e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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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 March 31, 2009.
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
(State or other jurisdiction of
incorporation or organization)
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41-1649949
(I.R.S. Employer Identification Number) |
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10 Forge Parkway, Franklin, MA
(Address of principal executive offices)
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02038
(Zip code) |
(508) 553-8850
(Registrants 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§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 o 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.
Large accelerated filer o |
Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) |
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 May 13, 2009, 19,741,838 shares of the registrants Common Stock. $0.01 par value, were
issued and outstanding.
ECHO THERAPEUTICS, INC.
Quarterly report on Form 10-Q for the period ended March 31, 2009
TABLE OF CONTENTS
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Item |
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Page |
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PART I
FINANCIAL INFORMATION
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1. |
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Consolidated Financial Statements |
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3 |
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Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008 |
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3 |
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Consolidated Statements of Operations for three months ended March 31, 2009 and 2008 |
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4 |
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Consolidated Statements of Cash Flows for three months ended March 31, 2009 and 2008 |
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5 |
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Notes to Consolidated Financial Statements (Unaudited) |
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6 |
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2. |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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16 |
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4T. |
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Controls and Procedures |
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23 |
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PART II
FINANCIAL INFORMATION
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2. |
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Unregistered Sales of Equity Securities and Use of Proceeds |
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23 |
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5. |
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Other Information |
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23 |
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6. |
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Exhibits |
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24 |
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SIGNATURES |
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24 |
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PART IFINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
Echo Therapeutics, Inc.
Consolidated Balance Sheets
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As of, |
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March 31, |
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December 31, |
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2009 |
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2008 |
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Unaudited |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
55,721 |
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$ |
242,867 |
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Prepaid expenses and other current assets |
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22,970 |
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17,132 |
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Total current assets |
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78,691 |
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259,999 |
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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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242,495 |
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Office and laboratory equipment |
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609,029 |
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609,029 |
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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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129,320 |
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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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1,172,900 |
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Less-Accumulated depreciation and amortization |
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(1,117,530 |
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(1,105,330 |
) |
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Net property and equipment |
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55,370 |
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67,570 |
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Other Assets: |
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Restricted cash |
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9,749 |
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10,250 |
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Intangible assets, net of accumulated amortization |
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9,797,571 |
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9,827,154 |
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Deferred financing costs, net of amortization |
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104,393 |
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141,373 |
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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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9,913,713 |
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9,980,777 |
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Total assets |
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$ |
10,047,774 |
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$ |
10,308,346 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current Liabilities: |
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Accounts payable |
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$ |
1,300,584 |
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$ |
1,177,719 |
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Current portion of notes payable, net of discounts |
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2,183,699 |
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2,054,062 |
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Derivative warrant liability |
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1,331,551 |
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Accrued expenses |
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193,370 |
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174,768 |
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Total current liabilities |
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5,009,204 |
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3,406,549 |
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Notes Payable, net of current portion and discounts |
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310,667 |
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300,467 |
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Stockholders Equity: |
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Convertible Preferred Stock, $0.01 par value, authorized 10,000,000 shares at
March 31, 2009 and December 31, 2008 : |
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Series A, authorized 2,636,363 shares, issued and outstanding 1,601,160 and
1,570,194 shares at March 31, 2009 and December 31, 2008, respectively
(preference in liquidation of $2,161,566 at March 31, 2009 |
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16,012 |
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15,702 |
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Series A-1, authorized 2,000,000 shares, issued and outstanding 793,479 and 778,136
shares at March 31, 2009 and December 31, 2008, respectively (preference in
liquidation
of $793,479 at March 31, 2009) |
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7,935 |
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7,781 |
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Series A-2, authorized 4,400,000 and none, issued and outstanding 201,017 and none
at
March 31, 2009 and December 31, 2008, respectively (preference in liquidation of
$100,509 at March 31, 2009) |
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2,010 |
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Common stock, $0.01 par value, authorized 60,000,000 shares, issued and outstanding
19,741,838 and 19,095,838 shares at March 31, 2009 and December 31, 2008, respectively |
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197,421 |
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190,960 |
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Additional paid-in capital |
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62,231,334 |
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64,668,550 |
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Accumulated deficit |
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(57,726,809 |
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(58,281,663 |
) |
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Total stockholders equity |
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4,727,903 |
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6,601,330 |
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Total liabilities and stockholders equity |
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10,047,774 |
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$ |
10,308,346 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
Echo Therapeutics, Inc.
Consolidated Statements of Operations
Unaudited
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Three Months Ended |
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March 31, |
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2009 |
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2008 |
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Operating Expenses: |
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Research and development |
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$ |
288,216 |
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$ |
770,207 |
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Selling, general and administrative |
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573,364 |
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1,190,418 |
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Total operating expenses |
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861,580 |
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1,960,625 |
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Loss from operations |
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(861,580 |
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(1,960,625 |
) |
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Other Income (Expense): |
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Interest income |
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389 |
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10,468 |
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Interest expense |
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(178,707 |
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(280,233 |
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Loss on extinguishment of debt |
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(1,212,013 |
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Derivatives loss |
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(251,432 |
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(538,698 |
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Other income (expense), net |
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(429,750 |
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(2,020,476 |
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Net loss |
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(1,291,330 |
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(3,981,101 |
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Accretion of dividends on Convertible
Preferred Stock |
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(57,674 |
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Net loss applicable to common shareholders |
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$ |
(1,349,004 |
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$ |
(3,981,101 |
) |
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Net loss per common share, basic and diluted |
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$ |
(0.07 |
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$ |
(0.22 |
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Basic and diluted weighted average common
shares outstanding |
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19,380,146 |
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18,314,683 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
Echo Therapeutics, Inc.
Consolidated Statements of Cash Flows
Unaudited
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Three Months Ended March 31, |
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2009 |
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2008 |
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Cash Flows From Operating Activities: |
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Net loss |
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$ |
(1,291,330 |
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$ |
(3,981,101 |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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41,783 |
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57,282 |
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Share-based compensation |
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398,463 |
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486,000 |
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Fair value of common stock and warrants issued for services |
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180,227 |
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Derivative loss |
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251,432 |
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538,698 |
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Loss on extinguishment of debt |
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1,212,013 |
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Non-cash interest expense |
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176,818 |
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254,579 |
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Changes in assets and liabilities: |
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Prepaid expenses and other current assets |
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(5,838 |
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(71,651 |
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Accounts payable |
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122,865 |
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171,877 |
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Accrued expenses |
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18,602 |
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267,673 |
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Net cash used in operating activities |
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(287,205 |
) |
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(884,403 |
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Cash Flows from Investing Activities: |
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Purchase of property and equipment |
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(5,600 |
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Decrease in restricted cash |
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501 |
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Net cash provided by (used in) investing activities |
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501 |
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(5,600 |
) |
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Cash Flows From Financing Activities |
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Proceeds from the sale of Series A-2 preferred stock |
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99,576 |
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Proceeds from Secured Senior Convertible Notes and Warrants |
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500,000 |
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Proceeds from Senior Convertible Promissory Notes |
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700,000 |
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Deferred financing costs |
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(432,309 |
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Dividends paid on Series A, A-1 and A-2 preferred stock |
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(18 |
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Proceeds from the exercise of warrants |
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106,207 |
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Net cash provided by financing activities |
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99,558 |
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873,898 |
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Net Decrease in Cash and Cash Equivalents |
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(187,146 |
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(16,105 |
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Cash and Cash Equivalents, beginning of period |
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242,867 |
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1,193,163 |
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Cash and Cash Equivalents, end of period |
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$ |
55,721 |
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$ |
1,177,058 |
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Supplemental Disclosure of Cash Flow Information and Non Cash Financing Transactions: |
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Cash paid for interest |
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$ |
816 |
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$ |
613 |
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Accretion of dividend on Series A, A-1 and A-2 Convertible Preferred Stock |
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$ |
57,656 |
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$ |
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Beneficial conversion feature on Senior Convertible Notes |
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$ |
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$ |
121,320 |
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Common stock issued for conversion of Senior Convertible Notes and accrued interest |
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$ |
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$ |
52,041 |
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Fair value of warrants issued for deferred financing costs |
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$ |
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$ |
185,668 |
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Fair value of warrants issued in connection with Senior Convertible Notes included in extinguishment loss |
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$ |
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$ |
626,480 |
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Adjustment to fair value of Bridge Notes exchanged for Senior Convertible notes included in extinguishment loss |
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$ |
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$ |
585,533 |
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Fair value of warrants issued in connection with exchange of Senior Convertible Notes for preferred stock
included in extinguishment loss |
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$ |
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$ |
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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 |
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$ |
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$ |
212,938 |
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Relative fair value of warrants issued with Secured Notes |
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$ |
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$ |
219,838 |
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Derivative warrant liability reclassified from stockholders equity |
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$ |
1,080,118 |
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$ |
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Senior Convertible Notes issued for accrued interest |
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$ |
6,538 |
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$ |
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|
The accompanying notes are an integral part of these consolidated financial statements.
5
Echo Therapeutics, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Period Ended March 31, 2009 (Unaudited)
(1) ORGANIZATION, BASIS OF PRESENTATION AND GOING CONCERN
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).
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, 2008 included in the Companys Annual Report on
Form 10-K as filed with the United States Securities and Exchange Commission (SEC) on April 13,
2009. 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 March 31, 2009 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 March 31, 2009, the Company had cash of approximately $56,000, a
working capital deficit of approximately $4,931,000 and an accumulated deficit of approximately
$57,727,000. 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 2009; 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 and derivative instruments 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. (Durham) intangible
assets related to contractual arrangements and technology are amortized over estimated useful lives
of three (3) and eight (8) years, respectively, on a straight-line basis.
6
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.
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.
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.
In reviewing the long-lived assets relating to our acquisition of Durham as of March 31, 2009,
the Company concluded that there were no events or changes in circumstances that would indicate
that the carrying value of such long-lived assets may not be recoverable. No impairment losses
were recorded for the three months ended March 31, 2009.
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 or greater than 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 do not meet the requirements
for classification as equity in accordance with EITF Issues No. 00-19 and 07-5 are classified as
liabilities. In such instances, net-cash settlement is assumed for financial reporting purposes,
even when the terms of the underlying contracts do not provide for a net-cash settlement. Such
financial instruments are initially recorded at fair value, or relative fair value when issued with
other instruments, with subsequent changes in fair value charged (credited) to operations in each
reporting period. If these instruments subsequently meet the requirements for classification under
EITF Issues No. 00-19 and 07-5, the Company reclassifies the fair value to equity.
Net Loss per Common Share
Basic and diluted net loss per share of the Companys common stock is presented in conformity
with SFAS No. 128, Earnings per Share. For the periods presented, options, warrants and convertible
securities were anti-dilutive and excluded from diluted loss per share calculations. Accordingly,
basic and diluted net loss per share of common stock has been computed by dividing the net loss
applicable to common stockholders in each period by the weighted average number of shares of common
stock outstanding during such period.
Research and Development Expenses
The Company charges research and development expenses to operations as incurred. Research and
development expenses primarily consist of salaries and related expenses for personnel and outside
contractor and consulting services. Other research and development expenses include the costs of
materials and supplies used in research and development, prototype manufacturing, clinical studies,
related information technology and an allocation of facilities costs.
Reclassifications
Certain comparative amounts have been reclassified to correspond with the current years
presentation.
7
Recent Accounting Pronouncements
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. The Company implemented SFAS No. 161 on
January 1, 2009 and it did not have a material impact on the consolidated financial statements of
the Company.
In June 2008, the FASB ratified EITF Issue No. 07-5, Determining Whether an Instrument (or an
Embedded Feature) Is Indexed to an Entitys Own Stock (EITF 07-5). EITF 07-5 provides that an
entity should use a two step approach to evaluate whether an equity-linked financial instrument (or
embedded feature) is indexed to its own stock, including evaluating the instruments contingent
exercise and settlement provisions. EITF 07-5 is effective for fiscal years beginning after
December 15, 2008. The consensus must be applied to outstanding instruments as of the beginning of
the fiscal year in which the consensus is adopted and should be treated as a cumulative-effect
adjustment to the opening balance of retained earnings. Early adoption is not permitted. On January
1, 2009, the Company reclassified approximately $1,100,000, representing the fair value of all
warrants with antidilution provisions, from additional paid-in capital and accumulated deficit to
derivative warrant liability.
(3) INTANGIBLE ASSETS
As of March 31, 2009, 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 |
|
|
$ |
182,429 |
|
|
$ |
172,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology related intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent for the AzoneTS-based product
candidates and formulation |
|
8 years |
|
|
1,305,000 |
|
|
|
|
|
|
|
1,305,000 |
|
Drug Master Files containing formulation,
clinical and safety documentation used by
the FDA |
|
8 years |
|
|
1,500,000 |
|
|
|
|
|
|
|
1,500,000 |
|
Two (2) in-process Durhalieve-related
pharmaceutical products |
|
8 years |
|
|
6,820,000 |
|
|
|
|
|
|
|
6,820,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total technology related intangible assets |
|
|
|
|
|
|
9,625,000 |
|
|
|
|
|
|
|
9,625,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
9,980,000 |
|
|
$ |
182,429 |
|
|
$ |
9,797,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The technology related intangible assets are being amortized on a straight line basis over
approximately 8 years beginning with the start of its useful life, which the Company has estimated
to be 2011, and the contract related intangible asset over approximately 3 years beginning with the
date of acquisition. Amortization expense was approximately $30,000 for the three months ended
March 31, 2009 and 2008, and is included in research and development in the Statement of
Operations.
(4) NOTES PAYABLE
Notes payable at March 31, 2009 and December 31, 2008 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2009 |
|
2008 |
|
|
|
|
|
|
|
|
|
Senior Convertible Notes: |
|
|
|
|
|
|
|
|
Senior convertible notes |
|
$ |
337,986 |
|
|
$ |
331,448 |
|
Unamortized discount |
|
|
(27,319 |
) |
|
|
(30,981 |
) |
|
|
|
|
|
|
310,667 |
|
|
|
300,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Notes: |
|
|
|
|
|
|
|
|
Senior secured notes |
|
|
2,209,426 |
|
|
|
2,209,426 |
|
Unamortized discount |
|
|
(25,727 |
) |
|
|
(155,364 |
) |
|
|
|
|
|
|
2,183,699 |
|
|
|
2,054,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable |
|
|
2,494,366 |
|
|
|
2,354,529 |
|
Less current portion of notes payable |
|
|
2,183,699 |
|
|
|
2,054,062 |
|
|
|
|
Notes payable, net of current portion |
|
$ |
310,667 |
|
|
$ |
300,467 |
|
|
|
|
8
Interest expense related to the Bridge Notes for the three months ended March 31, 2009 and
2008, including amortization of discounts and deferred financing costs, was approximately zero and
$197,000, respectively. During the three months ended March 31, 2009 and 2008, interest expense on
outstanding Senior Convertible Notes was satisfied by the issuance of additional Senior Convertible
Notes in the amount of approximately $16,000 and $72,000, respectively. Interest expense related to
the Secured Notes in the three months ended March 31, 2009 and 2008, including amortization of
discounts and deferred financing costs, was approximately $162,000 and $10,000, respectively.
(5) DERIVATIVE INSTRUMENTS
Derivative financial instruments are recognized as a liability on the consolidated balance
sheet and measured at fair value.
At January 1 and March 31, 2009, the Company had outstanding warrants to purchase 4,432,828
and 4,572,400 shares of its common stock. Included in these warrants are outstanding warrants to
purchase 3,359,705 shares that are considered to be derivative instruments since the agreements
contain down round provisions whereby the number of shares covered by the warrants is subject to
change in the event of certain dilutive stock issuances. Changes in fair value of the derivative
financial instruments are recognized currently in the Statement of Operations as a Derivatives Gain
(Loss). The primary underlying risk exposure pertaining to the warrants is the change in fair
value of the underlying common stock.
At March 31, 2009, these warrants represent the only derivative instruments held by the
Company. The fair value of these derivative instruments at March 31, 2009 was approximately
$1,332,000 and is included in Derivative Warrant Liability, a current liability. The change in
the fair value of the derivative warrant liability in the three months ended March 31, 2009, or
$251,432, was recorded as a Derivative Loss in the Statement of Operations.
(6) FAIR VALUES OF ASSETS AND LIABILITIES
In accordance with SFAS No. 157 Fair Value Measurements, the Company groups its financial
assets and financial liabilities generally measured at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the reliability of the assumptions used
to determine fair value.
Level 1 Valuation is based on quoted prices in active markets for identical assets or
liabilities. Level 1 assets and liabilities generally include debt and equity securities that
are traded in an active exchange market. Valuations are obtained from readily available
pricing sources for market transactions involving identical assets or liabilities.
Level 2 Valuation is based on observable inputs other than Level 1 prices, such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not active; or
other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities. For example, Level 2 assets and
liabilities may include debt securities with quoted prices that are traded less frequently
than exchange-traded instruments or mortgage loans held for sale, for which the fair value is
based on what the securitization market is currently offering for mortgage loans with similar
characteristics.
Level 3 Valuation is based on unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or liabilities. Level 3
assets and liabilities include financial instruments whose value is determined using pricing
models, discounted cash flow methodologies, or similar techniques, as well as instruments for
which the determination of fair value requires significant management judgment or estimation.
This category generally includes certain asset-backed securities, certain private equity
investments, residential mortgage servicing rights, and long-term derivative contracts.
The following methods and assumptions were used by the Company in estimating fair value for
the warrants considered to be derivative instruments.
The fair value of warrants is calculated using the Black-Scholes option pricing model. This
option pricing model requires input of assumptions including the volatility of the Companys stock
price, the contractual term of the warrant and the risk-free interest rate. Volatility is estimated
at historical stock prices. The risk-free rate is based on the yield of a U.S. Treasury security
with a term consistent with the warrant. The underlying stock is valued based on the closing
market price for the Companys Common Stock.
9
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
$ |
|
|
|
$ |
1,331,551 |
|
|
$ |
|
|
|
$ |
1,331,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company may also 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
three months ended March 31, 2009, 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.
Series A Preferred Stock Exchange
In conjunction with the dividend on the Series A Convertible Preferred Stock, the Company
accreted dividends of $41,815 for the three months ended March 31, 2009. For the three months ended
March 31, 2009, the Company paid quarterly dividends of $41,804 in the form of 30,966 shares of
Series A Convertible Preferred Stock.
Series A-1 Preferred Stock and Warrant Financing
In conjunction with the dividend on the Series A-1 Convertible Preferred Stock, the Company
accreted dividends of $15,350 for the three months ended March 31, 2009. For the three months ended
March 31, 2009, the Company paid quarterly dividends of $15,343 in the form of 15,343 shares of
Series A-1 Convertible Preferred Stock.
Series A-2 Preferred Stock and Warrant Financing
On March 6 and March 13, 2009, the Company entered into a Stock and Warrant Purchase Agreement
(the A-2 Purchase Agreement) with strategic institutional and accredited investors (the A-2
Investors) in connection with the Companys private placement (the A-2 Financing) of 200,000
shares of its Series A-2 Convertible Preferred Stock (the Series A-2 Stock) at a price of $0.50
per share together with warrants to purchase a number of shares of the Companys Common Stock equal
to thirty-five percent (35%) of the number of shares of Series A-2 Stock purchased by each Investor
(the A-2 Warrants) in the A-2 Financing. As of March 31, 2009, the Company had received gross
proceeds of $100,000 from the A-2 Financing and the A-2 Financing is still ongoing. The Company
allocated the proceeds between the Series A-2 Stock and the A-2 Warrants based on the relative fair
value.
Pursuant to the A-2 Purchase Agreement, the Company issued A-2 Warrants to the Investors to
purchase up to 70,000 shares of Common Stock. The A-2 Warrants are immediately exercisable at a
price per share of $0.75, subject to adjustment for stock splits, combinations or similar events,
and will expire no later than February 28, 2014. The A-2 Warrants allow for cashless exercise. In
addition, the Company has the option to redeem the A-2 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.
10
The offer, sale and issuance to the A-2 Investors of the A-2 Shares, the A-2 Warrants and the
shares of Common Stock issuable upon the exercise of the A-2 Warrants have been made in reliance on
the statutory exemption from registration in Section 4(2) of 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 A-2 Shares issued to the A-2 Investors
and the Common Stock issuable upon the exercise of the A-2 Warrants.
Pursuant to the terms of the Certificate of Designation, Preference and Rights of Series A-2
Convertible Preferred Stock, each share of Series A-2 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-2 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 A-2
Investor may convert their Shares at any time following issuance of the A-2 Shares. The Series A-2
Stock is not redeemable.
Each holder of Series A-2 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 A-2 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 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-2 Stock in
exchange for Additional Securities with a purchase price equal to an aggregate of 115% of the
Liquidation Preference of the Series A-2 Stock surrendered by such holder. The liquidation
preferences of the Series A-2 Stock are consistent with the Series A-1 Convertible Preferred Stock
(Series A-1 Stock) and the
Series A Convertible Preferred Stock (Series A
Stock) and the Series
A-2 Stock is not redeemable.
In the event that the Company liquidates, dissolves, or winds up its affairs (each, a
Liquidation Event), the holders of Series A-2 Stock will be entitled to receive (subject to the
rights of any securities designated as senior to the Series A-2 Stock) a liquidation preference
equal to the greater of (i) $.50 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-2 Stock. The Series A-2 Stock ranks pari passu with the Series A Stock and Series A-1 Stock.
The Company cannot create or issue any security senior to the Series A-2 Stock without the approval
of the holders of the majority of the aggregate outstanding Series A, Series A-1 Stock and Series
A-2 Stock.
In conjunction with the dividend on the Series A-2 preferred stock, the Company accreted
dividends of $510 for the three months ended March 31, 2009. For the three months ended March 31,
2009, the Company paid quarterly dividends of $509 in the form of 1,017 shares of Series A-2 Stock.
(8) COMMON STOCK
The Company has authorized 60,000,000 shares of common stock, $0.01 par value per share, of
which 19,741,838 and 19,095,838 shares were issued and outstanding as of March 31, 2009 and
December 31, 2008, respectively.
Exercise of Stock Purchase Warrants
In the three months ended March 31, 2009, the Company issued 8,750 shares of common stock in
connection with a cashless exercise of stock purchase warrants to purchase 12,500 shares of common
stock.
Grant of Restricted Stock and Cancellation of Options
On February 20, 2009, the Compensation Committee of the Board of Directors of the Company
granted an aggregate of 637,250 restricted shares of the Companys common stock with a fair value
of approximately $255,000 to certain employees and officers of the Company (the Restricted Share
Grant) pursuant to Restricted Stock Agreements under the Companys 2008 Plan. Subject to the
terms and conditions of the Restricted Stock Agreements, the restricted shares will vest upon the
first to occur of (i) FDA approval of the Companys Symphony tCGM System; or (ii) the sale of all
or substantially all of the assets of the Company or all or substantially all of the outstanding
capital stock of the Company in exchange for Liquid Proceeds. For the purposes of the Restricted
Share Grants, Liquid Proceeds means (a) cash; (b) securities which can be sold immediately on
NYSE or NASDAQ; (c) securities which are or will be registered such that they can be sold upon on
NYSE or NASDAQ upon termination of a lock-up period not to exceed one hundred eighty (180) days; or
(d) or a combination of cash and the foregoing securities. The Restricted Share Grant was effected
under Section 4(2) of the Securities Act. In addition, the Compensation Committee also approved
the cancellation of stock options for certain
officers of the Company to purchase 1,250,000 shares of the Companys common stock that were
granted on September 14, 2007 at an exercise price per share equal to $2.39.
11
The Company determined that the fair value of the restricted stock grant was less than the
fair value of the cancelled options immediately prior to cancellation. Therefore, there was no
incremental fair value and the Company will record the remaining unrecognized fair value of the
cancelled options over the vesting period of the Restricted Share Grant. Compensation expense
related to the Restricted Share Grant will be recognized when the Company concludes that
achievement of the performance vesting conditions is probable. Through March 31, 2009, the Company
has not concluded that achievement of the performance conditions related to the Restricted Share
Grant was probable.
(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 March 31, 2009, 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 March 31, 2009, 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 March 31,
2009, 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 March 31, 2009, 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 March
31, 2009, the number of shares authorized for issuance under the 2008 Plan was 1,700,000 shares.
As of March 31, 2009, there were restricted shares of common stock and options to purchase an
aggregate of 445,000 shares of common stock outstanding under the 2008 Plan and 1,255,000 shares
available for future grants under the 2008 Plan.
Share-Based Compensation
For options and restricted stock issued and outstanding during the three months ended March
31, 2009 and 2008, the Company recorded additional paid-in capital and non-cash compensation
expense of approximately $398,000 and $486,000, 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 24 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.
12
The assumptions used principally for options granted to employees and members of the Companys
Board of Directors in the three months ended March 31, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
Risk-free interest rate |
|
|
2.71 2.89% |
|
|
|
3.45% |
|
Expected dividend yield |
|
|
|
|
|
|
|
|
Expected term (employee / director grants) |
|
|
6.75 years |
|
|
|
6 years |
|
Forfeiture rate (excluding fully vested options) |
|
|
11% 33% |
|
|
|
11% |
|
Expected volatility |
|
|
152.68 152.68% |
|
|
|
156% |
|
A summary of option activity under the Companys stock plans and options granted to officers
of the Company outside any plan as of March 31, 2009 and changes during the three months then ended
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Weighted- |
|
Average |
|
|
|
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
|
|
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
Options |
|
Shares |
|
Price |
|
Term |
|
Value |
Outstanding at January 1, 2009 |
|
|
3,944,530 |
|
|
$ |
1.87 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
345,000 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(1,250,000 |
) |
|
$ |
2.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2009 |
|
|
3,039,530 |
|
|
$ |
0.89 |
|
|
8.68 years |
|
$ |
94,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2009 |
|
|
1,981,649 |
|
|
$ |
1.04 |
|
|
8.52 years |
|
$ |
78,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of options granted during the three months ended
March 31, 2009 was $0.40 per share. Share-based compensation expense recognized in the three months
ended March 31, 2009 was approximately $44,600 for options granted in the three months ended March
31, 2009. Total share-based compensation expense recognized in the three months ended March 31,
2009 was approximately $398,000. As of March 31, 2009, there was approximately $1,331,000 of total
unrecognized compensation expense related to non-vested share-based option compensation
arrangements, restricted stock and warrant compensation arrangements.
On February 20, 2009, the Compensation Committee approved the cancellation of stock options
for certain officers of the Company to purchase 1,250,000 shares of the Companys common stock that
were granted on September 14, 2007 at an exercise price per share equal to $2.39.
Repricing of Certain Nonqualified Stock Options
On February 20, 2009, the Compensation Committee of the Board of Directors of the Company
approved a reduction of the exercise price of options for certain officers of the Company to
purchase an aggregate of 1,300,000 shares of the Companys common stock to $0.55 per share (the
Repricing). Prior to the Repricing, the exercise price of such options was $1.39 per share. All
other terms of the options remained the same. The Company also repriced options held by certain
employees and consultants for the purchase of 550,000 shares of Common Stock with original exercise
prices between $0.61 and $2.25 to an exercise price of $0.40. The excess of the fair value of the
modified options over the fair value of the original options immediately prior to modification, or
approximately $35,000, will be added to the unrecognized portion of the original grants and charged
to expense over the remaining vesting period of the options.
Restricted Stock Grants
As of March 31, 2009, the Company had outstanding restricted stock grants amounting to 930,125
shares at a weighted-average grant-date fair value of $0.82 per share. Of the outstanding
restricted stock grants, 279,750 shares have not been registered under the Securities Act. A
summary of the status of the Companys nonvested restricted stock grants as of March 31, 2009, and
changes during the three months ended March 31, 2009, is presented below:
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant-Date |
|
Nonvested Shares |
|
Shares |
|
|
Fair Value |
|
Nonvested at January 1, 2009 |
|
|
3,750 |
|
|
$ |
1.77 |
|
Granted |
|
|
637,250 |
|
|
|
0.40 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2009 |
|
|
641,000 |
|
|
$ |
0.40 |
|
|
|
|
|
|
|
|
Vested at March 31, 2009 |
|
|
289,125 |
|
|
$ |
1.74 |
|
|
|
|
|
|
|
|
Share-based compensation recognized in the three months ended March 31, 2009 related to
restricted stock grants to officers and directors was approximately $12,200.
Grant of Restricted Stock to Officers and Certain Employees
On February 20, 2009, the Compensation Committee granted an aggregate of 637,250 restricted
shares of the Companys common stock to certain employees and officers of the Company pursuant to
Restricted Stock Agreements under the Companys 2008 Plan (see note 8).
(10) WARRANTS
At March 31, 2009, the Company had the following outstanding warrants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
Shares |
|
|
Exercise |
|
|
Date of |
|
|
|
Exercisable |
|
|
Price |
|
|
Expiration |
|
Issued to investors and placement agent in private placement |
|
|
118,620 |
|
|
$ |
24.50 |
|
|
|
12/8/2009 |
|
Issued to investor in former subsidiary |
|
|
15,000 |
|
|
$ |
50.00 |
|
|
|
2/23/2010 |
|
Issued to investors and placement agent in private placement |
|
|
476,830 |
|
|
$ |
5.80 |
|
|
|
3/7/2011 |
|
Issued to investors in private placement |
|
|
536,250 |
|
|
$ |
0.21 |
|
|
|
1/30/2014 |
|
Issued to investors and placement agent in private placement |
|
|
599,250 |
|
|
$ |
1.38 |
|
|
|
6/15-7/16/2012 |
|
Issued to financial advisor |
|
|
6,000 |
|
|
$ |
1.58 |
|
|
|
7/25/2012 |
|
Issued to financial advisor |
|
|
54,000 |
|
|
$ |
0.55 |
|
|
|
1/30/2014 |
|
Issued to financial advisor in connection with an acquisition |
|
|
80,750 |
|
|
$ |
2.18 |
|
|
|
9/14/2012 |
|
Issued to financial advisor in connection with an acquisition |
|
|
344,250 |
|
|
$ |
0.55 |
|
|
|
1/30/2014 |
|
Issued to financial advisor |
|
|
39,978 |
|
|
$ |
1.49 |
|
|
|
2/11/2013 |
|
Issued to financial advisor |
|
|
135,035 |
|
|
$ |
0.55 |
|
|
|
1/30/2014 |
|
Issued to Senior Convertible Note holders |
|
|
849,059 |
|
|
$ |
1.00 |
|
|
|
2/11/2013 |
|
Issued to Secured Note holders |
|
|
688,300 |
|
|
$ |
1.89 |
|
|
|
3/14/2013 |
|
Issued to financial advisor |
|
|
26,833 |
|
|
$ |
0.55 |
|
|
|
1/30/2014 |
|
Issued to Senior Convertible Note holders |
|
|
153,912 |
|
|
$ |
1.00 |
|
|
|
9/30/2013 |
|
Issued to investors in private placement |
|
|
268,333 |
|
|
$ |
1.50 |
|
|
|
10/28/2013-10/31/2013 |
|
Issued to investors in private placement |
|
|
70,000 |
|
|
$ |
0.75 |
|
|
|
3/6-3/13/2014 |
|
Issued to vendor |
|
|
50,000 |
|
|
$ |
0.70 |
|
|
|
3/2/2012 |
|
Issued to vendor |
|
|
60,000 |
|
|
$ |
0.60 |
|
|
|
3/15/2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4,572,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average exercise price |
|
|
|
|
|
$ |
2.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average duration in years |
|
|
|
|
|
|
|
|
|
3. 82 years |
|
|
|
|
|
|
|
|
|
|
|
|
14
Issuances of Warrants to Service Providers
On March 2, 2009, the Company issued warrants to purchase 50,000 shares of the Companys
common stock at an exercise price of $0.70 per share to a vendor for engineering services. The
warrants have a three year term. The fair value of the services has been determined to be
approximately $13,400 and was charged to share-based compensation expense.
On March 15, 2009, the Company issued warrants to purchase 60,000 shares of the Companys
common stock at an exercise price of $0.60 per share in consideration for the interest-free
deferral of amounts currently owed, and amounts to be invoiced, for consulting services. The
warrants have a five year term. The warrants vest at 20,000 shares immediately and an additional
10,000 shares vest on each of October 1, 2009, January 1, 2010, April 1, 2010 and July 1, 2010
unless the Company pays all outstanding invoices due to the service provider in full prior to any
such vesting date. The fair value of the warrants has been determined to be approximately $24,500
and will be recognized over the vesting period as share-based compensation expense
Issuance of Warrants for Financing
In conjunction with the Series A-2
Preferred Stock and Warrant Financing (see Note 7), the
Company issued the A-2 Investors warrants to purchase 70,000 shares of common stock at an exercise
price of $.75 per share with a five year term. The fair value of the warrants on the issuance date
was approximately $29,000.
Re-pricing of Warrants to Financial Advisor and Affiliates
On January 30, 2009, the Company entered into an engagement letter with Burnham Hill Partners
LLC (BHPLLC) pursuant to which BHPLLC will provide financial advisory services to the Company
(the Advisory Agreement) only as requested by the Company from time to time. In connection with
BHPLLCs engagement under the Advisory Agreement, all warrants held by BHPLLC and/or its registered
employees on January 30, 2009 (the Amended Warrants) were amended with a term of five (5) years
from the date of the Advisory Agreement and an exercise price equal to the lower of (i) $0.55 or
(ii) the current exercise price of such warrants. Additionally, if and when the Company first
requests financial advisory services from BHPLLC pursuant to the Agreement, the Company shall issue
to BHPLLC and/or its registered assignees or designees an aggregate of 360,000 warrants in
substantially the same form as the Amended Warrants.
On February 19, 2009, BHPLLC and the Company amended the Advisory Agreement, effective as of
January 30, 2009, to reflect their original intention to amend warrants held by BHPLLC and/or its
registered employees and affiliates of BHPLLC and/or its registered employees on January 30, 2009.
As a result, a total of 560,118 shares were repriced to $0.55 per share on January 30, 2009. The
closing price of the Companys stock on January 30, 2009 was $0.30. The excess of the fair value
of the modified warrants over the fair value of the original warrants immediately prior to
modification, or approximately $14,000 was charged to stock compensation expense during the three
months ended March 31, 2009.
(11) SUBSEQUENT EVENTS
Series A-2 Preferred Stock and Warrant Financing and Amended Agreement
In connection with the Series A-2 Financing, the Company received gross proceeds of $525,000
in April 2009 representing a total of 1,050,000 shares of Series A-2 Stock and warrants to purchase
517,500 shares of Common Stock. The A-2 Financing is ongoing through May 30, 2009.
On April 8, 2009, the Company entered into an Amended and Restated Stock and Warrant Purchase
Agreement dated as of April 2, 2009 (the Amended A-2 Purchase Agreement) with the A-2 Investors
and certain strategic institutional and accredited investors in connection with the A-2 Financing
of an aggregate of 700,000 shares of Series A-2 Stock (200,000 shares during the three months ended
March 31, 2009 and 500,000 shares on April 8, 2009) at a price of $.50 per share, together with
warrants to purchase a number of shares of the Companys Common Stock equal to (i) thirty-five
percent (35%), or (ii) for investments of $250,000 or more, fifty percent (50%), of the number of
shares of Series A-2 Stock purchased by each A-2 Investor in the A-2 Financing (the Amended A-2
Warrants).
Extension of Maturity Date for Senior Secured Notes
On April 23, 2009, the Company and Imperium entered into an amendment agreement (the
Amendment) pursuant to which the Company and Imperium agreed to extend the maturity date of the
Secured Notes issued by the Company to Imperium on March 24, 2008 and April 24, 2008 (together, the
Notes) to May 31, 2009. The Notes originally had maturity
15
dates of March 24, 2009 and April 24, 2009, respectively. The purpose of the maturity date
extension is to provide the Company and Imperium sufficient time to amend the financing agreement
and the Secured Notes to provide for, subject to certain conditions, at least a one-year extension
of the maturity of the Secured Notes, in addition to other provisions in the agreement.
Re-pricing of Warrants to Investor
On April 6, 2009, the Company executed a letter agreement pursuant to which it agreed to
change the exercise price of all outstanding warrants for the purchase of 950,085 shares of Common
Stock with exercise prices between $1.50 and $1.00 to $0.75 for an investor and its subsidiaries.
The Company is in the process of determining the accounting treatment for this transaction,
however, certain warrants that were repriced are included in the derivative warrant liability on
the balance sheet.
Grant of Restricted Stock to Employee
On May 8, 2009, the Company issued 50,000 restricted shares of the Companys common stock with
a fair value of approximately $34,000 to an employee of the Company (the Restricted Share Grant)
pursuant to a Restricted Stock Agreement under the Companys 2008 Plan. Subject to the terms and
conditions of the Restricted Stock Agreement, the restricted shares will vest upon the first to
occur of (i) FDA approval of the Companys Symphony tCGM System; or (ii) the sale of all or
substantially all of the assets of the Company or all or substantially all of the outstanding
capital stock of the Company in exchange for Liquid Proceeds. For the purposes of the Restricted
Share Grants, Liquid Proceeds means (a) cash; (b) securities which can be sold immediately on
NYSE or NASDAQ; (c) securities which are or will be registered such that they can be sold upon on
NYSE or NASDAQ upon termination of a lock-up period not to exceed one hundred eighty (180) days; or
(d) or a combination of cash and the foregoing securities. The Restricted Share Grant was effected
under Section 4(2) of the Securities Act. Compensation expense related to these restricted shares
will be recognized when the Company concludes that achievement of the performance vesting
conditions is probable.
ITEM 7. 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-K for the year ended December 31, 2008 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 (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 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-K for the fiscal year ended December 31, 2008 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. 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).
16
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.
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 March 31, 2009, the Company had cash of approximately $56,000, a
working capital deficit of approximately $4,931,000 and an accumulated deficit of approximately
$57,727,000. Through March 31, 2009, the Company has not been able to generate sufficient sales
from its operations to cover its costs and operating expenses. Although the Company has been able
to obtain unsecured and secured debt and issue securities through 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. Subsequent to March 31, 2009, the Company received gross proceeds from its ongoing
Series A-2 Preferred Stock and Warrant Financing of approximately $525,000 (see Note 11).
Additional financing is necessary to fund operations in 2009 and beyond. Management is currently
pursuing additional private equity financing, and such financing is expected to be completed during
2009. However, no assurances can be given as to the success of these plans. The financial
statements do not include any adjustments that might result from the outcome of these
uncertainties.
Operating Plan
We are a medical device and specialty pharmaceutical company. We are developing a
non-invasive, wireless, transdermal continuous glucose monitoring (tCGM) system for people with
diabetes and for use in a clinical setting (initially in acute care), together with transdermal
reformulations of specialty pharmaceutical products previously approved by the FDA.
We are principally involved with product development and clinical studies for our tCGM system.
Our Symphony tCGM system is a next-generation, non-invasive (needle-free), wireless tCGM system
designed to provide reliable, continuous blood glucose data conveniently and cost-effectively.
Presently, we have completed development of our prototype tCGM system, including our proprietary
skin permeation system and have engaged several development, engineering and manufacturing firms to
assist us with all necessary final development efforts in connection with our plan to obtain
regulatory approval through the FDA. We have completed several clinical studies over the past two
years for the use of our tCGM system in acute care (hospital) and diabetes home use environments.
We have engaged a consulting firm to evaluate our regulatory strategy for obtaining marketing
approval from the FDA of our tCGM system. In order to complete our product development, clinical
development programs and to obtain regulatory approval for our tCGM system, we will be required to
raise substantial additional financing.
Our specialty pharmaceuticals pipeline, resulting from our acquisition of Durham
Pharmaceuticals Ltd. in September 2007, is based on our proprietary AzoneTS transdermal drug
reformulation technology. We believe that, despite their commercial success in large, chronic
markets, many FDA-approved products with safety, efficacy and/or patient comfort and convenience
issues that limit or prohibit their full commercial potential are amenable to our AzoneTS
reformulation technology focused on improved dermal penetration. We are leveraging our AzoneTS
dermal penetration technology to engineer and develop a broad range novel topical reformulations of
commercially successful, FDA-approved products, generally in accordance with the FDAs Section
505(b)(2) guidelines. Our lead AzoneTS product candidate is Durhalieve, an AzoneTS topical
reformulation of triamcinolone acetonide. Durhalieve is covered by our New Drug Application on file
with the FDA for treatment of corticosteroid-responsive dermatoses. Also, we believe that
Durhalieve has the potential to be an effective topical (needle-free) treatment for keloid
scarring.
We have engaged a clinical research organization to advise and manage the final product
development requirements for our Durhalieve drug candidate. Presently, we are working to satisfy
the FDAs remaining manufacturing and clinical study requirements necessary to secure FDA approval
of Durhalieve.
Research and Development
A significant portion of our research and development expenses includes salaries paid to
personnel and outside consultants and service providers, as well as for the cost of materials used
in research and development, clinical studies, prototype manufacturing and related information
technology and the allocation of facilities costs. Unfortunately, due to financial constraints, we
have been unable to advance our medical device product development programs as rapidly as we had
originally anticipated.
17
Following the acquisition of AzoneTS and the related drug candidates, we have continued to
advance the development programs for Durhalieve for the treatment of corticosteroid-responsive
dermatoses and for the early stage AzoneTS reformulation drug candidates. Unfortunately, due to
financial constraints, we have been unable to advance our AzoneTS product development programs as
rapidly as we had originally anticipated, and none of the specialty pharmaceutical development
programs have been completed. If we are unable to complete our current planned development
schedule for Durhalieve, then we may incur additional expenses, which additional expenses cannot be
estimated at this time, to commercialize Durhalieve. Should Durhalieve not receive FDA approval,
then we may be required to write-off all or a portion of the intangible assets acquired as an
impairment charge based on the specific facts and circumstances that will be evaluated at a future
date.
We made a strategic decision to focus our product development efforts on our Symphony tCGM
system and Prelude SkinPrep system because we concluded that these products are these product are
the most advanced products (as to product development effort) in our pipeline and, we believe, the
regulatory path to FDA approval may be a more efficient process than our specialty pharmaceutical
product candidates.
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 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. 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 as filed with the
United States Securities and Exchange Commission (SEC) on April 13, 2009.
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
As of March 31, 2009, we had eleven (11) employees and used the services of two (2)
independent contractors. Of this group of employees and contractors, five (5) are involved with
finance and administration and eight (8) are involved with research and development, and clinical
and regulatory matters. In addition to these individuals, we utilize outside contract engineering
and contract manufacturing firms to support our operations. We have engaged a clinical research
organization and several consulting firms involved with regulatory strategy and clinical trial
planning. We believe that with sufficient funding during the next 12 months, we will increase the
number of employees in the areas of clinical research and testing, customer development and product
marketing.
As of March 31, 2008, we had ten (10) employees and six (6) independent contractor
arrangements with consultants.
We conduct our operations in leased facilities and have agreed to a lease through March 2010
with an option for an extension of an additional year. Our property and equipment does not include
manufacturing machinery and is limited to laboratory testing equipment, office furniture and
computer systems (network hardware and software and employee desk top systems). We do not
anticipate any significant purchases or sales of property and equipment during the next 12 months.
Comparison of the quarters ended March 31, 2009 and 2008
Research and Development Expenses Research and development expenses decreased by
approximately $482,000 to approximately $288,000 for the quarter ended March 31, 2009 from
approximately $770,000 for the quarter ended March 31, 2008. Research and development expenses
decreased primarily as a result of our decreased product and clinical development activity for our
Symphony and Prelude systems, including reduced outside contractor and employee costs. Our
decreased product and clinical development activity was due principally to our need to control
costs and expenses while we pursued additional funding needed to continue our operations. Research
and development expenses amounted to approximately 33% of total operating expenses during the
quarter ended March 31, 2009, and included product development expenses for our Prelude skin
preparation technology, product development for our Symphony transdermal continuous glucose
monitoring (tCGM) system, and regulatory consulting expenses related to our medical device
products. Product development and clinical
18
expenses included in research and development expenses represented approximately 96% and 4%,
respectively, of research and development expenses for the quarter ended March 31, 2009. During
the quarter ended March 31, 2008 the Company conducted a critical care trial at a Boston hospital,
and completed numerous in-house clinical studies. We engaged several engineering and product
development firms during the three months ended March 31, 2008 for the purposes of developing our
Symphony and Prelude devices to be used for obtaining marketing approval from the FDA. Product
development and clinical expenses amounted to approximately 94% and 6%, respectively, of research
and development expenses for the quarter ended March 31, 2008.
Selling, General and Administrative Expenses Selling, general and administrative expenses
decreased by approximately $617,000 to approximately $573,000 for the quarter ended March 31, 2009
from approximately $1,190,000 for the quarter ended March 31, 2008. The net decrease was due to the
combination of a decrease of approximately $88,000 in share-based compensation expenses from
approximately $486,000 in 2008 to approximately $398,000 in 2009, a decrease of approximately
$58,000 in salaries and payroll taxes from 2008 to 2009, a decrease of approximately $250,000 in
investor relations and a decrease in additional public company costs related to legal, accounting,
printing and media costs. Selling, general and administrative
expenses represented 67% and 61% of total operating expenses during the quarters ended March 31,
2009 and 2008, respectively. Share-based compensation expenses are non-cash charges relating to
the fair value of restricted common stock, options and warrants to purchase our common stock issued
to employees, directors and certain service providers. 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, legal, accounting, printing and
media costs, capital-raising costs, and costs for general operations.
Other Income (Expense) Interest income was approximately zero for the quarter ended March
31, 2009 compared to interest income of approximately $10,000 for the quarter ended March 31, 2008,
a decrease of approximately $10,000. The decrease in interest income was primarily attributable to
our lower average amount of cash equivalents and short term investments on hand during the three
months ended March 31, 2009 compared to the same period in 2008.
Interest Expense Interest expense was approximately $179,000 for the three months ended
March 31, 2009, compared to interest expense of approximately $280,000 for the same period in 2008,
a decrease of $101,000. The approximate net decrease in interest expense for each note payable
obligation is shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
March 31, |
|
March 31, |
|
Increase |
Note Payable Obligation |
|
2009 |
|
2008 |
|
(Decrease) |
Senior promissory bridge notes |
|
$ |
|
|
|
$ |
197,000 |
|
|
$ |
(197,000 |
) |
Senior convertible notes |
|
|
16,000 |
|
|
|
72,000 |
|
|
|
(56,000 |
) |
Senior secured notes |
|
|
162,000 |
|
|
|
10,000 |
|
|
|
152,000 |
|
Other short-term financing |
|
|
1,000 |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
Total notes payable |
|
$ |
179,000 |
|
|
$ |
280,000 |
|
|
$ |
(101,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash Interest included above |
|
$ |
177,000 |
|
|
$ |
255,000 |
|
|
$ |
(78,000 |
) |
|
|
|
Senior promissory bridge notes in the amount of approximately $1,325,000 were converted into
Senior Convertible Notes as of February 11, 2008. Senior convertible notes in the amount of
approximately $2,078,000 commenced on February 11, 2008 and were exchanged for Series A Preferred
Stock on September 30, 2008. We entered into a series of senior secured notes during the period
March 23, 2008 through June 3, 2009, borrowing up to an approximate balance of $2,209,000 as of
March 31, 2009. In connection with these financings, we incurred non-cash interest expense of
approximately $177,000 and $255,000 for the three months ended March 31, 2009 and 2008,
respectively, 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.
Derivative Loss At March 31, 2009, we had outstanding warrants to purchase 4,572,400 shares
of our common stock. Included in these warrants are outstanding warrants to purchase 3,359,705
shares that are considered to be derivative instruments since the agreements contain down round
provisions whereby the number of shares covered by the warrants is subject to change in the event
of certain dilutive stock issuances. Changes in fair value of the derivative financial instruments
are recognized currently in the 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. At March 31, 2009, these warrants
19
represent the only derivative instruments held by the Company. The fair value of these
derivative instruments at March 31, 2009 was approximately $1,332,000, and is included in
Derivative Liability on the balance sheet. In connection with this liability, approximately
$1,080,000 was recorded as a decrease in accumulated deficit as of January 1, 2009 and
approximately $251,000 was recorded as a derivative loss for the three months ended March 31, 2009.
In 2008, 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 March 31, 2008 with the decrease in the fair
value of approximately $30,000 being recorded as a reduction of the derivative loss.
Loss on Extinguishment of Debt In 2008, we determined that the terms of the Senior
Convertible Notes were 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
(originally issued in September 2007) at fair value on the date of issuance (February 11, 2008) and
recorded a loss on extinguishment of debt of approximately $586,000 for the three months ended
March 31, 2008. The fair value of the warrants issued to the holders of the Bridge Notes upon
conversion into the Senior Convertible Notes in February 2008, which we estimated to be
approximately $626,000, was also included in the loss on extinguishment of debt for the three
months ended March 31, 2008. 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.
Net Loss As a result of the factors described above, we had a net loss of approximately
$1,291,000 for the quarter ended March 31, 2009 compared to approximately $3,981,000 for the
quarter ended March 31, 2008.
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 and secured promissory
notes, and cash received in connection with exercises of common stock purchase options and
warrants. As of March 31, 2009, we had approximately $56,000 of cash and cash equivalents, with no
other short term investments.
Net cash used in operating activities was approximately $287,000 for the quarter ended March
31, 2009. The use of cash in operating activities was primarily attributable to the net loss of
approximately $1,291,000 for the quarter ended March 31, 2009, offset by non-cash expenses of
approximately $251,000 for derivative losses, approximately $42,000 for depreciation and
amortization, approximately $398,000 for share-based compensation expense, and approximately
$177,000 in non-cash interest expense relating to the Senior Convertible Promissory Notes and
Secured Senior Promissory Notes. An increase in accounts payable provided approximately $123,000 of
cash. Changes in other current assets and current liabilities provided net cash of approximately
$13,000.
Net cash provided by investing activities was approximately $1,000 for the quarter ended March
31, 2009, from the release of a restricted cash account.
Net cash provided by financing activities was approximately $100,000 for the quarter ended
March 31, 2009, primarily attributable to the proceeds from the sale of Series A-2 Convertible
Preferred Stock of approximately $100,000.
At March 31, 2009, we had outstanding warrants to purchase 4,572,400 shares of common stock at
exercise prices ranging from $0.21 to $50.00.
As of May 13, 2009, we had cash and cash equivalents of approximately $215,000.
Our management continues to aggressively pursue additional financing from existing
relationships (prior shareholders, investors and lenders) and from new investors. In 2008, we
engaged an investment banking firm to assist us with these efforts. Our ability to incur
additional indebtedness is limited due to the need to obtain consent of the holder under the terms
of our Secured Notes. In addition, our agreement with the holder of the Secured Notes contains a
number of restrictive covenants, including a requirement to maintain stockholders equity, as
defined, equal to or in excess of $6.5 million. In order
20
to advance our product development, clinical programs and financing activities, we expect our
monthly operating costs associated with salaries and benefits, consulting costs, legal costs and
other working capital costs to increase. Accordingly, we have relied primarily on raising equity
capital in order to continue our operations in order to achieve our business objectives while
continuing to satisfy the restrictive covenants of the Secured Notes, and we plan to continue to do
so throughout 2009.
The current economic conditions have had a significant impact on our ability to raise
necessary capital to fund our product development and clinical programs in accordance with our
original projected level of operations. We believe that uncertainties in the financial markets
have limited the availability of financing for us. During 2009, our product development, clinical
programs and FDA meetings and communication plans will be conducted to the extent possible based on
available funding from investors. During the three months ended March 31, 2009, we reduced our
expected development and clinical costs while pursuing necessary funding for operations. Without
sufficient funding for our programs, our progress to obtain regulatory approval for our medical
device product Symphony tCGM System and our specialty pharmaceutical candidate Durhalieve may be
delayed.
We have the ability to manage our costs aggressively and increase our operating efficiencies
while continuing an effective level of product development and clinical programs thereby maximizing
the time available to complete an equity financing. During the three months ended March 31, 2009,
we have reduced our product development and clinical programs as we continue to pursue equity
financing. Equity financing delays in the future could cause us to further delay or halt our
product development and clinical programs. Although we believe that required financing can be
obtained, there can be no guarantee that additional equity capital will be available in sufficient
amounts on terms favorable to us, if at all.
Even if we are successful in raising additional debt or equity capital during 2009, we will
still be required to raise substantial additional capital in the future to fund our research,
development and clinical programs, commercialize our product candidates and achieve profitability.
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. |
Series A-2 Preferred Stock and Warrant Financing On March 6 and March 13, 2009, we entered
into a Stock and Warrant Purchase Agreement (the A-2 Purchase Agreement) with strategic
institutional and accredited investors (the A-2 Investors) in connection with our private
placement (the A-2 Financing) of 200,000 shares of its Series A-2 Convertible Preferred Stock
(the Series A-2 Stock) at a price of $0.50 per share together with warrants to purchase a number
of shares of our Common Stock equal to thirty-five percent (35%) of the number of shares of Series
A-2 Stock purchased by each A-2 Investor (the A-2 Warrants) in the A-2 Financing. As of March 31,
2009, we had received gross proceeds of $100,000 from the A-2 Financing and the A-2 Financing is
still ongoing. Pursuant to the A-2 Purchase Agreement, we issued A-2 Warrants to these A-2 Investors
to purchase up to 70,000 shares of Common Stock. The A-2 Warrants are immediately exercisable at a
price per share of $0.75, subject to adjustment for stock splits, combinations or similar events,
and will expire no later than February 28, 2014. The A-2 Warrants allow for cashless exercise. In
addition, we have the option to redeem the A-2 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.
21
In connection with the A-2 Preferred Stock and Warrant Financing, the Company received gross
proceeds of $525,000 in April 2009 representing a total of 1,050,000 shares of Preferred Stock and
warrants to purchase 517,500 shares. The A-2 Financing is ongoing through May 30, 2009.
On April 8, 2009, the Company entered into an Amended and Restated Stock and Warrant Purchase
Agreement dated as of April 2, 2009 (the Amended A-2 Purchase Agreement) with the A-2 Investors
and certain strategic institutional and accredited investors in connection with the A-2 Financing
of an aggregate of 700,000 shares of Series A-2 Stock (200,000 shares during Q1 09 and 500,000
shares on April 8, 2009) at a price of $.50 per share, together with warrants to purchase a number
of shares of the Companys Common Stock equal to (i) thirty-five percent (35%), or (ii) for
investments of $250,000 or more, fifty percent (50%), of the number
of shares of Series A-2 Stock
purchased by each A-2 Investor in the A-2 Financing.
The offer, sale and issuance to the A-2 Investors of the Series A-2 Stock, the A-2 Warrants
and the shares of Common Stock issuable upon the exercise of the A-2 Warrants have been made in
reliance on the statutory exemption from registration in Section 4(2) of 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 Series A-2 Stock issued to the
A-2 Investors and the Common Stock issuable upon the exercise of the A-2 Warrants.
Pursuant to the terms of the Certificate of Designation, Preference and Rights of Series A-2
Convertible Preferred Stock, each share of Series A-2 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-2 Stock will pay a quarterly dividend, at an
annual rate of 8%, which is payable in cash or in kind at our option. Each Investor may convert its
Series A-2 Stock at any time following issuance of the Series A-2 Stock. The Series A-2 Stock is not redeemable.
Each holder of Series A-2 Stock shall have the right, exercisable on an all or none basis, to
participate in our first equity offering or series of equity-linked offerings to occur after the
date of the Financing that yields gross proceeds to us of at least $2,000,000 (the Qualified
Offering) on the same terms and conditions as offered by us to the other purchasers of such
securities issued and sold by us 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-2 Stock in exchange for Additional Securities
with a purchase price equal to an aggregate of 115% of the Liquidation Preference of the Series A-2
Stock surrendered by such holder. The liquidation preferences of the Series A-2 Stock are
consistent with the Series A-1 and Series A Stock and the Series A-2 Stock is not redeemable.
In the event that we liquidate, dissolve, or wind up our affairs (each, a Liquidation
Event), the holders of Series A-2 Stock will be entitled to receive (subject to the rights of any
securities designated as senior to the Series A-2 Stock) a liquidation preference equal to the
greater of (i) $.50 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-2 Stock.
The Series A-2 Stock ranks pari passu with the Series A Stock and Series A-1 Stock. We cannot
create or issue any security senior to the Series A-2 Stock without the approval of the holders of
the majority of the aggregate outstanding Series A, Series A-1 Stock and Series A-2 Stock.
In conjunction with the dividend on the Series A-2 preferred stock, the Company accreted
dividends of $510 for the three months ended March 31, 2009 and for the same period we paid annual
dividends of $509 in the form of 1,017 shares of Series A-2 Stock.
As of March 31, 2009, the Company satisfied 8% quarterly dividend commitments for its Series A
Stock, Series A-1 Stock and Series A-2 Stock with the issuance of additional preferred stock of 30,966
shares, 15,343 shares, and 1,017 shares, respectively.
We conduct our operations in leased facilities and have agreed to a lease through March 2010
with an option for an extension of an additional year. Our property and equipment does not include
manufacturing machinery and is limited to laboratory testing equipment, office furniture and
computer systems (network hardware and software and employee desk top systems). We do not
anticipate any significant purchases or sales of property and equipment during the next 12 months.
We anticipate that no hiring of additional employees will occur until sufficient funding has
been obtained.
22
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, including 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 any material 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 and following any necessary registering of underlying securities.
Effect of Inflation and Changes in Prices
Management does not believe that inflation and changes in price will have a material effect on
our operations.
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.
On March 2, 2009, we issued warrants to purchase 50,000 shares of the Companys common stock
at an exercise price of $0.70 per share to a vendor in consideration for engineering services. The
warrants have a three year term. The issuance of the warrants was made in a transaction not
involving any public offering pursuant to an exemption from registration under Section 4(2) of the
Securities Act.
On March 15, 2009, we issued warrants to purchase 60,000 shares of the Companys common stock
at an exercise price of $0.60 per share in consideration for the interest-free deferral of amounts
currently owed, and amounts to be invoiced, for consulting services. The warrants have a five year
term. The warrants vest at 20,000 shares immediately and an additional 10,000 shares vest on each
of October 1, 2009, January 1, 2010, April 1, 2010 and July 1, 2010 unless the Company pays all
outstanding invoices due to the service provider in full prior to any such vesting date. The fair
value of the warrants has been determined to be approximately $24,500 and will be recognized over
the vesting period. The issuance of the warrants 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 5. Other Information.
Our 2009 annual shareholders meeting will be held on July 8, 2009 at 4:00 p.m. EST at the
offices of Drinker Biddle & Reath LLP, located at One Logan Square, 1800 Cherry Street,
Philadelphia, Pennsylvania 19103. The meeting will be held in July to provide management adequate
time, following the close of our Series A-2 Convertible Preferred Stock and Warrant Financing, to
prepare for the meeting and present to our shareholders all matters which need to be approved at
the meeting.
23
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
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.
|
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|
|
ECHO THERAPEUTICS, INC.
|
|
Date: May 15, 2009 |
By: |
/s/ Patrick T. Mooney, M.D.
|
|
|
|
Patrick T. Mooney, M.D. |
|
|
|
Chief Executive Officer and Chairman of the Board |
|
|
|
|
|
|
By: |
/s/ Harry G. Mitchell, CPA
|
|
|
|
Harry G. Mitchell, CPA |
|
|
|
Chief Operating Officer, Chief Financial Officer
and Treasurer |
|
24
EXHIBIT INDEX
|
|
|
Exhibit No. |
|
Item. |
|
|
|
4.1
|
|
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 April 14, 2009. |
|
|
|
4.2
|
|
Form of Restricted Stock Agreement is incorporated herein by reference to Exhibit 10.2 to the
Companys Current Report on Form 8-K dated May 20, 2008. |
|
|
|
10.1
|
|
Letter agreement between the Company and Burnham Hill Partners LLC dated January 30, 2009 is
incorporated herein by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K dated
January 30, 2009. |
|
|
|
10.2
|
|
Letter agreement between the Company and Imperium Master Fund, Ltd. dated March 23, 2009 is
incorporated herein by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K dated
March 23, 2009. |
|
|
|
10.3
|
|
Amended and Restated Stock and Warrant Purchase Agreement by and among the Company and the Investors
named therein, dated as of April 2, 2009, is incorporated herein by reference to Exhibit 10.1 of the
Companys Current Report on Form 8-K dated April 14, 2009. |
|
|
|
10.4
|
|
Letter agreement between the Company and Imperium Master Fund, Ltd. dated April 23, 2009 is
incorporated herein by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K dated
April 24, 2009. |
|
|
|
31.1
|
|
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of the Chief Operating Officer, Chief Financial Officer and Treasurer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
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. |
|
|
|
32.2
|
|
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. |
|
|
|
99.1
|
|
Certificate of Designation, Rights and Preferences of Series A-2 Preferred Stock is incorporated
herein by reference to Exhibit 99.1 of the Companys Current Report on Form 8-K dated April 14, 2009. |
25