferred revenue |
|
|
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|
(37,500 |
) |
Accrued expenses |
|
|
291,147 |
|
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|
56,128 |
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|
Net cash used in operating activities |
|
|
(3,146,173 |
) |
|
|
(1,660,105 |
) |
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Cash Flows from Investing Activities: |
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Cash paid for acquisition of Durham |
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|
(60,000 |
) |
Purchase of property and equipment |
|
|
(29,080 |
) |
|
|
(2,578 |
) |
Decrease (Increase) in restricted cash |
|
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|
|
|
|
9,699 |
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|
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|
Net cash used in investing activities |
|
|
(29,080 |
) |
|
|
(52,879 |
) |
|
|
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|
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|
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|
Cash Flows From Financing Activities |
|
|
|
|
|
|
|
|
Repurchase of Series A preferred stock |
|
|
|
|
|
|
(73,334 |
) |
Proceeds from the sale of common stock, net of expenses |
|
|
|
|
|
|
2,233,326 |
|
Proceeds from Senior Convertible Notes and Warrants |
|
|
700,000 |
|
|
|
|
|
Proceeds from Senior Promissory Notes |
|
|
|
|
|
|
1,325,000 |
|
Proceeds from Secured Notes and Warrants |
|
|
2,000,000 |
|
|
|
|
|
Deferred financing costs |
|
|
(432,309 |
) |
|
|
|
|
Payments on equipment note payable |
|
|
|
|
|
|
(144,316 |
) |
Proceeds from exercise of stock options |
|
|
|
|
|
|
1,350 |
|
Proceeds from the exercise of warrants |
|
|
114,079 |
|
|
|
30,187 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
2,381,770 |
|
|
|
3,372,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Decrease) Increase in Cash and Cash Equivalents |
|
|
(793,483 |
) |
|
|
1,659,229 |
|
Cash and Cash Equivalents, beginning of period |
|
|
1,193,163 |
|
|
|
559,017 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, end of period |
|
$ |
399,680 |
|
|
$ |
2,218,246 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Echo Therapeutics, Inc.
(Formerly Sontra Medical Corporation)
Consolidated Statements of Cash Flows Concluded
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
Supplemental Disclosure of Cash Flow Information and Non Cash Financing Transactions: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
9,459 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Common stock issued for conversion of Senior Convertible Notes and accrued interest |
|
$ |
52,041 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Fair value of common stock issued for equity financing costs |
|
$ |
|
|
|
$ |
241,539 |
|
|
|
|
|
|
|
|
Fair value of common stock issued for Durham acquisition |
|
$ |
|
|
|
$ |
15,562,500 |
|
|
|
|
|
|
|
|
Beneficial conversion feature on Senior Convertible Notes |
|
$ |
121,320 |
|
|
$ |
1,325,000 |
|
|
|
|
|
|
|
|
Fair value of warrants issued for costs of Durham acquisition |
|
$ |
|
|
|
$ |
989,215 |
|
|
|
|
|
|
|
|
Fair value of warrants issued in connection with Senior Convertible Notes included in extinguishment loss |
|
$ |
626,480 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Adjustment to fair value of Bridge Notes exchanged for Senior Convertible notes included in extinguishment loss |
|
$ |
585,533 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Intrinsic value of the conversion feature of the Bridge Notes when converted to Senior Convertible Notes recorded
as a reduction of additional paid-in capital |
|
$ |
212,328 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Relative fair value of warrants issued with Secured Notes |
|
$ |
219,838 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Reclassification of derivative liability to additional paid in capital |
|
$ |
919,593 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Fair value of warrants issued in connection with exchange of Senior Convertible Notes for preferred
stock included in extinguishment loss |
|
$ |
106,182 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Senior Convertible Notes issued for accrued interest |
|
$ |
103,902 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Accretion of dividend on preferred stock |
|
$ |
|
|
|
$ |
483 |
|
|
|
|
|
|
|
|
Fair value of common stock issued for deferred financing costs |
|
$ |
185,668 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Conversion of Senior Convertible Notes to preferred stock |
|
$ |
2,077,886 |
|
|
$ |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Echo Therapeutics, Inc.
(Formerly Sontra Medical Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Period Ended September 30, 2008 (Unaudited)
(1) ORGANIZATION, BASIS OF PRESENTATION AND GOING CONCERN
Organization and Basis of Presentation
Echo Therapeutics, Inc. is a transdermal medical device and specialty pharmaceutical company
developing a non-invasive (needle-free), wireless, transdermal continuous glucose monitoring (tCGM)
system for people with diabetes and for use in hospital critical care units, as well as a wide
range of topical reformulations of pharmaceutical products previously approved by the United States
Food and Drug Administration (FDA).
Echo Therapeutics, Inc. was formed through the merger of a wholly-owned subsidiary of Sontra
Medical Corporation and Durham Pharmaceuticals Ltd. (doing business as Echo Therapeutics, Inc.
(Durham)) in September 2007 (the Merger). Previously, Durham was a majority-owned subsidiary of
Cato BioVentures. Effective October 8, 2007, Sontra Medical Corporation, a Minnesota corporation,
changed its name to Echo Therapeutics, Inc. (Echo-MN).
On June 9, 2008, Echo-MN entered into an Agreement and Plan of Merger (the Merger Agreement)
with a wholly-owned subsidiary of the same name, Echo Therapeutics, Inc., a Delaware corporation
(Echo-DE), in order to change Echo-MNs state of incorporation from Minnesota to Delaware (the
Merger). The Merger Agreement and Merger were approved by Echo-MNs shareholders at Echo-MNs
Annual Meeting of the Shareholders on May 20, 2008. Pursuant to the Merger Agreement, Echo-MN
merged with and into Echo-DE and Echo-DE is the surviving corporation (the Company).
Each share of common stock, par value $0.01 per share, of Echo-MN that was issued and
outstanding immediately prior to the Merger was converted into one issued and outstanding share of
common stock, par value $0.01 per share, of the Company (Common Stock), so that the holders of
all of the issued and outstanding shares of common stock of Echo-MN immediately prior to the Merger
became the holders of Common Stock of the Company when the Merger became effective.
The accompanying unaudited consolidated financial statements have been prepared in conformity
with generally accepted accounting principles in the United States (GAAP) consistent with those
applied in, and should be read in conjunction with, the Companys audited financial statements and
related footnotes for the year ended December 31, 2007 included in the Companys Annual Report on
Form 10-KSB as filed with the United States Securities and Exchange Commission (SEC) on March 31,
2008. The unaudited consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments, which are, in the opinion of management, necessary for a fair
presentation of the Companys financial position as of September 30, 2008 and its results of
operations and cash flows for the interim periods presented and are not necessarily indicative of
results for subsequent interim periods or for the full year. The interim financial statements do
not include all of the information and footnotes required by GAAP for complete financial statements
and allowed by the relevant SEC rules and regulations; however, the Company believes that its
disclosures are adequate to ensure that the information presented is not misleading.
The accompanying consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary, Sontra Medical Inc., a Delaware corporation. All significant inter-company
balances and transactions have been eliminated in the consolidated financial statements.
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 September 30, 2008, the Company had cash of approximately $400,000
and an accumulated deficit of approximately $56,875,000. Although the Company has been able to
issue securities through senior promissory notes, secured promissory notes and a series of private
placements to raise capital in order to fund its operations, it is not known whether the Company
will be able to continue this practice, or be able to obtain other types of financing to meet its
cash operating expenses. This, in turn, raises substantial doubt about the Companys ability to
continue as a going concern. Management is currently pursuing additional private equity financing,
and such financing is expected to be completed during 2008; however, no assurances can be given as
to the success of these plans. The consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements reflect the application of the following accounting
policies:
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
judgments, estimates and assumptions that affect the amounts reported in the Companys consolidated
financial statements and accompanying notes. Actual results could differ materially from those
estimates. The Company considers the valuation of intangible assets, the recoverability of
long-lived assets, the realizability of deferred tax assets and the fair value of share-based
payments issued to be material accounting estimates.
Intangible Assets and Other Long-Lived Assets
The Company records intangible assets at the acquisition date fair value. As a policy, the
Company amortizes its intangible assets using the straight-line method over their estimated useful
lives, as follows: patents and licenses, two (2) to twenty (20) years; definite-lived core and
developed technology, five (5) to twenty-five (25) years; and other intangible assets over various
periods. In connection with the acquisition of Durham Pharmaceuticals Ltd., intangible assets
related to contractual arrangements and technology are amortized over estimated useful lives of
three (3) and nine (9) years, respectively, on a straight-line basis.
In accordance with Financial Accounting Standards Board (FASB) Statement of Financial
Accounting Standards (SFAS) No. 144, Accounting for the Impairment and Disposal of Long-Lived
Assets, the Company reviews intangible assets subject to amortization quarterly 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 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. 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.
The Company generally calculates fair value as the present value of estimated future cash
flows it expects to generate from the asset using a risk-adjusted discount rate. If the estimate of
an intangible assets remaining useful life is changed, the Company amortizes the remaining
carrying value of the intangible asset prospectively over the revised remaining useful life.
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. No impairment
losses were recorded for the nine months ended September 30, 2008.
Share-Based Payments
Under SFAS No. 123R, the Company recognizes compensation costs 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 Companys policy is to grant employee and director stock options with an exercise price
equal to the fair value of the Companys common stock at the date of grant.
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 are indexed to the Companys
common stock are classified as liabilities when the Company is not permitted to settle the
instruments in unregistered shares. In such instances, in accordance with EITF Issue No. 00-19,
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 relative fair value with subsequent changes in fair value charged (credited)
to operations in each reporting period. If the Company subsequently obtains the ability to settle
the instruments in unregistered shares, the instruments are reclassified to equity at their fair
value.
On March 24, 2008, the Company entered into a registration rights agreement pursuant to which
the Company agreed to file a registration statement with the Securities and Exchange Commission
covering the resale of the common stock issuable
upon exercise of warrants issued to Imperium
Master Fund, Ltd. (Imperium) within 60 days after issuance of the securities. The Company also
agreed to use its best efforts to cause the registration statement to become effective under the
Securities Act as soon as practicable after filing the registration statement, but in no event
later than 180 days after issuance of the Imperium Warrants. As of May 14, 2008, the Company and
Imperium executed Amendment No. 1 to the Registration Rights
Agreement to eliminate these registration requirements and, as a result, the related warrants
were no longer required to be recorded as a derivative liability (see Note 5).
Reclassifications
Certain comparative amounts have been reclassified to correspond with the current years
presentation.
Recent Accounting Pronouncements
In December 2007, the FASB issued Statement No. 141 (revised) (No. 141R), Business
Combinations. This Statement replaces FASB Statement No. 141, and applies to all business entities
that previously used the pooling-of-interests method of accounting for some business combinations.
Under Statement No. 141R, an acquirer is required to recognize, at fair value, the assets acquired,
liabilities assumed, and any non-controlling interest in the entity acquired at the acquisition
date. Further, it requires that acquisition costs and expected restructuring costs be recognized
separately from the acquisition, and that the acquirer, in a business combination executed in
stages, recognizes the identifiable assets and liabilities as well as the non-controlling interest
in the entity acquired, at the full amounts of their fair values. SFAS No. 141R also requires an
acquirer to recognize the assets acquired and liabilities assumed arising from contractual
contingencies as of the acquisition date. Also under this statement, an acquirer is required to
recognize contingent consideration as of the acquisition date and eliminates the concept of
negative goodwill and requires gain recognition in instances in which the fair value of the
identifiable net assets exceeds the fair value of the consideration plus any non-controlling
interest in the entity acquired as of the acquisition date. SFAS No. 141R makes significant
amendments to other Statements and other authoritative guidance, and applies prospectively to
business combinations on or after the acquiring entitys first fiscal year that begins after
December 15, 2008, which is fiscal year 2009 for the Company. It may not be applied prior to that
date.
In March of 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133. SFAS No. 161 changes the disclosure
requirements for derivative instruments and hedging activities. Entities are now required to
provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under SFAS 133 and its related
interpretations, and (c) how derivative instruments and related hedged items affect the entitys
financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal
years and interim periods beginning after November 15, 2008 and is not expected to have a material
impact on the consolidated financial statements of the Company.
(3) ACQUISITION OF DURHAM PHARMACEUTICALS LTD.
The Company completed the acquisition of Durham (the Durham Acquisition) on September 14,
2007. Durham was a development-stage company focused on a broad portfolio of advanced topical
reformulations of widely-used, FDA-approved pharmaceutical products using AzoneTS, its
proprietary transdermal drug delivery technology platform. Durhams lead AzoneTS-reformulated
pharmaceutical product candidate is Durhalieve, an advanced reformulation of
triamcinolone acetonide for the treatment of corticosteroid responsive dermatoses. Durhalieve is
covered by a pending New Drug Application on file with the FDA.
(4) INTANGIBLE ASSETS
As of September 30, 2008, intangible assets related to the Durham Acquisition are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Life |
|
|
Cost |
|
|
Amortization |
|
|
Net |
|
|
|
|
Contract related intangible asset: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cato Research discounted contract |
|
3 years |
|
$ |
355,000 |
|
|
$ |
123,263 |
|
|
$ |
231,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology related intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent for the AzoneTS-based product
candidates and formulation |
|
9 years |
|
|
1,305,000 |
|
|
|
|
|
|
|
1,305,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drug Master Files containing formulation,
clinical and safety documentation used
by the FDA |
|
9 years |
|
|
1,500,000 |
|
|
|
|
|
|
|
1,500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two (2) in-process Durhalieve-related
pharmaceutical products |
|
9 years |
|
|
6,820,000 |
|
|
|
|
|
|
|
6,820,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total technology related intangible assets |
|
|
|
|
|
|
9,625,000 |
|
|
|
|
|
|
|
9,625,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
9,980,000 |
|
|
$ |
123,263 |
|
|
$ |
9,856,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense was approximately $30,000 and $89,000 for the three months and nine
months ended September 30, 2008. There was no amortization expense for the three months and nine
months ended September 30, 2007. Amortization expense is included in research and development in
the Statement of Operations.
(5) NOTES PAYABLE
Notes payable at September 30, 2008 and December 31, 2007 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Senior Secured Notes |
|
$ |
2,209,426 |
|
|
$ |
|
|
Unamortized discounts |
|
|
(290,983 |
) |
|
|
|
|
|
|
|
|
|
|
1,918,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Convertible Notes |
|
|
318,475 |
|
|
|
|
|
Unamortized discount |
|
|
(34,643 |
) |
|
|
|
|
|
|
|
|
|
|
283,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Promissory Bridge Notes |
|
|
|
|
|
|
1,325,000 |
|
Unamortized discount |
|
|
|
|
|
|
(938,542 |
) |
|
|
|
|
|
|
|
|
|
|
386,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable |
|
|
2,202,275 |
|
|
|
386,458 |
|
Less current portion of notes payable |
|
|
1,918,443 |
|
|
|
386,458 |
|
|
|
|
Notes payable, net of current portion |
|
$ |
283,832 |
|
|
$ |
|
|
|
|
|
2008 Senior Secured Note and Warrant Financing
On March 24, 2008, the Company entered into a secured note financing agreement with Imperium,
providing for, at the Companys option, the issuance of up to an aggregate $2,000,000 of original
issue discount senior secured notes (the Secured Notes) in up to four equal tranches, together
with warrants (the Imperium Warrants) to purchase up to 653,728 shares of common stock at an
exercise price of $1.94 per share as of September 30, 2008. On March 24, 2008, the Company drew
down the initial $500,000 in gross proceeds and issued the Imperium Warrants upon execution of the
agreement. The Company also issued additional Secured Notes and drew down $500,000 in gross
proceeds on each of April 24, 2008, June 2, 2008 and June 24, 2008, completing the financing for
$2,000,000.
The Company is not required to make monthly cash payments of principal and interest under the
Secured Notes. Instead, the outstanding principal of each Secured Note will accrete in value at an
annual rate of 10%, compounded monthly, resulting in a total principal amount of approximately
$552,357 due for each Secured Note at maturity. If, however, the Company completes an equity
issuance in one or more series of transactions totaling $5,000,000 (a Qualified Issuance), then
the
aggregate amount due for each Secured Note will be reduced from $552,357 to $546,903 and the
annual accretion value will be reduced from 10% to 9%.
Each Secured Note is due twelve months after the date of its issuance; provided, however, that
if the Company completes a Qualified Issuance by October 31, 2008, the Company has a right to
extend the maturity date of each Secured Note to 24 months after the date of its issuance. As of
October 31, 2008, the Company had not closed on a Qualified Issuance. The Company has the right to
repay the principal amount of the Secured Notes in cash, in whole, but not in part, prior to
maturity at a premium of 1.02 times the unpaid principal plus any other amount due under the
Secured Notes.
Events of default under the Secured Notes include: (1) failure to make a payment when due or
payable; (2) a breach of or notice of intent to breach any material term, covenant or condition in
the Secured Note or any of the transaction documents and such breach is not cured within five
business days after notice; (3) any false, incorrect or breach in any material respect of any
material representation or warranty made by the Company in the transaction documents; (4) the
default of more than $25,000 of any of the Companys other indebtedness that causes such debt to
become due and payable; or (5) a bankruptcy (whether voluntary or involuntary) or general
assignment for the benefit of the Companys creditors. All amounts outstanding under the Secured
Notes, plus an amount equal to the product of 1.10 and all amounts outstanding under the Secured
Notes, become due and payable upon the occurrence of an event of default or upon a change in
control (as defined in the Secured Notes).
In addition, the Company has agreed to certain covenants, including a prohibition on the
ability to incur future indebtedness (subject to certain exceptions) or make any dividend or
payment to holders of its capital stock (other than shares of the class of stock held by such
recipient), and a requirement that the Company maintain $6.5 million in stockholders equity
(excluding any impact of the issuance of the Imperium Warrants to stockholders equity) for so long
as the Secured Notes remain outstanding. The Company also agreed that it may not redeem its Senior
Convertible Notes (discussed below) as long as the Secured Notes remain outstanding, unless it
receives at least $10 million in gross proceeds from an issuance or series of related issuances of
equity securities.
The Companys subsidiary, Sontra Medical, Inc., has guaranteed the obligations under the
Secured Notes. Additionally, the Secured Notes are secured by all of the Companys assets.
The Imperium Warrants have a term of five years and are immediately exercisable at an exercise
price of $1.94 per share as of September 30, 2008. The Imperium Warrants provide for weighted
average anti-dilution protection upon future issuances or deemed issuances (subject to customary
exceptions) below the exercise price. The Imperium Warrants also allow for cashless exercise unless
the shares underlying the warrants are registered for resale on a registration statement filed
under the Securities Act of 1933, as amended (the Securities Act).
In connection with the issuance of the Secured Notes and Imperium Warrants, on March 24, 2008,
the Company and Imperium entered into a Registration Rights Agreement (the Registration Rights
Agreement) pursuant to which the Company agreed to file a registration statement with the SEC
covering the resale of the common stock issuable upon exercise of the Imperium Warrants within 60
days after issuance of the securities. The Company also agreed to use its best efforts to cause the
registration statement to become effective under the Securities Act as soon as practicable after
the filing of the registration statement, but in no event later than 180 days after issuance of the
Imperium Warrants. As of May 14, 2008, the Company and Imperium executed Amendment No. 1 to the
Registration Rights Agreement that eliminated the requirement for registration of the underlying
securities, but granted the holders of the Imperium Warrants piggy-back registration rights with
respect to certain registration statement filings by the Company in the future.
Due to certain requirements to obtain and maintain an effective registration statement
covering the shares underlying the Imperium Warrants, the Company originally determined that the
Imperium Warrants did not meet the requirements for classification as equity as described in EITF
Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Companys Own Stock as of March 31, 2008. As a result, the fair value of the
Imperium Warrants was recorded as a derivative liability which resulted in the recognition of a
derivative loss upon issuance in the amount of approximately $569,000. As a result of the
execution of Amendment No. 1 to the Registration Rights Agreement, the Company determined that the
Imperium Warrants met the requirements for classification as equity as described in EITF Issue No.
00-19 as of May 14, 2008. The derivative liability was adjusted to fair value as of May 14, 2008,
resulting in an additional derivative loss of approximately $17,000. The remaining derivative
liability of $919,593 was reclassified to additional paid-in capital. No derivative loss was
recognized during the three months ended September 30, 2008. The derivative loss for the nine
months ended September 30, 2008 amounted to approximately $587,000.
Interest expense related to the Secured Notes in the three months and nine months ended
September 30, 2008, including amortization of discounts and deferred financing costs, was
approximately $168,000 and $322,000, respectively.
2007 and 2008 Senior Promissory Bridge Notes and Senior Convertible Notes
On September 14, 2007, the Company completed a private placement of unsecured Senior
Promissory Bridge Notes (the Bridge Notes) in the aggregate principal amount of $1,325,000 to
Montaur Capital through Platinum Long Term Growth VII, LLC and to other strategic institutional and
individual accredited investors. The Bridge Notes were scheduled to be due September 15, 2008 and
accrued interest at a rate of 10% per annum, with interest payable upon maturity. If the Company
had completed a subsequent equity or equity-linked financing or a combination of equity financings
resulting in gross proceeds to the Company totaling at least $2,500,000 on or before December 15,
2007, inclusive of the Bridge Notes (a Qualified Financing), then the Bridge Notes would have
converted automatically into the equity securities issued in the Qualified Financing. The terms of
the Bridge Notes reflected a 20% premium in the event of an exchange such that upon an automatic
exchange of the Bridge Notes in any Qualified Financing, the holders of the Bridge Notes would be
deemed to have tendered an amount equal to 120% of the outstanding principal and interest of the
Bridge Notes in exchange for the equity securities issued to such holders in the Qualified
Financing. A Qualified Financing was not completed by December 31, 2007. Accordingly, the holders
of the Bridge Notes had one demand registration right and the Bridge Notes became (1) convertible
into shares of common stock at a ratio determined by dividing the outstanding principal and
interest of each Bridge Note by a price per share equal to the price per share of the Companys
most recent equity or equity-linked financing or (2) exchangeable at a 20% premium for securities
issued in any other subsequent equity or equity-linked financing.
On February 11, 2008, the Company completed an approximately $2.3 million private financing
with substantially all of the holders of the Bridge Notes. The $2,292,459 in aggregate principal
amount of unsecured Senior Convertible Notes issued in the financing (the Senior Convertible
Notes) bear interest annually at a rate of 8% per annum and provide the holders with the right to
convert principal into shares of the Companys common stock at $1.35 per share. The conversion
price is subject to weighted average anti-dilution protection, excluding certain customary
exceptions. The Senior Convertible Notes have a three-year term and the Company may elect to make
payments of interest in cash, additional notes, or stock.
Additionally, the investors received warrants to purchase 849,059 shares of common stock at an
exercise price of $1.00 per share as of September 30, 2008 for a term of five years. The warrants
provide for full anti-dilution price protection to the holders and allow for cashless exercise.
In connection with the Senior Convertible Note financing, certain holders representing
$1,275,000 face value of Bridge Notes exchanged their Bridge Notes at 120% of the outstanding
principal and interest of the Bridge Notes as payment toward the purchase price of the Senior
Convertible Notes purchased by such holders. Accordingly, the Company issued notes in the Senior
Convertible Note financing in the aggregate principal balance of $1,592,459 to the former holders
of the Bridge Notes upon their surrender of the Bridge Notes, and the Company received gross cash
proceeds in the amount of $700,000 in connection with the financing.
One holder of a Bridge Note with a face value of $50,000 converted the principal and accrued
interest of such Bridge Note into 52,041 shares of the Companys common stock, using a $1.00
conversion price as provided in the terms of the Bridge Notes. This was the last Bridge Note
outstanding and, following its conversion, no Bridge Notes remain outstanding.
The Company has determined that the terms of the Senior Convertible Notes are deemed
substantially different, as described in EITF Issue No. 96-19, Debtors Accounting for a
Modification or Exchange of Debt Instruments, from the terms of the Bridge Notes based on the
change in the fair value of the embedded conversion features. As a result, the Company recorded the
Senior Convertible Notes issued in exchange for the Bridge Notes at fair value on the date of
issuance and recorded a loss on extinguishment of approximately $586,000. An amount equal to the
intrinsic value of the conversion feature of the Bridge Notes as measured on the date of exchange
for the Senior Convertible Notes, or approximately $213,000, was recorded as a reduction in
additional paid-in capital in accordance with EITF Issue No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios. The
fair value of the warrants issued to the holders of the Bridge Notes upon conversion into the
Senior Convertible Notes, which the Company estimated to be approximately $626,000, was also
included in the loss on extinguishment. The difference between the fair value and the face value of
the Senior Convertible Notes is being accreted to interest expense over the term of the notes.
The new cash proceeds from the Senior Convertible Notes of $700,000 were allocated between the
notes and the warrants issued in the Senior Convertible Note financing on a relative fair value
basis. Approximately $220,000 of the proceeds was
allocated to the warrants and recorded as
additional paid-in capital and a discount on the Senior Convertible Notes. The Company determined
that the effective conversion price, after allocation of the proceeds, resulted in a beneficial
conversion feature of approximately $121,000 which was recorded as additional paid-in capital and a
further discount on the Senior Convertible Notes. The discounts on the Senior Convertible Notes are
being accreted to interest expense over the term of the notes.
Interest expense related to the Bridge Notes for the three months and nine months ended
September 30, 2008, including amortization of discounts and deferred financing costs, was
approximately $0 and $197,000, respectively. Interest expense
related to the Senior Convertible Notes for the three months and nine months ended September
30, 2008, including amortization of discounts and deferred financing costs, was approximately
$135,000 and $341,000, respectively. During the three months and nine months ended September 30,
2008, interest expense was satisfied by the issuance of additional Senior Convertible Notes in the
amount of approximately $87,000 and $104,000, respectively.
2008 Exchange Agreement
On September 30, 2008, the Company entered into an Exchange Agreement (the Exchange
Agreement) with substantially all of the holders of the Senior Convertible Notes (collectively,
the Investors). The Investors are the holders of an aggregate of $1,980,212 in principal amount
of the Senior Convertible Notes and an aggregate of $97,674 in principal amount of additional notes
issued as interest on the Senior Convertible Notes (collectively, the Notes), for a total
aggregate of $2,077,886 in principal amount of Notes constituting all of the issued and Senior
Convertible Notes, except for the aggregate $318,475 in principal amount of notes held by Gemini
Master Fund Ltd. (Gemini), who was not a party to the Exchange Agreement. Accrued interest of
$6,422 payable to Gemini for the three months ended September 30, 2008 was paid by an additional
Senior Convertible Note on October 1, 2008. The Senior Convertible Notes held by Gemini remain
outstanding with original terms.
Pursuant to the terms of the Exchange Agreement, the Company issued and delivered to the
Investors, in exchange for the cancellation of the Notes, 1,539,161 shares of a newly authorized
Series A Convertible Preferred Stock (see Note 7) and five-year warrants to purchase 153,912 shares
of common stock at an exercise price of $1.00 per share, subject to adjustment for stock splits,
combinations or similar events.
As
the Senior Convertible Notes did not contain the right to convert
into Series A Convertible Preferred Stock, the Company accounted for
the exchange as an extinguishment of the Senior Convertible Notes. As
a result, the difference between the fair value of the Series A
Convertible Preferred Stock issued over the carrying value of the
Senior Convertible Notes exchanged of $738,578 was recorded as an
extinguishment loss in the three months ended September 30, 2008. The
fair value of the warrants issued of $106,182 was also recorded as an
extinguishment loss in the three months ended September 30, 2008.
(6) FAIR VALUES OF ASSETS AND LIABILITIES
Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, which
provides a framework for measuring fair value under GAAP.
In accordance with SFAS 157, the Company groups its financial assets and financial liabilities
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.
Level 1 Quoted prices in active markets for identical assets or liabilities. Level 1 assets
and liabilities 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.
Level 2 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.
Level 3 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 includes, for example,
certain private equity investments and long-term derivative contracts.
The only asset or liability measured at fair value on a recurring basis is the Companys
derivative liability and is included in Level 3 in the fair value hierarchy. As a result of the
execution of Amendment No. 1 to the Registration Rights Agreement as described in Note 5, the
remaining liability balance was classified as additional paid-in capital as of May 14, 2008 and the
derivative liability was eliminated at that time. The fair value of the derivative liability at
September 30, 2008 was zero.
The table below presents the changes in Level 3 derivative liability measured at fair value on
a recurring basis.
|
|
|
|
|
|
|
Nine Months |
|
|
|
ended |
|
|
|
September 30, |
|
|
|
2008 |
|
Balance as of January 1, 2008 |
|
$ |
|
|
|
|
|
|
|
Total unrealized gain included
in net loss |
|
|
17,349 |
(1) |
Purchases, sales, issuances
and settlements |
|
|
902,244 |
|
Reclassification to equity |
|
|
(919,593 |
) |
|
|
|
|
Balance as of September 30, 2008 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains/(losses)
relating to instruments
at the reporting date |
|
$ |
|
|
|
|
|
|
|
|
|
(1) |
|
Included in derivative loss on the statement of operations
for the nine months ended September 30, 2008. |
Also, the Company may be required, from time to time, to measure certain other financial assets at
fair value on a nonrecurring basis. These adjustments to fair value usually result from
application of lower-of-cost-or-market accounting or write-downs of individual assets. In the nine
months ended September 30, 2008, there were no such adjustments.
(7) SERIES A CONVERTIBLE PREFERRED STOCK
Effective upon the Companys reincorporation in Delaware on June 9, 2008, the Company is
authorized in its Certificate of Incorporation to issue up to 10,000,000 shares of preferred stock
with the rights, preferences and privileges to be fixed by the Board of Directors. On September 29,
2008, the Board of Directors authorized the creation and issuance of a new class of Series A
Convertible Preferred Stock. The Board of Directors authorized the issuance of up to 2,636,363
shares of Series A Convertible Preferred Stock (Series A Stock) with the rights, preferences and
privileges described below.
Pursuant to the terms of the Certificate of Designation, Preference and Rights of Series A
Convertible Preferred Stock (the Certificate of Designation), each share of Series A Stock is
initially convertible into one share of common stock, subject to adjustment for stock splits,
combinations or similar events and subject to customary anti-dilution provisions. The Series A
Stock will pay a quarterly dividend, at an annual rate of 8%, which is payable in cash or in kind
at the option of the Company. Each holder of Series A Stock may convert its Series A Stock at any
time following issuance of the Series A Stock. The Series A Stock has no voting power, except as
otherwise required under Delaware General Corporate Law.
In the event that the Company liquidates, dissolves, or winds up its affairs (each, a
Liquidation Event), the holders of Series A Stock will be entitled to receive (subject to the
rights of any securities designated as senior to the Series A Stock) a liquidation preference equal
to the greater of (i) $1.35 per share or (ii) the amount that would be distributed in such
Liquidation Event on the number of shares of common stock issuable upon conversion of the Series A
Stock. The Company cannot create or issue any security senior to the Series A Stock without the
approval of the holders of the majority of the outstanding Series A Stock.
In conjunction with the dividend on the preferred stock, the Company accreted dividends of
$483 for the nine months ended September 30, 2007. For the nine months ended September 30, 2007,
the Company paid annual dividends of $483 in the form of 10,487 shares of common stock. No
dividends were accreted or paid on the preferred stock for the nine months ended September 30,
2008.
(8) COMMON STOCK
The Company has authorized 60,000,000 shares of common stock, $0.01 par value per share, of
which 18,801,933 and 17,870,804 shares were issued and outstanding as of September 30, 2008 and
December 31, 2007, respectively.
Exercise of Warrants
In December 2007, the Company requested from the holders of the warrants issued in January
2007 the right to redeem the outstanding warrants to purchase 1,506,250 shares of the Companys
common stock, $.01 par value, at $0.21 per share, for $0.001 per share. Through September 30, 2008,
no such warrants had been redeemed and warrants to purchase 545,000 shares of common stock were
exercised voluntarily, providing gross proceeds of approximately $114,079. In addition, the Company
issued 160,873 shares of common stock in connection with a cashless exercise of warrants issued in
January 2007 to purchase 181,250 shares of common stock.
Exercise of Stock Options
In the three months ended September 30, 2008, the Company issued 9,465 shares of common stock
in connection with a cashless exercise of stock options to purchase 66,666 shares of common stock.
Restricted Common Stock issued for Services
On March 25, 2008, the Company issued 25,000 shares of fully-vested, unregistered shares of
the Company common stock to consultants for investor relations services. On May 23, 2008, the
Companys Board of Directors approved the issuance of 150,000 fully-vested, unregistered shares
of the Companys common stock to consultants for investor relations services. An amount of 50,000
shares was earned by the consultant and issued by the Company on May 23, June 23 and August 23,
2008 (see Note 9).
(9) STOCK OPTION PLANS
In 1997, the Company adopted its 1997 Long-Term Incentive and Stock Option Plan (the 1997
Plan). Pursuant to the 1997 Plan, the Companys Board of Directors (or committees and/or executive
officers delegated by the Board of Directors) may grant incentive and nonqualified stock options to
the Companys employees, officers, directors, consultants and advisors. The Company has reserved an
aggregate of 150,000 shares of its common stock for issuance upon exercise of options granted under
the 1997 Plan. As of September 30, 2008, there were options to purchase an aggregate of 25,000
shares of common stock outstanding under the 1997 Plan and 116,546 shares available for future
option grants under the 1997 Plan.
In connection with the Companys strategic merger with ChoiceTel in 2002, the Company assumed
all outstanding options under the 1999 Sontra Medical, Inc. Stock Option and Incentive Plan (the
1999 Plan). The Company may not grant any additional options under the 1999 Plan. The Company
assumed options to purchase an aggregate of 86,567 shares of common stock under the 1999 Plan. As
of September 30, 2008, there were options to purchase an aggregate of 5,780 shares of common stock
outstanding under the 1999 Plan and none available for future grants.
In March 2003, the Companys shareholders approved its 2003 Stock Option and Incentive Plan
(the 2003 Plan). Pursuant to the 2003 Plan, the Companys Board of Directors (or 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 Companys employees, officers,
directors, consultants and advisors. On May 22, 2007, the shareholders of the Company increased the
number of shares authorized for issuance under the 2003 Plan by 1,000,000 shares. As of September
30, 2008, the maximum aggregate number of shares that may be authorized for issuance under the 2003
Plan for all periods is 1,600,000. As of September 30, 2008, there were restricted shares of common
stock and options to purchase an aggregate of 1,013,750 shares of common stock outstanding under
the 2003 Plan and 573,250 shares available for future grants under the 2003 Plan.
On May 20, 2008, the Companys shareholders approved the Echo Therapeutics, Inc. 2008 Equity
Compensation Plan (the 2008 Plan) at the Companys Annual Meeting of Shareholders. 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. As of
September 30, 2008, the number of shares authorized for issuance under the 2008 Plan was 1,700,000
shares and no grants had been made under the 2008 Plan.
Share-Based Compensation
For options and restricted stock issued and outstanding during the nine months ended September
30, 2008 and 2007, the Company recorded additional paid-in capital and non-cash compensation
expense of approximately $1,430,000 and $1,677,000, 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 Companys common stock using historical periods
consistent with the expected term of the options. The Company uses historical data, as well as
subsequent events occurring prior to the issuance of the financial statements, to estimate option
exercise and employee termination within the valuation model. The expected term of options granted
under the Companys stock plans is based on the average of the contractual term (generally 10
years) and the vesting period (generally 36 to 42 months) as permitted under SEC Staff Accounting
Bulletin No. 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 Companys common stock on the grant date.
The assumptions used principally for options granted to employees and members of the Companys
Board of Directors in the nine months ended September 30, 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
Risk-free interest rate |
|
|
3.85 |
% |
|
|
4.72 |
% |
Expected dividend yield |
|
|
|
|
|
|
|
|
Expected term (employee / director grants) |
|
|
6.75 years |
|
|
6.75 years |
|
Forfeiture rate (excluding fully vested options) |
|
|
33 |
% |
|
|
38 |
% |
Expected volatility |
|
|
152% - 157 |
% |
|
|
118% - 163 |
% |
A summary of option activity under the Companys stock plans and options granted to officers
of the Company outside any plan as of September 30, 2008 and changes during the nine months then
ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
Options |
|
Shares |
|
|
Price |
|
|
Term |
|
|
Value |
|
Outstanding at January 1, 2008 |
|
|
4,066,271 |
|
|
$ |
1.99 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
265,000 |
|
|
|
1.52 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(66,666 |
) |
|
|
(1.39 |
) |
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(320,075 |
) |
|
|
3.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2008 |
|
|
3,944,530 |
|
|
$ |
1.87 |
|
|
9.01 years |
|
$ |
114,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2008 |
|
|
2,091,609 |
|
|
$ |
2.05 |
|
|
8.85 years |
|
$ |
96,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of options granted during the nine months ended
September 30, 2008 was $1.52 per share. Share-based compensation expense recognized in the nine
months ended September 30, 2008 was approximately $186,000 for options granted in the nine months
ended September 30, 2008. Total share-based compensation expense recognized in the nine months
ended September 30, 2008 was approximately $1,430,000.
Restricted Stock Grants
As of September 30, 2008, the Company had outstanding restricted stock grants amounting to
317,875 shares at a weighted-average grant-date fair value of $1.72 per share. Of the outstanding
restricted stock grants, 304,750 shares have not been registered under the Securities Act. A
summary of the status of the Companys nonvested restricted stock grants as of September 30, 2008,
and changes during the nine months ended September 30, 2008, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant-Date |
|
Nonvested Shares |
|
Shares |
|
|
Fair Value |
|
Nonvested at January 1, 2008 |
|
|
16,875 |
|
|
$ |
1.77 |
|
Granted |
|
|
175,000 |
|
|
|
1.63 |
|
Vested |
|
|
(176,875 |
) |
|
|
1.63 |
|
Forfeited |
|
|
(11,250 |
) |
|
|
1.77 |
|
|
|
|
|
|
|
|
Nonvested at September 30, 2008 |
|
|
3,750 |
|
|
$ |
1.77 |
|
|
|
|
|
|
|
|
Share-based compensation recognized in the nine months ended September 30, 2008 related to
restricted stock grants to directors was approximately $4,400. Share-based compensation recognized
in the three and nine months ended September 30, 2008 related to restricted stock grants to
consultants for investor relations services was $65,000 and $285,000, respectively, and was
recorded in selling, general and administrative expense.
(10) WARRANTS
At September 30, 2008, the Company had the following outstanding warrants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
Shares |
|
|
Exercise |
|
|
Date of |
|
|
|
Exercisable |
|
|
Price |
|
|
Expiration |
|
Issued to investors in private placement |
|
|
212,083 |
|
|
$ |
15.00 |
|
|
|
10/15/2008 |
|
Issued to placement agent in private placement |
|
|
33,258 |
|
|
$ |
12.00 |
|
|
|
10/15/2008 |
|
Issued to investors and placement agent in private placement |
|
|
118,620 |
|
|
$ |
24.50 |
|
|
|
12/8-10/15/2009 |
|
Issued to investor in former subsidiary |
|
|
15,000 |
|
|
$ |
50.00 |
|
|
|
2/23/2010 |
|
Issued to investors and placement agent in private placement |
|
|
476,829 |
|
|
$ |
5.80 |
|
|
|
3/16/2016 |
|
Issued to investors in private placement |
|
|
611,250 |
|
|
$ |
0.21 |
|
|
|
1/30/09 |
|
Issued to investors and placement agent in private placement |
|
|
599,250 |
|
|
$ |
1.40 |
|
|
|
6/15-7/16/2012 |
|
Issued to financial advisor |
|
|
60,000 |
|
|
$ |
1.58 |
|
|
|
7/25/2012 |
|
Issued to financial advisor in connection with an acquisition |
|
|
425,000 |
|
|
$ |
2.18 |
|
|
|
9/14/2012 |
|
Issued to financial advisor |
|
|
175,013 |
|
|
$ |
1.48 |
|
|
|
2/11/2013 |
|
Issued to Senior Convertible Note holders |
|
|
849,059 |
|
|
$ |
1.00 |
|
|
|
2/11/2013 |
|
Issued to Secured Note holders |
|
|
653,728 |
|
|
$ |
1.94 |
|
|
|
3/14/2013 |
|
Issued to consultant |
|
|
25,000 |
|
|
$ |
2.50 |
|
|
|
3/25/2010 |
|
Issued to consultant |
|
|
80,000 |
|
|
$ |
2.50 |
|
|
|
3/25/2013 |
|
Issued to Senior Convertible Note holders |
|
|
153,912 |
|
|
$ |
1.00 |
|
|
|
9/30/2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4,488,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average exercise price |
|
|
|
|
|
$ |
3.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average duration in years |
|
|
|
|
|
|
|
|
|
3.17 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances to Consultants
On March 25, 2008, the Companys Board of Directors approved the issuance of warrants to
purchase 105,000 shares of the Companys common stock at an exercise price of $2.50 per share to
two consultants for investor relations services. The fair value of these services has been
determined to be approximately $133,000.
Issuance of Warrants for Financings
On February 11, 2008, the Company provided warrants to purchase 173,013 shares of the
Companys common stock at an exercise price of $1.49 per share ($1.48 as of September 30, 2008) to
Burnham Hill Partners, a division of Pali Capital, Inc., for a financing fee in connection with the
Senior Convertible Note financing. The fair value of these services has been determined to be
approximately $186,000 and has been recorded as a deferred financing cost with amortization over a
three year period. Amortization for the nine months ended September 30, 2008 amounted to
approximately $39,000.
In
conjunction with the Exchange Agreement (see Note 5), the Company issued the Investors warrants to
purchase 153,912 shares of common stock at an exercise price of $1.00 per share with a five year
term. The fair value of the warrants was $106,182 and was recorded as an extinguishment loss in
the three months ended September 30, 2008.
(11) RIGHT OF FIRST OFFER AGREEMENT
On April 21, 2008, the Company entered into a Dermatology Product Candidate Right of First
Offer Agreement (the Right of First Offer Agreement) with Cato BioVentures pursuant to which Cato
BioVentures granted the Company a right of first offer to purchase certain dermatology small
molecule drug or protein biologic product candidates or transdermal drug delivery technologies
which Cato BioVentures owns or licenses, as well as those owned by a third party for which Cato
BioVentures has a right to disclose to the Company (each, an Available Product Candidate). Under
the terms of the Right of First Offer Agreement, Cato BioVentures must promptly notify the Company
of an Available Product Candidate and discuss such Available Product Candidate exclusively with the
Company for a period of at least 90 days. The Company must provide notice of its interest in
pursuing the Available Product Candidate within such 90 day period or the Company will be deemed to
have declined its rights to the Available Product Candidate. The Right of First Offer Agreement
terminates on December 31, 2010 unless the parties mutually agree to extend the term beyond such
date.
(12) SUBSEQUENT EVENT
Preferred Stock and Warrant Financing On October 28, 2008 and October 31, 2008, the
Company entered into a Stock and Warrant Purchase Agreement (the Purchase Agreement) with
strategic institutional and accredited investors (the Investors) in connection with the Companys
private placement (the Financing) of 766,667 shares of its newly authorized Series A-1
Convertible Preferred Stock (the Shares) at a price of $1.50 per share together with warrants to
purchase a number of shares of the Companys Common Stock, $0.01 par value (the Common Stock)
equal to thirty-five percent (35%) of the number of Shares purchased by each Investor (the
Warrants) in the Financing. The Company received gross proceeds of $766,667 from the Financing.
The Company intends to use the net proceeds of the Financing for working capital and general
corporate purposes.
Pursuant to the Purchase Agreement, the Company issued Warrants to the Investors to purchase
up to 268,333 shares of Common Stock. The Warrants are immediately exercisable at a price per share
of $1.50, subject to adjustment for stock splits, combinations or similar events, and will expire
no later than October 1, 2013. The Warrants provide for standard weighted average anti-dilution
price protection upon future issuances or deemed issuances (subject to customary exceptions) below
the exercise price and allow for cashless exercise. In addition, the Company has the option to
redeem the Warrants, in whole but not in part, upon satisfaction of certain conditions, including
(i) the availability of an effective registration statement or Rule 144 exemption for any resale by
the holder, (ii) the shares of Common Stock trading at a price per share in excess of 200% of the
then-applicable exercise price for ten (10) trading days out of a period of fifteen (15)
consecutive trading days prior to the redemption, and (iii) an average daily trading volume during
such fifteen (15) consecutive trading days of at least 50,000 shares of Common Stock. Finally, an
exercise under the Warrants may not result in the holder beneficially owning more than 4.99% or
9.99%, as applicable, of all of the Common Stock outstanding at the time; provided, however, that a
holder may waive the foregoing provision upon sixty-one (61) days advance written notice to the
Company.
The offer, sale and issuance to the investors of the Series A-1 Convertible Preferred Stock,
the Warrants and the shares of Common Stock issuable upon the exercise of the Warrants have been
made in reliance on the statutory exemption from registration in Section 4(2) of the Securities Act
of 1933, as amended (the Securities Act), have not been and will not be registered under the
Securities Act, and, unless so registered, may not be offered or sold in the United States, except
pursuant to an applicable exemption from the registration requirements of the Securities Act and
applicable state securities laws. The Company is not required to register for resale under the
Securities Act the Shares issued to the Investors and the Common Stock issuable upon the exercise
of the Warrants.
Pursuant to the terms of the Certificate of Designation, Preference and Rights of Series A-1
Convertible Preferred Stock (the Certificate of Designation), each share of Series A-1
Convertible Preferred Stock (Series A-1 Stock) is initially convertible into one share of Common
Stock, subject to adjustment for stock splits, combinations or similar events and subject to
customary anti-dilution provisions. The Series A-1 Stock will pay a quarterly dividend, at an
annual rate of 8%, which is payable in cash or in kind at the option of the Company. Each Investor
may convert its Shares at any time following issuance of the Shares.
Each holder of Series A-1 Stock shall have the right, exercisable on an all or none basis, to
participate in the Companys first equity offering or series of equity-linked offerings to occur
after the date of the Financing that yields gross proceeds to the Company of at least $2,000,000
(the Qualified Offering) on the same terms and conditions as offered by the Company to the other
purchasers of such the securities issued and sold by the Company in the Qualified Offering (the
Additional Securities), except that the consideration for each holders participation in the
Qualified Offering shall be the surrender of 100% of such holders shares of Series A-1 Stock in
exchange for Additional Securities with a purchase price equal to an aggregate of 115% of the
Liquidation Preference of the Series A-1 Stock surrendered by such holder.
The Company is in the process of determining the accounting for the Financing. The Company
expects to allocate the proceeds from the Financing between the Series A-1 Stock and the Warrants
on a relative fair value basis. Any beneficial conversion feature on the Series A-1 Stock would be
recorded as a debit and credit to additional paid-in capital.
In connection with the Financing, the Company retained Burnham Hill Partners, a division of
Pali Capital, Inc. as its placement agent (the Placement Agent). The Company agreed to pay to the
Placement Agent for its services as follows: (a) a cash fee equal to 8% of the gross proceeds of
the Financing; and (b) warrants to acquire a number of shares of Common Stock of the Company equal
to 10% of the number of as-converted Shares issued to Investors in the Financing at a per share
exercise price of $1.10. The Company also agreed to pay reasonable out of pocket expenses of the
Placement Agent incurred in connection with the Financing in an amount not to exceed $5,000. These
costs, including the fair value of the warrants, will be recorded as stock issuance costs and net
against the proceeds from the Financing.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of our consolidated financial condition and results of operations
should be read in conjunction with the financial statements and the related notes thereto included
in the Companys Form 10-KSB for the year ended December 31, 2007 and elsewhere in this Form 10-Q.
The matters discussed herein contain forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended, 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. The factors that could cause
actual future results to differ materially from current expectations include, but are not limited
to, risks related to regulatory approvals and the success of our ongoing studies, including the
efficacy of our Symphony tCGM System, the failure of future development and preliminary marketing
efforts related to our tCGM system, risks and uncertainties relating to our ability to develop,
market and sell diagnostic products based on our skin permeation platform technologies, including
the Prelude SkinPrep System, the availability of substantial additional equity or debt capital to
support our research, development and product commercialization activities, the success of our
research, development, and regulatory approval, marketing and distribution plans and strategies,
including those plans and strategies related to our tCGM System and those discussed in Risk
Factors in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007 and
elsewhere in this report and the risks discussed in our other filings with the SEC. Readers are
cautioned not to place undue reliance on these forward-looking statements, which reflect
managements analysis, judgment, belief or expectation only as of the date hereof. We undertake no
obligation to publicly revise these forward-looking statements to reflect events or circumstances
that arise after the date hereof.
Overview
Echo Therapeutics, Inc. is a transdermal medical device and specialty pharmaceutical company
developing a non-invasive (needle-free), wireless, transdermal continuous glucose monitoring (tCGM)
system for people with diabetes and for use in hospital critical care units, as well as a wide
range of topical reformulations of pharmaceutical products previously approved by the United States
Food and Drug Administration (FDA).
Echo Therapeutics, Inc. was formed through the merger of a wholly-owned subsidiary of Sontra
Medical Corporation and Durham Pharmaceuticals Ltd. (doing business as Echo Therapeutics, Inc.) in
September 2007. Previously, Durham Pharmaceuticals Ltd. was a majority-owned subsidiary of Cato
BioVentures. Effective October 8, 2007, Sontra Medical Corporation, a Minnesota corporation,
changed its name to Echo Therapeutics, Inc. (Echo-MN).
On June 9, 2008, Echo-MN entered into an Agreement and Plan of Merger (the Merger Agreement)
with its wholly-owned subsidiary of the same name, Echo Therapeutics, Inc., a Delaware corporation
(Echo-DE), in order to change Echo-MNs state of incorporation from Minnesota to Delaware (the
Merger). The Merger Agreement and Merger were approved by Echo-MNs shareholders at Echo-MNs
Annual Meeting of the Shareholders on May 20, 2008. Pursuant to the Merger Agreement, Echo-MN
merged with and into Echo-DE and Echo-DE is the surviving corporation.
Our non-invasive Symphony tCGM System consists of our wireless transmission and transdermal
biosensor technologies and the Prelude SkinPrep System, which incorporates leading-edge,
non-invasive skin permeation control. Our Symphony tCGM System is designed to provide both
diabetics and hospital patients with a reliable, affordable, comfortable-to-wear, and easy-to-use,
needle-free continuous glucose monitoring device. In July 2008, we completed a positive clinical
study of our Symphony tCGM System. Using 1,292 reference blood glucose measurements from the ten
subjects in the study, Clarke error grid analysis of the study data showed that Echos Symphony
tCGM System had approximately 99% of the data in the combined A/B zones, with 76.4% in the A zone
and 22.4% in the B zone, and only 0.2% and 0.9% in the C zone and D zone, respectively. The MARD
for the study was 13.8%. The correlation coefficient for the data was 0.80. There were no adverse
events reported from the Prelude skin permeation or the Symphony tCGM biosensor systems.
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 September 30, 2008, we had cash of approximately $400,000 and an
accumulated deficit of approximately $56,875,000. For the nine months ended September 30, 2008, the
Company had no sales or revenues to cover its costs and operating expenses Although we have been
able to issue securities through senior promissory notes, secured promissory notes and a series of
private placements to raise capital, including the October 2008 offering of Series A-1 Convertible
Preferred Stock which yielded aggregate proceeds of $766,667, 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 cash operating expenses. This, in turn, raises substantial doubt about our
ability to continue as a going concern. Management is currently pursuing additional private equity
financing, and such financing is expected to be completed during 2008; however, no assurances can
be given as to the success of these plans. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
Strategic Acquisition of Durham Pharmaceuticals Ltd.
On September 14, 2007, we acquired Durham (the Durham Acquisition). Durham was a
development-stage company focused on a broad portfolio of advanced topical reformulations of
FDA-approved pharmaceutical products using its proprietary AzoneTS drug delivery technology.
Durhams lead AzoneTS-reformulated product, Durhalieve, is focused on the treatment of
corticosteroid responsive dermatoses and is covered by a New Drug Application on file with the FDA.
Durhalieve is also expected to be developed for the treatment of keloid scarring. We acquired
principally patented and unpatented pipeline specialty pharmaceutical product candidates, AzoneTS
formulation know-how and data-based technology related to AzoneTS Drug Master Files (including more
than 20 years of clinical and product development documentation) (DMFs). We purchased the DMFs
and related trademark and tradenames from an affiliate of Durham. We also entered into a Strategic
Master Services Agreement with Cato Research Ltd. (Cato Research), a global contract research and
development organization, providing for discounted service fees.
Since inception of Durham and up to the time of the Durham Acquisition, Durham operated as
both a majority-owned subsidiary of Cato BioVentures and a strategic drug development partner of
Cato Research. We believe the research and development of Durhams AzoneTS drug candidate
formulations was conducted through projects performed using contracted services through Cato
BioVentures and Cato Research, as Durham had no employees. During the period from its inception in
1999 through the date of the Durham Acquisition, Durham incurred approximately $7,500,000 of costs
and expenses related to its product development and regulatory activities and had no product or
service revenues.
As a result of the Durham Acquisition, we are now a transdermal medical device and specialty
pharmaceuticals company.
Results of Operations
We substantially reduced our staff and restructured our operations in December 2006.
Commencing in January 2007 and throughout 2007, we hired certain former employees and new employees
and engaged numerous independent contractors from time to time. As a result, the expenses for the
nine months ended September 30, 2008 may not be comparable with those in the same period in 2007.
As of September 30, 2008, we had eleven (11) employees and five (5) independent contractor
arrangements with consultants. Of this group of employees and consultants, six (6) are involved
with finance and administration and ten (10) are involved with research and development, and
clinical and regulatory matters. In addition to these individuals, we utilized outside contract
engineering and clinical research organizations during 2008.
Comparison of the nine months ended September 30, 2008 and 2007
Licensing Revenue Licensing revenue for the nine months ended September 30, 2008 was $0
compared to $37,500 for the nine months ended September 30, 2007, which were earned solely through
an agreement with HortResearch. In 2005 and 2006, HortResearch paid us $50,000 each year for a one
year option to license the use of our ultrasonic skin permeation technology. Accordingly, the
payments were recognized as revenue ratably over the service periods. In November 2007,
HortResearch did not elect to renew its license option.
Product Revenue and Cost of Product Revenue As a result of our strategic decision to not
pursue sales and marketing of the SonoPrep System, we had no product revenue in the nine months
ended September 30, 2008. For the same period in 2007, we had nominal revenues of $12,120 with a
cost of product revenue of $1,556 related to our sales and marketing of SonoPrep.
Research and Development Expenses Research and development expenses increased by
approximately $1,503,000 to approximately $2,426,000 for the nine months ended September 30, 2008
from approximately $923,000 for the nine months ended September 30, 2007. Research and development
expenses amounted to approximately 43% of total operating expenses during the nine months ended
September 30, 2008, and included product development expenses (including outside contract
engineering for our next generation skin permeation technology, product development for our next
generation transdermal continuous glucose monitoring (tCGM) system, clinical study expenses
including contract research organizations) associated with our tCGM system in hospital critical
care and ambulatory settings, and research and regulatory expenses related to our specialty
pharmaceutical product candidate, Durhalieve. Product development and clinical expenses included in
research and development expenses represented approximately 93% and 7%, respectively, of research and
development expenses for the
nine months ended September 30, 2008. Product development and clinical expenses included in
research and development expenses represented approximately 98% and 2%, respectively, of research
and development expenses for the nine months ended September 30, 2007.
Purchased Research and Development Expenses The Durham acquisition also resulted in
approximately $6,556,000 of purchased research and development costs for the nine months ended
September 30, 2007.
Selling, General and Administrative Expenses Selling, general and administrative expenses
increased by approximately $468,000 to approximately $3,280,000 for the nine months ended September
30, 2008 from approximately $2,812,000 for the nine months ended September 30, 2007. This increase
was due primarily to an increase in Company personnel and related costs, additional public company
costs related to investor relations, legal, accounting, printing and media and expanded capital
raising costs. Selling, general and administrative expenses represented 58% and 27% of total
operating expenses during the nine months ended September 30, 2008 and 2007, respectively.
Share-based compensation expenses for the nine months ended September 30, 2008 amounting to
approximately $1,430,000, are non-cash charges relating to the fair value assigned to the issuance
of restricted common stock, options and warrants to purchase our common stock by employees,
directors and certain service providers. We are not engaged in selling activities and accordingly,
general and administrative expenses relate to salaries and benefits for our executive, financial
and administrative staff, public company costs related to investor relations, legal, accounting,
printing and media costs, capital-raising costs, including those associated with travel, legal and
accounting services, and costs for general operations.
Other Income (Expense) Interest income was $21,746 for the nine months ended September 30,
2008, compared to interest income of $35,563 for the nine months ended September 30, 2007, a
decrease of $13,817. The decrease in interest income for the nine months ended September 30, 2008
was primarily attributable to our lower average amount of cash equivalents on hand during 2008
compared to 2007.
Interest expense was $861,863 for the nine months ended September 30, 2008, compared to
interest expense of $70,289 for the nine months ended September 30, 2007, an increase of $791,574.
The increase in interest expense is due principally to an increase in the amount of funding
obtained through the use of convertible and secured note arrangements. Bridge Notes in the amount
of $1.325 million issued on September 14, 2007 were either exchanged for Senior Convertible Notes
or converted into shares of our common stock in February 2008. Included in interest expense is
approximately $845,000 of non-cash interest related primarily to the amortization of discounts on
notes payable, the amortization of deferred financing costs and interest satisfied through the
issuance of promissory notes.
Interest expense of approximately $15,000 for the nine months ended September 30, 2007 related
to an outstanding note payable on equipment financing secured in 2005. The entire outstanding note
payable on equipment financing was paid in full in September 2007.
Derivative Loss Due to certain requirements to obtain and maintain an effective registration
statement covering the shares of common stock underlying the Imperium Warrants, we originally
determined that the Imperium Warrants did not meet the requirements for classification as equity as
described in EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Companys Own Stock. As a result, the fair value of the Imperium
Warrants was recorded as a derivative liability which resulted in the recognition of a derivative
loss upon issuance in the amount of approximately $569,000 in March 2008. As of May 14, 2008, the
Company and Imperium executed Amendment No. 1 to the Registration Rights Agreement and, as a
result, the Imperium Warrants were no longer required to be recorded as a derivative liability.
The derivative liability was adjusted to fair value at May 14, 2008 with the net increase in the
fair value of approximately $17,000 being recorded as an additional derivative loss.
Loss on Extinguishment of Debt We determined that the terms of the Senior Convertible Notes
are deemed substantially different, as described in EITF Issue No. 96-19, Debtors Accounting
for a Modification or Exchange of Debt Instruments, from the terms of the Bridge Notes based on
the change in the fair value of the embedded conversion features. As a result, we recorded the
Senior Convertible Notes issued in exchange for the Bridge Notes at fair value on the date of
issuance and recorded a loss on extinguishment of debt of approximately $586,000. The fair value of
the warrants issued to the holders of the Bridge Notes upon conversion into the Senior Convertible
Notes, which we estimated to be approximately $626,000, was also included in the loss on
extinguishment of debt. The difference between the fair value and the face value of the Senior
Convertible Notes is being accreted to interest expense over the term of the notes.
On September 30, 2008, the Company exchanged an aggregate principal amount of $2,077,886 of
its Senior Convertible Notes, including notes for amounts related to interest expense, for
1,539,161 shares of Series A Preferred Stock and five-year
warrants to purchase 153,912 shares of the Companys common stock at an
exercise price of $1.00 per share. The Company recorded an extinguishment loss of $844,760 in
connection with this exchange.
Net Loss As a result of the factors described above, we had a net loss of approximately
$9,189,000 for the nine months ended September 30, 2008 compared to approximately $10,278,000 for
the nine months ended September 30, 2007.
Comparison of the three months ended September 30, 2008 and 2007
Licensing Revenue Licensing revenue for the three months ended September 30, 2008 was zero
compared to $12,500 for the three months ended September 30, 2007 through an agreement with
HortResearch. In 2005 and 2006, HortResearch paid us $50,000 each year for a one year option to
license the use of our ultrasonic skin permeation technology. Accordingly, the payments were
recognized as revenue ratably over the service periods. In November 2007, HortResearch did not
elect to renew its license option.
Research and Development Expenses Research and development expenses increased by
approximately $561,000 to approximately $884,000 for the three months ended September 30, 2008 from
approximately $323,000 for the three months ended September 30, 2007. Research and development
expenses amounted to 50% and 4% of total operating expenses during the three months ended September
30, 2008 and 2007, respectively, and included product development expenses (including outside
contract engineering) for our next generation skin permeation technology, product development for
our next generation transdermal continuous glucose monitoring (tCGM) system, clinical study
expenses (including contract research organizations) associated with our tCGM system in hospital
critical care and ambulatory settings and, research and regulatory expenses related to our
specialty pharmaceutical product candidate, Durhalieve. Product development and clinical expenses
included in research and development expenses for the three months ended September 30, 2008
represented approximately 91% and 9%, respectively, of research and development expenses. Product
development and clinical expenses included in research and development expenses for the three
months ended September 30, 2007 represented approximately 99% and 1%, respectively, of research and
development expenses.
Purchased Research and Development Expenses The Durham acquisition resulted in approximately
$6,556,000 of purchased research and development costs for the three months ended September 30,
2007.
Selling, General and Administrative Expenses Selling, general and administrative expenses
decreased by approximately $892,000 approximately to $875,000 for the three months ended September
30, 2008 from approximately $1,768,000 for the three months ended September 30, 2007. This
decrease was due primarily to a reduction in public company costs related to investor relations,
legal, accounting, printing and media and capital raising costs. In addition, for the three months
ended September 30, 2008, there was a decrease in share-based compensation expense of approximately
$727,000 compared with the same period in 2007. Share based compensation amounted to approximately
$440,000 for the three months ended September 30, 2008. Share-based compensation expenses are a
non-cash charge relating to the fair value assigned to the issuance of restricted common stock,
options and warrants to purchase our common stock by employees, directors and certain service
providers. Selling, general and administrative expenses represented 50% and 20% of total operating
expenses during the three months ended September 30, 2008 and 2007, respectively. We are not
engaged in selling activities and accordingly, general and administrative expenses relate to
salaries and benefits for our executive, financial and administrative staff, public company costs
related to investor relations, legal, accounting, printing and media costs, capital-raising costs
including those associated with travel, legal and accounting services, and costs for general
operations.
Other Income (Expense) Interest income was $4,671 for the three months ended September 30,
2008, compared to interest income of $21,657 for the three months ended September 30, 2007, a
decrease of $16,986. The decrease in interest income for the three months ended September 30, 2008
was primarily attributable to our lower average amount of cash equivalents that we had on hand
during 2008 compared to 2007.
Interest expense was $303,473 for the three months ended September 30, 2008, compared to
interest expense of $64,131 for the three months ended September 30, 2007, an increase of $239,342.
The increase in interest expense is partly due to an increase in the amount of funding obtained
through the use of convertible and secured note arrangements. Bridge Notes in the amount of
$1.325 million issued on September 14, 2007 were either exchanged for Senior Convertible Notes or
converted into shares of our common stock in February 2008. Included in interest expense is
approximately $220,000 of non-cash interest related primarily to the amortization of discounts on
notes payable and the amortization of deferred financing costs.
Interest expense of approximately $9,000 for the three months ended September 30, 2007 related
to an outstanding note payable on equipment financing secured in 2005. The entire outstanding note
payable on equipment financing was paid in full in September 2007.
Loss on Extinguishment of Debt On September 30, 2008, the Company exchanged an aggregate
principal amount of $2,077,886 of its Senior Convertible Notes, including notes for amounts related
to interest expense, for 1,539,161 shares of Series A Preferred Stock and five-year warrants to
purchase 153,912 shares of the Companys common stock at an exercise price of $1.00
per share. The Company recorded an extinguishment loss of $844,760 in connection with this
exchange.
Net Loss As a result of the factors described above, we had a net loss of approximately
$2,903,000 for the three months ended September 30, 2008 compared to approximately $8,677,000 for
the three months ended September 30, 2007.
Liquidity and Capital Resources
We have financed our operations since inception primarily through private sales of common and
preferred stock, the issuance of convertible promissory notes and secured promissory notes, and
cash received in connection with exercises of options and warrants. As of September 30, 2008, we
had $399,680 of cash and cash equivalents, with no other short term investments.
Net cash used in operating activities was approximately $3,146,000 for the nine months ended
September 30, 2008. The use of cash in operating activities was primarily attributable to the net
loss of approximately $9,189,000 for the nine months ended September 30, 2008, offset by non-cash
expenses of approximately $147,000 for depreciation and amortization, approximately $1,430,000 for
share-based compensation, the fair value of common stock and warrants issued for services of
approximately $419,000, a derivative loss of approximately $587,000, a debt extinguishment loss of
approximately $2,057,000 and approximately $845,000 of interest expense relating to the
amortization of discounts and deferred financing costs. Increases in accounts payable and accrued
expenses provided approximately $594,000 of cash and an increase in prepaid expenses used cash of
approximately $36,000.
Net cash used in investing activities was approximately $29,000 for the nine months ended
September 30, 2008 and related to the cash used to purchase property and equipment.
Net cash provided by financing activities was approximately $2,382,000 for the nine months
ended September 30, 2008 and was comprised of gross proceeds from the issuances of Senior
Convertible Notes and Secured Notes in the aggregate amounting to approximately $2,700,000 and
proceeds from the exercise of common stock options and purchase warrants in the amount of
approximately $114,000, less cash paid for deferred financing costs of approximately $432,000.
At September 30, 2008, we had outstanding warrants to purchase 4,488,003 shares of common
stock at exercise prices ranging from $1.00 to $50.00 per share.
As of November 10, 2008, we had cash and cash equivalents of approximately $667,000.
Preferred Stock and Warrant Financing On October 28, 2008 and October 31, 2008, the
Company entered into a Stock and Warrant Purchase Agreement (the Purchase Agreement) with
strategic institutional and accredited investors (the Investors) in connection the Companys
private placement (the Financing) of 766,667 shares of its Series A-1 Convertible Preferred
Stock (the Shares) at a price per share of $1.50 together with warrants to purchase a number of
shares of the Companys Common Stock, $0.01 par value (the Common Stock) equal to thirty-five
percent (35%) of the number of Shares purchased by each Investor (the Warrants) in the Financing.
The Company received gross proceeds of $766,667 from the Financing. The Company intends to use the
net proceeds of the Financing for working capital and general corporate purposes.
2008 Exchange Agreement On September 30, 2008, the Company entered into an Exchange
Agreement (the Exchange Agreement) with substantially all of the holders of the Senior
Convertible Notes (collectively, the Investors). The Investors are the holders of an aggregate of
$1,980,212 in principal amount of the Senior Convertible Notes and an aggregate $97,674 in
principal amount of additional notes issued as interest on the Senior Convertible Notes
(collectively, the Notes), for a total aggregate of $2,077,886 in principal amount of Notes
constituting all of the issued and Senior Convertible Notes, except for the aggregate $318,475 in
principal amount of notes held by Gemini Master Fund Ltd. (Gemini), who was not a party to the
Exchange Agreement. Accrued interest of $6,422 payable to Gemini for the three months ended
September 30, 2008 was paid by an additional Senior Convertible Note on October 1, 2008. The
Senior Convertible Notes held by Gemini remain outstanding with original terms. The Gemini Notes
are convertible into shares of the Companys common stock at the option of the holder at a price
per share of $1.35, subject to adjustment for stock splits, combinations or similar events and
subject to customary weighted average anti-dilution adjustments.
Pursuant to the terms of the Exchange Agreement, the Company issued and delivered to the
Investors, in exchange for the cancellation of the Notes, 1,539,161 shares of a newly
authorized Series A Convertible Preferred Stock and five-year warrants to purchase 153,912 shares
of common stock at an exercise price of $1.00 per share, subject to adjustment for stock splits,
combinations or similar events.
The Certificate of Designation, Preference and Rights of Series A Convertible Preferred Stock
(the Certificate of Designation) provides that each share of Series A Preferred Stock is
initially convertible into one share of common stock, subject to adjustment for stock splits,
combinations or similar events and subject to customary anti-dilution provisions. The Series A
Preferred Stock will pay a quarterly dividend, at an annual rate of 8%, which is payable in cash or
in kind at the option of the Company. The holders of Series A Preferred Stock may convert their
shares at any time after issuance.
Senior Convertible Notes On February 11, 2008, we completed an approximately $2.3 million
private financing with substantially all of the former holders of our Bridge Notes issued in
September 2007. The $2,292,459 in aggregate principal amount of unsecured Senior Convertible Notes
issued in the financing (the Senior Convertible Notes) bear interest annually at a rate of 8.0%
per annum and provide the holders with the right to convert principal into shares of our common
stock at $1.35 per share. The conversion price is subject to weighted average anti-dilution
protection, excluding certain customary exceptions. The Senior Convertible Notes have a three-year
term and we may elect to make payments of interest in cash, additional notes, or stock.
Additionally, the investors received warrants to purchase 849,059 shares of common stock at an
exercise price of $1.00 per share as of September 30, 2008 for a term of five years. The warrants
provide for full anti-dilution price protection to the holders and allow for cashless exercise.
In connection with the Senior Convertible Note financing, certain holders representing
$1,275,000 face value of Bridge Notes exchanged their Bridge Notes at 120% of the outstanding
principal and interest of the Bridge Notes as payment toward the purchase price of the Senior
Convertible Notes purchased by such holders. Accordingly, we issued notes in the Senior Convertible
Note financing in the aggregate principal balance of $1,592,459 to the former holders of the Bridge
Notes upon their surrender of the Bridge Notes, and we received gross cash proceeds in the amount
of $700,000 in connection with the financing.
One holder of a Bridge Note with a face value of $50,000 converted the principal and accrued
interest of such Bridge Note into 52,041 shares of our common stock, using a $1.00 conversion price
as provided in the terms of the Bridge Notes. This was the last Bridge Note outstanding and,
following its conversion, no Bridge Notes remain outstanding.
We are using the net proceeds from the Senior Convertible Note offering for product
development, working capital and general corporate purposes.
We paid Burnham Hill Partners, a division of Pali Capital, Inc., $162,000 in connection with
the Senior Convertible Note financing and provided its designees/assignees warrants to purchase an
aggregate of 175,013 shares of common stock at an exercise price of $1.48 per share as of September
30, 2008.
2008 Secured Note and Warrant Financing On March 24, 2008, we entered into a Secured Note
financing with Imperium providing for, at our option, the issuance of up to an aggregate $2,000,000
of original issue discount senior secured notes (the Secured Notes) in four equal tranches,
together with warrants (the Imperium Warrants) to purchase up to 653,728 shares of our common
stock at an exercise price of $1.94 per share as of September 30, 2008. On March 24, 2008, we drew
down the initial $500,000 in gross proceeds and issued the Imperium Warrants upon execution of the
agreement. We also issued three additional Secured Notes and drew down $500,000 in gross proceeds
on each of April 24, 2008, June 2, 2008 and June 24, 2008, thus completing the $2,000,000
financing.
We are not required to make monthly payments of principal and interest under our Secured
Notes. Instead, the outstanding principal of each Secured Note will accrete in value at an annual
rate of 10%, compounded monthly, resulting in a total principal amount of approximately $552,357
due for each Secured Note at maturity. If we complete an equity issuance in one or more series of
transactions totaling $5,000,000 (a Qualified Issuance), then the aggregate amount due for each
Secured Note will be reduced from $552,357 to $546,903 and the annual accretion value will be
reduced from 10% to 9%.
Each Secured Note is due twelve months after the date of the issuance, provided, however, that
if we complete a Qualified Issuance by October 31, 2008, we may extend the maturity date of each
Secured Note to 24 months after the date of the issuance. The Company did not close on a Qualified
Financing by October 31, 2008. We may repay the principal amount of
the Secured Notes in cash, in whole, but not in part, prior to maturity at a premium of 1.02
times the unpaid principal plus any other amount due under the Secured Notes.
In addition, we have agreed to certain covenants, including a prohibition on our ability to
incur future indebtedness (subject to certain exceptions) or make any dividend or payment to
holders of our capital stock (other than shares of the class of stock held by such recipient), and
a requirement that we maintain $6.5 million in stockholders equity (excluding any impact of the
issuance of the Imperium Warrants to stockholders equity) for so long as the Secured Notes remain
outstanding. Because costs associated with the development of our products will increase our
liabilities, the requirement that we maintain a certain level of stockholders equity could limit
our ability to pursue necessary product development if we fail to raise additional equity capital.
We also agreed that we may not redeem our Senior Convertible Notes as long as the Secured
Notes remain outstanding, unless we receive at least $10 million in gross proceeds from an issuance
or series of related issuances of equity securities.
Our subsidiary, Sontra Medical, Inc., has guaranteed our obligations under the Secured Notes.
Additionally, the Secured Notes are secured by all of our assets.
The Imperium Warrants have a term of five years and are immediately exercisable at an exercise
price of $1.94 per share as of September 30, 2008. The Imperium Warrants provide for weighted
average anti-dilution protection upon future issuances or deemed issuances (subject to customary
exceptions) below the exercise price. The Imperium Warrants also allow for cashless exercise unless
the shares underlying the Warrants are registered for resale on a registration statement filed
under the Securities Act of 1933, as amended (the Securities Act). An exercise under the Imperium
Warrants may not result in the holder beneficially owning more than 9.9% of our common stock
outstanding at the time. The holder may waive the foregoing upon 60 days advance written notice.
In connection with the issuance of the Secured Notes and Imperium Warrants, on March 24, 2008,
we entered into a Registration Rights Agreement (the Registration Rights Agreement) pursuant to
which we agreed to file a registration statement with the Securities and Exchange Commission
covering the resale of the common stock issuable upon exercise of the Imperium Warrants within
60 days after issuance of the securities. On May 14, 2008, the Company and Imperium executed
Amendment No.1 to the Registration Rights Agreement that removed the registration requirements for
the underlying securities in connection with the financing, but granted the holders of the Imperium
Warrants piggy-back registration rights with respect to certain registration statement filings by
the Company in the future.
Our Secured Note financing agreement with Imperium includes a number of restrictive covenants,
including a prohibition on our ability to incur future indebtedness (subject to certain exceptions)
or make any dividend or payment to holders of our capital stock (other than shares of the class of
stock held by such recipient), and a requirement that we maintain $6.5 million in stockholders
equity (excluding any impact of the issuance of the Imperium Warrants to stockholders equity) for
so long as the Secured Notes remain outstanding. In order to advance our product development,
clinical programs and financing activities, we expect our monthly salaries and benefits, consulting
costs, legal costs and other working capital costs to increase. Because costs associated with the
development of our products will increase our liabilities, the requirement that we maintain a
certain level of stockholders equity could limit our ability to pursue necessary product
development if we fail to raise additional equity capital. Therefore, in order to achieve our
business objectives while continuing to satisfy the restrictive covenants of the Secured Notes, we
will be required to raise additional equity capital in 2008.
We are continuing to manage our costs aggressively and increase our operating efficiencies
while continuing our current level of product development and clinical programs, thereby maximizing
the time available to raise additional equity capital. Delays in obtaining sufficient levels of
equity capital could cause us to delay or halt our product development and clinical programs.
Although we believe that equity capital can be raised, there can be no guarantee that additional
equity capital will be available on terms favorable to us, if at all.
Even if we are successful in raising additional equity capital during 2008, we will still be
required to raise substantial additional capital in the future to satisfy our Secured Note
obligation in 2009, fund our research and development programs, obtain FDA approval of our
products, commercialize our product candidates and achieve profitability. Our ability to fund our
future operating requirements will depend on many factors, including:
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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. |
Strategic Product Development Agreement with Cato Research In connection with the Durham
Acquisition, we entered into a Strategic Master Services Agreement with Cato Research (Cato Master
Agreement) to provide us with contract research and development services and regulatory advice
(CRO Services). The Cato Master Agreement has an initial one year term, and is automatically
renewable for additional one-year terms unless either party provides sixty days notice prior to
the expiration of any one year term. The Cato Master Agreement provides an initial $80,000 credit,
of which $80,000 was used through June 30, 2008, for CRO Services and an ongoing 25% discount on
all CRO Services rendered on a time and materials basis during the term of the agreement. In
connection with the Cato Master Agreement, we entered into a Strategic Deferred Payment Agreement
with Cato Research in September 2007 (the Cato SDPA). Pursuant to the Cato SDPA, we are entitled
to defer payment to Cato Research for certain critical path CRO Services provided under the Cato
Master Agreement for the earlier of six (6) months from the due date of each invoice relating to
such CRO Services or the date we receive at least $5,000,000 in equity financing following the date
of the agreement. As of September 14, 2008, the Company had not deferred any payments for CRO
Services and the Cato SDPA expired.
Dermatology Product Candidate Agreement with Cato BioVentures On April 21,
2008, we entered into a Dermatology Product Candidate Right of First Offer Agreement (the Right of
First Offer Agreement) with Cato BioVentures pursuant to which Cato BioVentures granted to us a
right of first offer to purchase certain dermatology small molecule drug or protein biologic
product candidates or transdermal drug delivery technologies which Cato BioVentures owns or
licenses, as well as those owned by a third party for which Cato BioVentures has a right to
disclose to us (Available Product Candidates). Under the terms of the Right of First
Offer Agreement, Cato BioVentures must promptly notify us of an Available Product Candidate and
discuss such Available Product Candidate exclusively with us for a period of at least 90
days. We must provide notice of our interest in pursuing the Available Product Candidate within
such 90 day period or we will be deemed to have declined our rights to the Available Product
Candidate. The Right of First Offer Agreement terminates on December 31, 2010 unless the parties
mutually agree to extend its term.
Item 4T. Controls and Procedures.
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that
evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our
disclosure controls and procedures as of the end of the period covered by this report were
effective in ensuring that information required to be disclosed by us in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms and that the information required to be disclosed by
us in such reports is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rule
13a-15(f) of the Exchange Act) that occurred during the fiscal quarter to which this report relates
that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART IIOTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
We issued 50,000 shares of common stock to an investor relations firm on August 23, 2008
pursuant to a services agreement dated May 23, 2008, in consideration for investor relations
services. The issuance of the shares was made in a transaction not involving any public offering
pursuant to an exemption from registration under Section 4(2) of the Securities Act.
Item 6. Exhibits.
The Exhibits listed in the Exhibit Index immediately preceding such Exhibits are filed with or
incorporated by reference in this report.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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ECHO THERAPEUTICS, INC. |
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Date: November 14, 2008
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By:
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/s/ Patrick T. Mooney, M.D.
Patrick T. Mooney, M.D.
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Chief Executive Officer and Chairman of the Board |
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By:
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/s/ Harry G. Mitchell, CPA
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Harry G. Mitchell, CPA
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Chief Operating Officer, Chief Financial Officer and Treasurer |
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EXHIBIT INDEX
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Exhibit No. |
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Item. |
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2.1
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Agreement and Plan of Merger, dated June 9, 2008, between Echo Therapeutics, Inc., a Minnesota
corporation, and Echo Therapeutics, Inc., a Delaware corporation, is incorporated herein by reference
to Exhibit 2.1 of the Companys Current Report on Form 8-K dated June 9, 2008. |
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2.2
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Certificate of Ownership and Merger merging Echo Therapeutics, Inc., a Minnesota corporation, with and
into Echo Therapeutics, Inc., a Delaware corporation, is incorporated herein by reference to Exhibit
2.2 of the Companys Current Report on Form 8-K dated June 9, 2008. |
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2.3
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Articles of Merger merging Echo Therapeutics, Inc., a Minnesota corporation, with and into Echo
Therapeutics, Inc., a Delaware corporation, is incorporated herein by reference to Exhibit 2.3 of the
Companys Current Report on Form 8-K dated June 9, 2008. |
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3.1
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Certificate of Incorporation of the Company is incorporated herein by reference to Exhibit 3.1 of the
Companys Current Report on Form 8-K dated June 9, 2008. |
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3.2
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Bylaws of the Company is incorporated herein by reference to Exhibit 3.2 of the Companys Current
Report on Form 8-K dated June 9, 2008. |
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4.1
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Form of Warrant to Purchase Common Stock is incorporated herein by reference to Exhibit 4.1 of the
Companys Current Report on Form 8-K dated September 30, 2008. |
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4.2
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Form of Warrant to Purchase Common Stock is incorporated herein by reference to Exhibit 4.1 of the
Companys Current Report on Form 8-K dated October 28, 2008. |
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10.1
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Dermatology Product Candidate Right of First Offer Agreement is incorporated herein by reference to
Exhibit 10.1 of the Companys Current Report on Form 8-K dated April 25, 2008. |
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10.2
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Amendment No. 1 to Registration Rights Agreement between the Company and Imperium Master Fund, Ltd. is
incorporated herein by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K dated May
15, 2008. |
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10.3
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Exchange Agreement by and among the Company, Platinum Long Term Growth VII, LLC and the other
Investors named therein dated as of September 30, 2008 is incorporated herein by reference to Exhibit
4.1 of the Companys Current Report on Form 8-K dated September 30, 2008. |
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10.4
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Stock and Warrant Purchase Agreement by and among the Company and the Investors named therein, dated
as of October 28, 2008 is incorporated herein by reference to Exhibit 10.1 of the Companys Current
Report on Form 8-K dated October 28, 2008. |
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31.1
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Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification of the Chief Operating Officer, Chief Financial Officer and Treasurer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1
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Certification of the Chief 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
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Certification of the Chief Operating Officer, Chief Financial Officer and Treasurer 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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99.1
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Certificate of Designation, Rights and Preferences of Series A Preferred Stock is incorporated herein
by reference to Exhibit 99.1 of the Companys Current Report on Form 8-K dated September 30, 2008. |
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99.2
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Certificate of Designation, Rights and Preferences of Series A-1 Convertible Preferred Stock is
incorporated herein by reference to Exhibit 99.1 of the Companys Current Report on Form 8-K dated
October 28, 2008. |