XNAS:ECTE Echo Therapeutics Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
        For the quarterly period ended June 30, 2012
or

[  ]
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)
 
Delaware
41-1649949
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)

8 Penn Center
1628 JFK Blvd, Suite 300
Philadelphia, PA
19103
(Address of principal executive offices)
(Zip code)

(215) 717-4100
(Registrant’s telephone number, including area code)
 
    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]  No [  ]

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

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

Large accelerated filer [  ]
Accelerated filer [X]
Non-accelerated filer [  ]
Smaller reporting company [  ]
(Do not check if a smaller reporting company)

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

    As of August 7, 2012, 39,838,586 shares of the registrant’s Common Stock. $0.01 par value, were issued and outstanding.

 


 

 
 
ECHO THERAPEUTICS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2012
 
TABLE OF CONTENTS


PART I—FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
Echo Therapeutics, Inc.
Consolidated Balance Sheets
   
June 30,
2012
   
December 31,
2011
 
   
(Unaudited)
       
ASSETS
 
Current Assets:
           
Cash and cash equivalents
  $ 3,111,342     $ 8,995,571  
Cash restricted pursuant to letters of credit
    407,463       250,000  
Accounts receivable
    3,552       37,065  
Stock subscriptions receivable
          6,667  
Prepaid expenses and other current assets
    218,409       274,208  
Total current assets
    3,740,766       9,563,511  
                 
Property and Equipment, at cost:
               
Computer equipment
    332,287       298,290  
Office and laboratory equipment (including assets under capitalized leases)
    689,077       624,817  
Furniture and fixtures
    169,581       186,837  
Manufacturing equipment
    341,620       156,435  
Leasehold improvements
    187,264       187,264  
      1,719,829       1,453,643  
Less-Accumulated depreciation and amortization
    (1,156,232 )     (1,135,912 )
Net property and equipment (including assets under capitalized leases)
    563,597       317,731  
                 
Other Assets:
               
Intangible assets, net of accumulated amortization
    9,625,000       9,625,000  
Deposits and other assets
    10,816       20,565  
Total other assets
    9,635,816       9,645,565  
Total assets
  $ 13,940,179     $ 19,526,807  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current Liabilities:
               
Accounts payable
  $ 683,672     $ 365,298  
Deferred revenue
    123,721       123,708  
Current portion of notes payable and capital lease obligation, net of discounts
    2,405       2,288  
Derivative warrant liability
    392,536       1,035,337  
Accrued expenses and other liabilities
    742,979       965,832  
Total current liabilities
    1,945,313       2,492,463  
Notes payable and capital lease obligation, net of current portion and discounts
    2,656       3,888  
Deferred revenue, net of current portion
          61,867  
Total liabilities
    1,947,969       2,558,218  
                 
Commitments
               
                 
Stockholders’ Equity:
               
 Convertible Preferred Stock:
               
 Series C, $0.01 par value, authorized 10,000 shares, issued and outstanding 9,974.185 shares at June 30, 2012 and December 31, 2011
    100       100  
 Series D, $0.01 par value, authorized 3,600,000 shares, issued and outstanding 3,006,000 shares at June 30, 2012 and December 31, 2011 (preference in liquidation of $3,006,000 at June 30, 2012)
    30,060       30,060  
 Common Stock, $0.01 par value, authorized 150,000,000 shares, issued and outstanding 39,615,344 and 38,543,944 shares at June 30, 2012 and December 31, 2011, respectively
    396,156       385,442  
 Additional paid-in capital
    99,276,015       98,116,327  
 Common stock subscribed for but not paid for or issued, 0 and 33,333 shares at June 30, 2012 and December 31, 2011, respectively
          6,667  
 Accumulated deficit
    (87,710,121 )     (81,570,007 )
Total stockholders’ equity
    11,992,210       16,968,589  
Total liabilities and stockholders’ equity
  $ 13,940,179     $ 19,526,807  
 
The accompanying notes are an integral part of these consolidated financial statements.

Echo Therapeutics, Inc.
Consolidated Statements of Operations
(Unaudited)

   
For the Three Months
Ended June 30,
   
For the Six Months
Ended June 30,
 
 
 
2012
   
2011
   
2012
   
2011
 
Licensing revenue
  $ 30,927     $ 121,455     $ 61,854     $ 242,910  
Other revenue
    -       37,065       -       145,152  
Total revenues
    30,927       158,520       61,854       388,062  
                                 
Operating Expenses:
                               
Research and development
    2,200,307       996,149       3,591,952       1,862,099  
Selling, general and administrative
    1,334,852       978,150       3,194,256       1,900,265  
Total operating expenses
    3,535,159       1,974,299       6,786,208       3,762,364  
                                 
Loss from operations
    (3,504,232 )     (1,815,779 )     (6,724,354 )     (3,374,302 )
                                 
Other Income (Expense):
                               
Interest income
    1,556       1,210       4,515       3,289  
Interest expense
    (134 )     (604 )     (284 )     (13,354 )
Loss on extinguishment of debt/payables
    -       -       -       (1,514 )
Gain (loss) on disposals of assets
    (21,272 )     (2,531 )     (21,272 )     834  
Derivative warrant liability gain (loss)
    369,738       (122,011 )     601,281       (3,151,908 )
Other income (expense), net
    349,888       (123,936 )     584,240       (3,162,653 )
                                 
Net loss
    (3,154,344 )     (1,939,715 )     (6,140,114 )     (6,536,955 )
                                 
Deemed dividend on beneficial conversion feature of Series D Convertible Preferred Stock
    -       -       -       (1,975,211 )
                                 
Accretion of dividends on Convertible Perpetual Redeemable Preferred Stock
    -       (47,558 )     -       (93,242 )
                                 
Net loss applicable to common shareholders
  $ (3,154,344 )   $ (1,987,273 )   $ (6,140,114 )   $ (8,605,408 )
                                 
Net loss per common share, basic and diluted
  $ (0.08 )   $ (0.06 )   $ (0.16 )   $ (0.26 )
                                 
Basic and diluted weighted average common shares outstanding
    39,160,643       33,911,459       38,951,809       33,277,823  

The accompanying notes are an integral part of these consolidated financial statements.

 
Echo Therapeutics, Inc.
Consolidated Statements of Cash Flows
(Unaudited)

   
For the Six Months
Ended June 30,
 
 
 
2012
   
2011
 
Cash Flows From Operating Activities:
           
Net loss
  $ (6,140,114 )   $ (6,536,955 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    43,757       14,200  
Share-based compensation, net
    436,056       286,508  
Fair value of common stock and warrants issued for services
    50,299       380,763  
Derivative warrant liability (gain) loss 
    (601,281 )     3,151,908  
Non-cash loss on extinguishment of debt
          1,514  
Non-cash interest expense
          12,159  
Non-cash loss on disposal of assets
    21,272       2,731  
Changes in assets and liabilities:
               
Accounts receivable
    33,513       104,423  
Stock subscriptions receivable
          285,000  
Prepaid expenses and other current assets
    55,799       (83,602 )
Deposits and other assets
    9,749       (10,566 )
Accounts payable
    318,374       (175,345 )
Deferred revenue
    (61,854 )     (242,910 )
Accrued expenses and other liabilities
    67,147       207,238  
Net cash used in operating activities
    (5,767,283 )     (2,602,934 )
                 
Cash Flows from Investing Activities:
               
Purchase of property and equipment
    (310,895 )     (249,127 )
Increase in restricted cash
    (157,463 )     (128,250 )
Net cash used in investing activities
    (468,358 )     (377,377 )
                 
Cash Flows From Financing Activities:
               
Proceeds from the exercise of warrants
    151,680       576,224  
Proceeds from issuance of common stock and warrants, net of issuance costs
    6,667       794,761  
Principal payments for capital lease obligations
    (1,115 )     (1,009 )
Proceeds from issuance of Series D Convertible Preferred Stock, net of issuance costs
          2,478,702  
Proceeds from bridge notes
          1,000,000  
Repayment of bridge notes
          (75,000 )
Proceeds from exercise of stock options
    194,180       64,250  
Net cash provided by financing activities
    351,412       4,837,928  
                 
Net increase (decrease) in cash and cash equivalents
    (5,884,229 )     1,857,617  
Cash and cash equivalents, beginning of period
    8,995,571       1,342,044  
Cash and cash equivalents, end of period
  $ 3,111,342     $ 3,199,661  

The accompanying notes are an integral part of these consolidated financial statements.

 
Echo Therapeutics, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
 
 
 
Six Months Ended
June 30,
 
 
 
2012
   
2011
 
Supplemental Disclosure of Cash Flow Information and
   Non-Cash Financing Transactions:
           
             
Cash paid for interest
  $ 284     $ 1,196  
Accretion of dividend on Series B Perpetual Redeemable Preferred Stock
  $     $ 93,242  
Deemed dividend on beneficial conversion feature of Series D Convertible Preferred Stock
  $     $ 1,975,211  
Issuance of common stock in settlement of short term note
  $     $ 25,000  
Conversion of notes payable and accrued interest into Series D Convertible
   Preferred  Stock
  $     $ 1,006,000  
Reclassification of derivative warrant liability to additional paid-in capital
  $ 41,520     $ 2,170,727  
Fair value of warrants issued to investor relations services
  $     $ 173,000  
Fair value of common stock issued for short-term note extension
  $     $ 10,500  
Fair value of warrants issued to financial advisors as financing costs
  $     $ 41,363  
Fair value of common stock issued in connection with settlement agreement
  $ 208,000     $  
Cancellation of restricted common stock
  $     $ 5,250  

The accompanying notes are an integral part of these consolidated financial statements.


Notes To Consolidated Financial Statements
Quarter Ended June 30, 2012 (Unaudited)
 
(1)  ORGANIZATION AND BASIS OF PRESENTATION

Echo Therapeutics, Inc. (the “Company”) is a transdermal medical device company with significant expertise in advanced skin permeation technology that is primarily focused on continuous glucose monitoring and needle-free drug delivery.  The Company is developing its Prelude® SkinPrep System (“Prelude”) as a platform technology to allow for significantly enhanced and painless skin permeation that will enable two important applications:

 
analyte extraction, with the Symphony® tCGM System (“Symphony”) for needle-free, continuous glucose monitoring for use in hospital critical care units and for people with diabetes; and
 
enhanced needle-free drug delivery.

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Sontra Medical, Inc., a Delaware corporation. All significant intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States consistent with those applied in, and should be read in conjunction with, the Company’s audited consolidated financial statements and related footnotes for the year ended December 31, 2011 included in the Company’s Annual Report on Form 10-K as filed with the United States Securities and Exchange Commission (“SEC”) on March 15, 2012. These 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 Company’s financial position as of June 30, 2012 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. Certain amounts in prior periods have been reclassified to conform to current presentation.

The accompanying consolidated financial statements have been prepared on a basis assuming that the Company is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  As of June 30, 2012, the Company had cash of approximately $3,111,000, working capital of approximately $1,795,000 and an accumulated deficit of approximately $87,710,000.  We will require additional capital to fund our product development, research, manufacturing and clinical programs in accordance with our current projected level of operations.  The Company has funded its operations in the past primarily through debt and equity issuances.  Management intends to pursue additional financing to fund its operations.  Although management believes that it will be successful in securing additional financing, no assurances can be given as to the success of these plans or that such capital will be available to the Company in sufficient amounts to meet its operating cash needs or on terms acceptable to the Company.  The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

(2)  CASH AND CASH EQUIVALENTS

As of June 30, 2012, the Company held approximately $3,100,000 in cash and cash equivalents. The Company’s cash equivalents consist solely of bank money market funds. From time to time, the Company may have cash balances in excess of federal insurance limits. The Company has never experienced any previous losses related to these balances. All of the Company’s non-interest bearing cash balances were fully insured at June 30, 2012 due to a temporary federal program in effect from December 31, 2010 through December 31, 2012.  Under the program, there is no limit on the amount of insurance for eligible accounts.  Beginning in 2013, insurance coverage will revert to $250,000 per depositor at each financial institution and non-interest bearing cash balances may again exceed federally insured limits.

(3)  INTANGIBLE ASSETS

The Company’s intangible assets are related to the acquisition of assets from Durham Pharmaceuticals Ltd. in 2007 and are summarized as follows:

           
June 30, 2012
   
December 31, 2011
 
 
Estimated Life
 
Cost
   
Accumulated Amortization
   
Net
   
Net
 
Contract related intangible asset:
                         
Cato Research discounted contract
3 years
  $ 355,000     $ 355,000     $     $  
Technology related intangible assets:
                                 
Patents for the AzoneTS-based product candidates and formulation
6 years
    1,305,000             1,305,000       1,305,000  
Drug Master Files containing formulation, clinical and safety documentation used by the FDA
6 years
    1,500,000             1,500,000       1,500,000  
In-process pharmaceutical products for 2 indications
6 years
    6,820,000             6,820,000       6,820,000  
Total technology related intangible assets
      9,625,000             9,625,000       9,625,000  
Intangible assets, net
    $ 9,980,000     $ 355,000     $ 9,625,000     $ 9,625,000  

Intangible assets related to technology are expected to be amortized on a straight-line basis over the period ending 2019, when the underlying patents expire, and will commence upon revenue generation which the Company estimates may occur as early as 2013.  The contract related intangible asset was amortized over a three year period which ended in 2010.

(4)  OPERATING LEASE COMMITMENTS

The Company leases approximately 13,000 square feet of manufacturing, laboratory and office space in a single facility located in Franklin, Massachusetts under a lease expiring March 31, 2014.  Beginning June 1, 2012, a lease amendment increased the total space to 37,050 square feet and extended the expiration date to October 31, 2017.

The Company also leases approximately 5,400 square feet of corporate office space in a single facility located in Philadelphia, Pennsylvania under a lease expiring April 30, 2014.  Beginning June 1, 2012, a lease amendment increased the total space to 7,861 square feet and extended the expiration date to May 31, 2017.

Future minimum lease payments for each of the next 5 years under these operating leases are as follows:

   
Franklin
   
Philadelphia
   
Total
 
For the period ending December 31,
                 
2012
  $ 209,000     $ 90,000     $ 299,000  
2013
    424,000       183,000       607,000  
2014
    434,000       187,000       621,000  
2015
    444,000       192,000       636,000  
2016
    454,000       196,000       650,000  
Total
  $ 1,965,000     $ 848,000     $ 2,813,000  

The Company’s facilities lease expense was approximately $74,000 and $53,000 for the three months ended June 30, 2012 and 2011, respectively, and $151,000 and $86,000 for the six months ended June 30, 2012 and 2011, respectively.


(5)  DERIVATIVE WARRANT LIABILITY

At June 30, 2012 and December 31, 2011, the Company had outstanding warrants to purchase 7,268,974 and 7,527,529 shares of its Common Stock, respectively. Included in these outstanding warrants at June 30, 2012 are warrants to purchase 516,587 shares that are considered to be derivative financial instruments because the warrant agreements contain “down round” provisions whereby the number of shares covered by the warrants is subject to change in the event of certain future dilutive stock issuances. The fair value of these derivative instruments at June 30, 2012 was approximately $393,000, is considered Level 3 under the fair value hierarchy on a recurring basis, and is included in Derivative Warrant Liability, a current liability, in the Consolidated Balance Sheet. Changes in fair value of the derivative financial instruments are recognized in the Consolidated Statement of Operations as a Derivative Warrant Liability Gain or Loss. The Derivative Warrant Liability Gain for the three and six months ended June 30, 2012 was approximately $370,000 and $602,000, respectively. The Derivative Warrant Liability Loss for the three and six months ended June 30, 2011 was approximately $122,000 and $3,152,000, respectively.

The derivative warrant liability represents the risk exposure pertaining to the warrants and is based on the fair value of the underlying common stock and the gain or loss on the derivative warrant liability is a result of the change in fair value of the underlying common stock.  For the six months ended June 30, 2012, holders exercised warrants with “down round” provisions to purchase 118,500 shares, which resulted in a reclassification of approximately $42,000 from the Derivative Warrant Liability to Additional Paid-in Capital.  For the six months ended June 30, 2011, holders exercised warrants with “down round” provisions to purchase 602,693 shares, which resulted in a reclassification of approximately $2,171,000 from the Derivative Liability to Additional Paid-in Capital.

The table below presents the changes in the derivative warrant liability for the six months ended June 30, 2012 and 2011:

   
2012
   
2011
 
Derivative warrant liability as of January 1
  $ 1,035,337     $ 1,544,996  
    Total unrealized losses included in net loss (1) 
          2,191,147  
    Total realized losses included in net loss (1) 
          978,678  
    Total unrealized gains included in net loss (1) 
    (539,648 )     (17,917 )
    Total realized gains included in net loss (1) 
    (61,633 )      
    Reclassification of derivative warrant liability to additional paid-in capital for derivative warrants exercised
    (41,520 )     (2,170,726 )
Derivative warrant liability as of June 30
  $ 392,536     $ 2,526,178  
(1) Included in derivative warrant liability gain or loss in the Consolidated Statement of Operations.

(6)  PREFERRED STOCK
 
The Company is authorized to issue up to 40,000,000 shares of preferred stock with such rights, preferences and privileges as are determined by the Board of Directors.
 
Series C Convertible Preferred Stock
 
The Company has authorized 10,000 shares of Series C Preferred Stock (the “Series C Stock”), of which 9,974.185 shares were issued and outstanding as of June 30, 2012 and December 31, 2011.

Series D Convertible Preferred Stock

The Company has authorized 3,600,000 shares of Series D Preferred Stock (the “Series D Stock”), of which 3,006,000 shares were issued and outstanding as of June 30, 2012 and December 31, 2011.


(7)  COMMON STOCK

The Company has authorized 150,000,000 shares of Common Stock, of which 39,615,344 and 38,543,944 shares were issued and outstanding as of June 30, 2012 and December 31, 2011, respectively.

Stock Issued in Exchange for Services

During the six months ended June 30, 2012 and 2011, the Company issued 28,666 and 100,000 shares, respectively, of Common Stock with a fair value of $50,299 and $339,000, respectively, to vendors in exchange for their services.  Expenses associated with these transactions were included in Selling, General and Administrative Expenses in the Consolidated Statements of Operations.

(8)  STOCK OPTIONS AND RESTRICTED STOCK

In March 2003, the Company’s shareholders approved its 2003 Stock Option and Incentive Plan (the “2003 Plan”). Pursuant to the 2003 Plan, the Company’s Board of Directors (or its committees and/or executive officers delegated by the Board of Directors) may grant incentive and nonqualified stock options, restricted stock, and other stock-based awards to the Company’s employees, officers, directors, consultants and advisors. As of June 30, 2012, the maximum aggregate number of shares that may be authorized for issuance under the 2003 Plan for all periods is 1,600,000 shares. As of June 30, 2012, there were 161,250 restricted shares of Common Stock issued and options to purchase an aggregate of 514,000 shares of Common Stock outstanding under the 2003 Plan and 560,000 shares available for future grants.

In May 2008, the Company’s shareholders approved the 2008 Equity Compensation Plan (the “2008 Plan”). The 2008 Plan provides for grants of incentive stock options to employees and nonqualified stock options and restricted stock to employees, consultants and non-employee directors of the Company. In July 2010, the Company’s shareholders approved an amendment to the 2008 Plan to increase the maximum number of shares of Common Stock available under the Plan by 2,000,000 shares to 4,700,000 shares.  In June 2012, the Company’s shareholders approved an amendment to the 2008 Plan to increase the maximum number of shares available under the Plan by 5,300,000 shares to 10,000,000 shares.  As of June 30, 2012, there were restricted shares of Common Stock issued and options to purchase an aggregate of 3,978,406 shares of Common Stock outstanding under the 2008 Plan and 5,891,594 shares available for future grants.
 
   
Stock Option Plans
           
   
2003 Plan
   
2008 Plan
           
Shares Available For Issuance
                     
Total reserved for stock options and restricted stock
    1,600,000       10,000,000            
Net restricted stock issued net of cancellations
    (161,250 )     (2,208,406 )          
Stock options granted
    (1,544,491 )     (2,275,000 )          
Add back options cancelled before exercise
    678,491       375,000            
Options cancelled by plan vote
                     
Remaining shares available for future grants
    572,750       5,891,594            
               
Not Pursuant
to a Plan
 
Total granted
    1,544,491       2,275,000       3,100,000  
Less:   Restricted stock cancelled
                 
 Options cancelled
    (678,491 )     (375,000 )     (1,383,334 )
 Options exercised
    (352,000 )     (130,000 )     (666,666 )
Net shares outstanding before restricted stock
    514,000       1,770,000       1,050,000  
Net restricted stock issued net of cancellations
    161,250       2,208,406       284,844  
Outstanding shares at March 31, 2012
    675,250       3,978,406       1,334,844  
 
Share-Based Compensation – Options
 
   For stock options issued and outstanding during the six months ended June 30, 2012 and 2011, the Company recorded additional paid-in capital and non-cash compensation expense of approximately $407,000 and $287,000, respectively, each net of estimated forfeitures.

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

The assumptions used principally for stock options granted to employees and members of the Company’s Board of Directors in the six months ended June 30, 2012 and 2011 were as follows:

 
 
2012
   
2011
 
Risk-free interest rate
    0.94% — 2.05 %     2.43% — 3.47 %
Expected dividend yield
           
Expected term
 
6.5 years
   
6.0 — 6.5 years
 
Forfeiture rate (excluding fully vested stock options)
    15 %     0% — 15 %
Expected volatility
    131% — 137 %     140% — 142 %

A summary of stock option activity as of and for the six months ended June 30, 2012 is as follows:

 
 
 
 
Stock Options
 
 
 
 
Shares
   
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
 
Aggregate
Intrinsic
Value
 
Outstanding at January 1, 2012
    3,395,103     $ 1.68          
Granted
    430,000       1.84          
Exercised
    (233,666 )     0.96          
Forfeited or expired
    (257,437 )     4.58          
Outstanding at June 30, 2012
    3,334,000     $ 1.53  
7.3 years
  $ 1,866,200  
Exercisable at June 30, 2012
    2,112,830     $ 0.91  
6.1 years
  $ 1,861,033  

The weighted-average grant-date fair value of stock options granted during the six months ended June 30, 2012 was $1.84 per share. Share-based compensation expense recognized in the six months ended June 30, 2012 and 2011 was approximately $407,000 and $287,000, respectively. As of June 30, 2012, there was approximately $2,537,000 of total unrecognized compensation expense related to non-vested share-based option compensation arrangements. With the exception of the unrecognized share-based compensation related to certain restricted stock grants to officers and employees that contain performance conditions related to United States Food and Drug Administration (“FDA”) approval for Symphony or the sale of substantially all of the stock or assets of the Company (see Restricted Stock section below), unrecognized compensation is expected to be recognized over the next four years.

Share-Based Compensation – Restricted Stock

During the six months ended June 30, 2012, the Company granted an aggregate of 703,656 restricted shares of Common Stock to certain officers, employees, directors and consultants of the Company.  The grants were issued pursuant to the 2008 Plan.  The grant date fair value of these restricted stock grants was approximately $1,369,000.

 
A summary of the Company’s nonvested restricted stock activity as of and for the six months ended June 30, 2012, is as follows:

 
 
 
Restricted Stock
 
 
 
Shares
   
Weighted-
Average
Grant-Date
Fair Value
 
Nonvested at January 1, 2012
    1,819,594     $ 1.72  
Granted this period
    703,656       1.95  
Grants made in prior periods, now becoming restricted
    220,000       0.92  
Vested
    (110,000 )     2.24  
Forfeited
           
Nonvested at June 30, 2012
    2,633,250     $ 1.78  

Among the 2,633,250 shares of non-vested restricted stock, the various vesting criteria include the following:

·  
1,679,594 shares of restricted stock vest upon the FDA approval of Symphony or the sale of the Company;
 
·  
220,000 shares of restricted stock vest upon the sale of the Company; and
 
·  
733,656 shares of restricted stock vest over one to four years, at each of the anniversary dates of the grants.
 
As of June 30, 2012, there was approximately $1,378,000 of total unrecognized compensation expense related to non-vested share-based restricted stock arrangements granted pursuant to the Company’s equity compensation plans that vest over time in the forseeable future. As of June 30, 2012, the Company cannot estimate the timing of completion of performance vesting requirements required by certain of these restricted stock grant arrangements.  Compensation expense related to these restricted share grants will be recognized when the Company concludes that achievement of the performance vesting conditions is probable.

(9)  WARRANTS

At June 30, 2012, the Company had the following outstanding warrants:
   
Number of
Shares
Exercisable
   
Exercise Price
 
Date of Expiration
Outstanding warrants accounted for as derivative warrant liability:
             
Granted to investors and placement agent in private placement
    112,148     $ 1.28  
7/16/2012
Granted to financial investment advisor
    3,000       1.38  
7/25/2012
Granted to financial advisor in connection with an acquisition
    61,625       1.75  
9/14/2012
Granted to financial investment advisor
    7,500       1.30  
2/11/2013
Granted to investors in private placement
    154,990       0.50  
2/11/2013
Granted to investors in private placement
    177,324       1.50  
3/24/2013
Total outstanding warrants accounted for as derivative warrant liability
    516,587            
Weighted average exercise price
          $ 1.18    
Weighted average time to expiration in years
               
0.48 years
Outstanding warrants accounted for as equity:
                 
Granted to investors in private placement of preferred stock
    32,249     $ 1.00  
9/30/2013
Granted to investors in private placement of preferred stock
    198,333       1.50  
10/28/2013
Granted to investors in private placement of preferred stock
    390,000       0.75  
2/28/2014
Granted to vendor
    60,000       0.60  
3/15/2014
Granted to investors in private placement
    400,000       1.59  
6/30/2014
Granted to investors in private placement
    768,000       2.00  
11/13/2014
Granted to placement agent in private placement
    256,906       1.50  
11/13/2014
Granted to vendor
    50,000       2.00  
12/1/2012
Granted to investors in private placement
    63,000       2.00  
12/3/2014
Granted to investors in private placement
    341,325       2.25  
2/9/2015
Granted to placement agents in private placement
    28,500       2.25  
2/9/2015
Granted to investor in private placement
    6,375       2.25  
3/18/2015
Granted to financial investment advisor
    100,000       1.50  
2/10/2013
Granted to financial investment advisor
    10,367       2.00  
3/3/2013
Granted to investors in private placement
    187,500       1.50  
11/5/2012
Granted to investors in private placement
    187,500       2.50  
11/5/2012
Granted to placement agent in private placement
    5,000       1.50  
11/5/2012
Granted to placement agent in private placement
    5,000       2.50  
11/5/2012
Granted to investors in private placement
    35,000       1.50  
11/26/2012
Granted to investors in private placement
    35,000       2.50  
11/26/2012
Granted to investors in private placement
    495,000       1.50  
12/29/2012
Granted to investors in private placement
    512,500       2.50  
12/29/2012
Granted to placement agent in private placement
    30,000       1.50  
12/29/2012
Granted to placement agent in private placement
    30,000       2.50  
12/29/2012
Granted to investors in private placement
    245,750       1.50  
1/4/2013
Granted to investors in private placement
    245,750       2.50  
1/4/2013
Granted to placement agent in private placement
    18,125       1.50  
1/4/2013
Granted to placement agent in private placement
    18,125       2.50  
1/4/2013
Granted to investors in private placement
    255,000       1.50  
2/3/2013
Granted to investors in private placement
    280,000       2.50  
2/3/2013
Granted to placement agent in private placement
    1,250       1.50  
2/3/2013
Granted to placement agent in private placement
    1,250       2.50  
2/3/2013
Granted to investors in private placement
    250,000       1.50  
2/8/2013
Granted to investors in private placement
    250,000       2.50  
2/8/2013
Granted to investors in private placement
    959,582       3.00  
12/7/2014
Total outstanding warrants accounted for as equity
    6,752,387            
Weighted average exercise price
          $ 2.00    
Weighted average time to expiration in years
               
0.92 years
 
Totals for all warrants outstanding:
                 
Total
    7,268,974            
Weighted average exercise price
          $ 1.95    
Weighted average time to expiration in years
               
0.89 years
 
A summary of warrant activity for the six months ended June 30, 2012 is as follows:

 
Warrants
 
Shares
   
Weighted-
Average
Exercise Price
 
Outstanding at January 1, 2012
    7,527,529     $ 1.92  
Granted
           
Exercised
    (118,500 )     1.28  
Forfeited or expired
    (140,055 )     1.07  
Outstanding at June 30, 2012
    7,268,974     $ 1.95  

Exercise of Common Stock Warrants

During the six months ended June 30, 2012, the Company issued 118,500 shares of Common Stock upon the exercise of warrants.
 
(10)  LICENSING AND OTHER REVENUE
 
In 2009, the Company entered into a License Agreement with Handok Pharmaceuticals Co., Ltd. (“Handok”) pursuant to which the Company granted Handok a license to develop, use, market, sell and import Symphony for continuous glucose monitoring for use by medical facilities and/or individual consumers in South Korea (the “Handok License”). The Handok License has a minimum term of 10 years from the date of the first commercial sale of Symphony in South Korea.

The Company received a licensing fee of approximately $500,000 upon execution of the Handok License as well as future milestone payments and royalties. The Company recognizes the upfront, nonrefundable payments as revenue on a straight-line basis over the contractual or estimated performance period. During the six months ended June 30, 2012 and 2011, the Company recorded approximately $62,000 and $243,000, respectively, of nonrefundable license revenue.  As of June 30, 2012, approximately $124,000 of deferred revenue remains unrecognized, which is recognizable over the next 12 months and shown as Deferred Revenue amongst current liabilities on the Consolidated Balance Sheet.

(11)  LITIGATION

Harry G. Mitchell, the former Chief Operating Officer of the Company, resigned from that position in June 2011.  On August 25, 2011, Mr. Mitchell filed a complaint in the Norfolk County Superior Court in Massachusetts against the Company and its Chief Executive Officer, Patrick T. Mooney, claiming, among other things, that he resigned for good reason (as defined under his employment agreement) and was therefore entitled to certain benefits and also to certain payments under state wage payment statutes.  Mr. Mitchell sought compensatory damages, an award of attorneys’ fees and costs and other relief.  The Company responded to the complaint by serving a partial motion to dismiss on September 28, 2011.  The Company had accrued approximately $400,000 in settlement liability as of September 30, 2011 with respect to this matter, reflecting the Company’s best estimate then of probable loss exposure.

On December 20, 2011, the Company and Dr. Mooney entered into a Settlement and Release Agreement (the “Settlement Agreement”) with Mr. Mitchell in order to enable the Company’s senior management team to focus its full attention on product development and business operations.  In accordance with the Settlement Agreement, the Company agreed to (i) pay Mr. Mitchell a settlement payment in the gross amount of $125,000, to be paid in installments over a three month period, (ii) pay Mr. Mitchell’s full monthly COBRA premium for six months, and (iii) fully vest 100,000 shares of restricted Common Stock (the “Shares”) held by Mr. Mitchell.  The Shares vested in January 2012, the date when the Company received confirmation of Mr. Mitchell’s dismissal of his lawsuit, and resulted in an outstanding settlement accrued liability relating to the settlement of $290,000, representing the then fair value of the Common Stock to be issued, in the Company’s consolidated balance sheet as of December 31, 2011.  As of June 30, 2012, this matter has been completely resolved.

When the Shares were issued in January 2012, the accrued liability was largely satisfied and $82,000 of the previously recorded share-based compensation was reversed in that period due to a decline in the market value of the underlying Common Stock.

(12)  SUBSEQUENT EVENT

Financing Arrangement with Platinum-Montaur Life Sciences LLC
 
On August 8, 2012, the Company and Platinum-Montaur Life Sciences LLC, a Delaware limited liability company (“Montaur”) signed a commitment letter (the “Commitment Letter”) pursuant to which Montaur agreed to make a non-revolving draw credit facility available to the Company in an initial aggregate principal amount of $5,000,000 (the “Draw Credit Maximum Amount”). The term of the credit facility will be five years from the date of closing (the “Maturity Date”). Pursuant to the terms of the Commitment Letter, the Company may make an aggregate principal amount of draws which do not exceed the Draw Credit Maximum Amount. The Company may not re-borrow the amount of any repaid draw. The Draw Credit Maximum Amount available pursuant to the Loan Agreement will increase in additional $3,000,000 increments, in an amount not to exceed $20,000,000, upon the occurrence of certain regulatory and clinical study milestones. The principal balance of each draw will bear interest from the applicable draw date at a rate equal to 10.0% per annum. Interest payable by the Company will compound monthly.  The Company will make interest-only payments on the principal amount due in connection with each draw on the first business day of each month until the Maturity Date. The Company will have the right to permanently prepay any draw, in whole or in part.

On closing, the Company will issue Montaur a warrant to purchase 4,000,000 shares of Common Stock, with an exercise price of $2.00 per share and a term of five years.  In addition, for each $1,000,000 draw, the Company will issue Montaur a warrant to purchase 1,000,000 shares of Common Stock, with a term of five years and an exercise price equal to the lesser of: (a) 150% of the market price of the Common Stock at the time of the draw (but in no event less than $2.00 per share), or (b) $4.00 per share.
 
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 and elsewhere in this report. The matters discussed herein contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended, which involve risks and uncertainties. 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 safety and efficacy of Symphony and Prelude, the failure of future development and preliminary marketing efforts related to Symphony and Prelude, risks and uncertainties relating to our ability to develop, market and sell diagnostic products based on our skin permeation platform technologies, the availability of substantial additional 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 Symphony and Prelude and those discussed in “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 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 management’s 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.

Business

We are a transdermal medical device company with significant expertise in advanced skin permeation technology.  We are developing our Prelude® SkinPrep System (“Prelude”) as a platform technology to allow for painless and significantly enhanced skin permeation that will enable both needle-free drug delivery and analyte extraction.  Utilizing this technology, we are developing our needle-free Symphony® tCGM System (“Symphony”) as a non-invasive, wireless, transdermal continuous glucose monitoring (“tCGM”) system for use in hospital critical care units and for people with diabetes.

Our specialty pharmaceuticals pipeline is based on our proprietary AzoneTSTM transdermal drug reformulation technology.  Our most advanced drug candidate is Durhalieve, an AzoneTS formulation of triamcinolone acetonide.

Research and Development

We believe that ongoing research and development efforts are essential to our success.  A major portion of our operating expenses to date is related to our research and development activities. R&D expenses generally consist of internal salaries and related costs, and third-party vendor expenses for product design and development, product engineering and contract manufacturing. In addition, R&D costs include regulatory consulting, feasibility product testing (internal and external) and conducting nonclinical and clinical studies. R&D expenses were approximately $3,592,000 for the six months ended June 30, 2012 and $3,796,000 for the year ended December 31, 2011. We intend to maintain our strong commitment to R&D as an essential component of our product development efforts. Licensed or acquired technology developed by third parties may be an additional source of potential products; however, our ability to raise sufficient financing may impact our level of R&D spending.

Critical Accounting Policies and Estimates

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

On an ongoing basis, we evaluate our estimates and judgments for all assets and liabilities, including those related to stock-based compensation expense and the fair value of stock purchase warrants classified as derivative liabilities. We base our estimates and judgments on historical experience, current economic and industry conditions and on various other factors that are believed to be reasonable under the circumstances. This forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no changes in our critical accounting policies and estimates subsequent to those disclosed in our Annual Report on Form 10-K as filed with the SEC on March 15, 2012.

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

Results of Operations
 
Comparison of the Three Months ended June 30, 2012 and 2011
 
Licensing Revenue — We signed two licensing agreements during fiscal year 2009, each with a minimum term of ten years, that required non-refundable license payments by the licensees. The non-refundable license payments received in cash totaled $1,250,000 across both transactions. We are recognizing the non-refundable payments as revenue on a straight-line basis over our contractual or estimated performance period. During 2011 and 2010, we adjusted our amortization period for revenue recognition for each of our license arrangements to reflect a revision in the estimated timing of regulatory approval (or clearance).  Accordingly, we determined that approximately $31,000 and $121,000 license revenue was recognizable in the three months ended June 30, 2012 and 2011, respectively.

Other Revenue — We retain contract engineering and development services in connection with our product development for one of our licensees and such costs are reimbursed by that licensee and recorded as other revenue.  We recognized approximately $37,000 related to these contract engineering services during the three months ended June 30, 2011. The costs from the contract engineering services are included in research and development expenses on the Statements of Operations. There was no markup on the contract engineering services recorded as other revenue.  We did not have any such other revenue during the three months ended June 30, 2012.

Research and Development Expenses — Research and development expenses increased by approximately $1,204,000, or 121%, to approximately $2,200,000 for the three months ended June 30, 2012 from approximately $996,000 for the three months ended June 30, 2011. R&D expenses increased primarily as a result of increased engineering and design expenses incurred with outside contractors and personnel relating to Prelude and Symphony.

 R&D expenses for Prelude and Symphony amounted to approximately 62% and 50% of total operating expenses during the three months ended June 30, 2012 and 2011, respectively.  For the three months ended June 30, 2012, expenses consisted of primarily development, regulatory and manufacturing of $1,892,000, $289,000 and $7,000, respectively.  For the three months ended June 30, 2011, expenses consisted of primarily development, regulatory and clinical of $934,000, $12,000 and $8,000, respectively.

Selling, General and Administrative Expenses — Selling, general and administrative expenses increased by approximately $357,000, or 36%, to approximately $1,335,000 for the three months ended June 30, 2012 from approximately $978,000 for the three months ended June 30, 2011. We have experienced increases in personnel costs, legal costs, and expenses related to the addition of the corporate office in Philadelphia.

Selling, general and administrative expenses represented 38% and 50% of total operating expenses during the three months ended June 30, 2012 and 2011, respectively. We are not engaged in selling activities and, accordingly, general and administrative expenses relate principally to salaries and benefits for our executive, financial and administrative staff, public company reporting costs, investor relations, legal, accounting and media costs, capital-raising costs, and facilities costs.

Interest Income — Interest income was approximately $2,000 and $1,000 for the three months ended June 30, 2012 and 2011, respectively.

Interest Expense — Interest expense was approximately $100 and $600 for the three months ended June 30, 2012 and 2011, respectively.


Derivative Warrant Liability Gain (Loss) — Changes in the fair value of the derivative financial instruments are recognized in the Consolidated Statement of Operations as a derivative gain (loss). The primary underlying risk exposure pertaining to the warrants is the change in fair value of the underlying Common Stock. The derivative gain on warrants subject to “down round” provisions for the three months ended June 30, 2012 was approximately $370,000. The derivative loss on warrants subject to “down round” provisions for the three months ended June 30, 2011 amounted to approximately $122,000.  During the three months ended June 30, 2012, warrants with anti-dilution provisions were exercised to purchase 118,500 shares of Common Stock, which resulted in a $42,000 reclassification from derivative warrant liability to additional paid-in capital.  During the three months ended June 30, 2011, warrants with anti-dilution provisions were exercised to purchase 237,500 shares of common stock, which resulted in a $916,000 reclassification from derivate warrant liability to additional paid-in capital.

Net Loss Applicable to Common Shareholders — As a result of the factors described above, we had a net loss applicable to common shareholders of approximately $3,154,000 for the three months ended June 30, 2012 compared to approximately $1,987,000 for the three months ended June 30, 2011.

Comparison of the Six Months ended June 30, 2012 and 2011

Licensing Revenue — We signed two licensing agreements during fiscal year 2009, each with a minimum term of ten years, that required non-refundable license payments by the licensees. The non-refundable license payments received in cash totaled $1,250,000 across both transactions. We are recognizing the non-refundable payments as revenue on a straight-line basis over our contractual or estimated performance period. During 2011 and 2010, we adjusted our amortization period for revenue recognition for each of our license arrangements to reflect a revision in the estimated timing of regulatory approval (or clearance).  Accordingly, we determined that approximately $61,000 and $243,000 of license revenue was recognizable in the six months ended June 30, 2012 and 2011, respectively.

Other Revenue — We retain contract engineering and development services in connection with our product development for one of our licensees and such costs are reimbursed by that licensee and recorded as other revenue.  We recognized approximately $145,000 related to these contract engineering services during the six months ended June 30, 2011. The costs from the contract engineering services are included in research and development expenses on the Statements of Operations. There was no markup on the contract engineering services recorded as other revenue.  We did not have any such other revenue during the six months ended June 30, 2012.

Research and Development Expenses — Research and development expenses increased by approximately $1,730,000, or 93%, to approximately $3,592,000 for the six months ended June 30, 2012 from approximately $1,862,000 for the six months ended June 30, 2011. R&D expenses increased primarily as a result of increased engineering and design expenses incurred with outside contractors and personnel relating to Prelude and Symphony.

 R&D expenses for Prelude and Symphony amounted to approximately 53% and 49% of total operating expenses during the six months ended June 30, 2012 and 2011, respectively.  For the six months ended June 30, 2012, expenses consisted of primarily development, regulatory and manufacturing of $3,182,000, $372,000 and $14,000, respectively.  For the six months ended June 30, 2011, expenses consisted of primarily development, regulatory and clinical of $1,757,000, $22,000 and $17,000, respectively.

Selling, General and Administrative Expenses — Selling, general and administrative expenses increased by approximately $1,294,000, or 68%, to approximately $3,194,000 for the six months ended June 30, 2012 from approximately $1,900,000 for the six months ended June 30, 2011. We have experienced increases in personnel costs, legal costs, and expenses related to the addition of the corporate office in Philadelphia.

Selling, general and administrative expenses represented 47% and 51% of total operating expenses during the six months ended June 30, 2012 and 2011, respectively. We are not engaged in selling activities and, accordingly, general and administrative expenses relate principally to salaries and benefits for our executive, financial and administrative staff, public company reporting costs, investor relations, legal, accounting and media costs, capital-raising costs, and facilities costs.

Interest Income — Interest income was approximately $5,000 and $3,000 for the six months ended June 30, 2012 and 2011, respectively.

Interest Expense — Interest expense was approximately $300 and $13,000 for the six months ended June 30, 2012 and 2011, respectively.


Derivative Warrant Liability Gain (Loss) — Changes in the fair value of the derivative financial instruments are recognized in the Consolidated Statement of Operations as a derivative gain (loss). The primary underlying risk exposure pertaining to the warrants is the change in fair value of the underlying Common Stock. The derivative gain on warrants subject to “down round” provisions for the six months ended June 30, 2012 was approximately $601,000. The derivative loss on warrants subject to “down round” provisions for the six months ended June 30, 2011 amounted to approximately $3,152,000.    During the six months ended June 30, 2012, warrants with anti-dilution provisions were exercised to purchase 118,500 shares of Common Stock, which resulted in a $42,000 reclassification from derivative warrant liability to additional paid-in capital.  During the six months ended June 30, 2011, warrants with anti-dilution provisions were exercised to purchase 602,693 shares of common stock, which resulted in a $2,171,000 reclassification from derivate warrant liability to additional paid-in capital.

Net Loss Applicable to Common Shareholders — As a result of the factors described above, we had a net loss applicable to common shareholders of approximately $6,140,000 for the six months ended June 30, 2012 compared to approximately $8,605,000 for the six months ended June 30, 2011.

Liquidity and Capital Resources

We have financed our operations since inception primarily through private sales of our Common Stock and preferred stock, the issuance of convertible promissory notes, unsecured and secured promissory notes, non-refundable payments received under license agreements and cash received in connection with exercises of Common Stock purchase options and warrants. As of June 30, 2012, we had approximately $3,111,000 of cash and cash equivalents, with no other short term investments.

Net cash used in operating activities was approximately $5,767,000 for the six months ended June 30, 2012. The use of cash in operating activities was primarily attributable to the net loss of approximately $6,140,000.

Net cash used in investing activities of approximately $468,000 for the six months ended June 30, 2012.  Cash of approximately $157,000 was used in increasing restricted cash in escrow for the benefit of a vendor and a facility leaseholder during the six month period ended June 30, 2012. Also, cash of approximately $311,000 was used to purchase property and equipment for manufacturing equipment, computers and office furniture during the six month period ended June 30, 2012.
 
Net cash provided by financing activities was approximately $351,000 for the six months ended June 30, 2012. We received approximately $346,000 from the exercise of Common Stock warrants and options and approximately $7,000 in proceeds from the issuance of Common Stock and warrants. Principal payments on capitalized lease obligations used approximately $1,100 during the six months ended June 30, 2012.

At June 30, 2012, we had outstanding warrants to purchase 7,268,974 shares of Common Stock at exercise prices ranging from $0.50 to $3.00.  If exercised, these could provide cash proceeds to the Company of approximately $14,143,000.

We continue to aggressively pursue additional financing from existing relationships (prior shareholders, investors and lenders) and from new investors through placement agents and investment bankers to support operations, including our product and clinical development programs.

In August 2011 we filed a universal shelf registration statement on Form S-3 with the SEC to raise up to $75 million in capital.  This registration statement was declared effective on October 28, 2011.  In December 2011 we raised $5.4 million in capital, thereby reducing the amount available remaining under this shelf registration statement to $69.6 million.

We have demonstrated the ability to manage our costs aggressively and increase our operating efficiencies while advancing our medical device product development and clinical programs.  During the six months ended June 30, 2012, we managed our medical device product development, clinical and operating costs while pursuing necessary funding. In order to advance our product and clinical development programs, establish contract manufacturing and support our licensee for the manufacture of Prelude, pursue FDA approval for Symphony and support our operating activities, we expect our monthly operating costs associated with salaries and benefits, regulatory and public company consulting, contract engineering and manufacturing, legal and other working capital costs to increase. In the past, we have relied primarily on raising capital in order to meet our operating budget and to achieve our business objectives, and we plan to continue that practice in the future. Although we have been successful in the past with raising sufficient capital to conduct our operations, we will continue to vigorously pursue additional financing as necessary to meet our business objectives; however, there can be no guarantee that additional capital will be available in sufficient amounts on terms favorable to us, if at all.

 
Our ability to fund our future operating requirements will depend on many factors, including the following:

 
our ability to obtain funding from third parties, including any future collaborative partners, on reasonable terms;
 
our progress on research and development programs;
 
the time and costs required to gain regulatory approvals;
 
the costs of manufacturing, marketing and distributing our products, if successfully developed and approved;
 
the costs of filing, prosecuting and enforcing patents, patent applications, patent claims and trademarks;
 
the status of competing products; and
 
the market acceptance and third-party reimbursement of our products, if successfully developed and approved.

The economic conditions occurring during 2011 and continuing in 2012, including the tightening of available funding in the financial markets, had a significant impact on the extent of advancement on our product development and clinical programs in accordance with our original projected level of operations. Although we have recently raised sufficient capital to conduct our operations in the past, we believe that uncertainties in the financial markets may occur in the future, resulting in fund raising challenges for emerging medical device and pharmaceutical companies. Our future product and clinical development programs and regulatory activities may be dependent on available additional funding from investors. Without sufficient funding for our programs, our plan to obtain regulatory approval for Symphony and other product candidates may be delayed.

Facilities, Property and Equipment — We conduct our operations primarily in leased facilities in Philadelphia, PA and Franklin, MA and have executed leases through May 31, 2017 and October 31, 2017, respectively, for each facility.  Our property and equipment does not include manufacturing machinery and is limited to laboratory testing equipment, office furniture and computer systems.

Contractual Obligations

The following table outlines our current contractual obligations:

   
Payments due by period
 
   
Total
   
Less than
1 year
   
1-3 years
   
3-5 years
   
More than
5 years
 
Facility Lease – Franklin, MA
  $ 2,348,000     $ 419,000     $ 868,000     $ 908,000     $ 153,000  
Facility Lease – Philadelphia, PA
    930,000       181,000       375,000       374,000        
Operating Lease Obligations
    15,000       8,000       7,000              
Capital Lease Obligation
    6,000       3,000       3,000              
Total
  $ 3,299,000     $ 611,000     $ 1,253,000     $ 1,282,000     $
153,000
 

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements, including unrecorded derivative instruments that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. We have certain warrants and options outstanding but we do not expect to receive sufficient proceeds from the exercise of these instruments unless and until the trading price of our Common Stock is significantly greater than the applicable exercise prices of the options and warrants for a sustained period of time.

Effect of Inflation and Changes in Prices

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


ITEM 4.  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 the design and operations 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 SEC’s 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.

In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible control and procedures.

Internal Control over Financial Reporting

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

PART II—OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

The material set forth in Note 11 of the Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.

ITEM 6.  EXHIBITS

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



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ECHO THERAPEUTICS, INC.

Date: August 9, 2012
 
 
  By: /s/ Patrick T. Mooney  
    Patrick T. Mooney, M.D.  
    Chief Executive Officer and Chairman of the Board
    (Principal Executive Officer)  
       
  By: /s/ Christopher P. Schnittker  
    Christopher P. Schnittker, CPA  
    Chief Financial Officer and Treasurer
    (Principal Financial Officer)  
 


Exhibit No.
 
Item 
3.1  
Amended and Restated Certificate of Incorporation dated June 20, 2012.
3.2  
Certificate of Designation, Preferences and Rights of Series C Preferred Stock dated July 19, 2012.
3.3  
Certificate of Designation, Preferences and Rights of Series D Preferred Stock dated July 19, 2012.
5.1
 
 
Opinion of Morgan Lewis & Bockius LLP is incorporated by reference to Exhibit 5.1 of the Registrant’s Quarterly Report on Form 10-Q filed May 10, 2012.
10.1
 
 
At Market Issuance Sales Agreement with MLV & Co. dated May 9, 2012 is incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q filed May 10, 2012.***
10.2  
Amended and Restated License Agreement between the Company and Ferndale Pharma Group, Inc. dated July 3, 2012.**
31.1  
Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2  
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
 
 
Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
 
 
Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
 
 
 
The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (Extensible Business Reporting Language), (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements.*
     
 
*     Pursuant to Rule 406T of Regulation S-T, the XBRL (Extensible Business Reporting Language) information included in Exhibit 101 hereto is deemed furnished and not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
 
**   Confidential treatment has been requested as to certain portions, which portions have been omitted and filed separately with the Securities and Exchange Commission.
 
*** In response to shareholder feedback and concerns, the Company terminated the At Market Issuance Sales Agreement between the Company and MLV & Co. LLC effective as of May 28, 2012.  No shares were sold under the Sales Agreement prior to the termination date.
 

XNAS:ECTE Echo Therapeutics Inc Quarterly Report 10-Q Filling

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XNAS:ECTE Echo Therapeutics Inc Quarterly Report 10-Q Filing - 6/30/2012
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