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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: December 31, 2009
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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 No.) |
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10 Forge Parkway, Franklin, Massachusetts
(Address of principal executive offices)
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02038
(Zip Code) |
(Registrants telephone number, including area code)
(508) 553-8850
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
Indicate by check mark if the registrant is well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
The approximate aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of June 30, 2009, based upon the closing price of such stock on
that date, was approximately $35,360,000.
The number of shares of the registrants common stock outstanding as of March 22, 2010 was
29,053,245.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement (the Proxy Statement) to be filed with the
Securities and Exchange Commission relative to the issuers 2010 Annual Meeting of Shareholders are
incorporated by reference into Part III of this Form 10-K.
ECHO THERAPEUTICS, INC.
2009 Annual Report on Form 10-K
TABLE OF CONTENTS
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In this report, the Company, Echo, we, us, and our refer to Echo Therapeutics, Inc.
Common Stock refers to Echos Common Stock, $0.01 par value.
We own or have rights to various copyrights, trademarks and trade names used in our business,
including the following: Symphonytm tCGM System, Preludetm
SkinPrep System, AzoneTStm and Durhalievetm.
This Annual Report on Form 10-K contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), and Section
27A of the Securities Act of 1933 (the Securities Act), as amended. For this purpose, any
statements contained herein that are not statements of historical fact 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
important factors discussed under the caption Risk Factors in Item 1.A of this report, among
others, could cause actual results to differ materially from those indicated by forward-looking
statements made herein and presented elsewhere by management. Such forward-looking statements
represent managements current expectations and are inherently uncertain. Investors are warned that
actual results may differ from managements expectations. Echo does not undertake any obligation to
update forward-looking statements.
PART I
We are a medical device and specialty pharmaceutical company. We are developing a
non-invasive, wireless, transdermal continuous glucose monitoring (tCGM) system for use in
clinical settings and for people with diabetes together with a wide range of transdermal
reformulations of specialty pharmaceutical products previously approved by the United States Food
and Drug Administration (FDA).
Medical Device Overview
We are a transdermal medical device company with deep expertise in advanced skin permeation
technology. We are developing our Prelude SkinPrep System (Prelude) as a platform technology to
allow for significantly enhanced and painless skin permeation that will enable two important
applications:
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Analyte extraction, with the Symphony tCGM System (Symphony) for needle-free,
continuous glucose monitoring in hospital patients as the first application; and |
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Needle-free drug delivery, with the delivery of lidocaine as the first application.
Additional applications for painless, needle-free delivery of drugs are planned. |
Prelude incorporates a patented, dynamic feedback control mechanism for optimal skin
permeation control. Prelude allows for precise, highly effective and completely painless skin
permeation prior to analyte extraction or drug delivery.
Utilizing the patented, core skin permeation technology found in Prelude, we are developing
our needle-free Symphony tCGM System as a non-invasive, wireless, tCGM system for people with
diabetes and for use in hospital critical care units. Symphony includes the Prelude SkinPrep System
for needle-free skin permeation and our patented, non-invasive, continuous transdermal glucose
biosensor. With Symphony, we are initially focused on the hospital critical care setting with
technology designed to assist clinical professionals, improve patient compliance and achieve better
overall glucose control in critically ill patients. All existing FDA-approved continuous glucose
monitoring (CGM) systems are needle-based, requiring insertion of a glucose sensor into the
patients skin, which gives rise to risks of infection, inflammation or bleeding at the insertion
site. Symphony is a non-invasive tCGM system that does not require insertion of its glucose sensor
and thus does not give rise to the risks associated with needle-based CGM systems.
Preludetm SkinPrep System
We are developing Prelude as a safe, effective, easy-to-use and low-cost transdermal skin
permeation device for our Symphony tCGM System to enhance the flow of interstitial fluids and
molecules across the protective membrane of the stratum corneum, the outmost protective layer of
the skin. Prelude incorporates our patented skin permeation control technology into a comfortable,
hand-held device used to prepare a small area of the skin for the non-invasive sensor components of
Symphony. We have successfully used
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Prelude to increase the permeability of the skin allowing for analyte extraction and small
molecule drug delivery in both internal studies and external pilot clinical trials in both diabetes
home-use setting. Prelude will be used in our planned clinical studies for Symphony.
We believe Prelude can also be positioned in the transdermal drug delivery market. We expect
the localized disruption of the stratum corneum created by Prelude will potentially allow
transdermal drug delivery, possibly including drugs that have low and high molecular weights. In
addition, Prelude has the potential to provide a safe and cost effective skin permeation process
for the delivery of topical anesthetic creams to allow rapid delivery of medications across the
epidermis. We believe our Prelude skin permeation process has the potential to increase skin
permeation up to 100 times greater than untreated skin, perhaps making it possible to deliver a
wide array of large molecule drugs.
Partnership with Ferndale Pharma Group for Prelude for the Delivery of Lidocaine
During 2009, we entered into a licensing agreement with Ferndale Pharma Group,
Inc., a market leader in advanced skincare and topical therapeutic products. Under the terms of
the agreement, we granted Ferndale the right to develop, market, sell and distribute Prelude for
skin preparation prior to the application of topical 4% lidocaine cream prior to a wide-range of
needle-based medical procedures in North America and the United Kingdom. This partnership allows
our skin permeation technology platform to be combined with Ferndales leadership in the topical
anesthetic market.
Skin Permeation Control Feedback Technology
The key feature of our skin permeation technology is our patented feedback mechanism to
achieve optimal and pain-free skin preparation for our transdermal sensing technologies. Preludes
proprietary, patented feedback control mechanism consists of software, microprocessor controlled
circuit and measuring electrodes. While Prelude is in operation, the circuit measures the real-time
electrical conductivity of the test skin site. Prelude turns off automatically when the
conductivity measurement reaches the appropriate stopping point as identified by the software, thus
producing individualized, optimal skin permeation. As a result, Prelude only removes the outermost
layer of the epidermis, the stratum corneum, which is about 0.01 mm thick and consists of only dry,
dead skin cells. With the advantages of our proprietary feedback control mechanism, we believe the
skin permeation process is safe, effective, fast-acting and pain-free.
Symphonytm
tCGM System
Our lead medical device program in analyte extraction is our Symphony tCGM System, a
non-invasive (needle-free), wireless, transdermal continuous glucose monitoring system designed to
provide reliable, real-time blood glucose data conveniently, continuously and cost-effectively.
Symphony incorporates Prelude (our proprietary skin permeation device), a transdermal sensor, and
wireless transmission and data display technologies.
Symphonytm Transdermal Glucose Sensor Technology
The transdermal glucose sensor component of Symphony consists of an electrochemical glucose
sensor, a hydrogel layer, a potentiostat and a short-range RF transmitter. Sensor readings are
transmitted to a remote monitor/receiver where data are processed and displayed to the user.
When the Symphony sensor is placed on a properly permeated skin site, the hydrogel not only
can establish and maintain continuous fluid paths through the skin, but it can also act as a
reliable reservoir for the sensing chemistry to receive glucose flux and convert it into hydrogen
peroxide. The hydrogen peroxide is consumed by the electrochemical sensor and continuous electrical
signal is generated in the process.
The diffusion gradient and sensor consumption of glucose are a function of the blood glucose
concentration in the subpapillary vessels beneath the epidermis. As a result, the sensor generates
continuous current that is proportional to the blood glucose concentration. The first calibration
is made when the sensor stabilizes, followed by subsequent calibrations depending on the
applications. Due to our advanced hydrogel chemistry and the well-controlled skin permeation
process, the glucose flux detected by the sensor can provide reliable continuous glucose readings
for 24 hours.
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Symphonytm Wireless Transmitter
The Symphony transmitter assembly consists of coupling hydrogel/chemistry, sensor electrodes
and integrated electronics. To preserve data integrity and save power, the assembly digitizes,
stores and transmits discrete, coded signals via a wireless link to the Symphony receiving monitor.
Once the sensor is connected and adhered to the skin, the transmitter switches on automatically and
starts to broadcast data once every minute. A medical grade adhesive keeps the transmitter in place
and a hermetic seal protects the chemistry and electronics from fluid invasion. Disposable
components of the transmitter assembly are the hydrogel and the sensor electrodes. In our current
prototype design, our Symphony transmitter is reusable, but we believe it can also be disposable
depending on its application. Based upon our pilot clinical studies to date, we believe our
Symphony transmitter assembly can be applied to the forearm, upper arm, chest, upper back, abdomen
and many other sites on the body with tangible soft tissue.
Symphonytm Monitor
Our Symphony monitor receives digitally coded data from the transmitter assembly and then
decodes the data once every minute. Once a reference blood glucose value is entered manually (a
calibration) after a one hour warm-up period, the decoded data are converted to blood glucose
reading by a built-in data algorithm. The Symphony monitor displays the date, time of day, sensor
current, blood glucose reading and rate of increase or decrease, amount of time the transmitter has
been switched on, battery status, and any alarm or error modes.
A membrane key pad allows the user to interface with the monitor. The keys provide for on/off,
data entry, calibration, alarm silencing, and monitor resetting. Both the key pad and the LCD
display are back lighted to support full operation in the dark. The monitor also contains an
audible alarm, a RF receiver, a programming port, a rechargeable battery pack and a USB data port
for computerized record keeping or in-depth data analysis. We expect our Symphony monitor to offer
several display options to the user, including a graphical presentation of blood glucose level over
time, and to allow for programmable alarm thresholds at prescribed blood glucose limits to help the
user identify impending hyperglycemia and hypoglycemia.
Partnership with Handok Pharmaceutical for Symphonytm in South Korea
During 2009, we entered into a license agreement with Handok Pharmaceuticals Co., Ltd.
(Handok), the largest diabetes care-focused pharmaceutical company in South Korea. Under the
terms of the agreement, we granted Handok the right to develop, market, sell and distribute
Symphony to medical facilities and diabetics in South Korea.
Symphonytm Market Opportunities
Importance of Continuous Blood Glucose Monitoring
We believe that continuous blood glucose monitoring can be an important part of a diabetes
patients daily disease management program. Continuous blood glucose monitoring can help plan
diabetes treatment, guide day-to-day choices about diet, exercise and insulin use, and avoid
unwanted low blood glucose (hypoglycemia) and high blood glucose (hyperglycemia) events and the
complications that they can cause. Blood glucose levels are affected by many factors such as the
carbohydrate and fat content of food, exercise, stress, illness, and variability in insulin
absorption among others; therefore, it is often challenging for diabetes patients to avoid frequent
and unpredictable excursions above or below normal glucose levels. Patients are often unaware that
their glucose levels are either too high or too low, resulting in their inability to tightly
control their glucose levels and prevent the complications associated with unwanted glucose
excursions.
In an attempt to achieve and maintain blood glucose levels within a desired range, diabetes
patients must measure their glucose levels. The American Diabetes Association (ADA) recommends
that patients test their blood glucose levels at least three or four times per day; however,
despite evidence that intensive glucose management reduces the long-term complications associated
with diabetes, industry sources estimate that people with diabetes test, on average, less than
twice per day. We believe Symphony has the potential to improve patient compliance to frequent
glucose testing, achieve better glucose control and make a positive impact on overall day-to-day
diabetes management.
Hospital Critical Care Market
We believe Symphony has the potential to offer a non-invasive, wireless, tCGM solution for use
in the rapidly emerging hospital critical care market. A primary cause of infection in critically
ill patients is hyperglycemia which is a result of insulin resistance and
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total parenteral nutrition. Clinical studies have demonstrated that intensive insulin therapy
to maintain tight glycemic control significantly reduces patient mortality, complications and
infection rates, as well as hospital stays, services and overall hospital costs.
Regular monitoring of blood glucose levels is rapidly becoming a necessary procedure performed
by hospital critical care personnel to achieve tight glycemic control and ensure improved patient
outcomes. In a recent survey by Boston Biomedical Consultants of more than 60 hospital critical
care unit managers and nurse clinicians in the United States, more than 90% of those surveyed
acknowledged the benefits of tight glycemic control protocols in the hospital critical care
setting. We believe tight glycemic control protocols are becoming the new standard of care in
hospital critical care units across the United States, for patients with and without diabetes.
Today, standard practice by critical care nurses is to measure blood glucose at the patients
bedside periodically. We believe that a needle-free CGM system such as Symphony will save valuable
nursing time and expense by avoiding the need for frequent blood glucose sampling, in addition to
providing more clinically relevant, real-time glucose level and trending information needed to
develop better control algorithms for insulin administration.
Diabetes Home Use Market
Diabetes is a chronic and life-threatening disease caused by the bodys inability to produce
or properly use insulin, a key hormone the body uses to manage glucose, which fuels the cells in
the body. Insulin regulates the uptake of sugar from the blood into the cells. When glucose builds
up in the blood instead of going into cells, it can cause the cells to become starved for energy
and, over time, damage the eyes, kidneys, nerves or heart. Although not all of the causes of
diabetes are known, genetics and lifestyle factors such as obesity and lack of exercise appear to
play important roles. According to the ADA, about 21 million people in the United States, or
approximately seven percent (7%) of the population, have diabetes, including over 6 million people
who remain unaware that they have the disease. In addition, before people develop Type 2 diabetes
(discussed below), they usually have pre-diabetes, or blood glucose levels that are higher than
normal but not yet high enough to be diagnosed as diabetes. According to the ADA, there are 54
million people in the United States who have pre-diabetes.
When blood glucose levels are high, diabetes patients often administer insulin to reduce their
blood glucose level. Unfortunately, insulin administration can reduce blood glucose levels below
the normal range, causing hypoglycemia. In cases of severe hypoglycemia, diabetes patients risk
severe and acute complications, such as loss of consciousness or death. Due to the drastic nature
of acute complications associated with hypoglycemia, many diabetes patients are afraid of sharply
reducing their blood glucose levels and often remain in a hyperglycemic state, exposing themselves
to long-term complications of that condition.
Diabetes is typically classified into two major groups: Type 1 and Type 2. Type 1 diabetes
usually develops in children and young adults and is characterized by the bodys inability to
produce insulin. People with Type 1 diabetes rely on frequent administration of insulin to regulate
their blood glucose levels. Type 2 diabetes, by far the most common form of the disease worldwide,
results when either the body does not produce enough insulin or cells in the body ignore the
insulin produced and become insulin-resistant. People with Type 2 diabetes often require diet and
nutrition management, exercise, oral medications or insulin administration to regulate their blood
glucose levels.
According to the ADA, the cost of diabetes care in the United States in 2007 was more than
$174 billion, including $116 billion in excess medical expenditures attributed to diabetes and $58
billion in reduced national productivity. The ADA estimates that people with diabetes, on average,
have medical expenditures that are approximately 2.3 times higher than the expenditures would be in
the absence of diabetes and that approximately $1 in $10 healthcare dollars is attributed to
diabetes. A significant portion of overall diabetes care costs, approximately $7 billion according
to industry sources, is attributable to costs associated with monitoring blood glucose levels, and
that market segment is projected to grow substantially by 2010 as patients and their physicians
seek ways to manage glucose levels more effectively.
Specialty Pharmaceutical Overview
Our specialty pharmaceuticals pipeline is based on our proprietary
AzoneTStm transdermal drug reformulation technology. AzoneTS is a nontoxic,
nonirritating skin penetration enhancer that is intended to enable topical application of
FDA-approved prescription medications, including pharmaceutical products that previously could only
be administered systemically. AzoneTS increases lipid membrane fluidity in the stratum corneum
layer of the skin, thereby decreasing the diffusion resistance to topically applied therapeutics.
AzoneTS is a chemical combination of pyrolidone and decylmethyl sulfoxide, both of which alone act
as weak penetration enhancers. Our proprietary synergistic chemical combination enables AzoneTS to
be a highly effective skin penetration
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enhancer at low concentration levels. When combined with AzoneTS, we believe the penetration
of numerous commercially successful, FDA-approved drugs can be substantially improved from two to
more than twenty fold. 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.
With additional resources, we expect that our new AzoneTS product opportunities would be
AzoneTS reformulations of FDA-approved products or active pharmaceutical ingredients (APIs) and,
when developed pursuant to the FDAs Section 505(b)(2) guidelines, will have a significantly
reduced nonclinical testing burden compared to new chemical entities developed under the FDAs
Section 505(b)(1) requirements. We expect to be able to leverage our extensive AzoneTS nonclinical
Drug Master File (DMF), as well as the established safety database of the FDA-approved products
we reformulate with AzoneTS. We believe the main nonclinical safety studies that the FDA will
require us to perform for our AzoneTS reformulation product candidates under a Section 505(b)(2)
application will be pharmacokinetic studies and local and eye irritancy studies; however,
additional studies may be required.
There are several factors that will ultimately determine the cost and time associated with
developing new AzoneTS-based products, including the ease of reformulation of the API with AzoneTS,
how close the current route of administration is to the proposed route of administration, the level
of additional toxicology information required by the FDA, and the clinical trials needed to show
adequate safety and efficacy of the new product.
Durhalievetm
Our most advanced drug candidate is Durhalieve, an AzoneTS formulation of triamcinolone
acetonide, a widely-used, medium potency corticosteroid approved by the FDA for treatment of
corticosteroid-responsive dermatoses. In addition to Durhalieve for the treatment of
corticosteroid-responsive dermatoses, we believe that Durhalieve could be developed as a treatment
for keloid scarring.
If Durhalieve is approved by the FDA for treatment of corticosteroid-responsive dermatoses, we
believe we will be well-positioned to offer the pharmaceutical industry a highly efficient and
relatively low cost, advanced topical alternative for several FDA-approved oral and injectable
specialty pharmaceutical products.
Government Regulation
Government authorities in the United States, at the federal, state and local level, and other
countries extensively regulate the research, development, testing, manufacture, labeling,
promotion, advertising, distribution, marketing, export and import of products such as those we are
developing. In the United States, pharmaceuticals, biologics and medical devices are subject to
rigorous FDA regulation. Federal and state statutes and regulations govern, among other things, the
testing, manufacture, safety, efficacy, labeling, storage, export, record keeping, approval,
marketing, advertising and promotion of our potential products. The information that must be
submitted to the FDA in order to obtain approval to market a new drug varies depending on whether
the drug is a new product whose safety and effectiveness has not previously been demonstrated in
humans, or a drug whose active ingredient(s) and certain other properties are the same as those of
a previously approved drug. Drugs follow either the new drug application or biologics license
application routes. Product development and approval within this regulatory framework takes a
number of years and involves significant uncertainty combined with the expenditure of substantial
resources.
FDA Approval Process for Medical Devices
Generally, medical devices require FDA approval or clearance before they may be marketed.
There are two review procedures by which a product may receive such approval or clearance. Some
products may qualify for clearance under a pre-market notification, or 510(k) procedure, in which
the manufacturer provides to the FDA a pre-market notification that it intends to begin marketing
the product, and demonstrates to the FDAs satisfaction that the product is substantially
equivalent to a legally marketed device. A product is considered substantially equivalent if it has
the same intended use, and also has either the same technological characteristics (as defined in
the Federal Food, Drug, and Cosmetic Act (FD&CA)), or if the product has different technological
characteristics, the information submitted in the pre-market notification demonstrates that the
product is as safe and effective as a legally marketed device and does not raise different
questions of safety and effectiveness than a legally marketed device. Marketing may commence when
the FDA issues a clearance letter. If a medical device does not qualify for the 510(k) procedure,
the FDA must approve a pre-market approval application (PMA) before marketing can begin. PMA
applications must demonstrate, among other matters, that the medical device is safe and effective.
The PMA approval process is typically more comprehensive than the 510(k) process, and usually
requires pre-clinical and extensive clinical studies. Further, before the FDA will approve a PMA,
the manufacturer must pass an
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inspection demonstrating its compliance with the requirements of the FDAs quality system
regulations. FDA requests for additional studies during the review period are not uncommon and can
significantly delay approvals.
In addition, a number of other FDA requirements apply to medical device manufacturers and
distributors. Device manufacturers must be registered and their products listed with the FDA and
certain adverse events and product malfunctions must be reported to the FDA. The FDA also prohibits
an approved or cleared device from being marketed for unapproved or uncleared uses. Our product
labeling, promotion and advertising will be subject to continuing FDA regulation. Manufacturers
must comply with the FDAs quality system regulation, which establishes extensive requirements for
quality control and manufacturing procedures. The FDA periodically inspects facilities to ascertain
compliance with these and other requirements. Thus, manufacturers and distributors must continue to
spend time, money and effort to maintain compliance. Failure to comply with the applicable
regulatory requirements may subject us to a variety of administrative and judicially imposed
sanctions, including withdrawal of an approval or clearance, warning letters, product recalls,
product seizures, total or partial suspension of production or distribution, injunctions, and civil
and criminal penalties against us or our officers, directors or employees. Failure to comply with
regulatory requirements could have a material adverse effect on our business, financial condition
and results of operations.
In order to obtain marketing clearance for Symphony, we will be required to file a PMA that
demonstrates the safety and effectiveness of the product.
FDA Approval Process for Pharmaceutical Products
In the United States, the FDA regulates drugs under FD&CA and implementing regulations. The
steps required before a drug may be marketed in the United States include:
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completion of preclinical laboratory tests, animal studies and formulation studies under
the FDAs current good laboratory practices; |
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submission to the FDA of an investigational new drug for human clinical testing, which
must become effective before human clinical trials may begin and must include independent
institutional review board approval at each clinical site before the trial is initiated; |
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performance of adequate and well-controlled clinical trials to establish the safety and
efficacy of the product for each indication; |
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submission to the FDA of a New Drug Application (NDA); |
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satisfactory completion of an FDA Advisory Committee review, if applicable; |
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satisfactory completion of an FDA inspection of the manufacturing facility or facilities
at which the product is produced to assess compliance with current Good Manufacturing
Practices (GMP) to assure that the facilities, methods and controls are adequate to
preserve the drugs identity, strength, quality and purity; and |
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FDA review and approval of the NDA. |
Preclinical tests include laboratory evaluations of product chemistry, toxicity, and
formulation, as well as animal studies. An Investigational New Drug (IND) sponsor must submit the
results of the preclinical tests, together with manufacturing information and analytical data, to
the FDA as part of the IND. An IND will automatically become effective 30 days after receipt by the
FDA unless, before that time, the FDA raises concerns or questions about issues such as the conduct
of the trials as outlined in the IND application. In that case, the IND sponsor and the FDA must
resolve any outstanding FDA concerns or questions before clinical trials can proceed. Submission of
an IND application may not result in the FDA allowing clinical trials to commence.
Clinical trials involve the administration of the investigational product to human subjects
under specific protocols and the supervision of qualified investigators. Each clinical protocol
must be submitted to the FDA as part of the IND application, and an institutional review board at
each site where the study is conducted must also approve the proposed study.
Clinical trials typically are conducted in three sequential phases, but the phases may overlap
or be combined. Phase 1 trials usually involve the initial introduction of the investigational drug
into humans to evaluate the product candidates safety, dosage tolerance and pharmacodynamics and,
if possible, to gain an early indication of its effectiveness. Phase 2 trials usually involve
controlled trials in a
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limited patient population to evaluate dosage tolerance and appropriate dosage, identify
possible adverse effects and safety risks and evaluate the preliminary efficacy of the drug
candidate for specific indications. Phase 3 trials usually further evaluate clinical efficacy and
test further for safety in an expanded patient population. Phase 1, Phase 2 and Phase 3 testing may
not be completed successfully within any specified period, if at all. Furthermore, the FDA or we
may suspend or terminate clinical trials at any time on various grounds, including a finding that
the subjects or patients are being exposed to an unacceptable health risk.
Assuming successful completion of the required clinical testing, the results of the
preclinical studies and of the clinical studies, together with other detailed information,
including information on the chemistry, manufacture and control criteria of the product, are
submitted to the FDA in the form of a NDA or biologics license application requesting approval to
market the product candidate for one or more indications. The FDA reviews a NDA to determine, among
other things, whether a product candidate is safe and effective for its intended use and whether
its manufacturing is current GMP-compliant to assure and preserve the product candidates identity,
strength, quality and purity. The FDA may refuse to accept and review insufficiently complete
applications.
Before approving a NDA, the FDA will inspect the facility or the facilities at which the
product candidate is manufactured. If the FDA determines the application, manufacturing process or
manufacturing facilities are not acceptable, it will outline the deficiencies in the submission and
often will request additional testing or information. Notwithstanding the submission of any
requested additional information, the FDA ultimately may decide that the application does not
satisfy the regulatory criteria for approval.
The testing and approval process requires substantial time, effort and financial resources,
and each may take several years to complete. The FDA may not grant approval on a timely basis, or
at all. We may encounter difficulties or unanticipated costs in our efforts to secure necessary
governmental approvals, which could delay or preclude us from marketing our products. The FDA may
limit the indications for use or place other conditions on any approvals that could restrict the
commercial application of the products. After approval, some types of changes to the approved
product, such as adding new indications, manufacturing changes and additional labeling claims, are
subject to further FDA review and approval.
Post-Approval Requirements
If we obtain regulatory approval of a product candidate, we will be required to comply with a
number of post-approval requirements. For example, as a condition of approval of a NDA, the FDA may
require post-marketing testing and surveillance to monitor the products safety or efficacy.
In addition, holders of an approved NDA are required to report certain adverse reactions and
production problems to the FDA, to provide updated safety and efficacy information and to comply
with requirements concerning advertising and promotional labeling for their products. Also, quality
control and manufacturing procedures must continue to conform to current GMP after approval. The
FDA periodically inspects manufacturing facilities to assess compliance with current GMP, which
imposes certain procedural, substantive and recordkeeping requirements. Accordingly, manufacturers
must continue to expend time, money and effort in the area of production and quality control to
maintain compliance with current GMP and other aspects of regulatory compliance. We use, and will
continue to use in at least the near term, third-party manufacturers to produce our products in
clinical and commercial quantities. Future FDA inspections may identify compliance issues at our
facilities or at the facilities of our contract manufacturers that may disrupt production or
distribution or require substantial resources to correct.
Discovery of problems with a product or failure to comply with the applicable FDA requirements
at any time during the product development process, approval process or after approval, may subject
an applicant to administrative or judicial sanctions. These sanctions could include a clinical hold
on or termination of studies, the FDAs refusal to approve pending applications, license suspension
or revocation, withdrawal of an approval, restriction on marketing, warning letters, product
recalls, product seizures, total or partial suspension of production or distribution, injunctions,
fines, civil penalties or criminal prosecution. Also, new government requirements may be
established that could delay or prevent regulatory approval of our products under development.
Foreign Regulation
In addition to regulations in the United States, we will be subject to a variety of foreign
regulations governing clinical trials and commercial sales and distribution of our products.
Whether or not we obtain FDA approval for a product, we must obtain approval of a product by the
comparable regulatory authorities of foreign countries before we can commence clinical trials or
marketing of the product in those countries. The approval process varies from country to country,
and the time may be longer or shorter than that required for FDA approval. The requirements
governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly
from country to country.
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Related Matters
From time to time, federal legislation is drafted, introduced and passed in the United States
that could significantly change the statutory provisions governing the approval, manufacturing and
marketing of products regulated by the FDA. In addition, FDA regulations and guidance are often
revised or reinterpreted by the agency in ways that may significantly affect our business and our
products. It is impossible to predict whether legislative changes will be enacted, or FDA
regulations, guidance or interpretations changed, or what the impact of such changes, if any, may
be.
Research and Development
A major portion of our operating expenses to date is related to our research and development
(R&D) activities. R&D expenses generally consist of internal salaries and related costs, and
third-party firms for product design and development, product engineering and contract
manufacturing. In addition, R&D costs include regulatory consulting, feasibility product testing
(internal and external) and conducting nonclinical and clinical trials. R&D expenses were
approximately $2,807,000 and $3,191,000, for the years ended December 31, 2009 and 2008,
respectively. We intend to maintain our strong commitment to R&D as an essential component of our
product development efforts. Licensed or acquired technology developed by third parties may be an
additional source of potential products; however, our ability to raise sufficient financing may impact our R&D spending.
Manufacturing
We do not have, and do not intend to establish in the near term, our own manufacturing
capability for our medical device products or our pharmaceutical products or their APIs, or the
capability to package any products we may sell in the future. We intend to rely on third-party
manufacturers and suppliers to manufacture our medical devices and to produce and supply the APIs
and drug products that we require to meet preclinical research, testing and clinical study
requirements.
Currently, we do not have any long-term supply contracts with third-party manufacturers and
suppliers. We intend to use third-party manufacturers that comply with the FDAs GMP requirements
and other rules and regulations prescribed by domestic and foreign regulatory authorities.
If our product candidates are approved, we believe that qualified suppliers and manufacturers
for such medical device products and pharmaceutical products will be available in the future, at a
reasonable cost to us, although there can be no assurance that this will be the case.
Competition
The medical device and pharmaceutical industries are intensely competitive. Many companies,
universities, and research organizations developing competing product candidates have greater
resources and significantly greater experience in financial, research and development,
manufacturing, marketing, sales, distribution, and technical regulatory matters than we have. In
addition, many competitors have greater name recognition and more extensive collaborative
relationships. Our competitors could commence and complete clinical testing of their product
candidates, obtain regulatory approvals, and begin commercial-scale manufacturing of their products
faster than we are able to for our products. They could develop products that would render our
product candidates, and those of our collaborators, obsolete and noncompetitive. Our competitors
may develop more effective or more affordable products or achieve earlier patent protection or
product commercialization than we do.
We expect that any products that we develop will compete primarily on the basis of product
efficiency, safety, patient convenience, reliability, availability and price; however, there can be
no assurance that we will successfully develop technologies and products that are more effective,
safer, more convenient, more reliable, more available or more affordable than those being developed
by our current and future competitors. Please see Risks related to competition in Item 1A below.
Intellectual Property
We maintain a comprehensive portfolio of intellectual property that we consider to be of
material importance in protecting our technologies. Our success depends primarily on our ability to
establish and maintain the proprietary nature of our technology through the patent process. In
order to protect our proprietary technologies, we also rely on a combination of trademark,
copyright and trade secret protection, as well as confidentiality agreements with employees,
consultants and third parties.
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Our intellectual property covers skin permeation control for enhanced drug delivery and
transdermal diagnostics in the field of medical devices, and reformulations of topical products in
the field of specialty pharmaceuticals. These patents provide considerable protection from new
entrants, and we focus our patent coverage only on aspects of our technologies that we believe will
be significant and that could provide barriers to entry for our competition worldwide. Our success
depends to a significant degree upon our ability to develop proprietary products and technologies
and to obtain patent coverage for such products and technologies. We intend to continue our
practice of filing patent applications covering newly developed products and technologies.
Employees
As of December 31, 2009, we had nine (9) employees and two (2) active consultants. Of this
group of employees and consultants, five (5) are involved with finance and administration and six
(6) 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 December 31, 2008, we had eleven (11) employees and two (2) active consultants. Of this
group of employees and consultants, five (5) were involved with finance and administration and
eight (8) were involved with research and development, and clinical and regulatory matters.
Company Information
Our principal executive offices located at 10 Forge Parkway, Franklin, Massachusetts 02038 and
our telephone number is (508) 553-8850.
We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports available through our website, free of charge, as soon as
reasonably practicable after we file such material with, or furnish it to the SEC. Our OTC Bulletin
Board symbol is ECTE and our corporate website is www.echotx.com. The contents of our website are
not part of this Report, and our internet address is included in this document as an inactive
textual reference only.
Risk Factors
We operate in a rapidly changing environment that involves a number of risks, some of which
are beyond our control. Forward-looking statements in this document and those made from time to
time by us through our senior management are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements concerning the
expected future revenues or earnings or concerning projected plans, performance, or development of
products and services, as well as other estimates related to future operations, are necessarily
only estimates of future results and there can be no assurance that actual results will not
materially differ from expectations. Forward-looking statements represent managements current
expectations and are inherently uncertain. We do not undertake any obligation to update
forward-looking statements. Factors that could cause actual results to differ materially from
results anticipated in forward-looking statements include, but are not limited to, the following:
If we fail to raise additional capital, we will be unable to continue our business.
Our development efforts to date have consumed and will continue to require substantial amounts
of capital in connection with research and development of Symphony, Prelude and specialty
pharmaceuticals programs. As we conduct more advanced development of our Symphony tCGM System,
Prelude SkinPrep System and AzoneTS reformulation pipeline, we will need significant funding
to complete our product development programs and to pursue product commercialization. Additionally,
our independent registered public accounting firm has expressed substantial doubt about our ability
to continue as a going concern. Our ability to continue our business and our research, development
and commercialization activities associated with our product pipeline is highly dependent on our
ability to obtain additional sources of financing.
Any failure by us to fund our ongoing operations, including planned product development
initiatives, clinical studies and commercialization efforts, in a timely manner will have material
adverse consequences on our business operations and, as a result, on our consolidated financial
condition, results of operations and cash flows. To the extent that we attempt to raise additional
funds
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through third party collaborations and/or licensing arrangements, we may be required to
relinquish some rights to our technologies or products currently in various stages of development,
or grant licenses or other rights on terms that are not favorable to us. We may not be successful
in entering into any new collaboration or license agreement that results in material revenues.
Additionally, we do not expect that the revenues generated from these arrangements would be
sufficient alone to continue or expand our research or development activities and otherwise sustain
our operation in the near term, if at all.
We have a history of operating losses, we expect our operating losses to continue for the
foreseeable future and we may not continue as a going concern.
We have generated limited revenue and have had operating losses since our inception, including
a net loss of approximately $11,000,000 for the year ended December 31, 2009. As of December 31,
2009, we had an accumulated deficit of approximately $67,400,000. Losses have resulted principally
from costs incurred in connection with our research and development activities and from general and
administrative costs associated with our operations. The audit report from Wolf & Company, P.C.,
our independent registered public accounting firm, relating to our 2009 consolidated financial
statements contains Wolfs opinion that our recurring losses from operations, significant
accumulated deficit, significant working capital deficit and our failure to raise sufficient
capital to fund our operations, raise substantial doubt about our ability to continue as a going
concern. We also expect to have negative cash flows for the foreseeable future as we fund our
operating losses and capital expenditures. This will result in decreases in our working capital,
total assets and shareholders equity, which may not be offset by future funding. It is possible
that we will never generate sufficient revenue to achieve and sustain profitability. Even if we
achieve profitability, we may not be able to sustain or increase profitability. We expect our
operating losses to continue and increase for the foreseeable future as we continue to expend
substantial resources to conduct research and development, seek to obtain regulatory approval for
Symphony, Prelude, Durhalieve and our other AzoneTS product candidates, identify and secure
collaborative partnerships, and manage and execute our obligations in possible strategic
collaborations. These losses, among other things, have had and will continue to have an adverse
effect on our stockholders equity.
Our principal shareholders own a significant percentage of our stock and will be able to exercise
significant influence.
Our principal shareholders own a significant percentage of our outstanding capital stock.
Accordingly, these shareholders may be able to determine the composition of a majority of our Board
of Directors, retain the voting power to approve certain matters requiring shareholder approval,
and continue to have significant influence over our affairs. This concentration of ownership could
have the effect of delaying or preventing a change in our control. Furthermore, so long as the
purchasers in our January 2007 strategic private placement own 20% of the shares purchased in that
transaction, the purchasers have the right to designate one director for election to our Board of
Directors. The candidate is designated by the purchaser holding at least a majority of the shares
of Common Stock purchased in the January 2007 financing, and such holder is currently Sherbrooke
Partners, LLC, a beneficial owner of approximately 5.62% of our outstanding Common Stock as of
March 22, 2010. Additionally, this significant concentration of share ownership may adversely
affect the trading price of our Common Stock because investors often perceive disadvantages in
owning stock in companies with a concentration of ownership.
Our future success is dependent upon successful collaborations with strategic partners.
Our future success is dependent upon our ability to selectively enter into and maintain
collaborative arrangements with third parties for technology research and development, clinical
testing, product development and sales and marketing. If we are unable to enter into additional
development agreements or collaborative arrangements with strategic partners, we will be required
to internally fund all of our product development activities, significantly increasing business
risk and capital requirements in the development, clinical testing, manufacturing, marketing and
commercialization of new products. We could also encounter significant delays in introducing
products into markets or find that the development, manufacture or sale of proposed products in
such markets is adversely affected by the absence of those collaborative arrangements.
The process of establishing collaborative partners is difficult, time-consuming and involves
significant uncertainty. Discussions with potential collaborators may not lead to the establishment
of new collaborative relationships on favorable terms, if at all. If successful in establishing a
collaborative agreement, such agreement may never result in the successful development of products
or the generation of significant revenue. Any such agreements could limit our flexibility in
pursuing alternatives for the development or commercialization of our products. Even if we were to
enter into additional collaborative arrangements with third parties, there can be no assurance that
our financial condition or results of operations will significantly improve.
Our stock price has been volatile and may fluctuate in the future.
The trading price of our Common Stock may fluctuate significantly. This price may be
influenced by many factors, including:
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our financial condition, performance and prospects; |
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the depth and liquidity of the market for our Common Stock; |
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our ability to enter into successful collaborative arrangements with strategic
partners for research and development, clinical testing, and sales and marketing; |
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sales by selling shareholders of shares issued and issuable in connection with our
private placements; |
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investor perception of us and the industry in which we operate; |
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general financial and other market conditions; and |
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domestic and international economic conditions. |
Public stock markets have experienced extreme price and trading volume volatility,
particularly in the technology and life sciences sectors of the market. This volatility has
significantly affected the market prices of securities of many technology companies for reasons
frequently unrelated to or disproportionately impacted by the operating performance of these
companies. These broad market fluctuations may adversely affect the market price of our Common
Stock. In addition, fluctuations in our stock price may have made our stock attractive to momentum,
hedge or day-trading investors who often shift funds into and out of stocks rapidly, exacerbating
price fluctuations in either direction particularly when viewed on a quarterly basis.
Securities we issue to fund our operations could dilute or otherwise adversely affect our
shareholders.
We need to raise substantial additional funds through public or private equity or debt
financings to fund our operations. If we raise funds by issuing equity securities, the percentage
ownership of current shareholders will be significantly reduced and the new equity securities may
have rights senior to those of the shares of our Common Stock. We may not obtain sufficient
financing on terms that are favorable to current investors or us. We may delay, limit or eliminate
some or all of our proposed operations if adequate funds are not available.
Risks related to our discovery, development and commercialization of new medical products
Our medical device products are based on new technologies and may not be successfully developed or
achieve market acceptance.
Most of our products under development have a high risk of failure because they are based on
new technologies. To date, we have tested the feasibility of Prelude for various applications,
including continuous glucose monitoring and certain anesthetic applications. We have also tested
the feasibility of Symphony for the monitoring of glucose on a continuous basis; however, to
develop additional products or additional uses, substantial expenditures will be required,
including for feasibility studies, pre-clinical studies and clinical testing. Projected costs for
such development are difficult to estimate and they may change and increase frequently.
Our success is dependent on further developing new and existing products and obtaining
favorable results from pre-clinical studies and clinical trials and satisfying regulatory standards
and approvals required for the market introduction of such products, including skin permeation
methods and Symphony. There can be no assurance that we will not encounter unforeseen problems in
the development of Symphony and Prelude, or that we will be able to successfully address the
problems that do arise. There can be no assurance that any of our potential products will be
successfully developed, proven safe and efficacious in clinical trials, meet applicable regulatory
standards, be capable of being produced in commercial quantities at acceptable costs, or be
eligible for third-party reimbursement from governmental or private insurers. Even if we
successfully develop new products, there can be no assurance that such products will be
successfully marketed or achieve market acceptance, or that expected markets will develop for such
products. If any of our development programs are not successfully completed, required regulatory
approvals or clearances are not obtained, or potential products for which approvals or clearances
are obtained are not commercially successful, our business, financial condition and results of
operations would be materially adversely affected.
In addition, because our products are based on new technologies, they are subject to lengthy
sales cycles and may take substantial time and effort to achieve market acceptance, especially at
hospitals, which typically have a lengthy and rigorous approval process for adopting new
technologies.
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Our future success may be dependent in part upon successful development of
Symphonytm for the hospital critical care market.
We have completed the initial prototypes and have conducted several feasibility human clinical
studies at a leading Boston-area hospital, with a member of our Clinical Advisory Board serving as
principal investigator. Although we believe the clinical rationale exists for Symphony for the
critical care market, there can be no assurance that such a market will be established, or that we
will be able to successfully develop a product that will prove effective for this market or gain
market acceptance should such a market develop. Our Symphony product development process may take
several years and will require substantial capital outlays. If the critical care market does not
develop as we expect, or if we are unable to successfully develop Symphony for such markets on a
timely basis and within cost constraints, then our business and financial results will be
materially adversely affected.
Our pharmaceutical products are in various stages of development and may not be successfully
developed or obtain regulatory approval.
The product candidates in our AzoneTS pipeline are at various stages of developments. We have
filed a NDA covering Durhalieve, our most advanced AzoneTS product candidate, for corticosteroid
responsive dermatoses, with the FDA and we now seeking to satisfy FDA manufacturing requirements
necessary to secure market approval. We believe that the failure to advance Durhalieve beyond its
current stage of development will have a material adverse effect on our prospects and on our
business, financial condition and results of operations.
Several of our AzoneTS pipeline programs involve topical reformulations of FDA-approved
products. We must successfully complete nonclinical development activities, including reformulation
development, process development and manufacturing activities, with respect to these product
candidates before we can commence late-stage clinical development necessary to obtain regulatory
approval. These nonclinical development activities, as well as the clinical trials associated with
each AzoneTS reformulation development program, are expensive, uncertain and will take several
years to complete and may not yield results that support further clinical development or product
approvals.
Conducting clinical studies for any of our pharmaceutical product candidates for approval in
the United States requires filing an IND and reaching agreement with the FDA on clinical protocols,
finding appropriate clinical sites and clinical investigators, securing approvals for such studies
from the institutional review board at each such site, manufacturing clinical quantities of drug
candidates, supplying drug product to clinical sites and enrolling sufficient numbers of
participants. We cannot guarantee that we will be able to successfully accomplish these activities
or all of the other activities necessary to initiate and complete clinical trials. As a result, our
nonclinical and clinical development programs may be extended, delayed or terminated, and we may be
unable to obtain regulatory approvals or successfully commercialize our product candidates.
Our results to date provide no basis for predicting whether many of our pharmaceutical products
will be safe or effective, or receive regulatory approval.
Most of our AzoneTS product candidates are in early stages of reformulation development and
the likelihood of success of each product candidate is highly speculative. To date, much of the
data supporting our AzoneTS drug development programs and new chemical entities are derived from
laboratory and nonclinical studies and early stage clinical trials. Additional clinical trials in
humans may not show that our AzoneTS-reformulated drug candidates are safe and effective, in which
event we may need to further reformulate or abandon development of one or more of our current
product candidates. It is impossible to predict when or if our early-stage AzoneTS pipeline
products will prove effective or safe in humans or will receive regulatory approval. These
AzoneTS-reformulated compounds may not demonstrate in patients the chemical and pharmacological
properties ascribed to them in laboratory studies or early stage clinical trials, and they may
interact with human biological systems or other drugs in unforeseen, ineffective or harmful ways.
We may not be able to gain market acceptance of our product candidates, which would prevent us
from becoming profitable.
Even if our product candidates receive regulatory approval, we cannot be certain that any of
our product candidates will gain market acceptance among physicians, patients, healthcare payers,
hospitals, pharmaceutical companies and the medical community in general. The degree of market
acceptance will depend on a number of factors, including:
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Our establishment and demonstration to the medical community of the clinical efficacy and
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Our ability to create products that are superior to alternatives currently on the market;
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Our ability to establish in the medical community the potential advantage of our
treatments over alternative treatment methods. |
These and other factors combined with obtaining regulatory approvals will not guarantee future
revenues. Sales of medical products largely depend on the reimbursement of patients medical
expenses by government healthcare programs and private health insurers. Governments and private
insurers closely examine medical products to determine whether they should be covered by
reimbursement and, if so, the level of reimbursement that will apply. We cannot be certain that
third party payers will sufficiently reimburse sales of our products, or enable us to sell our
products at profitable prices. Similar concerns could also limit the reimbursement amounts that
health insurers or government agencies in other countries are prepared to pay for our products. In
many areas where we plan to market our products, including Europe, Japan and Canada, the pricing of
prescription drugs is controlled by the government or regulatory agencies. Government or other
regulatory agencies in these countries could determine that the pricing for our products should be
based on prices of other commercially available drugs for the same disease, rather than allowing us
to market our products at a premium as new drugs.
Sales of medical products also depend on physicians willingness to prescribe the treatment,
which is likely to be based on a determination by these physicians that the products are safe,
therapeutically effective and cost-effective. We cannot predict whether physicians, other
healthcare providers, government agencies or private insurers will determine that our products are
safe, therapeutically effective and cost effective relative to competing treatments.
We may not be able to obtain and maintain the third party relationships that are necessary to
develop, commercialize and manufacture some or all of our product candidates.
We expect to depend on collaborators, partners, licensees, contract research organizations,
manufacturers and other third parties to support our efforts to develop and commercialize our
product candidates, to manufacture clinical and commercial scale quantities of our product
candidates and products and to market, sell, and distribute any products we successfully develop.
We cannot guarantee that we will be able to successfully negotiate agreements for or maintain
relationships with collaborators, partners, licensees, clinical investigators, manufacturers and
other third parties on favorable terms, if at all. If we are unable to obtain or maintain these
agreements, we may not be able to clinically develop, formulate, manufacture, obtain regulatory
approvals for or commercialize our product candidates, which will in turn adversely affect our
business.
We expect to expend substantial management time and effort to enter into relationships with
third parties and, if we successfully enter into such relationships, to manage these relationships.
We must attract and retain collaborative partners and develop technologies and pipeline
candidates that meet the requirements of prospective collaborative partners. In addition,
substantial amounts of our expenditures will be paid to third parties in these relationships.
We cannot control the amount or timing of resources our contract partners will devote to our
research and development programs, product candidates or potential product candidates, and we
cannot guarantee that these parties will fulfill their obligations to us under these arrangements
in a timely fashion, if at all. In addition, our contract partners will generally have the right to
abandon research projects and terminate applicable agreements, including funding obligations, prior
to or upon the expiration of agreed upon research terms. There can be no assurance that we will be
successful in establishing multiple future collaborative arrangements on acceptable terms or at
all, that current or future collaborative partners will not terminate funding before completion of
projects, that our existing or future collaborative arrangements will result in successful product
commercialization or that we will derive any revenues from such arrangements. Some or all of our
collaborative partners may receive exclusive or co-exclusive rights to market products
incorporating our technology in a particular field of use or a particular territory. The grant of
such rights will limit our alternatives in commercializing certain of our products and
technologies.
We have no experience in sales, marketing and distribution and may have to enter into agreements
with third parties to perform these functions, which could prevent us from successfully
commercializing our product candidates.
We currently have no sales, marketing or distribution capabilities. To commercialize our
product candidates, we must either develop our own sales, marketing and distribution capabilities,
which will be expensive and time consuming, or make arrangements with third parties to perform
these services for us. If we enter into third party arrangements, the third parties may not be
capable of successfully selling any of our products. If we decide to market any of our products on
our own, we will have to commit significant resources to developing a marketing and sales force and
supporting distribution capabilities. If we decide to enter into arrangements with third parties
for performance of these services, we may find that they are not available on terms acceptable to
us, or at all. If we
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are not able to establish and maintain successful arrangements with third parties or build our
own sales and marketing infrastructure, we may not be able to commercialize our product candidates
which would adversely affect our business and financial condition.
If we are not able to retain our current senior management team and our scientific and medical
advisors or continue to attract and retain qualified scientific, technical and business personnel,
our business will suffer.
We are dependent on the members of our management team and our network of clinical,
regulatory, scientific and technical advisors for our business success. An important element of our
strategy is to take advantage of the research and development expertise of our current management
and to utilize the unique expertise of our advisors. We currently have employment agreements with
all of our senior executive officers. Our employment agreements with our senior executive officers
are terminable on short notice or no notice and provide for severance and change of control
benefits. The loss of any one of our senior executive officers could result in a significant loss
in the knowledge and experience that we, as an organization, possess and could cause significant
delays, or outright failure, in the development and further commercialization of our product
candidates.
Disputes under key agreements or conflicts of interest with our scientific advisors, clinical
investigators or other third party collaborators could delay or prevent development or
commercialization of our product candidates.
Any agreements we have or may enter into with third parties, such as collaborators, licensees,
suppliers, manufacturers, clinical research organizations, clinical investigators or clinical trial
sites, may give rise to disputes regarding the rights and obligations of the parties. Disagreements
could develop over rights to ownership or use of intellectual property, the scope and direction of
research and development, the approach for regulatory approvals or commercialization strategy. We
intend to conduct research programs in a range of therapeutic areas, but our pursuit of these
opportunities could result in conflicts with the other parties to these agreements that may be
developing or selling pharmaceuticals or conducting other activities in the same therapeutic areas.
Any disputes or commercial conflicts could lead to the termination of our agreements, delay
progress of our product development programs, compromise our ability to renew agreements or obtain
future agreements, lead to the loss of intellectual property rights or result in costly litigation.
We collaborate with outside scientific advisors and collaborators at academic and other
institutions that assist us in our research and development efforts. Our scientific advisors are
not our employees and may have other commitments that limit their availability to us. If a conflict
of interest between their work for us and their work for another entity arises, we may lose their
services.
We may have challenges in managing our outside contractors for product and regulatory
accomplishments.
We rely heavily upon and have relationships with outside contractors and consultants with
expertise in drug development, regulatory strategy, manufacturing and other matters. These parties
are not our employees and may have commitments to, or consulting or advisory contracts with, other
entities that may limit their availability to us. We have limited control over the activities of
consultants and outside contractors and, except as otherwise required by our collaboration and
consulting agreements, can expect only limited amounts of their time to be dedicated to our
activities. If any third party with whom we have or enter into a relationship is unable or refuses
to contribute to projects on which we need their help, our ability to generate advances in our
technologies and develop our product candidates could be significantly harmed.
Risks related to regulatory approvals
None of our product candidates has received regulatory approval. If we are unable to obtain
regulatory approval to market one or more of our product candidates, our business will be
adversely affected.
Most of our pharmaceutical product candidates are in early stages of development, and we do
not expect these product candidates to be commercially available in the foreseeable future, if at
all. Our product candidates are subject to strict regulation by regulatory authorities in the
United States and in other countries. In particular, human pharmaceutical therapeutic product
candidates are subject to rigorous preclinical and clinical testing and other requirements by the
FDA in the United States and similar authorities in other countries in order to demonstrate safety
and efficacy. Data obtained from preclinical studies and clinical trials are subject to varying
interpretations that could delay, limit or prevent regulatory approval. In addition, failure to
comply with regulatory requirements or inadequate manufacturing processes could also prevent
product approval. Because our product candidates involve or are expected to involve the application
of new technologies or are based upon a new therapeutic approach, they may be subject to
substantial additional review by various governmental regulatory authorities and, as a result, the
process of obtaining regulatory approval for them may proceed more slowly than for product
candidates based upon more conventional technologies. Furthermore, we may encounter delays or
rejections due to additional government regulation from future legislation, administrative action
or changes in
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FDA policy. We do not know whether regulatory agencies will grant approval for any of our
product candidates. Even if we complete preclinical studies and clinical trials successfully, we
may not be able to obtain regulatory approval or we may not receive approval to make claims about
our products that we believe to be necessary to effectively market our products.
We cannot market any product candidate until we have completed all necessary preclinical
studies and clinical trials and have obtained the necessary regulatory approvals. Outside the
United States, our ability to market any of our potential products is dependent upon receiving
marketing approval from the appropriate regulatory authorities. These foreign regulatory approval
processes include all of the risks associated with the FDA approval process described above plus
additional risks. If we are unable to receive regulatory approval, we will be unable to
commercialize our product candidates, and our business may fail.
If we are unable to successfully complete the preclinical studies or clinical trials necessary to
support PMA or NDA submissions to the FDA, we may be unable to commercialize
Symphonytm , Preludetm or AzoneTStm
products under development, which could impair our financial position.
Before submitting a PMA application to the FDA for Symphony (which includes our Prelude
SkinPrep System) or a NDA for an AzoneTS product candidate, we must successfully complete
preclinical studies and clinical trials that we believe will demonstrate that our product is safe
and effective. Product development, including preclinical studies and clinical trials, is a long,
expensive and uncertain process and is subject to delays and failure at any stage. Furthermore, the
data obtained from the studies and trial may be inadequate to support approval of a PMA or NDA, as
the case may be. With respect to our medical device programs, while we have in the past obtained,
and may in the future obtain, an Investigational Device Exemption, or IDE, prior to commencing
clinical trials for Symphony, FDA approval of an IDE application permitting us to conduct testing
does not mean that the FDA will consider the data gathered in the trial to be sufficient to support
approval of a PMA application, even if the trials intended safety and efficacy endpoints are
achieved.
The commencement or completion of any of our clinical trials may be delayed or halted, or be
inadequate to support approval of a PMA or NDA, as the case may be, for numerous reasons,
including, but not limited to, the following:
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the FDA or other regulatory authorities do not approve a clinical trial protocol or a
clinical trial, or place a clinical trial on hold; |
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patients do not enroll in clinical trials at the rate we expect; |
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patients do not comply with trial protocols; |
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patient follow-up is not at the rate we expect; |
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patients experience adverse side effects; |
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patients die during a clinical trial, even though their death may not be related to our
products; |
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institutional review boards (IRBs) and third-party clinical investigators may delay or
reject our trial protocol; |
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third-party clinical investigators decline to participate in a trial or do not perform a
trial on our anticipated schedule or consistent with the investigator agreements, clinical
trial protocol, good clinical practices or other FDA or IRB requirements; |
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third-party organizations do not perform data collection, monitoring and analysis in a
timely or accurate manner or consistent with the clinical trial protocol or investigational
or statistical plans; |
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regulatory inspections of our clinical trials or manufacturing facilities may, among
other things, require us to undertake corrective action or suspend or terminate our clinical
trials; |
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changes in governmental regulations or administrative actions; |
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the interim or final results of the clinical trial are inconclusive or unfavorable as to
safety or efficacy; or |
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the FDA concludes that our trial design is inadequate to demonstrate safety and efficacy. |
17
The results of preclinical studies do not necessarily predict future clinical trial results,
and predecessor clinical trial results may not be repeated in subsequent clinical trials.
Additionally, the FDA may disagree with our interpretation of the data from our preclinical studies
and clinical trials, or may find the clinical trial design, conduct or results inadequate to prove
safety or efficacy, and may require us to pursue additional pre-clinical studies or clinical
trials, which could further delay the approval of our products. If we are unable to demonstrate the
safety and efficacy of our products in our clinical trials, we will be unable to obtain regulatory
approval to market our products. The data we collect from our current clinical trials, our
pre-clinical studies and other clinical trials may not be sufficient to support FDA approval.
We depend on clinical investigators and clinical sites to enroll patients in our clinical trials
and other third parties to manage the trials and to perform related data collection and analysis
and, as a result, we may face costs and delays that are outside of our control.
We rely on clinical investigators and clinical sites to enroll patients in our clinical trials
and other third parties to manage the trial and to perform related data collection and analysis and
we may not be able to control the amount and timing of resources that clinical sites devote to our
clinical trials. If these clinical investigators and clinical sites fail to enroll a sufficient
number of patients in our clinical trials, fail to ensure compliance by patients with clinical
protocols or fail to comply with regulatory requirements, we will be unable to complete these
trials, which could prevent us from obtaining regulatory approval for our products. Our agreements
with clinical investigators and clinical sites for clinical testing place substantial
responsibilities on these parties and, if these parties fail to perform as expected, our trials
could be delayed or terminated. If these clinical investigators, clinical sites or other third
parties do not carry out their contractual duties or obligations, fail to meet expected deadlines,
or if the quality or accuracy of the clinical data they obtain is compromised due to their failure
to adhere to our clinical protocols, regulatory requirements or for other reasons, our clinical
trials may be extended, delayed or terminated, or the clinical data may be rejected by the FDA, and
we may be unable to obtain regulatory approval for, or successfully commercialize, our products.
The regulatory approval process is costly and lengthy and we may not be able to successfully
obtain all required regulatory approvals.
The preclinical development, clinical trials, manufacturing, marketing and labeling of medical
devices and specialty pharmaceuticals are all subject to extensive regulation by numerous
governmental authorities and agencies in the United States and other countries. We must obtain
regulatory approval for each of our product candidates before marketing or selling any of them. It
is not possible to predict how long the approval processes of the FDA or any other applicable
federal or foreign regulatory authority or agency for any of our products will take or whether any
such approvals ultimately will be granted. The FDA and foreign regulatory agencies have substantial
discretion in the medical device and drug approval process, and positive results in preclinical
testing or early phases of clinical studies offer no assurance of success in later phases of the
approval process. Generally, preclinical and clinical testing of products can take many years and
require the expenditure of substantial resources, and the data obtained from these tests and trials
can be susceptible to varying interpretations that could delay, limit or prevent regulatory
approval. If we encounter significant delays in the regulatory process that result in excessive
costs, this may prevent us from continuing to develop our product candidates. Any delay in
obtaining, or failure to obtain, approvals could adversely affect the marketing of our products and
our ability to generate product revenue. The risks associated with the approval process include:
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failure of our product candidates to meet a regulatory entitys requirements for safety,
efficacy and quality; |
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limitation on the indicated uses for which a product may be marketed; |
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unforeseen safety issues or side effects; and |
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governmental or regulatory delays and changes in regulatory requirements and guidelines. |
If we fail to obtain adequate reimbursement for our product candidates, the use of our potential
products could be severely limited.
Our ability to successfully commercialize our product candidates will depend significantly on
our ability to obtain acceptable prices and the availability of reimbursement to the patient from
third-party payors. Significant uncertainty exists as to the reimbursement status of newly-approved
healthcare products. If our potential products are not considered cost-effective or if we fail to
generate adequate third-party reimbursement for the users of our potential products and treatments,
then we may be unable to maintain price levels sufficient to realize an appropriate return on our
investment in product development. In both the United States and other
18
markets, sales of our potential products, if any, will depend in part on the availability of
reimbursement from third-party payors, examples of which include government health administration
authorities, private health insurers, health maintenance organizations, and pharmacy benefit
management companies.
Risks related to competition
We operate in highly competitive medical device and specialty pharmaceuticals markets and face
competition from large, well-established companies with significantly more resources, and, as a
result, we may not be able to compete effectively.
The industries in which we operate are extremely competitive. Many companies, universities,
and research organizations developing competing product candidates have greater resources and
significantly greater experience in financial, research and development, manufacturing, marketing,
sales, distribution, and regulatory matters than we have. In addition, many competitors have
greater name recognition and more extensive collaborative relationships. Our competitors could
commence and complete clinical testing of their product candidates, obtain regulatory approvals,
and begin commercial-scale manufacturing of their products faster than we are able to for our
products. They could develop products that would render our product candidates and those of our
collaborators obsolete and noncompetitive. Our competitors may develop more effective or more
affordable products or achieve earlier patent protection or product commercialization than us. If
we are unable to compete effectively against these companies, then we may not be able to
commercialize our product candidates or achieve a competitive position in the market. This would
adversely affect our ability to generate revenues.
The markets for glucose monitoring devices and specialty pharmaceuticals are intensely
competitive, subject to rapid change and significantly affected by new product introductions and
other market activities of industry participants. Several companies are developing or currently
marketing short-term continuous glucose monitoring products that will compete directly with our
Symphony tCGM System. To date, Abbott, Cygnus, DexCom and Medtronic have received approval from
the FDA for continuous glucose monitors for home use. The product originally developed and
marketed by Cygnus is no longer actively marketed. No company has received FDA approval for
continuous glucose monitoring in a hospital setting but Edwards Lifesciences, Luminous Medical,
Optiscan and Glumetrics are among those companies actively developing continuous or near-continuous
glucose monitoring devices for use in critical care. Most of the companies developing or marketing
competing glucose monitoring devices and specialty pharmaceuticals are publicly traded or divisions
of publicly-traded companies and these companies enjoy several competitive advantages, including:
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significantly greater name recognition; |
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established relations with healthcare professionals, customers and third-party payors; |
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established distribution networks; |
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additional lines of products, and the ability to offer rebates or bundle products to
offer higher discounts or incentives to gain a competitive advantage; |
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greater experience in conducting research and development, manufacturing, clinical
trials, obtaining regulatory approval for products and marketing approved products; and |
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greater financial and human resources for product development, sales and marketing, and
patent litigation. |
As a result, we may not be able to compete effectively against these companies or their
products.
No continuous glucose monitoring system has yet received FDA clearance as a replacement for
single-point finger stick devices, and Symphonytm may never be approved for
that indication.
We do not expect Symphony to eliminate the need for single-point finger stick devices in the
foreseeable future and it may not be approved by the FDA for that indication. At present, there is
no established precedent for FDA approval of a continuous glucose monitoring system as a
replacement for single-point finger stick devices.
19
Technological breakthroughs in the glucose monitoring market could render our product obsolete.
The glucose monitoring market is subject to rapid technological change and product innovation.
Our product is based on our proprietary technology, but a number of companies and medical
researchers are pursuing new technologies for the monitoring of glucose levels. FDA approval of a
commercially viable continuous glucose monitor or sensor produced by one of our competitors could
significantly reduce market acceptance of our system. Several of our competitors are in various
stages of developing continuous glucose monitors or sensors, including non-invasive and invasive
devices, and the FDA has approved four of these competing products. In addition, the National
Institutes of Health and other supporters of diabetes research are continually seeking ways to
prevent, cure or improve treatment of diabetes. As a result, our products may be rendered obsolete
by technological breakthroughs in diabetes monitoring, treatment, prevention or cure.
Risks related to products liability exposure
We may have significant product liability exposure which may harm our business and our reputation.
We face exposure to product liability and other claims if our product candidates, products or
processes are alleged to have caused harm. These risks are inherent in the testing, manufacturing,
and marketing of human therapeutic products. Although we currently maintain product liability
insurance, we may not have sufficient insurance coverage, and we may not be able to obtain
sufficient coverage at a reasonable cost, if at all. Our inability to obtain product liability
insurance at an acceptable cost or to otherwise protect against potential product liability claims
could prevent or inhibit the commercialization of any products or product candidates that we
develop. If we are sued for any injury caused by our products, product candidates or processes, our
liability could exceed our product liability insurance coverage and our total assets. Claims
against us, regardless of their merit or potential outcome, may also generate negative publicity or
hurt our ability to obtain physician endorsement of our products or expand our business.
Risks related to our intellectual property
Our inability to adequately protect our intellectual property could allow our competitors and
others to produce products based on our technology, which could substantially impair our ability
to compete.
Our success and our ability to compete is dependent, in part, upon our ability to maintain the
proprietary nature of our technologies. We rely on a combination of patent, copyright and trademark
law, trade secrets and nondisclosure agreements to protect our intellectual property; however, such
methods may not be adequate to protect us or permit us to gain or maintain a competitive advantage.
Our patent applications may not issue as patents in a form that will be advantageous to us, or at
all. Our issued patents, and those that may issue in the future, may be challenged, invalidated or
circumvented, which could limit our ability to stop competitors from marketing related products.
To protect our proprietary rights, we may in the future need to assert claims of infringement
against third parties to protect our intellectual property. The outcome of litigation to enforce
our intellectual property rights in patents, copyrights, trade secrets or trademarks is highly
unpredictable, could result in substantial costs and diversion of resources, and could have a
material adverse effect on our financial condition and results of operations regardless of the
final outcome of such litigation. In the event of an adverse judgment, a court could hold that some
or all of our asserted intellectual property rights are not infringed, invalid or unenforceable,
and could award attorney fees to the other party.
Despite our efforts to safeguard our unpatented and unregistered intellectual property rights,
we may not be successful in doing so or the steps taken by us in this regard may not be adequate to
detect or deter misappropriation of our technology or to prevent an unauthorized third party from
copying or otherwise obtaining and using our products, technology or other information that we
regard as proprietary. Additionally, third parties may be able to design around our patents.
Furthermore, the laws of foreign countries may not protect our proprietary rights to the same
extent as the laws of the United States. Our inability to adequately protect our intellectual
property could allow our competitors and others to produce products based on our technology, which
could substantially impair our ability to compete.
We are subject to claims of infringement or misappropriation of the intellectual property rights
of others, which could prohibit us from commercializing our product candidates, require us to
obtain licenses from third parties or to develop non-infringing alternatives, and subject us to
substantial monetary damages and injunctive relief.
20
As is generally the case in the medical device and pharmaceutical industries in which we
operate, third-parties may, in the future, assert infringement or misappropriation claims against
us with respect to our current or future products. Whether a product infringes a patent involves
complex legal and factual issues, the determination of which is often uncertain; therefore, we
cannot be certain that we have not infringed the intellectual property rights of such third parties
or others. Our competitors may assert that our product candidates, technologies and/or the methods
we employ in the use of Symphony and/or AzoneTS pipeline candidates are covered by U.S. or foreign
patents held by them. This risk is exacerbated by the fact that there are numerous issued patents
and pending patent applications relating to self-monitored glucose testing systems in the medical
technology field. Because patent applications may take years to issue, there may be applications
now pending of which we are unaware that may later result in issued patents that our products
infringe. There could also be existing patents of which we are unaware that one or more components
of our system may inadvertently infringe. As the number of competitors in the market for continuous
glucose monitoring systems and specialty pharmaceuticals grows, the possibility of inadvertent
patent infringement by us or a patent infringement claim against us increases.
Any infringement or misappropriation claim could cause us to incur significant costs, place
significant strain on our financial resources, divert managements attention from our business and
harm our reputation. If the relevant patents were upheld as valid and enforceable and we were found
to infringe, we could be prohibited from selling our product that is found to infringe unless we
obtain the right to use the technology covered by the patent or are able to design around the
patent. We may be unable to obtain such rights on terms acceptable to us, if at all, and we may not
be able to redesign our products to avoid infringement. Even if we are able to redesign our
products to avoid an infringement claim, we may not receive FDA approval for such changes in a
timely manner or at all. A court could also order us to pay compensatory damages and prejudgment
interest for such infringement and could, in addition, treble the compensatory damages and award
attorney fees. These damages could be substantial and could harm our reputation, business,
financial condition and operating results. A court also could enter orders that temporarily,
preliminarily or permanently enjoin us and our customers from making, using, selling or offering to
sell our products, or could enter an order mandating that we undertake certain remedial activities.
Depending on the nature of the relief ordered by the court, we could become liable for additional
damages to third parties.
We lease approximately 13,000 square feet of research-scale manufacturing, laboratory and
office space in a single facility located in Franklin, Massachusetts under a lease expiring March
31, 2011.
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ITEM 3. |
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LEGAL PROCEEDINGS. |
None.
PART II
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ITEM 5. |
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MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES. |
Our Common Stock is currently traded through the Over-The-Counter Bulletin Board (OTCBB) and
is quoted under the symbol ECTE. The following table sets forth the range of high and low closing
prices for our Common Stock for the periods indicated as reported by the OTCBB in 2008 and 2009.
The number of common shareholders of record of Echo as of March 22, 2010 was 186.
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Fiscal Year Ended December 31, 2008 |
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High |
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Low |
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First Quarter |
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$ |
1.90 |
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$ |
1.10 |
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Second Quarter |
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$ |
2.14 |
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$ |
1.00 |
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Third Quarter |
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$ |
1.94 |
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$ |
0.66 |
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Fourth Quarter |
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$ |
0.81 |
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$ |
0.35 |
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Fiscal Year Ended December 31, 2009 |
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High |
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Low |
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First Quarter |
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$ |
0.70 |
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$ |
0.25 |
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Second Quarter |
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$ |
1.69 |
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$ |
0.35 |
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Third Quarter |
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$ |
1.96 |
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$ |
1.36 |
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Fourth Quarter |
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$ |
1.70 |
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$ |
1.22 |
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* |
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The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions. |
21
We have never paid or declared any cash or other dividends on our Common Stock.
Information regarding our equity compensation plans and the securities authorized for issuance
hereunder is set forth in Item 11 below. Information regarding sales of unregistered securities is
set forth in Item 7, Notes 8 and 9.
We did not repurchase any shares of Common Stock during the year ended December 31, 2009.
During 2009, warrants to purchase 1,584,515 shares of our Common Stock were exercised
voluntarily in cashless exercises, providing no gross proceeds.
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ITEM 7. |
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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 consolidated financial statements and the related notes
thereto included elsewhere in this Form 10-K. The matters discussed herein contain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
and Section 27A of the Securities Act of 1933, as amended, which involve risks and uncertainties.
All statements other than statements of historical information provided herein may be deemed to be
forward-looking statements. Without limiting the foregoing, the words believes, anticipates,
plans, expects and similar expressions are intended to identify forward-looking statements.
Factors that could cause actual results to differ materially from those reflected in the
forward-looking statements include, but are not limited to, those discussed in Risk Factors and
elsewhere in this report and the risks discussed in our other filings with the 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.
Organization
We are a transdermal medical device and specialty pharmaceutical company developing a
non-invasive (needle-free), wireless, tCGM system for people with diabetes and for use in hospital
critical care units. We are also developing Prelude for transdermal drug delivery of a wide range
of novel topical reformulations of widely-used FDA-approved products.
The accompanying consolidated financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of liabilities in the
normal course of business. As of December 31, 2009, we had cash of approximately $1,167,000, a
working capital deficiency of approximately $2,616,000 and an accumulated deficit of approximately
$67,394,000. Through December 31, 2009, we have not been able to generate sufficient revenues from
our operations to cover our costs and operating expenses. Although we have been able to obtain
unsecured and secured debt and issue securities through a series of private placements to raise
capital in order to fund our operations, it is not known whether we will be able to continue this
practice, or be able to obtain other types of financing to meet our cash operating expenses. This,
in turn, raises substantial doubt about our ability to continue as a going concern. Subsequent
to December 31, 2009, we received gross proceeds from a Common Stock and Warrant Financing of
approximately $2,455,000 (see Consolidated Financial Statement Note 14). Additional financing is
necessary to fund operations in 2010 and beyond. We are currently pursuing additional private
equity financing, and such financing is expected to be completed during 2010; 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.
Operating Plan
We are principally involved with product development and clinical studies for our Symphony
tCGM System and our Prelude SkinPrep System. Symphony is a next-generation, non-invasive
(needle-free), wireless tCGM system designed to provide reliable, continuous blood glucose data
conveniently and cost-effectively. We have completed our principal research and advanced our
feasibility development of our Symphony prototype, including our proprietary Prelude skin
permeation system, and have engaged several product development, engineering, and contract
manufacturing firms to assist us with all necessary efforts in connection with our plan to finalize
product development and advance our regulatory approval process through the FDA. We have completed
several clinical studies using Symphony in an acute care (hospital) environment, as well as in
ambulatory settings for Type 1 and Type 2 Diabetics. In order to complete our product development,
clinical development programs and to obtain regulatory approval for Symphony, we need to raise
substantial additional financing.
22
In connection with a license agreement with Ferndale Pharma Group, Inc., we have substantially
completed product development on Prelude for use as needle-free skin preparation prior to the
application of topical 4% lidocaine cream for fast-acting, local dermal anesthesia prior to a
wide-range of needle-based medical procedures.
Our specialty pharmaceuticals pipeline 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 are candidate for our AzoneTS reformulation technology that is
focused on improved and enhanced dermal penetration. Our lead product candidate is Durhalieve, an
AzoneTS topical reformulation of triamcinolone acetonide. Durhalieve is covered by our NDA 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 on the remaining product
development requirements established by the FDA 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. In order to complete our product development program and to
continue efforts to obtain regulatory approval for Durhalieve, we need to raise substantial
additional financing.
Research and Development
A significant portion of our research and development expenses includes salaries paid to
personnel, outside product development design and engineering firms and other contract service
providers, as well as for the allocation of facilities costs.
Our product development efforts are principally concentrated on our medical device products:
Symphony and Prelude. While our medical device product development programs are moving forward,
financial constraints (principally in 2009) have prevented us from advancing these programs in
accordance with the timelines we had originally anticipated.
In connection with our specialty pharmaceuticals pipeline and due to financial constraints
(principally in 2009), we have been unable to advance and finalize 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 obtain sufficient funding necessary
to complete our current planned development schedule for Durhalieve, then we may incur additional
time and expenses to obtain approval for Durhalieve from the FDA and 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.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these
consolidated financial statements requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period.
On an ongoing basis, we evaluate our estimates and judgments for all assets and liabilities,
including those related to stock-based compensation expense and, the fair value determined for
stock purchase warrants classified as derivative liabilities. We base our estimates and judgments
on historical experience, current economic and industry conditions and on various other factors
that are believed to be reasonable under the circumstances. This forms the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different assumptions or
conditions. We believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial statements.
Our significant accounting policies are described in Item 7 Financial Statements Note 2
Summary of Significant Accounting Policies. We believe the critical accounting policies
discussed below are those most important for an understanding of our financial condition and
results of operations and require our most difficult, subjective or complex judgments.
Intangible Assets and Other Long-Lived Assets We record intangible assets at acquisition
date fair value. As a policy, we amortize our 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 our acquisition of Durham
Pharmaceuticals Ltd., a North Carolina corporation doing business as
23
Echo Therapeutics, Inc. (the ETI Acquisition) in September 2007, 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.
Accounting for Impairment and Disposal of Long-Lived Assets We review 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.
Conditions that would indicate impairment and trigger an impairment assessment include, but are not
limited to, a significant adverse change in legal factors or business climate that could affect the
value of an asset, or an adverse action or assessment by a regulator. If the carrying value of an
asset exceeds its undiscounted cash flows, we write-down the carrying value of the intangible asset
to its fair value in the period identified.
For purposes of this analysis, we estimate our cash flows using a projection period not
exceeding ten years, market size based on estimated prescription volume, estimated market share,
average pricing, estimated costs to complete product development, operating expenses and a blended
tax rate. Generally, cash flow forecasts for purposes of cash impairment analysis are prepared on a
consistent basis and using a consistent methodology as those prepared for the income approach used
to initially estimate the intangible assets fair value.
If the carrying value of assets is determined not to be recoverable, we record an impairment
loss equal to the excess of the carrying value over the fair value of the assets. Our estimate of
fair value is based on the best information available to us, in the absence of quoted market
prices.
We generally calculate fair value as the present value of estimated future cash flows that we
expect to generate from the asset using the income approach as described above. Significant
estimates included in the discounted cash flow analysis as consistent with those described above
are used except that we introduce a risk-adjusted discount rate. The risk-adjusted discount rate is
estimated using a weighted-average cost of capital analysis. If the estimate of an intangible
assets remaining useful life is changed, we amortize the remaining carrying value of the
intangible asset prospectively over the revised remaining useful life. For other long-lived assets,
we evaluate quarterly whether events or circumstances have occurred that indicate that the carrying
value of these assets may be impaired.
Share-based Payments We record share-based payments at fair value. The grant date fair
value of awards to employees and directors, net of expected forfeitures, is recognized as expense
in the statement of operations over the requisite service period. The fair value of options is
calculated using the Black-Scholes option pricing model. This option valuation model requires input
of assumptions including the volatility of our stock price, the expected life of the option and the
risk-free interest rate. We estimate the volatility of our stock price using historical prices. We
estimate the expected life of our option using the average of the vesting period and the
contractual term of the option. The estimated forfeiture rate is based on historical forfeiture
information as well as subsequent events occurring prior to the issuance of the financial
statements. Because our stock options have characteristics significantly different from those of
traded options, and because changes in the input assumptions can materially affect the fair value
estimate, the existing model may not necessarily provide a reliable single measure of fair value of
our stock options.
Derivative Instruments We generally do not use derivative instruments to hedge exposures to
cash-flow or market risks; however, certain warrants to purchase Common Stock that do not meet the
requirements for classification as equity are classified as liabilities. In such instances,
net-cash settlement is assumed for financial reporting purposes, even when the terms of the
underlying contracts do not provide for a net-cash settlement. Such financial instruments are
initially recorded at fair value, 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 as equity, we reclassify
the fair value to equity.
24
Revenue Recognition To date, we have generated revenue primarily from licensing agreements,
including upfront, nonrefundable license fees, and from amounts reimbursed by licensees for
third-party engineering services for product development. We recognize revenue when the following
criteria have been met:
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persuasive evidence of an arrangement exists; |
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delivery has occurred and risk of loss has passed; |
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the price to the buyer is fixed or determinable; and |
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collectability is reasonably assured. |
In addition, when evaluating multiple element arrangements, we consider whether the components
of the arrangement represent separate units of accounting. Multiple elements are divided into
separate units of accounting if specified criteria are met, including whether the delivered element
has stand-alone value to the customer and whether there is objective and reliable evidence of the
fair value of the undelivered items. The consideration received is allocated among the separate
units based on their respective fair values, and the applicable revenue recognition criteria are
applied to each of the separate units. Otherwise, the applicable revenue recognition criteria are
applied to combined elements as a single unit of accounting.
We typically receive upfront, nonrefundable payments for the licensing of its intellectual
property upon the signing of a license agreement. We believe that these payments generally are not
separable from the payments we receive for providing research and development services because the
license does not have stand-alone value from the research and development services we provide under
these agreements. Accordingly, we account for these elements as one unit of accounting and
recognize upfront, nonrefundable payments as revenue on a straight-line basis over its contractual
or estimated performance period. Revenue from the reimbursement of research and development efforts
is recognized as the services are performed based on proportional performance adjusted from time to
time for any delays or acceleration in the development of the product. We determine the basis of
the estimated performance period based on the contractual requirements of its collaboration
agreements. At each reporting period, we evaluate whether events warrant a change in the estimated
performance period.
Other Revenue includes amounts earned and billed under the license and collaboration agreements for
reimbursement for research and development costs for contract engineering services. For the
services rendered, principally third-party contract engineering services, the revenue recognized approximates the costs associated
with the services.
We believe that full consideration has been given to all relevant circumstances that we may be
subject to, and the consolidated financial statements accurately reflect our best estimate of the
results of operations, financial position and cash flows for the periods presented.
Results of Operations
Comparison of the years ended December 31, 2009 and 2008
Licensing Revenue We signed two licensing agreements during the year ended December 31,
2009, each with a minimum term of ten years, that required up-front non-refundable license payments
by the licensees. The up-front non-refundable license payments received in cash totaled $1,250,000.
We are recognizing the up-front, non-refundable payments as revenue on a straight-line basis over our
contractual or estimated performance period. Accordingly, we determined that approximately $536,000
of the non-refundable license revenue was recognizable in the year ended December 31, 2009.
Approximately $591,000 is recognizable over the next 12 months and is shown as current deferred
revenue and approximately $123,000 is recognizable as revenue beyond the 12 month period and is
classified as non-current. There was no licensing revenue or deferred revenue in the year ended
December 31, 2008.
Other Revenue Other Revenue of approximately $795,000 for the year ended December 31, 2009
consisted of revenue recognized on reimbursed research and development expenses (contract
engineering services). These expenses, with no mark-up by us, are included in research and
development expenses in the Consolidated Statement of Operations. There was no Other Revenue in the
year ended December 31, 2008.
25
Research and Development Expenses Research and development expenses decreased by
approximately $384,000 to approximately $2,807,000 for the year ended December 31, 2009 from
approximately $3,191,000 for the year ended December 31, 2008. Research and development expenses
decreased primarily as a result of our decreased product and clinical development activity for
Symphony and Prelude, including reduced outside contractor and our 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. During the year
ended December 31, 2008, we conducted a critical care trial at a Boston hospital, and during 2008
and 2009 we completed numerous clinical studies. Research and development expenses amounted to
approximately 48% and 46% of total operating expenses during the years ended December 31, 2009 and
2008, respectively, and included product development and regulatory consulting expenses for Prelude
and Symphony. Product development and clinical expenses included in research and development
expenses represented approximately 95% and 5%, respectively, of research and development expenses
for the year ended December 31, 2009. We engaged several engineering and product development firms
during the years ended December 31, 2009 and 2008 for the purposes of developing our Symphony and
Prelude devices. Product development and clinical expenses amounted to approximately 96% and 4%,
respectively, of research and development expenses for the year ended December 31, 2008.
Selling, General and Administrative Expenses Selling, general and administrative expenses
decreased by approximately $681,000 to approximately $3,055,000 for the year ended December 31,
2009 from approximately $3,736,000 for the year ended December 31, 2008. The net decrease was due
to the combination of a decrease of approximately $526,000 in share-based compensation expenses, a
decrease of approximately $42,000 in salaries and payroll taxes, a decrease of approximately
$294,000 in outside investor relations services, a decrease in legal expenses of approximately of
$218,000, an increase of approximately $198,000 in financial investment advisory and promotional
expenses, an increase of approximately $45,000 in promotional costs and an increase of
approximately $156,000 in miscellaneous administrative expenses. Selling, general and administrative
expenses represented 52% and 54% of total operating expenses during the years ended December 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 $2,000 for the year ended December
31, 2009 compared to interest income of approximately $25,000 for the year ended December 31, 2008,
a decrease of $23,000. The decrease in interest income for the year ended December 31, 2009 was
attributable to our lower average amount of cash equivalents on hand during 2009 compared to 2008.
Interest Expense Interest expense was approximately $332,000 for the year ended December
31, 2009, compared to interest expense of approximately $1,050,000 for the year ended December 31,
2008, a decrease of approximately $718,000. The approximate net decrease in interest expense for
each note payable obligation is shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended |
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
Increase |
|
Note Payable Obligations |
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
Senior promissory bridge notes |
|
$ |
|
|
|
$ |
197,000 |
|
|
|
($197,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior convertible notes |
|
|
55,000 |
|
|
|
359,000 |
|
|
|
($304,000 |
) |
2008 Senior secured notes |
|
|
204,000 |
|
|
|
492,000 |
|
|
|
($288,000 |
) |
2009 Senior secured note |
|
|
16,000 |
|
|
|
|
|
|
$ |
16,000 |
|
Capitalized Leases |
|
|
1,000 |
|
|
|
|
|
|
$ |
1,000 |
|
Other short-term financing |
|
|
56,000 |
|
|
|
2,000 |
|
|
$ |
54,000 |
|
|
|
|
|
|
|
|
|
|
|
Total notes payable |
|
$ |
332,000 |
|
|
$ |
1,050,000 |
|
|
|
($718,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash Interest included above |
|
$ |
313,000 |
|
|
$ |
1,037,000 |
|
|
|
($724,000 |
) |
|
|
|
|
|
|
|
|
|
|
During 2009, substantially all debt was either repaid or converted into equity.
Loss on Extinguishment of Debt In 2008, we determined that the terms of the Senior
Convertible Notes are deemed substantially different from the terms of the Senior Promissory
Bridge Notes (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
26
(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 year ended
December 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 year ended
December 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 those notes.
On September 30, 2008, we exchanged an aggregate principal amount of $2,077,868 of our Senior
Convertible Notes, including notes for amounts related to interest expense, for 1,539,161 shares of
Series A Convertible Preferred Stock (Series A Stock) and five-year warrants to purchase 153,912
shares of our Common Stock at an exercise price of $1.00 per share. We recorded an extinguishment
loss of approximately $845,000 in connection with this exchange. The total extinguishment loss for
the year ended December 31, 2008 was approximately $2,057,000.
During the year ended December 31, 2009, we recorded a loss on extinguishment of debt in the
amount of approximately $1,820,000 relating to the retirement of the 2009 Senior Secured Note in
exchange for 200.6031 shares of Series B Perpetual Preferred Stock (Series B Stock) and 3,113.084
shares of Series C Preferred Stock (Series C Stock). Additionally, we recorded a loss on
extinguishment of debt in the amount of approximately $32,000 relating to the 2008 Secured Senior
Notes.
On November 13, 2009, we recorded a loss on extinguishment when the remaining Senior
Convertible Notes and accrued interest totaling $355,070 were exchanged for 284,056 shares of
Common Stock and warrants. The loss of approximately $196,000 on extinguishment of these notes
consisted of approximately $27,000 of unamortized deferred financing costs, $18,000 of unamortized
discount and approximately $150,000 in excess fair value of the shares and warrants issued on
extinguishment over that received under the original terms.
Derivative Loss At December 31, 2009, we had outstanding warrants to purchase 7,356,502
shares of our Common Stock. Included in these warrants are outstanding warrants to purchase
1,483,760 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. The fair value of these derivative instruments at
December 31, 2009 was approximately $2,117,000 and is included in Derivative Warrant Liability, a
current liability. Changes in fair value of the derivative financial instruments are recognized
currently in the Consolidated Statement of Operations as a Derivative Gain (Loss). The primary
underlying risk exposure pertaining to the warrants is the change in fair value of the underlying
Common Stock. The Derivative loss on warrants subject to down round provisions for the years
ended December 31, 2009 and 2008 amounted to approximately $4,050,000 and none, respectively.
During the year ended December 31, 2009, warrants to purchase 1,584,515 shares of Common Stock were
exercised, of which 664,397 shares included antidilution provisions, which resulted in a reclassification to additional paid-in capital in the amount of
approximately $3,268,000.
In 2008, due to certain requirements to obtain and maintain an effective registration
statement covering the shares of Common Stock underlying the warrants issued to Imperium Master
Fund Ltd. (Imperium) in 2008 (the Imperium Warrants), we originally determined that the
Imperium Warrants did not meet the requirements for classification as equity. 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, Imperium agreed to eliminate our obligation to maintain an effective
registration statement covering the shares of Common Stock underlying the Imperium Warrants;
therefore, the Imperium Warrants were no longer required to be recorded as a derivative liability.
The derivative liability was adjusted to fair value as of May 14, 2008, resulting in an additional
derivative loss of approximately $18,000. The derivative loss for the year ended December 31, 2008
amounted to approximately $587,000. The Company reclassified approximately $920,000 to additional
paid-in capital in the year ended December 31, 2008 related to the Imperium Warrants.
Net Loss As a result of the factors described above, we had a net loss of approximately
$10,958,000 for the year ended December 31, 2009 compared to approximately $10,596,000 for the year
ended December 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, unsecured and secured
promissory notes, up-front non-refundable payments received under license agreements and cash
received in connection with exercises of Common Stock purchase options and warrants. As of
December 31, 2009, we had approximately $1,167,000 of cash and cash equivalents, with no other
short term investments.
Net cash used in operating activities was approximately $2,274,000 for the year ended December
31, 2009. The use of cash in operating activities was primarily attributable to the net loss of
approximately $10,958,000, offset by non-cash expenses of
27
approximately $4,050,000 for derivative losses, approximately $159,000 for depreciation and
amortization, approximately $1,299,000 for share-based compensation
expense, approximately $429,000
for share-based compensation expense to outside service providers,
approximately $245,000 for the fair value of derivative warrant
liability issued for services, approximately $2,024,000 for
non-cash losses on extinguishment of debt, approximately $313,000 in non-cash interest expense
relating to the Senior Convertible Notes, 2008 Senior Secured Notes, and short-term promissory
notes, and approximately $64,000 of other non-cash expenses. A decrease in accounts payable used
approximately $229,000 of cash. An increase in deferred revenue relating to the new license
agreements provided approximately $714,000 of cash. An increase in accounts receivable used
approximately $130,000 of cash. A decrease in accrued expenses and other liabilities used
approximately $44,000 of cash. Changes in prepaid expenses and other current assets used net cash
of approximately $210,000.
Net cash used in investing activities was approximately $20,000 for the year ended December
31, 2009. Cash of approximately $1,000 was provided as result of the
release of a portion of restricted cash. Cash
was used to purchase approximately $21,000 in office equipment.
Net cash provided by financing activities was approximately $3,218,000 for the year ended
December 31, 2009. The cash was primarily attributable to proceeds from the sale of common stock of
approximately $2,740,000, approximately $700,000 of proceeds from the sale of Series A-2
Convertible Preferred Stock (Series A-2 Stock), and approximately $1,990,000 provided by a
short-term senior secured note These were offset by payments made on the 2008 Senior Secured Notes
of approximately $2,209,000. Principal payments on capitalized lease obligations used less than
$1,000. Proceeds from bridge notes provided $125,000 of cash and this amount was used to repay
these Senior Promissory Bridge Notes.
At December 31, 2009, we had outstanding warrants to purchase 7,356,502 shares of Common Stock
at exercise prices ranging from $0.50 to $5.80.
As of March 22, 2010, we had cash and cash equivalents of approximately $2,001,000.
We continue to aggressively pursue additional financing from existing relationships (prior
shareholders, investors and lenders) and from new investors. We engaged investment banking firms to
assist us on these efforts. During the period January 2010 through March 22, 2010, we have raised
an additional $2,455,000 in cash from the issuance of our Common Stock and warrants.
For additional information about our operating plan with respect to our products and product
development, please see our Business discussion in Item 1 above.
We have demonstrated the ability to manage our costs aggressively and increase our operating
efficiencies while advancing our medical device product development and clinical programs, thereby
maximizing the time available to complete necessary financing. During the year ended December 31,
2009, we reduced our originally projected medical device product development and clinical costs
while pursuing necessary funding for operations. In order to advance our product development,
clinical programs, pursuit of FDA approval for Symphony and financing activities, we expect our
monthly operating costs associated with salaries and benefits, consulting costs, contract
manufacturing, legal costs and other working capital costs to increase. Accordingly, we have relied
primarily on raising equity capital in order to achieve our business objectives, and we plan to
continue to do so in the future. Limited available financing and delays in securing financing in
the future could cause us to further delay or halt our product development and clinical programs.
Although we continue to vigorously pursue acceptable financing, there can be no guarantee that
additional capital will be available in sufficient amounts on terms favorable to us, if at all.
The economic conditions during 2009, including the tightening of available funding in the
financial markets, 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 may continue in 2010. Our
product development, clinical programs and regulatory activities will be conducted to the extent
possible based on available funding from investors. Without sufficient funding for our programs,
our progress to obtain regulatory approval for Symphony and Durhalieve may be delayed.
Even if we are successful in raising necessary capital in the near term, we will still be
required to raise substantial additional capital in the future to fund new product research,
product development and clinical programs, commercialize our pharmaceutical product candidates and
achieve profitability. Our ability to fund our future operating requirements will depend on many
factors, including the following:
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|
our ability to obtain funding from third parties, including any future collaborative
partners, on reasonable terms; |
|
|
|
|
our progress on research and development programs;
|
28
|
|
|
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 |
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|
the market acceptance and third-party reimbursement of our products, if successfully
developed and approved. |
During 2009 and through March 22, 2010, no warrants have been redeemed and warrants to
purchase 1,599,515 shares were exercised through a cashless exercise provision, providing no gross
proceeds to us. Commencing January 1, 2010, we are required to accrue and pay quarterly dividends
to our Series B Stock holder at a rate of 8% per annum.
Senior Convertible Notes On February 11, 2008, we completed an approximately $2,300,000
private financing with Montaur Capital through Platinum Long Term Growth VII, LLC and certain other
select institutional and strategic investors of unsecured senior convertible notes due February 12,
2011 (the Senior Convertible Notes) and warrants. The $2,292,459 in aggregate principal amount of
Senior Convertible Notes issued in the financing had an interest rate of 8% per annum, payable
quarterly, and provided investors with the right to convert principal into shares of our Common
Stock at $1.35 per share. The conversion price was subject to weighted average anti-dilution
protection, excluding certain customary exceptions. Additionally, the
investors received five-year warrants to purchase 849,059 shares of
Common Stock at an exercise price of $1.00 per share. The warrants
provide for full antidilution price protection and allow for cashless exercise.
In connection with the financing, certain holders in the principal amount of $1,275,000 of
Bridge Notes exchanged their Bridge Notes at 120% of the outstanding principal and interest as
payment toward the purchase price of the Senior Convertible Notes. Accordingly, we issued Senior
Convertible Notes in the aggregate principal balance of $1,592,459 to the former holders of the
Bridge Notes upon their surrender of the Bridge Notes, and we received gross cash proceeds in the
amount of $700,000 in connection with the financing. In 2008, one holder of the principal amount of
$50,000 of Bridge Notes converted the principal and accrued interest into 52,041 shares of our
Common Stock at a $1.00 conversion price as provided by the terms of the Bridge Notes.
2008 Secured Note and Warrant Financing On March 24, 2008, we entered into a Secured Note
financing with Imperium providing for, at our option, the issuance of up to an aggregate $2,000,000
of original issue discount senior secured notes (the 2008 Secured Notes) in four equal tranches,
together with the Imperium Warrants to purchase up to 653,728 shares of our Common Stock at an
exercise price of $1.94 per share as of December 31, 2009. During 2008, we borrowed the entire
$2,000,000 of 2008 Secured Notes in four (4) equal installments.
We were not required to make monthly cash payments of principal and interest under the 2008
Secured Notes. Instead, the outstanding principal of each of the 2008 Secured Notes accreted in
value at an annual rate of 10%, compounded monthly, resulting in a total principal amount of
approximately $2,209,428 at maturity, i.e. $552,357 due for each of the four (4) 2008 Secured
Notes.
On June 2, 2009, we paid all of the outstanding 2008 Secured Notes.
2008 Series A Preferred Stock Exchange Agreement On September 30, 2008, we entered into an
Exchange Agreement (the Series A Agreement) with substantially all of the holders of the 2008
Senior Convertible Notes (collectively, the Series A Investors). The Series A Investors are the
holders of an aggregate of $1,980,212 in principal amount of the 2008 Senior Convertible Notes and
an aggregate $97,656 in principal amount of additional notes issued as interest on the 2008 Senior
Convertible Notes (collectively, the Notes), for a total aggregate of $2,077,868 in principal
amount of Notes constituting all of the issued and 2008 Senior Convertible Notes, except for the
aggregate $318,475 in principal amount of notes held by Gemini Master Fund Ltd. (Gemini), who was
not a party to the Series A Agreement. Accrued interest of $19,201 payable to Gemini for the year
ended December 31, 2009 was paid by issuing additional notes.
The 2008 Senior Convertible Notes held by Gemini (the Gemini Notes) remained outstanding
with original terms until November 13, 2009, when we exchanged the Gemini Notes plus accrued
interest for Common Stock and warrants.
Pursuant to the terms of the Series A Agreement, we issued and delivered to the Series A
Investors, in exchange for the cancellation of the Notes, 1,539,161 shares of the Series A Stock,
plus 14 fractional shares to be settled in cash at $1.00 per share, and five-year warrants to
purchase 153,912 shares of Common Stock at an exercise price of $1.00 per share, subject to
adjustment for stock splits, combinations or similar events. As of June 29, 2009 the Series A Stock
was exchanged for Common Stock (see below).
29
2008 Vendor Obligation Conversion As of December 31, 2008, we issued 318,905 shares of our
Common Stock to Cato BioVentures in settlement of a payable in the amount of $140,318.
2008 Series A-1 Preferred Stock Financing On October 28, 2008 and October 31, 2008, we
entered into a Stock and Warrant Purchase Agreement with certain select institutional and strategic
accredited investors (the A-1 Investors) in connection with a private placement transaction (the
A-1 Financing) in which the A-1 Investors purchased an aggregate of 766,667 shares of our Series
A-1 Convertible Preferred Stock (Series A-1 Stock) at a per share price of $1.00 (the A-1
Shares) and received warrants to purchase a number of shares of our Common Stock equal to
thirty-five percent (35%) of the number of A-1 Shares purchased by each A-1 Investor at an exercise
price per share equal to $1.50. Each share of Series A-1 Stock was initially convertible into one
share of Common Stock, subject to adjustment for stock splits, combinations or similar events. The
A-1 Financing provided us with gross proceeds of $766,667. We used the net proceeds for working
capital and general corporate purposes. As of June 29, 2009 the A-1 Shares were exchanged for
Common Stock (see below).
2009 Series A-2 Preferred Stock Financing On April 8, April 24, April 28 and May 31, 2009,
we entered into an Amended and Restated Stock and Warrant Purchase Agreement dated as of April 2,
2009 (the A-2 Agreement) with certain strategic institutional and accredited investors (the A-2
Investors) in connection with our private placement (the A-2 Financing) of 1,200,000 shares of
Series A-2 Stock at a price of $0.50 per share together with warrants to purchase a number of
shares of 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 (the A-2 Warrants) in the A-2 Financing. We received gross proceeds of $700,000 from the
A-2 Financing and we used the net proceeds for working capital and general corporate purposes.
Pursuant to the A-2 Agreement, we issued A-2 Warrants to the A-2 Investors to purchase up to
640,000 shares of Common Stock. The A-2 Warrants were 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 us.
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 anti-dilution provisions upon conversion. 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 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. As of June 29, 2009 the Series A-2 Stock was exchanged for Common Stock (see below).
For the year ended December 31, 2008, we satisfied 8% quarterly dividend commitments for our
Series A Stock and Series A-1 Stock with the issuance of additional preferred stock of 31,033
shares and 11,469 shares, respectively.
For the year ended December 31, 2009, we satisfied 8% quarterly dividend commitments for our
Series A Stock, Series A-1 Stock and Series A-2 Stock with the issuance of additional preferred
stock of 62,539 shares, 30,985 shares and 22,436 shares, respectively.
2009 Senior Secured Note On June 1, 2009, we issued to Platinum Montaur Life Sciences, LLC
(Platinum) a 10% Senior Secured Promissory Note (the Platinum Note) in the principal amount of
$1,990,000. The outstanding principal of the Platinum Note accreted in value at an annual rate of
10%, compounded monthly.
The maturity date of the Platinum Note was June 29, 2009, which maturity date was subsequently
extended to July 7, 2009. We used the net proceeds of the Platinum Note to pay a substantial
portion of the Senior Secured Notes. As of June 30, 2009, we exchanged the Platinum Note and
interest for 200.6031 shares of Series B Stock and 1,205.016 shares of Series C Stock.
Series A Preferred Stock Exchange On June 29, 2009, we entered into an Exchange Agreement
(the Series A Exchange Agreement) with all of the holders of the Series A Stock (collectively,
the Series A Holders). The Series A Holders held an
30
aggregate of 1,632,733 shares of Series A Stock, including paid-in-kind dividends accrued
through June 29, 2009, constituting all of the issued and outstanding Series A Stock.
Under the terms of the Series A Exchange Agreement, we issued and delivered to the Series A
Holders, in exchange for the cancellation of the Series A Stock, 2,938,920 shares of Common Stock.
The Series A Exchange Agreement states that, if, as a result of this exchange transaction, any
Series A Holder or any of its affiliates, individually or in the aggregate, would beneficially own
more than 9.99% of our issued and outstanding Common Stock (the Threshold Amount), the Series A
Holder would receive Common Stock rounded to the nearest whole share, up to the Threshold Amount,
and the remaining Common Stock would be exchanged for Series C Stock convertible into the number of
shares of Common Stock equal to the difference between the aggregate number of shares of Common
Stock to be issued to the Series A Holder and the actual number of shares of Common Stock issued.
As a result of this provision, one Series A Holder received 2,323.105 shares of Series C Stock
instead of 2,323,105 shares of Common Stock. The remaining Series A Holders received 615,815 shares
of Common Stock. After giving effect to the terms of the Series A Exchange Agreement, we do not
have any shares of Series A Stock issued and outstanding.
We recorded a deemed dividend on the beneficial conversion equal to the incremental fair value
resulting from the reduction in the conversion price, or approximately $2,012,000. This deemed
dividend is included in the Statement of Operations in arriving at Net Loss Applicable to Common
Shareholders.
Series A-1 Preferred Stock Exchange On June 29, 2009, we entered into an Exchange Agreement
(the A-1 Exchange Agreement) with all of the holders of the Series A-1 Stock (collectively, the
A-1 Holders). The A-1 Holders held an aggregate of 809,121 shares of our Series A-1 Stock,
including paid-in-kind dividends accrued through June 29, 2009, constituting all of the issued and
outstanding Series A-1 Stock.
Under the terms of the A-1 Exchange Agreement, we issued and delivered to the A-1 Holders, in
exchange for the cancellation of the Series A-1 Stock, 1,078,828 shares of Common Stock. The A-1
Exchange Agreement states that, if, as a result of this exchange transaction, any A-1 Holder or any
of its affiliates, individually or in the aggregate, would beneficially own more than the Threshold
Amount, the A-1 Holder would receive Common Stock rounded to the nearest whole share, up to the
Threshold Amount, and the remaining Common Stock would be exchanged for Series C Stock convertible
into the number of shares of Common Stock equal to the difference between the aggregate number of
shares of Common Stock to be issued to the A-1 Holder and the actual number of shares of Common
Stock issued. As a result of this provision, one A-1 Holder received 280.993 shares of Series C
Stock instead of 280,993 shares of Common Stock. The remaining A-1 Holders received 797,835 shares
of Common Stock. After giving effect to the A-1 Exchange Agreement, we do not have any shares of
Series A-1 Stock issued and outstanding.
We recorded a deemed dividend on the beneficial conversion equal to the incremental fair value
resulting from the reduction in the conversion price, or approximately $415,000. This deemed
dividend is included in the Statement of Operations in arriving at Net Loss Applicable to Common
Shareholders.
Series A-2 Preferred Stock Exchange On June 29, 2009, we entered into an Exchange Agreement
(the A-2 Exchange Agreement) with all of the holders of the Series A-2 Stock (collectively, the
A-2 Holders). The A-2 Holders held an aggregate of 1,422,436 shares of the Series A-2 Stock,
including paid-in-kind dividends accrued through June 29, 2009, constituting all of the issued and
outstanding Series A-2 Stock.
Under the terms of the A-2 Exchange Agreement, we issued and delivered to the A-2 Holders, in
exchange for the cancellation of the Series A-2 Stock, 1,422,436 shares of Common Stock. The A-2
Exchange Agreement states that, if, as a result of this exchange transaction, any A-2 Holder or any
of its affiliates, individually or in the aggregate, would beneficially own more than the Threshold
Amount, the A-2 Holder would receive Common Stock rounded to the nearest whole share, up to the
Threshold Amount, and the remaining Common Stock would be exchanged for Series C Stock convertible
into the number of shares of Common Stock equal to the difference between the aggregate number of
shares of Common Stock to be issued to the A-2 Holder and the actual number of shares of Common
Stock issued. As a result of this provision, one A-2 Holder received 508.986 shares of Series C
Stock instead of 508,986 shares of Common Stock. After giving effect to the A-2 Exchange Agreement,
we do not have any shares of Series A-2 Stock issued and outstanding. The remaining A-2 Holders
received 913,450 shares of Common Stock.
Series B Perpetual Preferred Stock and Warrant Financing On July 7, 2009, we entered into a
Stock Purchase Agreement as of June 30, 2009 (the Series B Agreement) with Platinum in connection
with our private placement (the Series B Financing) of 200.6031 shares of Series B Stock,
together with 1,205,016 shares of Common Stock, for an aggregate price of $2,006,031. We received
payment of the purchase price in the form of the extinguishment of the 2009 Senior Secured Note in
the amount of
31
$2,006,031, which amount included principal and interest accrued through June 30, 2009. As the
Platinum Note was not originally convertible, we recognized a loss on the extinguishment of this
debt of approximately $1,820,000 which represents the excess of the fair value of the Series B
Stock and the Series C Stock over the carrying value of the Platinum Note.
The Series B Agreement states that the Series B Financing may not result in a purchaser or any
of its affiliates, individually or in the aggregate, beneficially owning more than the Threshold
Amount; provided, however, that a purchaser may waive the foregoing provision upon sixty-one (61)
days advance written notice to us. If the Series B Financing would result in a purchaser owning
Common Stock in excess of the Threshold Amount, then the purchaser would receive Common Stock
rounded to the nearest whole share, up to the Threshold Amount, and the remaining Common Stock
would be exchanged for Series C Stock convertible into the number of shares of Common Stock equal
to the difference between the aggregate number of shares of Common Stock to be issued to the
purchaser and the actual number of shares of Common Stock issued. As a result of this provision,
Platinum received 1,205.016 shares of Series C Stock instead of 1,205,016 shares of Common Stock
that it otherwise would have received pursuant to the Series B Agreement.
Pursuant to the terms of the Certificate of Designation, Preference and Rights of Series B
Perpetual Preferred Stock (the Series B Certificate), at our option, we may redeem, in whole at
any time or in part, the outstanding Series B Stock at a redemption price per share equal to the
sum of the Face Amount and the accrued and unpaid dividends thereon through the redemption date. In
addition, we are obligated to redeem the Series B Stock within two business days following the
occurrence of any of the events set forth below:
|
1. |
|
If we complete an equity or equity linked financing with gross proceeds of $8
million or greater, we shall redeem 100% of the outstanding Series B Stock, including
all accrued and unpaid dividends thereon; |
|
|
2. |
|
If we complete an equity or equity linked financing with gross proceeds of $5
million or greater, we shall redeem an amount of Series B Stock equal to 50% of the
original amount of outstanding Series B Stock issued pursuant to the Series B
Agreement, including all accrued and unpaid dividends thereon; |
|
|
3. |
|
If we complete an equity or equity linked financing with gross proceeds of
less than $5 million, we shall use 20% of the gross proceeds of such financing to
redeem outstanding Series B Stock, including all accrued and unpaid dividends thereon,
on a pro rata basis; |
|
|
4. |
|
If we receive proceeds from any licensing, partnership or similar
agreement(s) or any milestone payments resulting from such licensing, partnering or
similar agreement(s), we shall use 20% of the gross proceeds to redeem outstanding
Series B Stock, including all accrued and unpaid dividends thereon, on a pro rata
basis; and |
|
|
5. |
|
If we completes a merger or consolidation with or into another corporation,
or the sale of all or substantially all of our properties or assets to any other
person, we shall use the gross proceeds of such transaction to redeem the outstanding
Series B Stock, including all accrued and unpaid dividends thereon to the date of
redemption. |
The Series B Stock yields a quarterly dividend commencing as of January 1, 2010, at an initial
annual rate of 8%, which is payable in cash or in kind at our option on a quarterly basis. If the
Series B Stock is outstanding on the twelve month anniversary of the Issuance Date (as defined in
the Series B Certificate), the dividend rate shall increase to 10% per annum and, if the Series B
Stock is outstanding on the eighteen month anniversary of the Issuance Date, then the dividend rate
shall increase to 12% per annum.
In the event of any Liquidation Event (as defined in the Series B Certificate) the holders of
the Series B Stock will be entitled to receive (subject to the rights of any securities designated
as senior to the Series B Stock) a liquidation preference equal to the Face Amount thereof plus any
accrued but unpaid dividends thereon. We cannot create or issue any security senior to the Series B
Stock without the prior approval of the holders of at least 67% of the outstanding Series B Stock.
On January 19, 2010, the Company entered into a letter agreement with the sole holder of
Series B Stock (the Series B Holder) regarding the payment to the Series B Holder of $143,750
(the Redemption Amount) for the redemption of 14.375 shares of Series B Stock in connection with
the November Financing and December Financing. The Series B Holder waived payment of the
Redemption Amount until the Company has a net cash balance in excess of $3,000,000. In
consideration for the deferral, the Company agreed that, upon the closing of its next equity
offering with gross proceeds of less than $5,000,000, it would use 25% of the gross proceeds to
redeem Series B Stock (the 25% Redemption).
32
On March 16, 2010, the Company entered into an additional agreement with the Series B Holder
pursuant to which the Series B Holder waived both the 25% Redemption identified in the January 19,
2010 letter and the redemption required by the Series B
Certificate with respect to amounts received in the February
Financing through March 16, 2010. Accordingly, a redemption in the amount of
approximately $614,000 was waived by the Series B Holder in connection with the February Financing.
November 2009 Common Stock and Warrant Financing On November 13, 2009, we entered into a
Common Stock and Warrant Purchase Agreement (the November Agreement) with certain strategic
institutional and accredited investors (the November Investors) in connection with our private
placement (the November Financing) of shares of Common Stock at a price of $1.25 per share (the
November Shares) together with warrants to purchase a number of shares of Common Stock equal to
(i) seventy percent (70%) or (ii) for those November Investors who purchased November Shares for a
purchase price of at least $750,000, one hundred percent (100%), of the number of November Shares
purchased by each investor in the November Financing (the November Warrants).
We have received gross proceeds of $3,211,320 in connection with the November Financing. Of
this amount, we received payment of a portion of the purchase price in the form of the
extinguishment of the Gemini Notes in the approximate amount of $355,070, which amount included
principal and interest accrued through November 13, 2009. A portion of one November Investors
purchase price was comprised of the investment of $450,000 of the funds payable to such investor by
us for the redemption of a portion of the Series B Stock owned by such investor upon the closing of
the November Financing.
In
addition, $31,250 of the proceeds will be used to redeem shares of the
outstanding Series B Stock in accordance with the Series B
Certificate and is included in accrued expenses and other liabilities
at December 31, 2009.
Of the total proceeds, the Company received approximately $2,461,000 for
the issuance of 1,969,056 shares of Common Stock and $750,000 for 600 shares of Series C Stock
issued to an investor due to ownership limitations.
We used the net proceeds of the November Financing primarily for working capital and general
corporate purposes. Burnham Hill Partners LLC (the Placement Agent) received for its placement
agent services: (a) a cash fee equal to seven percent (7%) of the gross proceeds received by us in
connection with the November Financing; and (b) warrants to acquire a number of shares of Common
Stock equal to 10% of the number of November Shares issued to the November Investors in the
November Financing at a per share exercise price equal to 120% of the purchase price of the
November Shares issued in the November Financing. We also agreed to pay reasonable out of pocket
expenses of the Placement Agent incurred in connection with the November Financing in an amount not
to exceed $5,000.
Pursuant to the November Agreement, we issued warrants to the November Investors to purchase
up to 2,398,339 shares of Common Stock. The November Warrants, which expire no later than November
13, 2014, are immediately exercisable at a price per share of $2.00
(1,598,339 shares) or, for those November
Investors who purchased November Shares for a purchase price of at least $1,000,000, at a price per
shares of $1.60 (800,000 shares). The exercise price is subject to adjustment for stock splits, combinations or
similar events.
December 2009 Common Stock and Warrant Financing On December 3, 2009, we closed on a Common
Stock and Warrant Purchase Agreement dated November 30, 2009 (the December Agreement) with
certain strategic institutional and accredited investors in connection with the private placement
(the December Financing) of shares of Common Stock at a price of $1.25 per share (the December
Shares).
Under the terms of the December Agreement, each investor received warrants to purchase a
number of shares of Common Stock with an exercise price of $2.00 per share equal to seventy percent
(70%) of the number of December Shares purchased by such investor (the December Warrants).
We received proceeds of $562,500 in connection with the Financing and intend to use the net
proceeds of the Financing primarily for working capital and general corporate purposes. In
addition, $112,500 of the proceeds will be used to redeem shares of the outstanding Series B Stock
in accordance with the Series B Certificate and is included in accrued expenses and other
liabilities at December 31, 2009.
Pursuant to the December Agreement, we issued an aggregate of 450,000 shares of Common Stock,
315,000 December Warrants to the investors and 45,000 warrants to the placement agent and its
assignees. The December Warrants are immediately exercisable and expire no later than December 3,
2014. The exercise price is subject to adjustment for stock splits, combinations or similar events.
33
The December Warrants allow for cashless exercise. An exercise under the December 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 us.
Facilities, Property and Equipment We conduct our operations in leased facilities and have
agreed to a lease through March 2011. Our property and equipment does not include manufacturing
machinery and is limited to laboratory testing equipment, office furniture and computer systems
(network hardware, software and employee desk top systems). Except for the purchase (possibly
through capital lease financing) of molds and dies in connection with Symphony and Prelude, we do
not anticipate any significant purchases or sales of property and equipment during the next 12
months.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, including unrecorded derivative instruments that
have or are reasonably likely to have a current or future material effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources. We have certain warrants and options outstanding but we
do not expect to receive sufficient proceeds from the exercise of these instruments unless and
until the trading price of our Common Stock is significantly greater than the applicable exercise
prices of the options and warrants and mainly 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.
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Echo Therapeutics, Inc. Consolidated Financial Statements
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Page |
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|
F-1 |
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|
|
|
F-2 |
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|
|
F-3 |
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|
F-4 |
|
|
|
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F-5 |
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|
|
|
F-7 |
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35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Echo Therapeutics, Inc.
Franklin, Massachusetts
We have audited the accompanying consolidated balance sheets of Echo Therapeutics, Inc. as of
December 31, 2009 and 2008, and the related consolidated statements of operations, changes in
stockholders equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating
the overall consolidated financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Echo Therapeutics, Inc. as of December 31, 2009 and
2008, and the results of its operations and its cash flows for the years then ended in conformity
with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the consolidated financial
statements, the Company has suffered recurring losses from operations, has a significant
accumulated deficit, has a significant working capital deficit and has been unable to raise
sufficient capital to fund its operations. This raises substantial doubt about the Companys
ability to continue as a going concern. Managements plans in regard to these matters are also
described in Note 1. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
|
|
|
|
|
|
|
|
/s/ WOLF & COMPANY, P.C.
|
|
|
|
|
|
Boston, Massachusetts |
|
|
March 31, 2010 |
|
F-1
Echo Therapeutics, Inc.
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
As of, |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,166,858 |
|
|
$ |
242,867 |
|
Accounts receivable |
|
|
130,036 |
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
226,641 |
|
|
|
17,132 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,523,535 |
|
|
|
259,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, at cost: |
|
|
|
|
|
|
|
|
Computer equipment |
|
|
262,278 |
|
|
|
242,495 |
|
Office and laboratory equipment (including assets under capitalized leases) |
|
|
618,723 |
|
|
|
609,029 |
|
Furniture and fixtures |
|
|
14,288 |
|
|
|
14,288 |
|
Manufacturing equipment |
|
|
129,320 |
|
|
|
129,320 |
|
Leasehold improvements |
|
|
177,768 |
|
|
|
177,768 |
|
|
|
|
|
|
|
|
|
|
|
1,202,377 |
|
|
|
1,172,900 |
|
Less-Accumulated depreciation and amortization |
|
|
(1,143,167 |
) |
|
|
(1,105,330 |
) |
|
|
|
|
|
|
|
Net property and equipment (including assets under capitalized leases) |
|
|
59,210 |
|
|
|
67,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets: |
|
|
|
|
|
|
|
|
Restricted cash |
|
|
9,749 |
|
|
|
10,250 |
|
Intangible assets, net of accumulated amortization |
|
|
9,708,822 |
|
|
|
9,827,154 |
|
Deferred financing costs, net of accumulated amortization |
|
|
|
|
|
|
141,373 |
|
Deposits and other assets |
|
|
2,000 |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
Total other assets |
|
|
9,720,571 |
|
|
|
9,980,777 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
11,303,316 |
|
|
$ |
10,308,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
948,712 |
|
|
$ |
1,177,719 |
|
Deferred revenue |
|
|
591,051 |
|
|
|
|
|
Current portion of notes payable and capital lease obligation, net of discounts |
|
|
1,874 |
|
|
|
2,054,062 |
|
Derivative warrant liability |
|
|
2,116,696 |
|
|
|
|
|
Accrued expenses and other liabilities |
|
|
481,679 |
|
|
|
174,768 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
4,140,012 |
|
|
|
3,406,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Payable and capital lease obligation, net of current portion and discounts |
|
|
8,247 |
|
|
|
300,467 |
|
Deferred Revenue, net of current portion |
|
|
122,451 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
4,270,710 |
|
|
|
3,707,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity: |
|
|
|
|
|
|
|
|
Perpetual, Redeemable Preferred Stock: |
|
|
|
|
|
|
|
|
Series B, authorized 40,000 shares, issued and outstanding 141.2281 and none
at December 31, 2009 and 2008, respectively (preference in liquidation of
$1,412,281 at December 31, 2009) |
|
|
2 |
|
|
|
|
|
Convertible Preferred Series: |
|
|
|
|
|
|
|
|
Series A, authorized 2,636,363 shares, issued and outstanding none and
1,570,194 shares at December 31, 2009 and 2008, respectively |
|
|
|
|
|
|
15,702 |
|
Series A-1, authorized 2,000,000 shares, issued and outstanding none and 778,136
shares at December 31, 2009 and 2008, respectively |
|
|
|
|
|
|
7,781 |
|
Series A-2, authorized 4,400,000 and none at December 31, 2009 and 2008,
respectively, issued and outstanding none at
December 31, 2009 and 2008 |
|
|
|
|
|
|
|
|
Series C, authorized 10,000 shares, issued and outstanding 4,918.1 and none
at December 31, 2009 and 2008, respectively |
|
|
49 |
|
|
|
|
|
Common stock, $0.01 par value, authorized 100,000,000 and 60,000,000 shares at
December 31, 2009 and 2008, respectively, issued and outstanding 27,045,792
and 19,095,838 shares at December 31, 2009 and 2008, respectively |
|
|
270,459 |
|
|
|
190,960 |
|
Additional paid-in capital |
|
|
74,155,716 |
|
|
|
64,668,550 |
|
Accumulated deficit |
|
|
(67,393,620 |
) |
|
|
(58,281,663 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
7,032,606 |
|
|
|
6,601,330 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
11,303,316 |
|
|
$ |
10,308,346 |
|
|
|
|
|
|
|
|
See report of independent registered public accounting firm and notes to the consolidated financial statements.
F-2
Echo Therapeutics, Inc.
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
For the Years ended |
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Licensing revenue |
|
$ |
536,497 |
|
|
$ |
|
|
Other revenue |
|
|
795,424 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
|
1,331,921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
Research and development |
|
|
2,807,405 |
|
|
|
3,191,060 |
|
Selling, general and administrative |
|
|
3,054,984 |
|
|
|
3,735,640 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
5,862,389 |
|
|
|
6,926,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(4,530,468 |
) |
|
|
(6,926,700 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
Interest income |
|
|
1,562 |
|
|
|
24,641 |
|
Interest expense |
|
|
(331,500 |
) |
|
|
(1,049,953 |
) |
Loss on extinguishment of debt |
|
|
(2,047,292 |
) |
|
|
(2,056,773 |
) |
Derivatives loss |
|
|
(4,050,443 |
) |
|
|
(586,716 |
) |
|
|
|
|
|
|
|
Other income (expense), net |
|
|
(6,427,673 |
) |
|
|
(3,668,801 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(10,958,141 |
) |
|
|
(10,595,501 |
) |
|
|
|
|
|
|
|
|
|
Deemed dividend on beneficial conversion of Series A and A-1 Preferred Stock |
|
|
(2,426,876 |
) |
|
|
|
|
Accretion of dividends on Convertible Preferred Stock |
|
|
(126,676 |
) |
|
|
(53,371 |
) |
|
|
|
|
|
|
|
Net loss applicable to common shareholders |
|
$ |
(13,511,693 |
) |
|
$ |
(10,648,872 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted |
|
$ |
(0.61 |
) |
|
$ |
(0.57 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common shares outstanding |
|
|
22,290,956 |
|
|
|
18,608,905 |
|
|
|
|
|
|
|
|
See report of independent registered public accounting firm and notes to the consolidated financial statements.
F-3
Echo Therapeutics, Inc.
Consolidated Statements of Changes in Stockholders Equity
Years Ended December 31, 2009 and 2008
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Preferred Stock |
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Common Stock |
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Additional |
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Total |
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Number of |
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Carrying |
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Number of |
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Carrying |
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Paid-in |
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Accumulated |
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Stockholders |
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Shares |
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Value |
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Shares |
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Value |
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Capital |
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Deficit |
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Equity |
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Balance at December 31, 2007 |
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$ |
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|
17,870,804 |
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$ |
178,710 |
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|
$ |
57,575,593 |
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$ |
(47,686,162 |
) |
|
$ |
10,068,141 |
|
Issuance of Common Stock for certain Bridge Notes issued in 2007 |
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52,041 |
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|
520 |
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51,521 |
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52,041 |
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Issuance of Common Stock in settlement of accounts payable and accrued
expenses |
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318,905 |
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3,189 |
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137,129 |
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140,318 |
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Intrinsic value of conversion feature on Bridge Notes upon conversion to
Senior Convertible Notes |
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(212,328 |
) |
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(212,328 |
) |
Beneficial Conversion Feature Senior Convertible Notes |
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121,320 |
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121,320 |
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Issuance of Series A Preferred |
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1,539,161 |
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15,392 |
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2,062,476 |
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2,077,868 |
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Issuance of Series A-1 Preferred, net of issuance cost of $63,333 |
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766,667 |
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7,667 |
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697,667 |
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705,334 |
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Dividends on Preferred Stock |
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42,502 |
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424 |
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(433 |
) |
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(9 |
) |
Exercise of January 2007 PIPE warrants |
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705,873 |
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7,059 |
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107,020 |
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114,079 |
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Exercise of Stock Options |
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9,465 |
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95 |
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(95 |
) |
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Warrants issued to Bridge Note holders upon conversion to Senior
Convertible Notes |
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626,480 |
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626,480 |
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Warrants issued to Senior Convertible Note holders |
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219,838 |
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219,838 |
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Fair value of warrants issued in connection with exchange of Senior
Convertible Notes for Series A Preferred Stock |
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106,182 |
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106,182 |
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Fair value of warrants reclassified from derivative liability |
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919,593 |
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919,593 |
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Fair value of warrants issued for services |
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185,667 |
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185,667 |
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Share-based payments restricted stock for services, net of forfeitures |
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138,750 |
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1,387 |
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246,113 |
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247,500 |
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Share-based payments options and restricted stock, net of forfeitures |
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1,824,807 |
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1,824,807 |
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Net Loss |
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(10,595,501 |
) |
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(10,595,501 |
) |
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Balance at December 31, 2008 |
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2,348,330 |
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23,483 |
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19,095,838 |
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190,960 |
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64,668,550 |
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(58,281,663 |
) |
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6,601,330 |
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Reclassification of warrants to derivative liability |
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(2,926,302 |
) |
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1,846,184 |
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(1,080,118 |
) |
Issuance of Series A-2 Preferred Stock |
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1,400,000 |
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14,000 |
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685,576 |
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|
699,576 |
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Dividends on Series A, A-1 and A-2 Preferred Stock |
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115,960 |
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|
1,160 |
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(1,206 |
) |
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(46 |
) |
Exercise of warrants |
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1,211,704 |
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12,117 |
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(12,117 |
) |
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Share-based payments restricted stock, net of forfeitures |
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1,992,094 |
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19,921 |
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289,837 |
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309,758 |
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Share-based payments options, net of forfeitures |
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1,298,789 |
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|
1,298,789 |
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Fair value of warrants issued for services |
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|
|
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|
|
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|
173,726 |
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|
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|
173,726 |
|
Redemption of Series B Preferred Stock |
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|
(59 |
) |
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|
(1 |
) |
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|
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(593,749 |
) |
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|
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(593,750 |
) |
Issuance of Common Stock and Series C Preferred Stock, net of cash
issuance costs of $229,048 |
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|
600 |
|
|
|
6 |
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2,419,056 |
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|
24,190 |
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3,670,774 |
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|
3,694,970 |
|
Exchange of Series A, A-1 and A-2 Preferred Stock for Series C Preferred
Stock and common stock |
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|
(3,861,178 |
) |
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(38,611 |
) |
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2,327,100 |
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|
23,271 |
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|
15,340 |
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Exchange of Senior Secured Note and accrued interest for Series B and C
Preferred Stock, net of cash issuance costs of $207,148 |
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|
1,406 |
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14 |
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3,618,445 |
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3,618,459 |
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Fair value of derivative warrant liabilities reclassified to additional
paid-in capital |
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3,268,053 |
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|
|
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|
3,268,053 |
|
Net Loss |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
(10,958,141 |
) |
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|
(10,958,141 |
) |
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Balance at December 31, 2009 |
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|
5,059 |
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|
$ |
51 |
|
|
|
27,045,792 |
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|
$ |
270,459 |
|
|
$ |
74,155,716 |
|
|
$ |
(67,393,620 |
) |
|
$ |
7,032,606 |
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See report of independent registered public accounting firm and the notes to the consolidated
financial statements.
F-4
Echo Therapeutics, Inc
Consolidated Statements of Cash Flows
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Years Ended December 31, |
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|
2009 |
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|
2008 |
|
Cash Flows From Operating Activities: |
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|
Net loss |
|
$ |
(10,958,141 |
) |
|
$ |
(10,595,501 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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|
|
|
|
|
|
|
Depreciation and amortization |
|
|
158,618 |
|
|
|
191,723 |
|
Share-based compensation |
|
|
1,298,789 |
|
|
|
1,824,807 |
|
Fair value of common stock and warrants issued for services |
|
|
429,093 |
|
|
|
247,500 |
|
Fair value of derivative warrant liability issued for services |
|
|
245,369 |
|
|
|
|
|
Derivative loss |
|
|
4,050,443 |
|
|
|
586,716 |
|
Non-cash loss on extinguishment of debt |
|
|
2,024,031 |
|
|
|
2,056,773 |
|
Non-cash interest expense |
|
|
312,652 |
|
|
|
1,037,019 |
|
Other non-cash expense |
|
|
64,136 |
|
|
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(130,036 |
) |
|
|
|
|
Prepaid expenses and other current assets |
|
|
(209,509 |
) |
|
|
8,131 |
|
Accounts payable |
|
|
(229,007 |
) |
|
|
933,049 |
|
Deferred revenue |
|
|
713,502 |
|
|
|
|
|
Accrued expenses and other liabilities |
|
|
(43,986 |
) |
|
|
(234,858 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(2,274,046 |
) |
|
|
(3,944,641 |
) |
|
|
|
|
|
|
|
|
|
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|
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|
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|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(20,938 |
) |
|
|
(29,080 |
) |
Decrease in restricted cash |
|
|
501 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(20,437 |
) |
|
|
(29,080 |
) |
|
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|
|
|
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|
|
|
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|
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Cash Flows From Financing Activities |
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|
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|
Proceeds from the sale of Series A-1 preferred stock, net of expenses |
|
|
|
|
|
|
705,334 |
|
Proceeds from bridge notes |
|
|
125,000 |
|
|
|
|
|
Repayment of bridge notes |
|
|
(125,000 |
) |
|
|
|
|
Proceeds from the sale of Series A-2 preferred stock, net of expenses |
|
|
699,576 |
|
|
|
|
|
Proceeds from the sale of common stock, net of expenses |
|
|
2,739,703 |
|
|
|
|
|
Principal payments for capital lease obligations |
|
|
(866 |
) |
|
|
|
|
Proceeds from Senior Secured Note |
|
|
1,990,000 |
|
|
|
|
|
Proceeds (payments) from (on) Senior Secured Convertible Notes and
Warrants |
|
|
(2,209,426 |
) |
|
|
2,000,000 |
|
Proceeds from Senior Convertible Promissory Notes |
|
|
|
|
|
|
700,000 |
|
Deferred financing costs |
|
|
(467 |
) |
|
|
(495,979 |
) |
Dividends paid in cash on Series A, A-1 and A-2 preferred stock |
|
|
(46 |
) |
|
|
(9 |
) |
Proceeds from the exercise of warrants |
|
|
|
|
|
|
114,079 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
3,218,474 |
|
|
|
3,023,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents |
|
|
923,991 |
|
|
|
(950,296 |
) |
Cash and Cash Equivalents, beginning of period |
|
|
242,867 |
|
|
|
1,193,163 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, end of period |
|
$ |
1,166,858 |
|
|
$ |
242,867 |
|
|
|
|
|
|
|
|
See report of independent registered public accounting firm and the notes to the consolidated
financial statements.
F-5
Echo Therapeutics, Inc
Consolidated Statements of Cash Flows
|
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|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
Supplemental Disclosure of Cash Flow Information and Non Cash Financing
Transactions: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
18,848 |
|
|
$ |
9,831 |
|
|
|
|
|
|
|
|
Accretion of dividend on Series A, A-1 and A-2 Convertible Preferred
Stock |
|
$ |
126,676 |
|
|
$ |
53,371 |
|
|
|
|
|
|
|
|
Derivative warrant liability reclassified from stockholders equity |
|
$ |
1,080,118 |
|
|
$ |
919,593 |
|
|
|
|
|
|
|
|
Senior Convertible Notes issued for accrued interest |
|
$ |
23,622 |
|
|
$ |
116,875 |
|
|
|
|
|
|
|
|
Fair Value of common stock and warrants issued for equity financing
costs |
|
$ |
|
|
|
$ |
166,901 |
|
|
|
|
|
|
|
|
Beneficial conversion feature on Senior Convertible Notes |
|
$ |
|
|
|
$ |
121,320 |
|
|
|
|
|
|
|
|
Common stock issued for conversion of Senior Convertible Notes and
accrued interest |
|
$ |
|
|
|
$ |
52,041 |
|
|
|
|
|
|
|
|
Fair value of warrants issued for deferred financing costs |
|
$ |
|
|
|
$ |
185,667 |
|
|
|
|
|
|
|
|
Excess of fair value of the Series A Convertible Preferred Stock
over the carrying value of the Senior Convertible Notes included in
the extinguishment loss |
|
$ |
|
|
|
$ |
738,578 |
|
|
|
|
|
|
|
|
Fair value of warrants issued in connection with Senior Convertible
Notes included in extinguishment loss |
|
$ |
|
|
|
$ |
626,480 |
|
|
|
|
|
|
|
|
Adjustment to fair value of Bridge Notes exchanged for Senior
Convertible notes included in extinguishment loss |
|
$ |
|
|
|
$ |
585,533 |
|
|
|
|
|
|
|
|
Fair value of warrants issued in connection with exchange of Senior
Convertible Notes for preferred stock included in extinguishment
loss |
|
$ |
|
|
|
$ |
106,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic value of the conversion feature of the Bridge Notes when
converted to Senior Convertible Notes recorded as a reduction of
additional paid-in capital |
|
$ |
|
|
|
$ |
212,328 |
|
|
|
|
|
|
|
|
Relative fair value of warrants issued with Secured Notes |
|
$ |
|
|
|
$ |
219,838 |
|
|
|
|
|
|
|
|
Conversion of Senior Convertible Notes to preferred stock |
|
$ |
|
|
|
$ |
2,077,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in settlement of accounts payable and
accrued expenses |
|
$ |
83,000 |
|
|
$ |
140,318 |
|
|
|
|
|
|
|
|
Deemed dividend on beneficial conversion of Series A and A1
Preferred Stock |
|
$ |
2,426,876 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Conversion of Senior Secured Note to Series B and Series C preferred |
|
$ |
2,006,031 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Redemption of Series B Preferred Stock included in accrued expenses |
|
$ |
143,750 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Redemption liability satisfied through offset of proceeds due in
connection with November 2009 Financing |
|
$ |
450,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Senior Convertible Note exchanged for Common Stock and warrants |
|
$ |
355,070 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Reclassification of derivative liability to additional paid-in capital |
|
$ |
3,268,053 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Fair value of warrants included in stock issuance costs |
|
$ |
869,484 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Exchange of Series A, A-1 and A-2 Preferred Stock to Series C
Preferred Stock and common stock |
|
$ |
3,724,529 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Asset acquired under Capital Lease Agreement |
|
$ |
10,988 |
|
|
$ |
|
|
|
|
|
|
|
|
|
See report of independent registered public accounting firm and the notes to the consolidated
financial statements.
F-6
ECHO THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2009 and 2008
(1) ORGANIZATION, BASIS OF PRESENTATION AND GOING CONCERN
Echo Therapeutics, Inc. is a medical device and specialty pharmaceutical company developing
the Symphony tCGM System (Symphony), a non-invasive (needle-free), wireless, transdermal
continuous glucose monitoring (tCGM) system for people with diabetes and for use in a clinical
setting (initially in acute care), as well as a wide range of topical reformulations of
pharmaceutical products previously approved by the United States Food and Drug Administration
(FDA). Echo is also developing its needle-free Prelude SkinPrep System (Prelude) for
transdermal drug delivery, including topical lidocaine.
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 consolidation.
Going Concern
The accompanying consolidated financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of liabilities in the
normal course of business. As of December 31, 2009, the Company had cash of approximately
$1,167,000, a working capital deficit of approximately $2,616,000 and an accumulated deficit of
approximately $67,394,000. Through December 31, 2009, the Company has not been able to generate
sufficient revenue 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 December 31, 2009, the Company received gross
proceeds from a Common Stock and warrant financing of approximately $2,455,000 (see Note 14).
Management is currently pursuing additional private equity financing, and such financing is
expected to be completed during 2010; 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 consolidated financial statements reflect the application of the following
accounting policies:
The accompanying consolidated financial statements have been prepared in accordance with the
Financial Accounting Standards Board (FASB) FASB Accounting Standard Codification (the
Codification) which is the source of authoritative accounting principles recognized by the FASB
to be applied by nongovernmental entities in the preparation of financial statements in conformity
with generally accepted accounting principles (GAAP) in the United States. The Codification was
effective for the Company during its interim period ending September 30, 2009 and it did not have
an impact on its financial condition or results of operations.
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, the estimated performance period under
license agreements and the fair value of share-based payments and derivative instruments issued to
be material accounting estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of ninety days or less to
be cash equivalents. Cash equivalents consisted of money market funds as of December 31, 2009 and
2008. The Company maintains its cash in bank deposit accounts which, at times, may exceed the
federally insured limits. Restricted cash represents a security deposit on the Companys leased
offices.
F-7
Accounts Receivable
Accounts receivable represent amounts billed by the Company. An allowance for doubtful
accounts is determined based on managements best estimate of probable losses inherent in the
accounts receivable balance. Management assesses the allowance based on information regarding
nature of the receivables and historical experience. No allowance was deemed necessary as of
December 31, 2009.
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., a North Carolina
corporation doing business as Echo Therapeutics, Inc. (the ETI Acquisition) 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.
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.
The Company performs a regular review of the underlying assumptions, circumstances, time
projections and revenue and expense estimates to decide if there is a possible impairment. In
reviewing the long-lived assets relating to the ETI Acquisition as of December 31, 2009, the
Company concluded that there was no impairment of the carrying value of such long-lived assets. No
impairment losses were recorded for the years ended December 31, 2009 and 2008.
Depreciation and Amortization
The Company provides for depreciation and amortization by charges to operations for the cost
of assets using the straight-line method based on the estimated useful lives of the related assets,
as follows:
|
|
|
Asset Classification |
|
Estimated Useful Life |
Computer equipment.
|
|
3 years |
Office and laboratory equipment
|
|
3-5 years |
Furniture and fixtures.
|
|
7 years |
Manufacturing equipment.
|
|
5 years |
Leasehold improvements.
|
|
Life of lease |
Share-Based Payments
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
Common Stock at the date of grant.
The Company recognizes compensation costs resulting from the issuance of stock-based awards to
non-employees as an expense in the statement of operations over the service period based on a measurement of fair value
for each stock award.
F-8
Derivative Instruments
The Company generally does not use derivative instruments to hedge exposures to cash-flow or
market risks; however, certain warrants to purchase Common Stock that do not meet the requirements
for classification as equity are classified as liabilities. In such instances, net-cash settlement
is assumed for financial reporting purposes, even when the terms of the underlying contracts do not
provide for a net-cash settlement. Such financial instruments are initially recorded at fair value,
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 as equity, the Company reclassifies the fair value to equity.
Concentration of Credit Risk
The Company has no significant off-balance-sheet risk. Financial instruments, which subject
the Company to credit risk, principally consist of cash and cash equivalents. The Company mitigates
its risk by maintaining the majority of its cash and equivalents with high-quality financial
institutions.
Financial Instruments
The estimated fair value of the Companys financial instruments, which include cash and cash
equivalents, restricted cash, accounts receivable, accounts payable and capital lease obligation,
approximates their carrying value due to the short-term nature of these instruments and their
market terms. The Company determined that it was impracticable to estimate the fair value of the
Senior Convertible Notes and Senior Secured Notes at December 31, 2008 since a quoted market price
is not available and because the Company has not obtained or developed a valuation model to make
the estimate, and the cost of obtaining an independent valuation is excessive considering the
materiality of the instruments to the Company.
Net Loss per Common Share
Basic and diluted net loss per share of Common Stock has been computed by dividing the net
loss applicable to common stockholders in each period by the weighted average number of shares of
Common Stock outstanding during such period. For the periods presented, options, warrants and
convertible securities were anti-dilutive and therefore excluded from diluted loss per share
calculations.
Segment Information
Operating segments are identified as components of an enterprise about which separate discrete
financial information is available for evaluation by the chief operating decision maker, or
decision making group, in making decisions regarding resource allocation and assessing performance.
To date, the Company has viewed its operations and manages its business as principally one
operating segment, which is the development of transdermal skin permeation and diagnostics medical
devices and, specialty pharmaceutical drugs. As of December 31, 2009 and 2008, all of the Companys
assets were located in the United States.
Research and Development Expenses
The Company charges research and development expenses to operations as incurred. Research and
development expenses primarily consist of salaries and related expenses for personnel and outside
contractor and consulting services. Other research and development expenses include the costs of
materials and supplies used in research and development, prototype manufacturing, clinical studies,
related information technology and an allocation of facilities costs.
Income Taxes
The Company is primarily subject to U.S. federal, Massachusetts and New Jersey state income
tax. Tax years subsequent to 2005 remain open to examination by U.S. federal and state tax
authorities.
For federal and state income taxes, deferred tax assets and liabilities are recognized based
upon temporary differences between the financial statement and the tax basis of assets and
liabilities. Deferred income taxes are based upon prescribed rates and enacted laws
F-9
applicable to periods in which differences are expected to reverse. A valuation allowance is
recorded when it is more likely than not that some portion or all of the deferred tax assets will
not be realized. Accordingly, since the Company cannot be assured of realizing the deferred tax
asset, a full valuation allowance has been provided.
When tax returns are filed, it is highly certain that some positions taken would be sustained
upon examination by the taxing authorities, while others are subject to uncertainty about the
merits of the position taken or the amount of the position that would be ultimately sustained. The
benefit of a tax position is recognized in the financial statements in the period during which,
based on all available evidence, management believes it is more likely than not that the position
will be sustained upon examination, including the resolution of appeals or litigation processes, if
any. Tax positions taken are not offset or aggregated with other positions. Tax positions that
meet the more-likely-than-not recognition threshold are measured as the largest amount of tax
benefit that is more than 50% likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken that exceeds the amount
measured as described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheet along with any associated interest and penalties that would be payable
to the taxing authorities upon examination. There were no uncertain tax position liabilities
recorded at December 31, 2009.
The Companys policy is to recognize interest and penalties related to income tax matters in
income tax expense. As of December 31, 2009 and 2008, the Company had no accruals for interest or
penalties related to income tax matters.
Licensing and Other Revenue Recognition
To date, the Company has generated revenue primarily from licensing agreements, including
upfront, nonrefundable license fees, with collaborators and licensees. The Company recognizes
revenue when the following criteria have been met:
|
|
|
persuasive evidence of an arrangement exists; |
|
|
|
|
delivery has occurred and risk of loss has passed; |
|
|
|
|
the price to the buyer is fixed or determinable; and |
|
|
|
|
collectability is reasonably assured. |
In addition, when evaluating multiple element arrangements, the Company considers whether the
components of the arrangement represent separate units of accounting. Multiple elements are divided
into separate units of accounting if specified criteria are met, including whether the delivered
element has stand-alone value to the customer and whether there is objective and reliable evidence
of the fair value of the undelivered items. The consideration received is allocated among the
separate units based on their respective fair values, and the applicable revenue recognition
criteria are applied to each of the separate units. Otherwise, the applicable revenue recognition
criteria are applied to combined elements as a single unit of accounting.
The Company typically receives upfront, nonrefundable payments for the licensing of its
intellectual property upon the signing of a license agreement. The Company believes that these
payments generally are not separable from the payments it receives for providing research and
development services because the license does not have stand-alone value from the research and
development services it provides under its agreements. Accordingly, the Company accounts for these
elements as one unit of accounting and recognizes upfront, nonrefundable payments as revenue on a
straight-line basis over its contractual or estimated performance period. Revenue from the
reimbursement of research and development efforts is recognized as the services are performed based
on proportional performance adjusted from time to time for any delays or acceleration in the
development of the product and is included in Other Revenue. The Company determines the basis of the estimated performance period
based on the contractual requirements of its collaboration agreements. At each reporting period,
the Company evaluates whether events warrant a change in the estimated performance period.
Other Revenue includes amounts earned and billed under the license and collaboration
agreements for reimbursement of research and development costs for contract engineering services.
For the services rendered, principally third-party contract engineering services, the revenue
recognized approximates the costs associated with the services.
F-10
Recent Accounting Pronouncements
In June 2008, the FASB ratified an accounting pronouncement that 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. This accounting pronouncement 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 $1,080,000, representing the
fair value of all warrants with anti-dilution provisions, from additional paid-in capital and
accumulated deficit to derivative warrant liability.
In October 2009, the FASB issued two related accounting pronouncements, ASU 2009-13 and ASU
2009-14, relating to revenue recognition. One pronouncement provides guidance on allocating the
consideration in a multiple-deliverable revenue arrangement and requires additional disclosure,
while the other pronouncement provides guidance specific to revenue arrangements that include
software elements.
For multiple-deliverable arrangements, the pronouncement eliminates the requirement that there
be objective and reliable evidence of fair value of the undelivered item in order for the delivered
item to be considered a separate unit of accounting. Now, the delivered item shall be considered a
separate unit of accounting if the delivered item has value to the customer on a standalone basis
and, if the arrangement includes a general right of return relative to the delivered item, delivery
or performance of the undelivered item or items is considered probable and substantially in the
control of the vendor. Arrangement consideration shall be allocated at the inception of the
arrangement to all deliverables on the basis of their relative selling price. When applying the
relative selling price method, the selling price of each deliverable shall be determined using
vendor-specific objective evidence, if it exists; third party evidence of selling price; or if
neither of those exist, the vendor shall use its best estimate of the selling price for that
deliverable.
The pronouncement specific to certain revenue arrangements that include software elements
amends the scope of arrangements that are accounted for under software revenue recognition rules
and provides guidance for allocating the arrangement consideration. The pronouncement clarifies
that the following arrangements are outside the scope of accounting under software revenue
recognition rules and must follow the general revenue recognition rules for multiple- deliverable
arrangements: 1) non-software components of tangible products, 2) software components of tangible
products that are sold, licensed or leased with tangible products when the software components and
non-software components of the tangible product function together to deliver the tangible products
essential functionality, and 3) undelivered elements that relate to software that is essential to
the tangible products functionality in 2 above. If an arrangement contains software and
non-software deliverables, consideration must be allocated to the non-software deliverables
individually and to the software deliverables as a group based on the relative selling price
method.
Both of these pronouncements are effective prospectively for revenue arrangements entered into
or materially modified in fiscal years beginning on or after June 15, 2010 and both must be adopted
together. Early adoption is permitted. If a vendor elects early adoption and the period of
adoption is not the beginning of the vendors fiscal year, the vendor is required to apply the
guidance in these pronouncements retrospectively from the beginning of the vendors fiscal year. A
vendor may also elect to adopt the guidance in these pronouncements retrospectively to prior
periods.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic
820), Improving Disclosures about Fair Value Measurements. This Update requires new disclosures
and clarifies existing disclosures regarding recurring and nonrecurring fair value measurements to
provide increased transparency to users of the financial statements. The new disclosures and
clarification of existing disclosures are effective for interim and annual periods beginning after
December 15, 2009, except for the disclosures pertaining to the roll forward of activity for Level
3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010,
and for interim periods within those fiscal years. Management does not expect the adoption of this
Update to have a material impact on its financial statements.
F-11
(3) INTANGIBLE ASSETS
As of December 31, 2009 and 2008, intangible assets related to the ETI Acquisition are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
Estimated |
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
Life |
|
Cost |
|
|
Amortization |
|
|
Net |
|
|
Net |
|
Contract related intangible asset: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cato Research discounted contract |
|
3 years |
|
$ |
355,000 |
|
|
$ |
271,178 |
|
|
$ |
83,822 |
|
|
$ |
202,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology related intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents for the AzoneTS-based product candidates and formulation |
|
8 years |
|
|
1,305,000 |
|
|
|
|
|
|
|
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 |
|
|
|
1,500,000 |
|
In-process pharmaceutical products for two (2) indications |
|
8 years |
|
|
6,820,000 |
|
|
|
|
|
|
|
6,820,000 |
|
|
|
6,820,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total technology related intangible assets |
|
|
|
|
9,625,000 |
|
|
|
|
|
|
|
9,625,000 |
|
|
|
9,625,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
9,980,000 |
|
|
$ |
271,178 |
|
|
$ |
9,708,822 |
|
|
$ |
9,827,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The technology related intangible assets will be 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 $118,000 for both years ended December
31, 2009 and 2008, and is included in research and development in the Consolidated Statement of
Operations.
Estimated amortization expense for each of the next five years is as follows:
|
|
|
|
|
|
|
Estimated |
|
|
Amortization |
Year Ending December 31: |
|
Expense |
2010 |
|
$ |
84,000 |
|
2011 |
|
|
1,203,000 |
|
2012 |
|
|
1,203,000 |
|
2013 |
|
|
1,203,000 |
|
2014 |
|
|
1,203,000 |
|
(4) OPERATING AND CAPITAL LEASE COMMITMENTS
Operating Lease The Company leases approximately 13,000 square feet of manufacturing,
laboratory and office space in a single facility located in Franklin, Massachusetts under a lease
expiring March 31, 2011. Future minimum lease payments under this operating lease are approximately
as follows:
|
|
|
|
|
|
|
Amount |
|
For the years ended December 31, |
|
|
|
|
2010 |
|
$ |
189,000 |
|
2011 |
|
|
47,000 |
|
|
|
|
|
Total |
|
$ |
236,000 |
|
|
|
|
|
The Companys facilities lease expense was approximately $185,000 and $172,000 for the years
ended December 31, 2009 and 2008, respectively.
Capital Lease In July 2009, the Company entered into a five-year lease of an office copier
which is included with the Office and Laboratory Equipment. The value of the equipment capitalized
was approximately $11,000. The lease payments of $234 per month, payable in arrears, reflect a 10%
interest rate. Accumulated depreciation on the leased copier as of December 31, 2009 was
approximately $1,100. During the year ended December 31, 2009, interest expense related to the
capital lease obligation was approximately $500.
F-12
(5) NOTES
PAYABLE AND CAPITAL LEASE OBLIGATION
Notes payable and capital lease obligations at December 31, 2009 and 2008 consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Senior Convertible Notes: |
|
|
|
|
|
|
|
|
Senior Convertible notes |
|
|
|
|
|
|
331,448 |
|
Unamortized Discount |
|
|
|
|
|
|
(30,981 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Notes: |
|
|
|
|
|
|
|
|
Senior Secured notes |
|
|
|
|
|
|
2,209,426 |
|
Unamortized Discounts |
|
|
|
|
|
|
(155,364 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,054,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligation |
|
|
10,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable and capital lease obligation |
|
|
10,121 |
|
|
|
2,354,529 |
|
Less current portion of notes payable and capital lease obligation |
|
|
1,874 |
|
|
|
2,054,062 |
|
|
|
|
|
|
|
|
Notes Payable and capital lease obligation, net of current portion |
|
$ |
8,247 |
|
|
$ |
300,467 |
|
|
|
|
|
|
|
|
2007 and 2008 Senior Promissory Bridge Notes and Senior Convertible Notes
On September 14, 2007, the Company completed a private placement of unsecured Senior
Promissory Bridge Notes (the Bridge Notes) in the aggregate principal amount of $1,325,000 to
strategic institutional and individual accredited investors. The Bridge Notes were scheduled to be
due September 15, 2008 and accrued interest at a rate of 10% per annum, with interest payable upon
maturity. On February 11, 2008, the Company completed an approximately $2.3 million private
financing with substantially all of the holders of the Bridge Notes. The $2,292,459 in aggregate
principal amount of unsecured Senior Convertible Notes issued in the financing (the Senior
Convertible Notes) bore interest annually at a rate of 8% per annum and provided the holders with
the right to convert principal into shares of Common Stock at $1.35 per share. The conversion price
was subject to weighted average anti-dilution protection, excluding certain customary exceptions.
The Senior Convertible Notes had a three-year term and the Company could elect to make payments of
interest in cash, additional notes, or stock.
Additionally, the investors received warrants to purchase 849,059 shares of Common Stock at an
exercise price of $1.00 per share a term of five years. The warrants provide for full
anti-dilution price protection to the holders and allow for cashless exercise.
In connection with the Senior Convertible Notes financing, certain holders representing
$1,275,000 face value of Bridge Notes exchanged their Bridge Notes at 120% of the outstanding
principal and interest of the Bridge Notes as payment toward the purchase price of the Senior
Convertible Notes purchased by such holders. Accordingly, the Company issued notes in the Senior
Convertible Notes financing in the aggregate principal balance of $1,592,459 to the former holders
of the Bridge Notes upon their surrender of the Bridge Notes, and the Company received gross cash
proceeds in the amount of $700,000 in connection with the financing.
In 2008, one holder of a Bridge Note with a face value of $50,000 converted the principal and
accrued interest of such Bridge Note into 52,041 shares of Common Stock, at a $1.00 conversion
price as provided in the terms of the Bridge Notes. No Bridge Notes remained outstanding at
December 31, 2009 and 2008.
The Company has determined that the terms of the Senior Convertible Notes are deemed
substantially different, as described in from the terms of the Bridge Notes based on the change
in the fair value of the embedded conversion features. As a result, the Company recorded the Senior
Convertible Notes issued in exchange for the Bridge Notes at fair value on the date of issuance and
recorded a loss on extinguishment of approximately $586,000. An amount equal to the intrinsic value
of the conversion feature of the Bridge Notes as measured on the date of exchange for the Senior
Convertible Notes, or approximately $213,000, was recorded as a reduction in additional paid-in
capital in accordance with EITF Issue No. 98-5, Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios. The fair value of the
warrants issued to the holders of the Bridge Notes upon conversion into the Senior Convertible
Notes, which the Company estimated to be approximately $626,000, was recorded as additional paid-in
capital and also included in the loss on extinguishment. The difference between the fair value and
the face value of the Senior Convertible Notes is being accreted to interest expense over the term
of the notes.
F-13
The new cash proceeds from the Senior Convertible Notes of $700,000 were allocated between the
notes and the warrants issued in the Senior Convertible Notes financing on a relative fair value
basis. Approximately $220,000 of the proceeds was allocated to the warrants and recorded as
additional paid-in capital and a discount on the Senior Convertible Notes. The Company determined
that the effective conversion price, after allocation of the proceeds, resulted in a beneficial
conversion feature of approximately $121,000 which was recorded as additional paid-in capital and a
further discount on the Senior Convertible Notes. The discounts on the Senior Convertible Notes are
being accreted to interest expense over the term of the notes.
Interest expense related to the Bridge Notes for the years ended December 31, 2009 and 2008,
including amortization of discounts, was approximately none and $197,000, respectively. Interest
expense related to the Senior Convertible Notes for the years ended December 31, 2009 and 2008,
including amortization of discounts and deferred financing costs, was approximately $55,000 and
$359,000, respectively. During the years ended December 31, 2009 and 2008, accrued interest of
approximately $24,000 and $117,000, respectively, was satisfied by the issuance of
additional Senior Convertible Notes.
2008 Senior Secured Note and Warrant Financing
On March 24, 2008, the Company entered into a Secured Note financing with Imperium Master
Fund, Ltd. (Imperium), providing for, at the Companys option, the issuance of up to an aggregate
$2,000,000 of original issue discount senior secured notes (the Secured Notes) in four equal
tranches, together with warrants (the Imperium Warrants) to purchase up to 653,728 shares of
Common Stock at an exercise price of $1.62 per share as of December 31, 2009. On March 24, 2008,
the Company drew down the initial $500,000 in gross proceeds and issued the Imperium Warrants upon
execution of the agreement. The Company also issued additional Secured Notes and drew down $500,000
in gross proceeds on each of April 24, 2008, June 2, 2008 and June 24, 2008, completing the
financing for $2,000,000.
The Company was not required to make monthly cash payments of principal and interest under our
Secured Notes. Instead, the outstanding principal of each Secured Note accreted in value at an
annual rate of 10%, compounded monthly, resulting in a total principal amount of approximately
$552,357 due for each Secured Note at maturity. If, however, the Company completed an equity
issuance in one or more series of transactions totaling $5,000,000 (a Qualified Issuance), then
the aggregate amount due for each Secured Note would be reduced from $552,357 to $546,903 and the
annual accretion value will be reduced from 10% to 9%.
Each Secured Note was due twelve months after the date of the issuance, provided, however,
that if the Company completed a Qualified Issuance by October 31, 2008, it had a right to extend
the maturity date of each Secured Note to 24 months after the date of the issuance. The Company did
not complete a Qualified Issuance by October 31, 2008. The Company had the right to repay the
principal amount of the Secured Notes in cash, in whole, but not in part, prior to maturity at a
premium of 1.02 times the unpaid principal plus any other amount due under the Secured Notes.
The Imperium Warrants have a term of five years and are immediately exercisable at an exercise
price of $1.62 per share (as of December 31, 2009). The Imperium Warrants provide for weighted
average exercise price and number of warrant shares anti-dilution protection upon future issuances
or deemed issuances (subject to customary exceptions) below the exercise price.
In connection with the issuance of the Secured Notes and Imperium Warrants, on March 24, 2008,
the Company entered into a Registration Rights Agreement pursuant to which it agreed to file a
registration statement with the Securities and Exchange Commission covering the resale of the
Common Stock issuable upon exercise of the Imperium Warrants within 60 days after issuance of the
securities. The Company also agreed to use its best efforts to cause the registration statement to
become effective under the Securities Act as soon as practicable after the filing of the
registration statement, but no later than 180 days after issuance of the Imperium Warrants. As of
May 14, 2008, the Company entered into Amendment No. 1 to the Registration Rights Agreement and
eliminated the requirement for registration of the underlying securities, but granted the holders
of the Imperium Warrants piggy-back registration rights with respect to certain registration
statement filings by the Company in the future (see Note 6).
On April 23, 2009, the Company entered into an amendment agreement with Imperium pursuant to
which the maturity date of the following Secured Notes were extended: a note issued on March 24,
2008 with a maturity date of March 24, 2009, which maturity date was extended to May 31, 2009 and a
note issued on April 24, 2008 with a maturity date of April 24, 2009, which maturity date was
subsequently extended to May 31, 2009.
On June 2, 2009, the Company paid all of the outstanding Secured Notes and accrued interest.
Interest expense related to the Secured Notes in the years ended December 31, 2009 and 2008
was approximately $204,000 and $492,000, respectively.
F-14
2008 Exchange Agreement
On September 30, 2008, the Company entered into an Exchange Agreement (the Exchange
Agreement) with substantially all of the holders of the Senior Convertible Notes (collectively,
the Investors). The Investors were the holders of an aggregate of $1,980,212 in principal amount
of the Senior Convertible Notes and an aggregate $97,656 in principal amount of additional notes
issued as interest on the Senior Convertible Notes (collectively, the 2008 Notes), for a total
aggregate of $2,077,868 in principal amount of 2008 Notes constituting all of the issued and Senior
Convertible Notes, except for the aggregate $318,475 in principal amount of notes held by Gemini
Master Fund Ltd. (Gemini), who was not a party to the Exchange Agreement. Accrued interest of
$23,622and $19,201 payable to Gemini for the years ended December 31, 2009 and 2008, respectively,
was paid by issuing additional notes.
Pursuant to the terms of the Exchange Agreement, the Company issued and delivered to the
Investors, in exchange for the cancellation of the 2008 Notes, 1,539,161 shares of a newly
authorized Series A Convertible Preferred Stock (see Note 8) (Series A Stock) and five-year
warrants to purchase 153,912 shares of Common Stock at an exercise price of $1.00 per share,
subject to adjustment for stock splits, combinations or similar events.
As the Senior Convertible Notes did not contain the right to convert into Series A Stock, the
Company accounted for the exchange as an extinguishment of the Senior Convertible Notes. As a
result, the difference between the fair values of the Series A Stock issued over the carrying value
of the Senior Convertible Notes exchanged of $738,578 was recorded as an extinguishment loss in the
year ended December 31, 2008. The fair value of the warrants issued of $106,182 was also recorded
as an extinguishment loss in the year ended December 31, 2008.
The Senior Convertible Notes held by Gemini (the Gemini Notes) remained outstanding at
December 31, 2008 with original terms. The Gemini Notes were convertible into shares of Common
Stock at Geminis option at a price per share of $1.35, subject to adjustment for stock splits,
combinations or similar events and subject to customary weighted average anti-dilution adjustments.
As of November 13, 2009, the Company exchanged the Gemini Notes and accrued interest for Common
Stock and warrants (see Note 9). The Company recorded a loss on extinguishment when the Gemini Notes and
accrued interest totaling $355,070 were exchanged for 284,056 shares of Common Stock and warrants.
The loss of approximately $196,000 on extinguishment of the Gemini Notes consisted of approximately
$27,000 of unamortized deferred financing costs, $18,000 of unamortized discount and approximately
$150,000 in excess fair value of the shares and warrants issued on extinguishment over that
received under the original terms.
2009 Senior Secured Note
On June 1, 2009, the Company issued to Platinum Montaur Life Sciences, LLC (Platinum) a 10%
Senior Secured Promissory Note (the Platinum Note) in the principal amount of $1,990,000. The
outstanding principal of the Platinum Note accreted in value at an annual rate of 10%, compounded
monthly.
The maturity date of the Platinum Note was June 29, 2009, which maturity date was subsequently
extended to July 7, 2009. The Company used the net proceeds of the Platinum Note to pay a
substantial portion of the Senior Secured Notes. As of June 30, 2009, the Company exchanged the
Platinum Note and accrued interest for 200.6031 shares of Series B Perpetual Preferred Stock
(Series B Stock) and 1,205.016 shares of Series C Preferred Stock (Series C Stock) (see Note
9). The Company recognized a loss of approximately $1,820,000 from the extinguishment of this debt.
During the year ended December 31, 2009, interest expense related to the 2009 Senior Secured Note,
including amortization of discounts and deferred financing costs, was approximately $16,000.
2009 Promissory Demand Notes
On October 6, 2009, the Company issued Promissory Demand Notes (collectively, the 2009
Notes) in the aggregate amount of $125,000 to three payees. In connection with the loan evidenced
by each 2009 Note, the Company was required to issue each payee 1,000 unregistered shares of common
stock for every $10,000 of principal invested for each week such 2009 Note remains outstanding.
Each 2009 Note was due and payable upon the earlier of (i) a demand of payment made any time after
October 31, 2009 or (ii) the acceleration of obligations under the terms of the 2009 Note. A total
of 37,500 shares with a fair value of approximately $54,000 were issued in October 2009 pursuant to
the 2009 Notes which was included in interest expense. The 2009 Notes were paid in full on October
31, 2009.
F-15
(6) DERIVATIVE INSTRUMENTS
Derivative financial instruments are recognized as a liability on the consolidated balance
sheet and measured at fair value.
At January 1 and December 31, 2009, the Company had outstanding warrants to purchase 4,432,828
and 7,356,502 shares of its common stock. Included in these outstanding warrants at December 31,
2009 are warrants to purchase 1,483,760 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. The fair value of
these derivative instruments at December 31, 2009 was approximately $2,117,000 and is included in
Derivative Warrant Liability, a current liability. Changes in fair value of the derivative
financial instruments are recognized currently in the Statement of Operations as a Derivatives
Loss. The changes in the fair value of the derivative warrant liability in the twelve months ended
December 31, 2009, were approximately $4,050,000.
The primary underlying risk exposure pertaining to the warrants is the change in fair value of
the underlying common stock for each reporting period. Of the total warrants exercised in 2009,
warrants to purchase 1,584,515 shares of common stock were exercised per a cashless exercise
provision. For the year ended December 31, 2009, warrants with down round provisions to purchase
1,572,015 shares were exercised and certain antidilution rights were waived (see Note 11) which
resulted in a reclassification to additional paid-in capital in the amount of approximately
$3,268,000.
In 2008, due to certain requirements to obtain and maintain an effective registration
statement covering the shares of common stock underlying the Imperium warrants, the Company
originally determined that the Imperium Warrants did not meet the requirements for classification
as equity. 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, Imperium agreed to eliminate the
Companys obligation to maintain an effective registration statement covering the shares of common
stock underlying the Imperium Warrants 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 as of May 14, 2008, resulting in an additional derivative loss of approximately $18,000. The
derivative loss for the year ended December 31, 2008 amounted to
approximately $587,000. The Company reclassified approximately
$920,000 to additional paid-in capital in the year ended December 31,
2008.
(7) FAIR VALUES OF ASSETS AND LIABILITIES
The Company groups its financial assets and financial liabilities generally measured at fair
value in three levels, based on the markets in which the assets and liabilities are traded and the
reliability of the assumptions used to determine fair value.
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Level 1 Valuation is based on quoted prices in active markets for identical assets or
liabilities. Level 1 assets and liabilities generally include debt and equity securities
that are traded in an active exchange market. Valuations are obtained from readily
available pricing sources for market transactions involving identical assets or
liabilities. |
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Level 2 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. |
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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.
F-16
Volatility is estimated at historical stock prices. The risk-free interest 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 Common Stock.
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:
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December 31, 2009 |
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Liabilities: |
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Derivative warrant liability
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2,116,696 |
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2,116,696 |
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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. There were
no such adjustments in the year ended December 31, 2009.
(8) PREFERRED STOCK
The Company is authorized to issue up to 40,000,000 shares (10,000,000 at December 31, 2008)
of preferred stock with such rights, preferences and privileges as are fixed by the Board of
Directors.
Series A Convertible Preferred Stock
The Company has authorized 2,636,363 shares of Series A Convertible Preferred Stock, of which
none and 1,570,194 shares were issued and outstanding as of December 31, 2009 and 2008,
respectively.
Series A-1 Convertible Preferred Stock
The Company has authorized 2,000,000 shares of Series A-1 Convertible Preferred Stock, of
which none and 778,136 shares were issued and outstanding as of December 31, 2009 and 2008,
respectively.
Series A-2 Convertible Preferred Stock
The Company has authorized 4,400,000 shares of Series A-2 Convertible Preferred Stock, of
which no shares were issued and outstanding as of either December 31, 2009 or 2008.
Series A Preferred Stock Exchange
On June 29, 2009, the Company entered into an Exchange Agreement (the Series A Exchange
Agreement) with all of the holders of the Series A Stock (collectively, the Series A Holders).
The Series A Holders held an aggregate of 1,632,733 shares of the Series A Stock, including
paid-in-kind dividends accrued through June 29, 2009, constituting all of the issued and
outstanding Series A Stock. The Series A Stock was initially convertible into shares of Common
Stock at the option of the holder at a price per share of $1.35, subject to adjustment for stock
splits, combinations or similar events and subject to customary weighted average anti-dilution
adjustments.
Under the terms of the Series A Exchange Agreement, the Company issued and delivered to the
Series A Holders, in exchange for the cancellation of the Series A Stock, 2,938,920 shares of
Common Stock. The Series A Exchange Agreement states that, if, as a result of this exchange
transaction, any Series A Holder or any of its affiliates, individually or in the aggregate, would
beneficially own more than 9.99% of the Companys issued and outstanding Common Stock (the
Threshold Amount), the Series A Holder would receive Common Stock rounded to the nearest whole
share, up to the Threshold Amount, and the remaining Common Stock would be exchanged for Series C
Stock convertible into the number of shares of Common Stock equal to the difference between the
aggregate number of shares of Common Stock to be issued to the Series A Holder and the actual
number of shares of Common Stock issued. As a result of this provision, one Series A Holder
received 2,323.105 shares of Series C Stock instead of 2,323,105 shares of Common Stock. The
remaining Series A Holders received 615,815 shares of Common Stock. After giving effect to the
terms of the Series A Exchange Agreement, the Company does not have any shares of Series A Stock
issued and outstanding.
F-17
The Company recorded a deemed dividend on the beneficial conversion equal to the incremental
fair value resulting from the reduction in the conversion price, or approximately $2,012,000. This
deemed dividend is included in the Consolidated Statement of Operations in arriving at Net Loss
Applicable to Common Shareholders.
Series A-1 Preferred Stock Exchange
On June 29, 2009, the Company entered into an Exchange Agreement (the Series A-1 Exchange
Agreement) with all of the holders of the Series A-1 Convertible Preferred Stock (collectively,
the Series A-1 Holders). The Series A-1 Holders held an aggregate of 809,121 shares of the
Companys Series A-1 Convertible Preferred Stock (Series A-1 Stock), including paid-in-kind
dividends accrued through June 29, 2009, constituting all of the issued and outstanding Series A-1
Stock. The Series A-1 Stock was initially convertible into shares of Common Stock at the option of
the holder at a price per share of $1.00, subject to adjustment for stock splits, combinations or
similar events and subject to customary weighted average anti-dilution adjustments.
Under the terms of the Series A-1 Exchange Agreement, the Company issued and delivered to the
Series A-1 Holders, in exchange for the cancellation of the Series A-1 Stock, 1,078,828 shares of
Common Stock. The Series A-1 Exchange Agreement states that, if, as a result of this exchange
transaction, any Series A-1 Holder or any of its affiliates, individually or in the aggregate,
would beneficially own more than the Threshold Amount, the Series A-1 Holder would receive Common
Stock rounded to the nearest whole share, up to the Threshold Amount, and the remaining Common
Stock would be exchanged for Series C Stock convertible into the number of shares of Common Stock
equal to the difference between the aggregate number of shares of Common Stock to be issued to the
Series A-1 Holder and the actual number of shares of Common Stock issued. As a result of this
provision, one Series A-1 Holder received 280.993 shares of Series C Stock instead of 280,993
shares of Common Stock. The remaining Series A-1 Holders received 797,835 shares of Common Stock.
After giving effect to the Series A-1 Exchange Agreement, the Company does not have any shares of
Series A-1 Stock issued and outstanding.
The Company recorded a deemed dividend on the beneficial conversion equal to the incremental
fair value resulting from the reduction in the conversion price, or approximately $415,000. This
deemed dividend is included in the Statement of Operations in arriving at Net Loss Applicable to
Common Shareholders.
Series A-2 Preferred Stock Financing and Exchange
On April 8, April 24, April 28 and May 31, 2009, the Company entered into an Amended and
Restated Stock and Warrant Purchase Agreement dated as of April 2, 2009 (the A-2 Purchase
Agreement) with certain strategic institutional and accredited investors (the A-2 Investors) in
connection with the private placement (the A-2 Financing) of 1,200,000 shares of our 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 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 (the A-2 Warrants) in the A-2 Financing. The Company
received gross proceeds of $700,000 from the A-2 Financing and used the net proceeds for working
capital and general corporate purposes.
Pursuant to the A-2 Purchase Agreement, the Company issued A-2 Warrants to the A-2 Investors
to purchase up to 640,000 shares of Common Stock. The A-2 Warrants were 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 A-2 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 us.
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 anti-dilution provisions upon conversion. 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 Companys option. 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. As of June 29, 2009 the Series A-2 Stock was exchanged for Common Stock
(see below).
F-18
On June 29, 2009, the Company entered into an Exchange Agreement (the A-2 Exchange
Agreement) with all of the holders of the A-2 Investors. The A-2 Investors held an aggregate of
1,422,436 shares of the Series A-2 Stock, including paid-in-kind dividends accrued through June 29,
2009, constituting all of the issued and outstanding Series A-2 Stock.
Under the terms of the A-2 Exchange Agreement, the Company issued and delivered to the A-2
Investors, in exchange for the cancellation of the Series A-2 Stock, 1,422,436 shares of Common
Stock. The A-2 Exchange Agreement states that, if, as a result of this exchange transaction, any
A-2 Investor or any of its affiliates, individually or in the aggregate, would beneficially own
more than the Threshold Amount, the A-2 Investor would receive Common Stock rounded to the nearest
whole share, up to the Threshold Amount, and the remaining Common Stock would be exchanged for
Series C Stock convertible into the number of shares of Common Stock equal to the difference
between the aggregate number of shares of Common Stock to be issued to the A-2 Investor and the
actual number of shares of Common Stock issued. As a result of this provision, one A-2 Investor
received 508.986 shares of Series C Stock instead of 508,986 shares of Common Stock. After giving
effect to the A-2 Exchange Agreement, the Company does not have any shares of Series A-2 Stock
issued and outstanding. The remaining A-2 Investors received 913,450 shares of Common Stock.
Series B Perpetual Preferred Stock and Warrant Financing
The Company has authorized 40,000 shares of non-convertible Series B Stock, of which 141.2281
and zero shares were issued and outstanding as of December 31, 2009 and 2008, respectively. The
Series B Stock was issued on June 30, 2009.
On July 7, 2009, the Company entered into a Stock Purchase Agreement as of June 30, 2009 (the
Series B Agreement) with Platinum in connection with the Companys private placement (the Series
B Financing) of 200.6031 shares (10,000 to 1 conversion) of Series B Stock, together with
1,205,016 shares of Common Stock, for an aggregate price of $2,006,031. The Company received
payment of the purchase price in the form of the extinguishment of the Platinum Note (see Note 5)
in the amount of $2,006,031, which amount included principal and interest accrued through June 30,
2009. As the Platinum Note was not originally convertible, the Company recognized a loss on the
extinguishment of this debt of approximately $1,820,000 which represents the excess of the fair
value of the Series B Stock and the Series C Stock over the carrying value of the Platinum Note.
The Series B Agreement states that the Series B Financing may not result in a purchaser or any
of its affiliates, individually or in the aggregate, beneficially owning more than the Threshold
Amount; provided, however, that a purchaser may waive the foregoing provision upon sixty-one (61)
days advance written notice to the Company. If the Series B Financing would result in a purchaser
owning Common Stock in excess of the Threshold Amount, then the purchaser would receive Common
Stock rounded to the nearest whole share, up to the Threshold Amount, and the remaining Common
Stock would be exchanged for Series C Stock convertible into the number of shares of Common Stock
equal to the difference between the aggregate number of shares of Common Stock to be issued to the
purchaser and the actual number of shares of Common Stock issued. As a result of this provision,
Platinum received 1,205.016 shares (1,000 to 1 conversion) of Series C Stock instead of 1,205,016
shares of Common Stock that it otherwise would have received pursuant to the Series B Agreement.
Pursuant to the terms of the Companys Certificate of Designation, Preference and Rights of
Series B Perpetual Preferred Stock (the Series B Certificate), the Company, at its option, may
redeem, in whole at any time or in part, the outstanding Series B Stock at a redemption price per
share equal to the sum of the Face Amount ($10,000) and the accrued and unpaid dividends thereon
through the redemption date. In addition, the Company shall be obligated to redeem the Series B
Stock within two business days following the occurrence of any of the events set forth below:
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If the Company completes an equity or equity linked financing with gross
proceeds of $8 million or greater, the Company shall redeem 100% of the outstanding
Series B Stock, including all accrued and unpaid dividends thereon; |
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If the Company completes an equity or equity linked financing with gross
proceeds of $5 million or greater, the Company shall redeem an amount of Series B
Stock equal to 50% of the original amount of outstanding Series B Stock issued
pursuant to the Series B Agreement, including all accrued and unpaid dividends
thereon; |
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If the Company completes an equity or equity linked financing with gross
proceeds of less than $5 million, the Company shall use 20% of the gross proceeds of
such financing to redeem outstanding Series B Stock, including all accrued and unpaid
dividends thereon, on a pro rata basis; |
F-19
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If the Company receives proceeds from any licensing, partnership or similar
agreement(s) or any milestone payments resulting from such licensing, partnering or similar agreement(s), the Company shall use
20% of the gross proceeds to redeem outstanding Series B Stock, including all accrued and
unpaid dividends thereon, on a pro rata basis; and |
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If the Company completes a merger or consolidation of the Company with or
into another corporation, or the sale of all or substantially all of the Companys
properties or assets to any other person, the Company shall use the gross proceeds of
such transaction to redeem the outstanding Series B Stock, including all accrued and
unpaid dividends thereon to the date of redemption. |
The Series B Stock will yield a quarterly dividend, at an initial annual rate of 8%, which is
payable in cash or in kind at the option of the Company. If the Series B Stock is outstanding on
the twelve month anniversary of the Issuance Date (as defined in the Series B Certificate), the
dividend rate shall increase to 10% per annum and, if the Series B Stock is outstanding on the
eighteen month anniversary of the Issuance Date, then the dividend rate shall increase to 12% per
annum.
In the event of any Liquidation Event (as defined in the Series B Certificate) the holders of
the Series B Stock will be entitled to receive (subject to the rights of any securities designated
as senior to the Shares) a liquidation preference equal to the Face Amount thereof plus any accrued
but unpaid dividends thereon. The Company cannot create or issue any security senior to the Series
B Stock without the prior approval of the holders of at least 67% of the Companys outstanding
Series B Stock.
In accordance with redemption requirements, during the year ended December 31, 2009, the
Company redeemed 59.3750 shares of Series B Stock at a cost of $593,750 in connection with the
financings dated November 13 and December 3, 2009. Of this amount, $450,000 was satisfied by
offsetting proceeds owed in connection with the November Financing (see Note 9) and $143,750 was
included in Accrued Expenses. Subsequent to December 31, 2009, Platinum waived the required
redemption for the period January 19, 2010 through March 16, 2010 (see Note 14).
Series C Preferred Stock
The Company has authorized 10,000 shares of Series C Stock, of which 4,918.100 and zero shares
were issued and outstanding as of December 31, 2009 and 2008, respectively. The Series C Stock was
created on June 30, 2009.
Pursuant to the terms of the Certificate of Designation, Preference and Rights of Series C
Preferred Stock (the Series C Certificate), each share of Series C Stock is initially convertible
into one thousand shares of Common Stock, subject to adjustment for stock splits, combinations or
similar events. Each holder who receives Series C Stock may convert its Series C Stock at any time
following its issuance. The Company can not, without the prior approval of the holders of at least
67% of the shares of the outstanding Series C Stock, (i) amend or repeal the Series C Stock so as
to adversely affect any right, preference, privilege or voting power of the Series C Stock; or (ii)
make a distribution with respect to junior classes of stock except that the Company may make a
distribution on Common Stock if it makes a distribution on the Series C Stock on an as-converted
basis.
In the event of any Liquidation Event (as defined in the Series C Certificate), the holders of
Series C Stock will be entitled to receive (subject to the rights of any securities designated as
senior to the Series C Stock) a per share liquidation preference equal to an amount calculated by
taking the total amount available for distribution to holders of all the Companys outstanding
Common Stock before deduction of any preference payments for the Series C Stock, divided by the
total of (x) all of the then outstanding shares of Common Stock, plus (y) all of the shares of
Common Stock into which all of the outstanding shares of the Series C Stock can be converted, in
each case prior to any distribution to the holders of Common Stock or any other securities
designated as junior to the Series C Stock.
(9) COMMON STOCK
The Company has authorized 100,000,000 and 60,000,000 shares of Common Stock, $0.01 par value
per share, of which 27,045,792 and 19,095,838 shares were issued and outstanding as of December 31,
2009 and 2008, respectively.
2008 Private Placements of Common Stock
During 2008, warrants to purchase 726,250 shares of our Common Stock were exercised
voluntarily, providing gross proceeds of approximately $114,000. Total common shares of 705,873
were issued in connection with these exercises as certain warrants were exercised through a
cashless exercise provision allowed in the holders warrant agreement.
F-20
During 2008, the Company issued 138,750 shares of fully-vested, unregistered shares of Common
Stock with a fair value of $247,500 to a consultant for investor relations services.
As of December 31, 2008, the Company issued 318,905 shares of its Common Stock to Cato
BioVentures in settlement of a payable in the amount of $140,318.
November 2009 Common Stock and Warrant Financing
On November 13, 2009, the Company entered into a Common Stock and Warrant Purchase Agreement
(the November Agreement) with certain strategic institutional and accredited investors in
connection with the private placement (the November Financing) of shares of Common Stock at a
price of $1.25 per share (the November Shares). Under the terms of the November Agreement, each
investor shall receive warrants to purchase a number of shares of Common Stock with an exercise
price of $2.00 per share equal to (i) seventy percent (70%) of the number of November Shares
purchased by such investor or, (ii) for those investors who purchased November Shares for a
purchase price of at least $750,000, one hundred percent (100%) of the number of November Shares
purchased by such investor (the November Warrants). In addition, each investor who purchased
November Shares for a purchase price of at least $1,000,000 shall receive November Warrants with an
exercise price of $1.60 per share.
The Company received proceeds of $3,211,320 in connection with the November Financing. The
Company received payment of a portion of the proceeds in the form of the extinguishment of the
Gemini Notes (together with additional notes issued as payment for accrued interest) in the
approximate amount of $355,000, which amount included principal and interest accrued through
November 13, 2009 (see Note 5). A portion of one investors purchase price was comprised of the
investment of $450,000 of the funds payable to such investor by the Company for the redemption of a
portion of the Series B Stock owned by such investor upon the closing of the November Financing.
Of the total proceeds, the Company received approximately $2,461,000 for the issuance of 1,969,056
shares of Common Stock and $750,000 for 600 shares of Series C stock issued to an investor due to
ownership limitations.
Pursuant to the Purchase Agreement, the Company issued November Warrants to purchase an
aggregate of 2,398,339 shares of Common Stock to the investors, of which 1,598,339 shares have an
exercise price equal to $2.00 per share and 800,000 shares have an exercise price equal to $1.60
per share. The Company issued warrants to purchase 256,906 share at $0.50 per share to the
placement agent and its assignees. The warrants are immediately exercisable and expire no later
than November 13, 2014. The exercise price is subject to adjustment for stock splits, combinations
or similar events. The November Warrants allow for cashless exercise. An exercise under the
November 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.
December 2009 Common Stock and Warrant Financing
On December 3, 2009, the Company closed on a financing pursuant to a Common Stock and Warrant
Purchase Agreement dated as of November 20, 2009 (the December Agreement) with certain strategic
institutional and accredited investors in connection with the private placement (the December
Financing) of shares of Common Stock at a price of $1.25 per share (the December Shares). Under
the terms of the December Agreement, each investor shall receive warrants to purchase a number of
shares of Common Stock with an exercise price of $2.00 per share equal to (i) seventy percent (70%)
of the number of December Shares purchased by such investor or, (ii) for those investors who
purchased December Shares for a purchase price of at least $750,000, one hundred percent (100%) of
the number of December Shares purchased by such investor (the December Warrants). In addition,
the December Warrants issued to each investor who purchased December Shares for a purchase price of
at least $1,000,000 have an exercise price of $1.60 per share.
The Company received proceeds of $562,500 in connection with the December Financing.
Pursuant to the December Agreement, the Company issued 450,000 shares of common stock, an
aggregate of 315,000 December Warrants to the investors and 45,000 warrants to the placement agent
and its assignees. The December Warrants are immediately exercisable and expire no later than
December 3, 2014. The exercise price is subject to adjustment for stock splits, combinations or
similar events. The December Warrants allow for cashless exercise. An exercise under the December
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.
F-21
Burnham Hill Partners Engagement Letters
On February 11, 2008, the Company provided warrants to purchase 175,013 shares of Common Stock
at an exercise price of $1.49 per share to Burnham Hill Partners, a division of Pali Capital, Inc.
(BHP), for a financing fee in connection with the Senior Convertible Note financing. The fair
value of these services has been determined to be approximately $186,000 and has been recorded as a
deferred financing cost with amortization over a three year period.
On October 14, 2008, the Company entered into an engagement letter with BHP pursuant to which
BHP provided placement agent services to the Company in connection with the A-1 Financing (see Note
8). The Company agreed to pay to BHP for its services as follows: (a) a cash fee equal to 8% of the
gross proceeds of the A-1 Financing; and (b) warrants to acquire a number of shares of Common Stock
of the Company equal to 10% of the number of as-converted Shares issued to investors in the A-1
Financing at a per share exercise price of $1.10. These costs, including the fair value of the
warrants, will be recorded as stock issuance costs and net against the proceeds from the A-1
Financing. As a result of the A-1 Financing, the Company paid BHP $61,333 and provided warrants to
purchase 26,833 shares of Common Stock with an exercise price of $1.10 per share. The fair value of
these warrant shares was determined to be approximately $15,000 as of February 11, 2008 which was
recorded as both a debit and credit to additional paid-in capital as a stock issuance cost.
On June 30, 2009, the Company entered into an engagement letter with Burnham Hill Partners LLC
(BHP LLC) pursuant to which BHP LLC provided placement agent services to the Company in
connection with the Series B Financing (see Note 8). The Company agreed to pay BHP LLC a cash fee
of $200,000 (the Series B Fee) which was due and payable upon the earlier of (i) the Company
having a net cash balance in excess of $2,000,000 or (ii) October 1, 2009; and (b) warrants to
acquire 400,000 shares of Common Stock, with a term of five years, an exercise price per share
equal to 105% of the closing bid price of Common Stock on June 30, 2009. On September 30, 2009, the
Company and BHP LLC entered into a letter agreement (the Letter) extending the due date of the
Series B Fee. The Letter provides that the Fee is due and payable by the Company upon the earlier
of (i) the Company having a net cash balance in excess of $2,000,000 or (ii) March 31, 2010. On
March 16, 2010, BHP LLC agreed that the Company does not owe BHP any fees that may have been
payable pursuant to any and all previous agreements between BHP and the Company. As a result of
the Series B Financing, the Company issued to BHP LLC and/or its designees and assignees warrants
to purchase 400,000 shares of Common Stock at an exercise price of $1.59. The fair value of these
warrant shares was determined to be approximately $557,000 as of June 30, 2009 which was recorded
as both a debit and credit to additional paid-in capital as a stock issuance cost.
On October 13, 2009, the Company entered into an engagement letter with BHP LLC pursuant to
which BHP LLC provided placement agent services to the Company in connection with the November
Financing. BHP LLC received a cash placement fee of $168,438 and the Company issued to BHP LLC
and/or its designees and assignees warrants to purchase 256,906 shares of Common Stock at an
exercise price of $1.50. The fair value of these warrant shares was determined to be approximately
$263,000 as of November 13, 2009 which was recorded as both a debit and credit to additional
paid-in capital as a stock issuance cost.
Boenning & Scattergood Engagement Letter
On October 13, 2009, the Company entered into an engagement letter with Boenning &
Scattergood, Inc. (Boenning) pursuant to which Boenning provided placement agent services to the
Company in connection with the December Financing. The Company agreed to pay Boenning for its
services as follows: (a) a cash fee equal to seven percent (7%) of the gross cash proceeds received
by the Company in connection with the December Financing; and (b) warrants to acquire a number of
shares of Common Stock equal to 10% of the number of December Shares issued to the investors at a
per share exercise price equal to the greater of (i) 110% of the purchase price of the December
Shares issued or (ii) the closing price of the Common Stock on the closing date. As a result of
the December Financing, Boenning received a cash placement fee of $39,375 and the Company issued to
Boenning and/or its designees and assignees warrants to purchase 45,000 shares of Common Stock at
an exercise price of $1.38. The fair value of these warrant shares was determined to be
approximately $49,950 as of December 3, 2009 which was recorded as both a debit and credit to
additional paid-in capital as a stock issuance cost.
2009 Exercise of Common Stock Warrants
During 2009, warrants to purchase 1,584,515 shares of our Common Stock were voluntarily
exercised per a cashless process, providing no proceeds. Total common shares of 1,211,704 were
issued in connection with these exercises through a cashless exercise provision allowed in each
holders warrant agreement.
F-22
Cancellation of Grant of Restricted Stock
On August 4, 2009, the Company cancelled 5,000 restricted shares of Common Stock that had been
granted to a former employee of the Company pursuant to a Restricted Stock Agreement under the
Companys 2008 Plan.
Common Stock Reserves
As of December 31, 2009, the Company had the following reserves established for the future
issuance of Common Stock as follows:
|
|
|
|
|
Reserve for exercise of warrants |
|
|
7,356,502 |
|
Reserve for the issuance of restricted stock grants |
|
|
2,218,250 |
|
Reserve for the issuance of stock options outside of a qualified plan |
|
|
1,650,000 |
|
Reserve for the exercise of stock options |
|
|
4,518,138 |
|
|
|
|
|
Total Reserves |
|
|
15,742,890 |
|
|
|
|
|
(10) 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. As of December 31, 2009,
there were options to purchase an aggregate of 25,000 shares of Common Stock outstanding under the
1997 Plan and no shares available for future 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 December 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. As of December 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
December 31, 2009, there were restricted shares of Common Stock and options to purchase an
aggregate of 943,750 shares of Common Stock outstanding under the 2003 Plan and 643,250 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). The 2008 Plan provides for grants of incentive stock options
to employees and nonqualified stock options and restricted Common Stock to employees, consultants
and non-employee directors of the Company. On July 8, 2009, the shareholders of the Company voted
in favor of the Board of Directors recommendation to increase the number of shares authorized for
issuance under the 2008 Plan from 1,700,000 shares to 2,700,000 shares. The 2008 Plan was amended
effective as of May 1, 2009 to reflect such increase in authorized shares. As of December 31,
2009, the number of shares authorized for issuance under the 2008 Plan was 2,700,000 shares. As of
December 31, 2009, there were restricted shares of Common Stock and options to purchase an
aggregate of 300,000 shares of Common Stock outstanding under the 2008 Plan and 2,400,000 shares
available for future grants under the 2008 Plan.
Share-Based Compensation
For options and restricted Common Stock issued and outstanding during the year ended December
31, 2009 and 2008, the Company recorded additional paid-in capital and non-cash compensation
expense of $1,298,789 and $1,824,807, respectively, each net of estimated forfeitures
The fair value of each option award is estimated on the date of grant using the Black-Scholes
option pricing model that uses the assumptions noted in the following table. Expected volatilities
are based on historical volatility of the Common Stock using historical periods consistent with the
expected term of the options. The Company uses historical data, as well as subsequent events
occurring
F-23
prior to the issuance of the consolidated financial statements, to estimate option exercise
and employee termination within the valuation model. The expected term of options granted under the
Companys stock plans, all of which qualify as plain vanilla, is based on the average of the
contractual term (generally 10 years) and the vesting period (generally 36 42 months) as
permitted under SEC Staff Accounting Bulletin Nos. 107 and 110. The risk-free rate is based on the
yield of a U.S. Treasury security with a term consistent with the option. Restricted stock grants
are valued based on the closing market price for the Common Stock on the grant date.
The assumptions used principally for options granted to employees in the years ended December
31, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
2009 |
|
2008 |
Risk-free interest rate |
|
2.43% - 2.78% |
|
2.25% - 4.11% |
Expected dividend yield |
|
|
|
|
Expected term (employee grants) |
|
6 years |
|
6 - 6.75 years |
Forfeiture rate (excluding fully vested options) |
|
12.54% |
|
11% - 33% |
Expected volatility |
|
150% - 151% |
|
151% - 156% |
A summary of option activity under the Companys stock plans and options granted to officers
of the Company outside any plan as of December 31, 2009 and changes during the year then ended is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
Options |
|
Shares |
|
|
Price |
|
|
Term |
|
|
Value |
|
Outstanding at January 1, 2008 |
|
|
3,944,530 |
|
|
$ |
1.87 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
345,000 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(1,365,000 |
) |
|
$ |
2.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
2,924,530 |
|
|
$ |
0.90 |
|
|
7.91 years |
|
$ |
3,039,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2009 |
|
|
2,609,868 |
|
|
$ |
0.95 |
|
|
7.82 years |
|
$ |
2,664,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of options granted during the year ended December
31, 2009 was $0.44 per share. The weighted average remaining life of these options was 7.91 years.
Share-based compensation expense recognized in the year ended December 31, 2009 was $62,000 for
options granted during the year ended December 31, 2009. Total share-based compensation expense
recognized for the year ended December 31, 2009 was approximately $1,299,000. As of December 31,
2009, there was approximately $106,000 of total unrecognized compensation expense related to
non-vested share-based option compensation arrangements. The unrecognized compensation expense is
estimated to vest over a two year period.
As of December 31, 2009, the Company had outstanding restricted stock grants (including
436,250 shares issued under the 2003 Plan) amounting to 2,283,094 shares at a weighted-average
grant-date fair value of $1.19 per share. Of the outstanding restricted stock grants, 2,192,000
shares have not been registered. A summary of the status of the Companys nonvested restricted
stock grants as of December 31, 2009, and changes during the year ended December 31, 2009, is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant-Date |
|
Nonvested Shares |
|
Shares |
|
|
Fair Value |
|
Nonvested at January 1, 2009 |
|
|
3,750 |
|
|
$ |
1.77 |
|
Granted |
|
|
1,992,125 |
|
|
$ |
1.08 |
|
Vested |
|
|
(274,250 |
) |
|
$ |
0.74 |
|
Forfeited |
|
|
(6,875 |
) |
|
$ |
0.77 |
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2009 |
|
|
1,714,750 |
|
|
$ |
1.13 |
|
|
|
|
|
|
|
|
|
Vested at December 31, 2009 |
|
|
568,344 |
|
|
$ |
1.39 |
|
|
|
|
|
|
|
|
|
Share-based compensation recognized in the year ended December 31, 2009 related to restricted
stock grants was approximately $255,000.
As of December 31, 2009, there was approximately $2,349,000 of total unrecognized compensation
expense related to nonvested share-based restricted stock arrangements granted under the Companys
stock plans. As of December 31, 2009, the Company cannot estimate the timing of completion of
performance vesting requirements required by these restricted stock grant arrangements.
F-24
Grant of Restricted Stock and Re-pricing 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 Common Stock to $0.55 per share. Prior to the
repricing, the exercise price of such options was $1.39 per share. 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 of between $0.61 and $2.25 to an exercise price of $0.40. All
other terms of the options remained the same. 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 Common Stock that were granted on September 14, 2007 at an exercise price per share equal to
$2.39. 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 charged to expense
over the remaining vesting period of the options.
During 2009, the Company granted an aggregate of 1,569,750 restricted shares of the Companys
Common Stock with a fair value of approximately $1,750,000 to certain employees, officers and
directors of the Company pursuant to Restricted Stock Agreements under the 2003 Plan (225,000
shares) and the 2008 Plan (1,344,750 shares) (the Restricted Share Grants). 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 Symphony; 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 Grants were effected under
Section 4(2) of the Securities Act.
Compensation expense related to the Restricted Share Grants will be recognized when the
Company concludes that achievement of the performance vesting conditions is probable. Through
December 31, 2009, the Company has not concluded that achievement of the performance conditions
related to the Restricted Share Grants was probable.
During 2009, the Company issued 125,000 shares of its unregistered common stock with the fair
value of approximately $189,100, to vendors in consideration for investor relations and other
services. The issuance of the shares outside any stock option plan was made in a transaction not
involving any public offering pursuant to an exemption from registration under Section 4(2) of the
Securities Act.
During October 2009, the Company issued 37,500 shares of its unregistered common stock with
the fair value of approximately $54,000, to three lenders for interest on the 2009 Promissory
Demand Notes (see Note 5). The fair value was recorded as a non-cash interest expense in the
consolidated financial statements. The issuance of the shares outside any stock option plan 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 December 4, 2009, the Company issued 200,000 shares of its unregistered common stock with a
fair value of approximately $250,000 to a vendor in consideration for investor relations services.
Under the terms of the agreement, only 50,000 shares vested as of December 31, 2009 with a fair
value of approximately $63,000. The issuance of the shares outside any stock option plan 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 December 11, 2009, the Company issued 64,844 shares of its unregistered common stock with a
fair value of approximately $83,000 to a member of the Companys Board of Director in consideration
for past services to the Company. Under the terms of the agreement, the shares vest when the
Company concludes that achievement of the performance vesting conditions is probable. The issuance
of the shares outside of any stock option plan was made in a transaction not involving any public
offering pursuant to an exemption from registration under Section 4(2) of the Securities Act.
Repricing of Certain Nonqualified Stock Options
On June 3, 2009, the Compensation Committee of the Board of Directors of the Company approved
a reduction of the exercise price of options for a certain consultant of the Company to purchase
25,000 shares of Common Stock to $0.80 per share. Prior to the repricing, the exercise price of
such options was $1.95 per share. All other terms of the options remained the same. The incremental
fair value resulting from the repricing was immaterial.
F-25
(11) WARRANTS
The Company determines the fair value of warrants issued using the Black-Scholes option
pricing model. The assumptions used in connection with the Black-Scholes option pricing model for
Common Stock warrants granted to BHP during the years ended December 31, 2009 and 2008 were as
follows:
|
|
|
|
|
|
|
2009 |
|
2008 |
Risk-free interest rate |
|
2.87% - 3.80% |
|
3.34% |
Expected dividend yield |
|
|
|
|
Expected term (contractual term) |
|
3 - 5 years |
|
5 years |
Forfeiture rate |
|
0% |
|
0% |
Expected volatility |
|
150% - 153% |
|
155% |
Expected volatilities are based on historical volatility of the Common Stock using historical
periods consistent with the expected term of the warrant. The risk-free rate is based on the yield
of a U.S. Treasury security with a term consistent with the warrant.
The warrants issued in the years ended December 31, 2009 and 2008 generally have a term of
five (5) years, a non-redeemable feature and a cashless exercise provision. Certain warrants have a
standard weighted average anti-dilution protection and piggy back registration rights.
At December 31, 2009, the Company had the following outstanding warrants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
Shares |
|
|
Exercise |
|
|
|
|
|
|
Exercisable |
|
|
Price |
|
|
Date of Expiration |
|
Granted to investor in former subsidiary |
|
|
15,000 |
|
|
$ |
0.50 |
|
|
|
2/23/2010 |
|
Granted to investors and placement agent in private placement. |
|
|
476,830 |
|
|
$ |
5.80 |
|
|
|
3/16/2016 |
|
Granted to investors and placement agent in private placement. |
|
|
419,250 |
|
|
$ |
1.32 |
|
|
|
6/15-7/16/2012 |
|
Granted to investors and placement agent in private placement. |
|
|
180,000 |
|
|
$ |
0.75 |
|
|
|
6/15/2012 |
|
Granted to financial investment advisor |
|
|
6,000 |
|
|
$ |
1.46 |
|
|
|
7/25/2012 |
|
Granted to financial advisor in connection with an acquisition |
|
|
80,750 |
|
|
$ |
1.90 |
|
|
|
9/14/2012 |
|
Granted to financial investment advisor |
|
|
39,978 |
|
|
$ |
1.36 |
|
|
|
2/11/2013 |
|
Granted to investors in private placement |
|
|
733,412 |
|
|
$ |
0.50 |
|
|
|
2/11/2013 |
|
Granted to investors in private placement |
|
|
767,792 |
|
|
$ |
1.62 |
|
|
|
3/24/2013 |
|
Granted to investors in private placement of preferred stock |
|
|
121,663 |
|
|
$ |
0.75 |
|
|
|
9/30/2013 |
|
Granted to investors in private placement of preferred stock |
|
|
32,249 |
|
|
$ |
1.00 |
|
|
|
9/30/2013 |
|
Granted to investors in private placement of preferred stock |
|
|
198,333 |
|
|
$ |
1.50 |
|
|
|
10/28/2013 |
|
Granted to investors in private placement of preferred stock |
|
|
70,000 |
|
|
$ |
0.75 |
|
|
|
10/31/2013 |
|
Granted to investors in private placement of preferred stock |
|
|
640,000 |
|
|
$ |
0.75 |
|
|
|
2/28/2014 |
|
Granted to vendor |
|
|
50,000 |
|
|
$ |
0.70 |
|
|
|
3/2/2012 |
|
Granted to vendor |
|
|
60,000 |
|
|
$ |
0.60 |
|
|
|
3/15/2014 |
|
Granted to investors in private placement |
|
|
400,000 |
|
|
$ |
1.59 |
|
|
|
6/30/2014 |
|
Granted to investors in private placement |
|
|
1,598,339 |
|
|
$ |
2.00 |
|
|
|
11/13/2014 |
|
Granted to investors in private placement |
|
|
800,000 |
|
|
$ |
1.60 |
|
|
|
11/13/2014 |
|
Granted to placement agent in private placement |
|
|
256,906 |
|
|
$ |
1.50 |
|
|
|
11/13/2014 |
|
Granted to vendor |
|
|
50,000 |
|
|
$ |
2.00 |
|
|
|
12/1/2012 |
|
Granted to investors in private placement |
|
|
315,000 |
|
|
$ |
2.00 |
|
|
|
12/3/2014 |
|
Granted to placement agent in private placement |
|
|
45,000 |
|
|
$ |
1.38 |
|
|
|
12/3/2014 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
7,356,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average exercise price |
|
|
|
|
|
$ |
1.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average duration in years |
|
|
|
|
|
|
|
|
|
3.87 years |
|
|
|
|
|
|
|
|
|
|
|
|
A summary of warrant activity in the year ended December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
Warrants |
|
Shares |
|
|
Price |
|
Outstanding at January 1, 2009 |
|
|
4,432,828 |
|
|
$ |
2.57 |
|
Granted |
|
|
4,804,704 |
|
|
$ |
1.54 |
|
Exercised |
|
|
(1,584,515 |
) |
|
$ |
0.43 |
|
Forfeited or expired |
|
|
(296,515 |
) |
|
$ |
10.48 |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
7,356,502 |
|
|
$ |
1.71 |
|
|
|
|
|
|
|
|
F-26
Re-pricing of Warrants to Financial Advisor and Affiliates
On January 30, 2009, the Company entered into an engagement letter with BHP pursuant to which
BHP will provide financial advisory services to the Company (the Advisory Agreement) only as
requested by the Company from time to time. In connection with BHPs engagement under the Advisory
Agreement, all warrants held by BHP 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 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 BHP
pursuant to the Agreement, the Company shall issue to BHP 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, BHP and the Company amended the Advisory Agreement, effective as of
January 30, 2009, to reflect their original intention to amend warrants held by BHP and/or its
registered employees and affiliates of BHP 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 expense as of the date of the modification.
Issuances of Warrants to Service Providers
On March 2, 2009, the Company issued warrants to purchase 50,000 shares of 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 expense.
On March 15, 2009, the Company issued warrants to purchase 60,000 shares of 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.
Approximately $57,000 was charged to expense in the year ended December 31, 2009.
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 closing price of the Companys stock on April 6, 2009 was $0.45. The excess of the fair value
of the modified warrants over the fair value of the original warrants immediately prior to
modification, or approximately $11,500 was charged to stock compensation expense during the year
ended December 31, 2009.
Waiver of Anti-Dilution Provisions
As of December 31, 2009, certain holders of warrants to purchase an aggregate of 758,422
shares of the Common Stock at exercise prices ranging from $.50 to $0.75 per share waived the
anti-dilution provisions set forth in such warrants (see Note 6).
(12) INCOME TAXES
No provision or benefit for federal or state income taxes has been recorded, as the Company
has incurred a net loss for all periods presented, and has provided a valuation allowance against
its deferred tax assets.
At December 31, 2009, the Company had federal net operating loss carryforwards of
approximately $46,000,000, which will expire in varying amounts beginning in 2018. The Company also
had research and development tax credit carryforwards of approximately $1,378,000 which will begin
to expire in 2018 unless previously utilized. The United States Tax Reform Act of 1986 contains
provisions that may limit the Companys net operating loss carryforwards available to be used in
any given year in the event of significant changes in the ownership interests of significant
stockholders, as defined.
F-27
Significant components of the Companys net deferred tax asset are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Deferred Tax Assets/(Liabilities) |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
17,001,000 |
|
|
$ |
16,842,000 |
|
Research credit carryforward |
|
|
1,378,000 |
|
|
|
827,000 |
|
Acquired intangible assets, net |
|
|
(3,814,000 |
) |
|
|
(3,785,000 |
) |
Other temporary differences |
|
|
117,000 |
|
|
|
132,000 |
|
|
|
|
|
|
|
|
Total deferred tax assets, net |
|
|
14,682,000 |
|
|
|
14,016,000 |
|
Valuation allowance |
|
|
(14,682,000 |
) |
|
|
(14,016,000 |
) |
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
The Company has maintained a full valuation allowance against its deferred tax items in both
2009 and 2008. A valuation allowance is required to be recorded when it is more likely than not
that some portion or all of the net deferred tax assets will not be realized. Since the Company
cannot be assured of realizing the net deferred tax asset, a full valuation allowance has been
provided.
The Company has no unrecognized tax benefits at December 31, 2009 that would affect its
effective tax rate. The Company does not anticipate a significant change in the amount of
unrecognized tax benefits over the next twelve months. Since the Company is in a loss carryforward
position, the Company is generally subject to US federal and state income tax examinations by tax
authorities for all years for which a loss carryforward is available.
Income taxes computed using the federal statutory income tax rate differs from the Companys
effective tax rate primarily due to the following:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
Income taxes (benefit) at statutory rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
State income tax, net of federal benefit |
|
|
0.9 |
% |
|
|
2.4 |
% |
Permanent Differences |
|
|
|
|
|
|
|
|
Derivative loss |
|
|
(13.1 |
)% |
|
|
(1.9 |
)% |
Loss on extinguishment of debt |
|
|
(6.4 |
)% |
|
|
(6.8 |
)% |
Stock compensation expense |
|
|
(4.3 |
)% |
|
|
(5.2 |
)% |
Other |
|
|
(2.6 |
)% |
|
|
(3.5 |
)% |
R&D credits |
|
|
1.1 |
% |
|
|
(0.5 |
)% |
Change in valuation allowance |
|
|
(10.6 |
)% |
|
|
(20.5 |
)% |
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
(13) LICENSING AND OTHER REVENUE AND RELATED ACCOUNTS RECEIVABLE
Ferndale License of Prelude SkinPrep System On May 27, 2009, the Company entered into a
License Agreement with Ferndale Pharma Group, Inc. (Ferndale) pursuant to which the Company
granted Ferndale a license in North America and the United Kingdom to develop, assemble, use,
market, sell and export Prelude for skin preparation prior to the application of a topical
analgesic or anesthetic cream for local dermal anesthesia or analgesia prior to a needle insertion
or IV procedure (the Ferndale License). The Ferndale License has a minimum term of 10 years from
the date of the first commercial sale of Prelude product components in North America or the United
Kingdom.
The Company received a licensing fee of $750,000 upon execution of the Ferndale License. In
addition, the Company will receive a payment of $750,000 within ninety (90) days after receipt of
the FDAs 510(k) medical device clearance of Prelude. Ferndale will pay the Company an escalating
royalty on net sales of Prelude product components. The Company will also receive milestone
payments based on Ferndales achievement of certain net sales targets of the product components, as
well as guaranteed minimum annual royalties.
The Company recognizes the upfront, nonrefundable payments as revenue on a straight-line basis
over the contractual or estimated performance period. Accordingly, the Company determined that
approximately $404,000 of the non-refundable license revenue was recognizable in the year ended
December 31, 2009. Approximately $346,000 is recognizable over the next 12 months and is shown as
current deferred revenue. There was no licensing revenue or deferred revenue in the year ended
December 31, 2008.
Other Revenue The Company has retained contract engineering services in connection with
product development pursuant to the Ferndale License and the Company is reimbursed by Ferndale for
the cost of product development engineering services. Other
F-28
Revenue of approximately $795,000 relates to product development costs incurred during the
year ended December 31, 2009 and received from Ferndale in October 2009. The expenses billed to the
Company are included in Research and Development expenses on the Statements of Operations. There
was no markup on these expenses. There was no Other Revenue in the year ended December 31, 2008.
Handok License of Symphony tCGM System On June 15, 2009, the Company entered into a
License Agreement with Handok Pharmaceuticals Co., Ltd. (Handok) pursuant to which the Company
granted Handok a license to develop, use, market, sell and import Symphony for continuous glucose
monitoring for use by medical facilities and/or individual consumers in South Korea (the Handok
License). The Handok License has a minimum term of 10 years from the date of the first commercial
sale of Symphony in South Korea.
The Company received a licensing fee of approximately $500,000 upon execution of the Handok
License. In addition, the Company will receive milestone payments upon receipt of the FDAs
clearance of Symphony and upon the first commercial sale of Symphony in South Korea. Handok will
also pay the Company a royalty on net sales of Symphony. The Company also will receive milestone
payments based on Handoks achievement of certain other targets.
The Company recognizes the upfront, nonrefundable payments as revenue on a straight-line basis
over the contractual or estimated performance period. Accordingly, the Company determined that
approximately $133,000 of the non-refundable license revenue was recognizable in the year ended
December 31, 2009. Approximately $245,000 is recognizable over the next 12 months and is shown as
current deferred revenue. The approximately $122,000 that remains is recognizable as revenue beyond
the 12 month period and is classified as non-current. There was no licensing revenue or deferred
revenue in the year ended December 31, 2008.
(14) SUBSEQUENT EVENTS
In January 2010, the Company issued 275,000 shares of its common stock with a fair value of
approximately $483,500 to three vendors in consideration for various consulting services. The fair
value of these common shares will be charged to selling, general and administrative expenses. A
total of 165,000 and 110,000 shares were issued under the 2003 Plan and 2008 Plan, respectively.
On January 21, 2010, the Company issued 60,000 shares of its common stock with a fair value of
approximately $113,000 as a charitable contribution which will be charged to selling, general and
administrative expense. The shares were issued in a transaction not involving any public offering
pursuant to an exemption from registration under Section 4(2) of the Securities Act.
On February 22, 2010, an investor exercised a warrant to purchase 15,000 shares per a
cashless exercise process. A total of 10,714 shares were issued.
February 2010 Common Stock and Warrant February Financing
On February 4, 2010 the Company entered into a Common Stock and Warrant Purchase Agreement
(the February Agreement) with certain strategic institutional and accredited investors in
connection with the Companys private placement (the February Financing) of shares of its Common
Stock, at a price of $1.50 per share (the February Shares). Under the terms of the February
Agreement, each investor shall receive warrants to purchase a number of shares of Common Stock with
an exercise price of $2.25 per share equal to fifty percent (50%) of the number of February Shares
purchased by such investor (the February Warrants).
To date, the Company received proceeds of approximately $2,455,000 in connection with the
February Financing and the February Financing is still ongoing.
Pursuant to the February Agreement, the Company issued an aggregate of 818,362 February
Warrants to the investors with a fair value of approximately $943,000. The February Warrants are
immediately exercisable and expire no later than five (5) years from the date of issuance. The
exercise price is subject to adjustment for stock splits, combinations or similar events. The
February Warrants allow for cashless exercise. An exercise under the February Warrants may not
result in the holder beneficially owning more than 4.99% or 9.99%, as applicable, of all of the
Common Stock outstanding at the time; provided, however, that a holder may waive the foregoing
provision upon sixty-one (61) days advance written notice to the Company.
The offer, sale and issuance to the investors of the February Shares, February Warrants, and
shares of Common Stock issuable upon the exercise of the February 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
F-29
applicable state securities laws. The Company is not required to register for resale under the
Securities Act (i) the February Shares issued to the investors, (ii) the February Warrants or (iii)
the Common Stock issuable upon the exercise of the February Warrants.
Placement Agent Agreements
In connection with the February Financing, the Company retained Boenning and BHP LLC as its
placement agents (each, a Placement Agent). The Company agreed to pay each Placement Agent for
its services as follows: (a) a cash fee equal to seven percent (7%) of the gross cash proceeds
received by the Company in connection with the February Financing from investors the Placement
Agent directly introduced to the February Financing; and (b) warrants to acquire a number of shares
of Common Stock equal to 10% of the number of February Shares issued to the investors directly
introduced to the February Financing by the Placement Agent at a per share exercise price equal to
$2.25 and with such other terms and conditions as are equal or substantially similar to those
included in the February Warrants. The Company also agreed to pay reasonable out of pocket
expenses of each Placement Agent incurred in connection with the February Financing in an amount
not to exceed $5,000 per Placement Agent.
Series B Redemption Agreements
On January 19, 2010, the Company entered into a letter agreement with the sole holder of
Series B Stock (the Series B Holder) regarding the payment to the Series B Holder of $143,750
(the Redemption Amount) for the redemption of 14.375 shares of Series B Stock in connection with
the November Financing and December Financing. The Series B Holder waived payment of the
Redemption Amount until the Company has a net cash balance in excess of $3,000,000. In
consideration for the deferral, the Company agreed that, upon the closing of its next equity
offering with gross proceeds of less than $5,000,000, it would use 25% of the gross proceeds to
redeem Series B Stock (the 25% Redemption).
On March 16, 2010, the Company entered into an additional agreement with the Series B Holder
pursuant to which the Series B Holder waived both the 25% Redemption identified in the January 19,
2010 letter and the redemption required by the Series B
Certificate with respect to amounts received in the February
Financing through March 16, 2010. Accordingly, a redemption in the amount of
approximately $614,000 was waived by the Series B Holder in connection with the February Financing.
Other Agreements
On March 16, 2010, BHP LLC agreed that the Company does not owe BHP LLC any fees pursuant to
any and all previous agreements between BHP LLC and the Company. Accordingly, the Series B Fee was
waived and the Company intends to record Other Income for the forgiveness of debt in the amount of
$200,000 in March 2010.
On March 3, 2010 the Company entered into a Financial Advisory Agreement pursuant to which the
Company shall issue warrants to purchase 20,000 shares of the Common Stock of the Company at a
price of $2.00 per share with a fair value of approximately $27,000.
On March 3, 2010, the Company entered into an Investor Relations Service Agreement pursuant to
which it granted a consultant stock options under the 2008 Plan to purchase one hundred thousand
(100,000) shares of Common Stock at an exercise price of $1.70 per share. The fair value of these
stock options is approximately $138,000 as of March 3, 2010.
On March 5, 2010, the Company entered into an agreement for placement agent services. In the
event that an investor makes an investment in the Company, the consultant will receive 5% fee on
the total investment amount and warrants to purchase common shares of the Company equal to 7% of
the number of shares issued to the investor. The warrants would be exercisable over a period of 5
years at a price equal to the price per share of the warrants issued to the investor.
On March 12, 2010, the Company issued warrants to purchase 100,000 shares of its Common Stock
with a fair value of approximately $126,000 to an individual for continued investor introduction
services to the Company. The warrants are immediately exercisable and expire no later than three
(3) years from the date of issuance with an exercise price of $1.50 per share. The fair value of
these warrants issued will be charged to selling, general and administrative expenses.
F-30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A(T). CONTROLS AND PROCEDURES.
We have carried out an evaluation, under the supervision and the participation of our
management, including our principal executive officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2009. Based upon that
evaluation, our principal executive officer and principal financial officer concluded that, as of
the end of that period, our disclosure controls and procedures are effective in providing
reasonable assurance that (a) the information required to be disclosed by us in the 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 (b) such information is accumulated and
communicated to our management, including our principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required disclosure. In designing and
evaluating our disclosure controls and procedures, our management recognized that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and our management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Changes in Internal Control over Financial Reporting
We evaluate the effectiveness of our internal control over financial reporting in order to
comply with Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires us to evaluate
annually the effectiveness of our internal controls over financial reporting as of the end of each
fiscal year, and to include a management report assessing the effectiveness of our internal control
over financial reporting in all annual reports. We have not made any changes in our internal
control over financial reporting during our fourth fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting.
Managements Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting for the company. Internal control over financial reporting is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision
of, a companys principal executive and principal financial officers and effected by a companys
board of directors, management and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Our internal control over
financial reporting includes those policies and procedures that:
|
|
|
pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets; |
|
|
|
|
provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and |
|
|
|
|
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on the
financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as
of December 31, 2009. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control
Integrated Framework.
Following our assessment, management has concluded that, as of December 31, 2009, our internal
control over financial reporting is effective based on those criteria.
This annual report does not include an attestation report of the companys registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by the companys registered public accounting firm pursuant to temporary
rules of the SEC that permit the company to provide only managements report in this annual report.
66
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
Incorporated by reference to the portions of our Definitive Proxy Statement entitled Election
of Directors, Directors and Executive Officers, The Board of Directors and its Committees,
Audit Committee Financial Expert and Section 16(a) Beneficial Ownership Reporting Compliance.
We have adopted a Code of Business Conduct and Ethics that applies to all of our directors,
officers and employees, including our principal executive officer and principal financial officer.
A copy of our Code of Business Conduct and Ethics is posted on our website at
www.echotx.com.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference to the portions of our Definitive Proxy Statement entitled
Executive Compensation, Outstanding Equity Awards at Fiscal Year-End, Compensation Committee
Interlocks and Insider Participation, Compensation Committee Report, and Director
Compensation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
Incorporated by reference to the portion of our Definitive Proxy Statement entitled
Securities Ownership of Certain Beneficial Owners and Management, Executive Compensation, and
Equity Compensation Plans.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Incorporated by reference to the portions of our Definitive Proxy Statement entitled Certain
Relationships and Related Transaction, Independence of Members of Board of Directors and The
Board of Directors and its Committees.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Incorporated by reference to the portions of our Definitive Proxy Statement entitled
Independent Registered Public Accounting Firm and Audit Committee Policy on Pre-Approval of
Services of Independent Registered Public Accounting Firm.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
The Exhibits listed in the Exhibit Index immediately preceding such Exhibits are filed with or
incorporated by reference in this report.
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
ECHO THERAPEUTICS, INC.
|
|
|
By: |
/s/ Patrick T. Mooney
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Name: |
Patrick T. Mooney, M.D. |
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Title: |
Chief Executive Officer |
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Date: March 31, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities indicated on March
31, 2010.
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By: |
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/s/ Patrick T. Mooney
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By: |
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/s/ Shawn K. Singh
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Name:
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Patrick T. Mooney, M.D.
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Name:
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Shawn K. Singh, J.D. |
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Title:
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Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
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Title:
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President and Director |
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By: |
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/s/ Walter W. Witoshkin
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By: |
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/s/ Vincent D. Enright
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Name:
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Walter W. Witoshkin
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Name:
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Vincent D. Enright |
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Title:
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Director
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Title:
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Director |
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By: |
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/s/ Harry G. Mitchell
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Name:
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Harry G. Mitchell |
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Title:
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Chief Operating Officer,
Chief Financial Officer
and Treasurer
(Principal Financial
Officer and
Principal Accounting Officer) |
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68
EXHIBIT INDEX
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Exhibit |
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Number |
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Description of Document |
3.1
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Certificate of Incorporation of the Registrant is incorporated herein by reference to Exhibit
3.1 of the Registrants Quarterly Report on Form 10-Q for the period ended June 30, 2009. |
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3.2
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Certificate of Designation, Rights and Preferences of Series A Convertible Preferred Stock is
incorporated herein by reference to Exhibit 99.1 of the Registrants Current Report on Form
8-K dated September 30, 2008. |
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3.3
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Certificate of Designation, Rights and Preferences of Series A-1 Convertible Preferred Stock
is incorporated herein by reference to Exhibit 99.1 of the Registrants Current Report on
Form 8-K dated October 28, 2008. |
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3.4
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Certificate of Designation, Rights and Preferences of Series A-2 Convertible Preferred Stock
is incorporated herein by reference to Exhibit 99.1 of the Registrants Current Report on
Form 8-K dated April 8, 2009. |
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3.5
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Certificate of Designation, Rights and Preferences of Series B Preferred Stock is
incorporated herein by reference to Exhibit 99.1 of the Registrants Current Report on Form
8-K dated July 7, 2009. |
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3.6
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Certificate of Designation, Rights and Preferences of Series C Preferred Stock is
incorporated herein by reference to Exhibit 10.2 of the Registrants Current Report on Form
8-K dated June 29, 2009. |
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3.7
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Bylaws of the Registrant is incorporated herein by reference to Exhibit 3.2 to the
Registrants Current Report on Form 8-K dated June 9, 2008. |
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69
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Exhibit |
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Number |
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Description of Document |
10.1*
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1997 Long-Term Incentive and Stock Option Plan, as amended, is incorporated herein by
reference to Exhibit 10.3 of the Registrants Quarterly Report on Form 10-QSB for the period
ended June 30, 2002. |
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10.2*
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1999 Stock Option and Incentive Plan is incorporated herein by reference to Exhibit 10.31 of
the Registrants Registration Statement on Form S-4 filed on April 24, 2002. |
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10.3
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Lease Agreement between the Registrant and Forge Park Investors LLC dated January 24, 2003 is
incorporated herein by reference to Exhibit 10.13 to the Registrants Annual Report on
Form 10-K for the fiscal year ended December 31, 2002. |
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10.4
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Common Stock and Warrant Purchase Agreement dated as of March 7, 2006 by and among the
Registrant and the investors listed on Schedule 1 thereto is incorporated herein by reference
to Exhibit 99.1 to the Registrants Current Report on Form 8-K dated March 7, 2006. |
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10.5
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Form of Common Stock Purchase Warrant is incorporated herein by reference to Exhibit 99.2 to
the Registrants Current Report on Form 8-K dated March 7, 2006. |
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10.6*
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2003 Stock Option and Incentive Plan, as amended, is incorporated herein by reference to
Appendix I of the Registrants Definitive Schedule 14A filed on April 17, 2007. |
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10.7*
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Form of Restricted Stock Agreement for use under the Registrants 2003 Stock Option and
Incentive Plan is incorporated herein by reference to Exhibit 99.1 to the Registrants
Current Report on Form 8-K dated August 14, 2006. |
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10.8
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Common Stock and Warrant Purchase Agreement dated as of January 2, 2007 by and among the
Registrant, Sherbrooke Partners, LLC and the purchasers named therein is incorporated herein
by reference to Exhibit 10.1 of the Registrants Current Report on Form 8-K dated January 1,
2007. |
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10.9
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Form of Warrant to Purchase Shares of Common Stock is incorporated herein by reference to
Exhibit 10.2 of the Registrants Current Report on Form 8-K dated January 1, 2007. |
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10.10
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Form of Subscription Agreement is incorporated herein by reference to Exhibit 10.1 of the
Registrants Current Report on Form 8-K dated June 15, 2007. |
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10.11
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Form of Warrant to Purchase Shares of Common Stock is incorporated herein by reference to
Exhibit 10.2 of the Registrants Current Report on Form 8-K dated June 15, 2007. |
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10.12*
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Employment Agreement by and between the Registrant and Patrick T. Mooney dated as of
September 14, 2007 is incorporated herein by reference to Exhibit 10.4 to the Registrants
Current Report on Form 8-K dated September 14, 2007 (including Nonqualified Stock Option
Agreement). |
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10.13*
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Employment Agreement by and between the Registrant and Shawn K. Singh dated as of
September 14, 2007 is incorporated herein by reference to Exhibit 10.5 to the Registrants
Current Report on Form 8-K dated September 14, 2007 (including Nonqualified Stock Option
Agreement). |
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10.14*
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Employment Agreement by and between the Registrant and Harry G. Mitchell dated as of
September 14, 2007 is incorporated herein by reference to Exhibit 10.6 to the Registrants
Current Report on Form 8-K dated September 14, 2007 (including Nonqualified Stock Option
Agreement). |
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10.15
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Form of Warrant to Purchase Shares of Common Stock is incorporated herein by reference to
Exhibit 10.1 to the Registrants Quarterly Report on Form 10-QSB for the period ended
September 30, 2007. |
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10.16*
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Form of Nonqualified Stock Option Agreement is incorporated herein by reference to
Exhibit 10.1 to the Registrants Current Report on Form 8-K dated December 22, 2007. |
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10.17
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First Amendment to Lease dated February 11, 2008 by and between the Registrant and CRP-2
Forge, LLC, as successor in interest to Forge Park Investors LLC, is incorporated herein by
reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K dated March 13,
2008. |
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10.18
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Note and Warrant Purchase Agreement by and among the Registrant and the Purchasers named
therein dated as of February 11, 2008 is incorporated herein by reference to Exhibit 10.1 to
the Registrants Current Report on Form 8-K dated February 11, 2008. |
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10.19
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Guaranty dated as of February 11, 2008 executed by Sontra Medical, Inc. is incorporated
herein by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K dated
February 11, 2008. |
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10.20
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Guaranty dated as of February 11, 2008 executed by Echo Therapeutics, Inc. is incorporated
herein by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K dated
February 11, 2008. |
70
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Exhibit |
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Number |
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Description of Document |
10.21
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Form of Senior Convertible Promissory Note is incorporated herein by reference to
Exhibit 10.4 to the Registrants Current Report on Form 8-K dated February 11, 2008. |
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10.22
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Form of Warrant is incorporated herein by reference to Exhibit 10.5 to the Registrants
Current Report on Form 8-K dated February 11, 2008. |
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10.23
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Securities Purchase and Loan Agreement by and among the Registrant and the Purchaser named
therein dated as of March 24, 2008 is incorporated herein by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K dated March 24, 2008. |
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10.24
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Form of Original Issue Discount Senior Secured Note is incorporated herein by reference to
Exhibit 10.2 to the Registrants Current Report on Form 8-K dated March 24, 2008. |
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10.25
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Form of Warrant is incorporated herein by reference to Exhibit 10.3 to the Registrants
Current Report on Form 8-K dated March 24, 2008. |
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10.26
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Guaranty dated as of March 24, 2008 executed by Echo Therapeutics, Inc., Sontra Medical,
Inc., Imperium Advisers, LLC, and Imperium Master Fund, Ltd. is incorporated herein by
reference to Exhibit 10.4 to the Registrants Current Report on Form 8-K dated March 24,
2008. |
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10.27
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Security Agreement by and among the Registrant, Imperium Advisers, LLC, Imperium Master Fund,
Ltd., Echo Therapeutics, Inc. and Sontra Medical, Inc. dated as of March 24, 2008 is
incorporated herein by reference to Exhibit 10.5 to the Registrants Current Report on
Form 8-K dated March 24, 2008. |
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10.28
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Registration Rights Agreement by and among the Registrant and the Purchaser dated as of
March 24, 2008 is incorporated herein by reference to Exhibit 10.6 to the Registrants
Current Report on Form 8-K dated March 24, 2008. |
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10.29*
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Nonqualified Stock Option Agreement by and between the Registrant and Vincent D. Enright
dated as of March 25, 2008 is incorporated herein by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K dated March 25, 2008. |
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10.30
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Amendment No. 1 to Registration Rights Agreement by and among the Registrant and Imperium
Master Fund, Ltd. dated as of May 14, 2008 is incorporated herein by reference to
Exhibit 10.1 to the Registrants Current Report on Form 8-K dated May 14, 2008. |
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10.31*
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2008 Equity Incentive Plan is incorporated herein by reference to Appendix B to the
Registrants Definitive Proxy Statement on Schedule 14A filed on April 30, 2009. |
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10.32
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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. |
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10.33
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Exchange Agreement between the Registrant and the Investors named therein dated as of
September 30, 2008 is incorporated herein by reference to Exhibit 10.1 to the Registrants
Current Report on Form 8-K dated September 30, 2008. |
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10.34
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Form of Warrant to Purchase Common Stock is incorporated herein by reference to Exhibit 4.1
to the Registrants Current Report on Form 8-K dated September 30, 2008. |
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10.35
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Stock and Warrant Purchase Agreement between the Registrant and the Purchasers named therein
dated as of October 28, 2008 is incorporated herein by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K dated October 28, 2008. |
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10.36
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Form of Warrant to Purchase Common Stock is incorporated herein by reference to Exhibit 4.1
to the Registrants Current Report on Form 8-K dated October 28, 2008. |
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10.37
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Letter agreement between the Registrant and Burnham Hill Partners LLC dated January 30, 2009
is incorporated herein by reference to Exhibit 10.1 to the Registrants Current Report on
Form 8-K dated January 30, 2009. |
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10.38
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Letter agreement between the Registrant and Imperium Master Fund, Ltd. dated March 23, 2009
is incorporated herein by reference to Exhibit 10.1 to the Registrants Current Report on
Form 8-K dated March 23, 2009. |
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10.39
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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. |
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10.40
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Form of Warrant to Purchase Common Stock is incorporated herein by reference to Exhibit 4.1
of the Companys Current Report on Form 8-K dated April 14, 2009. |
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10.41
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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. |
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10.42
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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. |
71
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Exhibit |
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Number |
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Description of Document |
10.43
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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. |
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10.44
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License Agreement between the Company and Ferndale Pharma Group, Inc. dated as of May 27,
2009 is incorporated herein by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K dated May 27, 2009. |
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10.45
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License Agreement between the Company and Handok Pharmaceuticals Co., Ltd. dated as of June
15, 2009 is incorporated herein by reference to Exhibit 10.1 to the Companys Current Report
on Form 8-K dated June 15, 2009. |
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10.46
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Form of Exchange Agreement between the Company and Series A Holders, Series A-1 Holders and
Series A-2 Holders dated June 29, 2009 is incorporated herein by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K dated June 29, 2009. |
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10.47
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Stock Purchase Agreement by and between the Company and Platinum dated as of June 30, 2009 is
incorporated herein by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K
dated July 7, 2009. |
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10.48
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Common Stock and Warrant Purchase Agreement by and among the Company and the Investors named
therein, dated as of November 13, 2009, is incorporated herein by reference to Exhibit 10.1
of the Companys Current Report on Form 8-K dated November 17, 2009. |
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10.49
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Form of Common Stock Purchase Warrant incorporated herein by reference to Exhibit 4.1 of the
Companys Current Report on Form 8-K dated November 17, 2009. |
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10.50
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Common Stock and Warrant Purchase Agreement by and among the Company and the Investors named
therein, dated as of November 30, 2009 is incorporated herein by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K dated November 30, 2009. |
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10.51
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Form of Warrant to Purchase Common Stock incorporated herein by reference to Exhibit 4.1 of
the Companys Current Report on Form 8-K dated November 30, 2009. |
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10.52
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Common Stock and Warrant Purchase Agreement by and among the Company and the Investors named
therein, dated as of February 4, 2010 is incorporated herein by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K dated February 4, 2010. |
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10.53
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Form of Warrant to Purchase Common Stock incorporated herein by reference to Exhibit 4.1 of
the Companys Current Report on Form 8-K dated February 4, 2010. |
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21
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Subsidiaries of the Registrant. |
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23
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Consent of Wolf & Company, P.C. |
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31.1
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Certification of the Chief Executive Officer and Chairman of the Board pursuant to
Rule 13a-14(a) or Rule 15d-14(a) of the Securities and Exchange Act of 1934 as adopted under
Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification of the Chief Operating Officer, Chief Financial Officer and Treasurer pursuant
to Rule 13a-14(a) or Rule 15d-14(a) of the Securities and Exchange Act of 1934 as adopted
under Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1
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Certification of the Chief Executive Officer and Chairman of the Board pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2
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Certification of the Chief Operating Officer, Chief Financial Officer and Treasurer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
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* |
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Management contract or compensatory plan or arrangement filed in
response to Item 13 of Form 10-K. |
72