e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010.
or
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 000-23017
ECHO THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
|
|
41-1649949 |
(State or other jurisdiction of
|
|
(I.R.S. Employer Identification Number) |
incorporation or organization) |
|
|
|
|
|
10 Forge Parkway, Franklin, MA
|
|
02038 |
(Address of principal executive offices)
|
|
(Zip code) |
(508) 553-8850
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o |
Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of May 14, 2010, 29,083,245 shares of the registrants Common Stock. $0.01 par value, were
issued and outstanding.
ECHO THERAPEUTICS, INC.
Quarterly report on Form 10-Q for the period ended March 31, 2010
TABLE OF CONTENTS
2
PART IFINANCIAL INFORMATION
Item 1. Financial Statements.
Echo Therapeutics, Inc.
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
As of, |
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
Unaudited |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,897,238 |
|
|
$ |
1,166,858 |
|
Accounts receivable |
|
|
|
|
|
|
130,036 |
|
Prepaid expenses and other current assets |
|
|
283,413 |
|
|
|
226,641 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
2,180,651 |
|
|
|
1,523,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, at cost: |
|
|
|
|
|
|
|
|
Computer equipment |
|
|
262,958 |
|
|
|
262,278 |
|
Office and laboratory equipment (including assets under capitalized leases) |
|
|
618,723 |
|
|
|
618,723 |
|
Furniture and fixtures |
|
|
14,288 |
|
|
|
14,288 |
|
Manufacturing equipment |
|
|
129,320 |
|
|
|
129,320 |
|
Leasehold improvements |
|
|
177,768 |
|
|
|
177,768 |
|
|
|
|
|
|
|
|
|
|
|
1,203,057 |
|
|
|
1,202,377 |
|
Less-Accumulated depreciation and amortization |
|
|
(1,151,398 |
) |
|
|
(1,143,167 |
) |
|
|
|
|
|
|
|
Net property and equipment (including assets under capitalized leases) |
|
|
51,659 |
|
|
|
59,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets: |
|
|
|
|
|
|
|
|
Restricted cash |
|
|
9,749 |
|
|
|
9,749 |
|
Intangible assets, net of accumulated amortization |
|
|
9,679,239 |
|
|
|
9,708,822 |
|
Deposits and other assets |
|
|
2,000 |
|
|
|
2,000 |
|
|
|
|
|
|
|
|
Total other assets |
|
|
9,690,988 |
|
|
|
9,720,571 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
11,923,298 |
|
|
$ |
11,303,316 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
3
|
|
|
|
|
|
|
|
|
|
|
As of, |
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
Unaudited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
925,057 |
|
|
$ |
948,712 |
|
Deferred revenue |
|
|
551,982 |
|
|
|
591,051 |
|
Current portion of capital lease obligation |
|
|
1,921 |
|
|
|
1,874 |
|
Derivative warrant liability |
|
|
1,620,351 |
|
|
|
2,116,696 |
|
Accrued expenses and other liabilities |
|
|
166,414 |
|
|
|
481,679 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
3,265,725 |
|
|
|
4,140,012 |
|
|
|
|
|
|
|
|
|
|
Capital lease obligation, net of current portion |
|
|
7,749 |
|
|
|
8,247 |
|
Deferred revenue, net of current portion |
|
|
147,550 |
|
|
|
122,451 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
3,421,024 |
|
|
|
4,270,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity: |
|
|
|
|
|
|
|
|
Perpetual, Redeemable Preferred Stock: |
|
|
|
|
|
|
|
|
Series B, authorized 40,000 shares, issued and outstanding 144.0140 and 141.2281
shares at March 31, 2010 and December 31, 2009, respectively (preference
in liquidation of $1,440,140 at March 31, 2010) |
|
|
2 |
|
|
|
2 |
|
Convertible Preferred Series: |
|
|
|
|
|
|
|
|
Series C, authorized 10,000 shares, issued and outstanding 4,918.1 shares at March 31, 2010
and December 31, 2009 |
|
|
49 |
|
|
|
49 |
|
Common stock, $0.01 par value, authorized 100,000,000 shares, issued and outstanding
29,053,245 and 27,045,792 shares at March 31, 2010 and December 31, 2009, respectively |
|
|
290,534 |
|
|
|
270,459 |
|
Additional paid-in capital |
|
|
77,486,855 |
|
|
|
74,155,716 |
|
Accumulated deficit |
|
|
(69,275,166 |
) |
|
|
(67,393,620 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
8,502,274 |
|
|
|
7,032,606 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
11,923,298 |
|
|
$ |
11,303,316 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
4
Echo Therapeutics, Inc.
Consolidated Statements of Operations
Unaudited
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Licensing revenue |
|
$ |
13,972 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
Research and development |
|
|
1,113,485 |
|
|
|
288,216 |
|
Selling, general and administrative |
|
|
1,277,623 |
|
|
|
573,364 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
2,391,108 |
|
|
|
861,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(2,377,136 |
) |
|
|
(861,580 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
Interest income |
|
|
691 |
|
|
|
389 |
|
Interest expense |
|
|
(1,089 |
) |
|
|
(178,707 |
) |
Gain on extinguishment of financial advisor fee
payable |
|
|
200,000 |
|
|
|
|
|
Derivatives gain (loss) |
|
|
295,988 |
|
|
|
(251,432 |
) |
|
|
|
|
|
|
|
Other income (expense), net |
|
|
495,590 |
|
|
|
(429,750 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(1,881,546 |
) |
|
|
(1,291,330 |
) |
|
|
|
|
|
|
|
|
|
Accretion of dividends on Convertible Preferred Stock |
|
|
|
|
|
|
(57,674 |
) |
In-kind dividends on Perpetual Redeemable Preferred
Stock |
|
|
(27,859 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common shareholders |
|
$ |
(1,909,405 |
) |
|
$ |
(1,349,004 |
) |
|
|
|
|
|
|
|
Net loss per common share, basic and diluted |
|
$ |
(0.07 |
) |
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
Basic and diluted weighted average common shares
outstanding |
|
|
28,242,669 |
|
|
|
19,380,146 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
Echo Therapeutics, Inc
Consolidated Statements of Cash Flows
Unaudited
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
Cash Flows From Operating Activities: |
|
|
|
|
|
|
|
|
Net loss |
|
|
($1,881,546 |
) |
|
|
($1,291,330 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
37,814 |
|
|
|
41,783 |
|
Share-based compensation |
|
|
59,720 |
|
|
|
398,463 |
|
Fair value of common stock issued for charitable contributions |
|
|
113,400 |
|
|
|
|
|
Fair value of common stock and warrants issued for services |
|
|
620,471 |
|
|
|
|
|
Fair value of options issued for services |
|
|
46,109 |
|
|
|
|
|
Derivative (gain) loss |
|
|
(295,988 |
) |
|
|
251,432 |
|
Non-cash gain on extinguishment of financial advisor fee payable |
|
|
(200,000 |
) |
|
|
|
|
Non-cash interest expense |
|
|
|
|
|
|
176,818 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
130,036 |
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
(56,772 |
) |
|
|
(5,838 |
) |
Accounts payable |
|
|
(23,655 |
) |
|
|
122,865 |
|
Deferred revenue |
|
|
(13,970 |
) |
|
|
|
|
Accrued expenses and other liabilities |
|
|
(115,265 |
) |
|
|
18,602 |
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(1,579,646 |
) |
|
|
(287,205 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(680 |
) |
|
|
|
|
Decrease in restricted cash |
|
|
|
|
|
|
501 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(680 |
) |
|
|
501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities: |
|
|
|
|
|
|
|
|
Proceeds from the sale of Series A-2 preferred stock, net of expenses |
|
|
|
|
|
|
99,576 |
|
Proceeds from the sale of common stock, net of expenses |
|
|
2,311,157 |
|
|
|
|
|
Principal payments for capital lease obligations |
|
|
(451 |
) |
|
|
|
|
Dividends paid in cash on Series A, A-1 and A-2 preferred stock |
|
|
|
|
|
|
(18 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
2,310,706 |
|
|
|
99,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents |
|
|
730,380 |
|
|
|
(187,146 |
) |
Cash and Cash Equivalents, beginning of period |
|
|
1,166,858 |
|
|
|
242,867 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, end of period |
|
$ |
1,897,238 |
|
|
$ |
55,721 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
Echo Therapeutics, Inc
Consolidated Statements of Cash Flows
Unaudited
|
|
|
|
|
|
|
|
|
|
|
Three Months ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
Supplemental Disclosure of Cash Flow Information and Non Cash Financing Transactions: |
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
1,089 |
|
|
$ |
816 |
|
|
|
|
|
|
|
|
Accretion of dividend on Series A, A-1 and A-2 Convertible Preferred Stock |
|
$ |
|
|
|
$ |
57,656 |
|
|
|
|
|
|
|
|
In-kind dividend paid on Series B Perpetual Preferred Stock |
|
$ |
27,859 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Derivative warrant liability reclassified from stockholders equity |
|
$ |
|
|
|
$ |
1,080,118 |
|
|
|
|
|
|
|
|
Senior Convertible Notes issued for accrued interest |
|
$ |
|
|
|
$ |
6,538 |
|
|
|
|
|
|
|
|
Reclassification of derivative liability to additional paid-in capital |
|
$ |
200,357 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Fair value of warrants issued to financial advisors as financing costs |
|
$ |
217,141 |
|
|
$ |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
7
Echo Therapeutics, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Period Ended March 31, 2010 (Unaudited)
(1) ORGANIZATION, BASIS OF PRESENTATION AND GOING CONCERN
Echo Therapeutics, Inc. is a transdermal medical device company with deep expertise in
advanced skin permeation technology that is initially focused on diabetes care and needle-free drug
delivery. Echo is developing its Prelude SkinPrep System (Prelude) as a platform technology to
allow for significantly enhanced and painless skin permeation that will enable two important
applications:
|
|
|
Analyte extraction, with the Symphony tCGM System (Symphony) for needle-free,
continuous glucose monitoring in hospital patients and diabetics as the first application. |
|
|
|
|
Needle-free drug delivery, with the delivery of lidocaine as the first application.
Additional applications for painless, needle-free delivery of drugs are planned. |
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.
The accompanying unaudited consolidated financial statements have been prepared in conformity
with generally accepted accounting principles in the United States (GAAP) consistent with those
applied in, and should be read in conjunction with, the Companys audited financial statements and
related footnotes for the year ended December 31, 2009 included in the Companys Annual Report on
Form 10-K as filed with the United States Securities and Exchange Commission (SEC) on March 31,
2010. The unaudited consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments, which are, in the opinion of management, necessary for a fair
presentation of the Companys financial position as of March 31, 2010 and its results of operations
and cash flows for the interim periods presented and are not necessarily indicative of results for
subsequent interim periods or for the full year. The interim financial statements do not include
all of the information and footnotes required by GAAP for complete financial statements and allowed
by the relevant SEC rules and regulations; however, the Company believes that its disclosures are
adequate to ensure that the information presented is not misleading.
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 March 31, 2010, the Company had cash of approximately $1,897,000,
a working capital deficit of approximately $1,085,000 and an accumulated deficit of approximately
$69,275,000. Although the Company has issued securities through senior promissory notes, secured
promissory notes and a series of private placements to raise capital in order to fund its
operations, it is not known whether the Company will be able to continue this practice or obtain
other types of financing to meet its cash operating expenses. This, in turn, raises substantial
doubt about the Companys ability to continue as a going concern. Management is currently pursuing
additional private equity financing and such financing is expected to be completed during 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) INTANGIBLE ASSETS
As of March 31, 2010 and December 31, 2009, intangible assets related to the acquisition
of assets from Durham Pharmaceuticals Ltd. in September 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
|
|
Estimated |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Life |
|
|
Cost |
|
|
Amortization |
|
|
Net |
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract related intangible asset: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cato Research discounted contract |
|
3 years |
|
$ |
355,000 |
|
|
$ |
300,761 |
|
|
$ |
54,239 |
|
|
$ |
83,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology related intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent 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 |
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
|
|
Estimated |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Life |
|
|
Cost |
|
|
Amortization |
|
|
Net |
|
|
Net |
|
Two (2) in-process Durhalieve-related
pharmaceutical products |
|
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 |
|
|
$ |
300,761 |
|
|
$ |
9,679,239 |
|
|
$ |
9,708,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The technology related intangible assets are being amortized on a straight line basis over
approximately 8 years beginning with the start of its useful life, which the Company has estimated
to be 2011, and the contract related intangible asset over approximately 3 years beginning with the
date of acquisition. Amortization expense was approximately $30,000 for each of the three months
ended March 31, 2010 and 2009, respectively, and is included in research and development in the
Statement of Operations.
(3) CAPITAL AND OPERATING LEASE COMMITMENTS
Capital lease obligation at March 31, 2010 and December 31, 2009 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2010 |
|
2009 |
Capital lease obligation |
|
|
9,670 |
|
|
|
10,121 |
|
Less current portion of capital lease obligation |
|
|
1,921 |
|
|
|
1,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligation, net of current portion |
|
$ |
7,749 |
|
|
$ |
8,247 |
|
|
|
|
Capital Lease In 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 March 31, 2010 was approximately
$1,600. During the three months ended March 31, 2010 and 2009, interest expense related to the
capital lease obligation was approximately $250 and none, respectively.
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 ending December 31, |
|
|
|
|
2010 |
|
$ |
139,000 |
|
2011 |
|
|
46,000 |
|
|
|
|
|
Total |
|
$ |
185,000 |
|
|
|
|
|
The Companys facilities lease expense was approximately $51,000 and $47,000 for the three
months ended March 31, 2010 and 2009, respectively.
(4) DERIVATIVE INSTRUMENTS
Derivative financial instruments are recognized as a liability on the consolidated balance
sheet and measured at fair value.
At March 31, 2010 and December 31, 2009, the Company had outstanding warrants to purchase
8,282,198 and 7,356,502 shares of its common stock, respectively. Included in these outstanding
warrants at March 31, 2010 are warrants to purchase 1,342,195 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 March 31, 2010 was approximately
$1,620,000 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 Gain (Loss). The change in the fair value of the derivative warrant liability
in the three months ended March 31, 2010 and 2009 was
approximately $296,000 and ($251,000), respectively, was recorded as a Derivative
Gain (Loss) in the Statements of Operations.
The primary underlying risk exposure pertaining to the warrants is the change in fair value of
the underlying common stock for each reporting period. For the three months ended March 31, 2010,
warrants with down round provisions to purchase 143,793 shares
9
were exercised which resulted in a reclassification to additional paid-in capital in the
amount of approximately $200,000.
(5) 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.
Level 1 Valuation is based on quoted prices in active markets for identical assets or
liabilities. Level 1 assets and liabilities generally include debt and equity securities that are
traded in an active exchange market. Valuations are obtained from readily available pricing sources
for market transactions involving identical assets or liabilities.
Level 2 Valuation is based on observable inputs other than Level 1 prices, such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data for substantially the
full term of the assets or liabilities. For example, Level 2 assets and liabilities may include
debt securities with quoted prices that are traded less frequently than exchange-traded instruments
or mortgage loans held for sale, for which the fair value is based on what the securitization
market is currently offering for mortgage loans with similar characteristics.
Level 3 Valuation is based on unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or liabilities. Level 3 assets
and liabilities include financial instruments whose value is determined using pricing models,
discounted cash flow methodologies, or similar techniques, as well as instruments for which the
determination of fair value requires significant management judgment or estimation. This category
generally includes certain asset-backed securities, certain private equity investments, residential
mortgage servicing rights, and long-term derivative contracts.
The following methods and assumptions were used by the Company in estimating fair value for
the warrants considered to be derivative instruments.
The fair value of warrants is calculated using the Black-Scholes option pricing model. This
option pricing model requires input of assumptions including the volatility of the Companys stock
price, the contractual term of the warrant and the risk-free interest rate.
Volatility is estimated at historical stock prices. The risk-free 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Fair Value |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative warrant liability |
|
$ |
|
|
|
$ |
1,620,351 |
|
|
$ |
|
|
|
$ |
1,620,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Fair Value |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative warrant liability |
|
$ |
|
|
|
$ |
2,116,696 |
|
|
$ |
|
|
|
$ |
2,116,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company may also be required, from time to time, to measure certain other financial assets
at fair value on a nonrecurring basis. These adjustments to fair value usually result from
application of lower-of-cost-or-market accounting or write-downs of individual assets. In the three
months ended March 31, 2010, there were no such other adjustments.
(6) PREFERRED STOCK
The Company is authorized to issue up to 40,000,000 shares of preferred stock with such
rights, preferences and privileges as are fixed by the Board of Directors.
10
Convertible Preferred Stock
The Company has authorized 2,636,363 shares, 2,000,000 shares and 4,400,000 shares of Series
A, Series A-1 and Series A-2 Convertible Preferred Stock, respectively. As of March 31, 2010 and
December 31, 2009, there were no shares issued and outstanding in these Series.
The Company has authorized 10,000 shares of Series C Preferred Stock (the Series C Stock),
of which 4,918.1 shares were issued and outstanding as of March 31, 2010 and December 31, 2009.
Series B Perpetual, Redeemable Preferred Stock
The Company has authorized 40,000 shares of non-convertible Series B Perpetual Preferred Stock
(the Series B Stock), of which 144.014 shares were issued and outstanding as of March 31, 2010,
and 141.2281 shares were issued and outstanding at December 31, 2009. In the three months ended
March 31, 2010, the Company paid in-kind dividends in the form of 2.7859 shares of Series B Stock
with a face value of approximately $28,000.
Series B Redemption Agreement 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 2009 financing and December 2009 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 2010 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
2010 financing.
(7) COMMON STOCK
The Company has authorized 100,000,000 shares of common stock, $0.01 par value per share at
March 31, 2010 and December 31, 2009 of which 29,053,245 and 27,045,792 shares were issued and
outstanding as of March 31, 2010 and December 31, 2009, respectively.
February 2010 Common Stock and Warrant 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 received 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 gross proceeds of approximately $2,455,000 in connection with
the February Financing.
Pursuant to the February Agreement, the Company issued an aggregate of 818,362 February
Warrants to the investors with a fair value of approximately $1,379,000. 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 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.
11
Exercise of Stock Purchase Warrants
In the three months ended March 31, 2010, investors effected cashless exercises of warrants to
purchase 143,793 shares which resulted in the issuance of 35,714 shares to the investors.
Issuance of Common Stock for Services
In January 2010, the Company issued 265,000 shares of its common stock with a fair value of
approximately $466,000 to two vendors in consideration for various consulting services. The fair
value of these common shares is charged to selling, general and administrative expenses. A total of
165,000 and 100,000 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 was 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.
Issuance of Restricted Stock for Services
In
January 2010, the Compensation Committee granted an aggregate of
10,000 shares of the Companys common stock with a fair value of
approximately $18,000 to a media consulting vendor pursuant to a
Restricted Stock Agreement under the Companys 2008
Plan (see Note 8). In the three months ended March 31, 2010, the
Company recorded $4,500 of selling, general and administrative expense
and approximately $13,500 of total unrecognized expense related to
this arrangement.
(8) 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 March 31, 2010, 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 March 31, 2010, 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 March 31, 2010, the maximum aggregate number of shares
that may be authorized for issuance under the 2003 Plan for all periods is 1,600,000. As of March
31, 2010, there were restricted shares of common stock and options to purchase an aggregate of
1,545,000 shares of common stock outstanding under the 2003 Plan and 42,000 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 stock to employees, consultants and
non-employee directors of the Company. As of March 31, 2010, the number of shares authorized for
issuance under the 2008 Plan was 2,700,000 shares. As of March 31, 2010, there were restricted
shares of common stock and options to purchase an aggregate of 1,894,750 shares of common stock
outstanding under the 2008 Plan and 805,250 shares available for future grants under the 2008 Plan.
Share-Based Compensation
For options and restricted stock issued and outstanding during the three months ended March
31, 2010 and 2009, the Company recorded additional paid-in capital and non-cash compensation
expense of approximately $60,000 and $398,000, respectively, each net of estimated forfeitures.
12
The fair value of each option award is estimated on the date of grant using the Black-Scholes
option pricing model that uses the assumptions noted in the following table. Expected volatilities
are based on historical volatility of the Companys common stock using historical periods
consistent with the expected term of the options. The Company uses historical data, as well as
subsequent events occurring prior to the issuance of the financial statements, to estimate option
exercise and employee termination within the valuation model. The expected term of options granted
under the Companys stock plans is based on the average of the contractual term (generally 10
years) and the vesting period (generally 24 to 42 months). The risk-free rate is based on the
yield of a U.S. Treasury security with a term consistent with the option. Restricted stock grants
are valued based on the closing market price for the Companys common stock on the grant date.
The assumptions used principally for options granted to employees and members of the Companys
Board of Directors in the three months ended March 31, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
Risk-free interest rate |
|
|
3.62 3.71 |
% |
|
|
2.71 2.89 |
% |
Expected dividend yield |
|
|
|
|
|
|
|
|
Expected term (employee / director grants) |
|
6.75 years |
|
6.75 years |
Forfeiture rate (excluding fully vested options) |
|
|
0% 33 |
% |
|
|
11% 33 |
% |
Expected volatility |
|
|
148% 151 |
% |
|
|
152.68 |
% |
A summary of option activity under the Companys stock plans and options granted to officers
of the Company outside any plan as of March 31, 2010 and changes during the three months then ended
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
Options |
|
Shares |
|
|
Price |
|
|
Term |
|
|
Value |
|
Outstanding at January 1, 2010 |
|
|
2,924,530 |
|
|
$ |
0.90 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
100,000 |
|
|
|
1.70 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2010 |
|
|
3,024,530 |
|
|
$ |
0.94 |
|
|
7.56 years |
|
$ |
2,470,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2010 |
|
|
2,783,885 |
|
|
$ |
0.81 |
|
|
7.57 years |
|
$ |
2,290,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of options granted during the three months ended
March 31, 2010 was $1.38 per share. Share-based compensation expense recognized in the three months
ended March 31, 2010 was approximately $46,000 for options granted in the three months ended March
31, 2010. Total share-based compensation expense recognized in the three months ended March 31,
2010 was approximately $60,000. As of March 31, 2010, there was approximately $767,000 of total
unrecognized compensation expense related to non-vested share-based option compensation
arrangements. Unrecognized share-based compensation of approximately
$600,000 related to certain
restricted stock grants to officers and employees that contain
performance conditions. At March 31, 2010, the Company cannot estimate
the timing of completion of these performance vesting requirements.
The remaining unrecognized compensation is expected to be recognized
over the next 12 months.
Restricted Stock Grants
As of March 31, 2010, the Company had outstanding restricted stock grants amounting to
2,293,094 shares at a weighted-average grant-date fair value of $1.23 per share. Of the outstanding
restricted stock grants, 567,094 shares have not been registered under the Securities Act. A
summary of the status of the Companys nonvested restricted stock grants as of March 31, 2010, and
changes during the three months ended March 31, 2010, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant-Date |
|
Nonvested Shares |
|
Shares |
|
|
Fair Value |
|
Nonvested at January 1, 2010 |
|
|
1,779,594 |
|
|
$ |
1.13 |
|
Granted |
|
|
10,000 |
|
|
|
1.80 |
|
Vested |
|
|
(2,500 |
) |
|
|
(1.80 |
) |
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2010 |
|
|
1,787,094 |
|
|
$ |
0.84 |
|
|
|
|
|
|
|
|
Vested at March 31, 2010 |
|
|
506,000 |
|
|
$ |
1.58 |
|
|
|
|
|
|
|
|
As
of March 31, 2010, there was approximately $1,750,000 of total
unrecognized compensation expense related to nonvested share-based restricted stock arrangements granted under the
Companys stock plans.
As of March 31, 2010, the Company cannot estimate the timing of
completion of performance vesting requirements included in these
restricted stock grant arrangements.
13
Grant of Stock Options to Consultant
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 100,000 shares of
Common Stock at an exercise price of $1.70 per share. The fair value of these stock options was
approximately $155,000 as of March 3, 2010. Under the terms of
the Agreement, one-third vests upon execution of the agreement, one-third vests upon execution of
a term sheet with a potential
corporate partner and one-third vests upon execution of a partnership arrangement. In the three
months ended March 31, 2010, the Company recorded approximately $46,000 of selling, general and
administrative expense and approximately $109,000 of total unrecognized expense related to this
arrangement.
(9) WARRANTS
At March 31, 2010, the Company had the following outstanding warrants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
Shares |
|
|
Exercise |
|
|
Date of |
|
|
|
Exercisable |
|
|
Price |
|
|
Expiration |
|
Granted to investors and placement agent in private placement. |
|
|
476,830 |
|
|
$ |
5.80 |
|
|
|
3/7/2011 |
|
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 |
|
|
$ |
1.92 |
|
|
|
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 |
|
|
641,227 |
|
|
$ |
1.61 |
|
|
|
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 |
|
Granted to investors in private placement |
|
|
811,987 |
|
|
$ |
2.25 |
|
|
|
2/9/2015 |
|
Granted to placement agents in private placement |
|
|
128,899 |
|
|
$ |
2.25 |
|
|
|
2/9/2015 |
|
Granted to investor in private placement |
|
|
6,375 |
|
|
$ |
2.25 |
|
|
|
3/18/2015 |
|
Granted to financial investment advisor |
|
|
100,000 |
|
|
$ |
1.50 |
|
|
|
2/10/2013 |
|
Granted to financial investment advisor |
|
|
20,000 |
|
|
$ |
2.00 |
|
|
|
3/3/2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
8,282,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average exercise price |
|
|
|
|
|
$ |
1.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average duration in years |
|
|
|
|
|
|
|
|
|
3.77 years |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Warrants to Service Providers
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.
The warrants are immediately exercisable and expire no later than three
(3) years from the date of issuance.
In the three months ended
March 31, 2010, the Company recorded approximately $5,000 of selling, general and administrative
expense and approximately $22,000 of total unrecognized expense related to this arrangement.
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 was charged to selling, general and administrative expenses during the three months
ended March 31, 2010.
14
(10) LICENSING REVENUE
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. The
Company recognizes the upfront, nonrefundable payment as revenue on a straight-line basis over the
contractual or estimated performance period. During the three months ended March 31, 2010, the
estimated date of performance under the Ferndale License was extended a total of six months resulting in a
reduction in Licensing revenue for the period of $9,000. Approximately $355,000 is recognizable
over the next 12 months and is shown as current deferred revenue. There was no licensing revenue or
deferred revenue in the three months ended March 31, 2009.
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. The Company recognizes the upfront, nonrefundable payment as revenue on a straight-line
basis over the contractual or estimated performance period. Accordingly, the Company determined
that approximately $23,000 of the non-refundable license revenue was recognizable in the three
months ended March 31, 2010. During the three months ended March 31, 2010, the estimated date of
performance under the Handok License was extended a total of six months. Approximately $196,000 is
recognizable over the next 12 months and is shown as current deferred revenue. The approximately
$148,000 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 three months ended March 31,
2009.
(11) PLACEMENT AGENT AGREEMENTS
In connection with the February Financing, the Company retained Boenning & Scattergood and
Burnham Hill Partners LLC (BHP) 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. In connection with the February
Financing, the Company has issued warrants to the Placement Agents to purchase 128,899 shares of
common stock in the aggregate with a fair value of approximately
$217,000 and has paid the Placement Agents in the aggregate fees amounting to
approximately $135,000.
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
placement agent 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 September 30, 2009, the Company and BHP entered into an letter agreement (the Letter)
extending the due date of a $200,000 placement fee (the Fee) payable by the Company to BHP to in
connection with placement agent services provided by BHP pursuant to an engagement letter between
the parties dated June 30, 2009. The Fee was originally due upon the earlier of (i) the Company
having a net cash balance in excess of $2,000,000 or (ii) October 1, 2009. 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 LLC any fees pursuant to any and all previous agreements
15
between BHP LLC and the Company. Accordingly, the Fee was waived and the Company recorded a
gain on extinguishment of financing fee payable of $200,000 in March 2010.
(12) SUBSEQUENT EVENTS
As of April 12, 2010, the Company entered into an agreement pursuant to which it was obligated
to issue 30,000 shares of its common stock to a vendor or his designee in consideration for
investor relations services. The issuance of the shares was made in a transaction not involving any
public offering pursuant to an exemption from registration under Section 4(2) of the Securities
Act. The stock has a fair value of $48,000 and will be recognized in 2010 as investor relations
expense.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of our consolidated financial condition and results of operations
should be read in conjunction with the financial statements and the related notes thereto included
in the Companys Form 10-K for the year ended December 31, 2009 and elsewhere in this Form 10-Q.
The matters discussed herein contain forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended (the Exchange Act), and Section 27A of the
Securities Act of 1933, as amended, which involve risks and uncertainties. All statements other
than statements of historical information provided herein may be deemed to be forward-looking
statements. Without limiting the foregoing, the words believes, anticipates, plans, expects
and similar expressions are intended to identify forward-looking statements. The factors that could
cause actual future results to differ materially from current expectations include, but are not
limited to, risks related to regulatory approvals and the success of our ongoing studies, including
the efficacy of Symphony and Prelude, the failure of future development and preliminary marketing
efforts related to Symphony and Prelude, risks and uncertainties relating to our ability to
develop, market and sell diagnostic products based on our skin permeation platform technologies,
the availability of substantial additional equity or debt capital to support our research,
development and product commercialization activities, the success of our research, development, and
regulatory approval, marketing and distribution plans and strategies, including those plans and
strategies related to Symphony and Prelude and those discussed in Risk Factors in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2009 and elsewhere in this report and
the risks discussed in our other filings with the SEC. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect managements analysis, judgment, belief
or expectation only as of the date hereof. We undertake no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after the date hereof.
Overview
The accompanying consolidated financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of liabilities in the
normal course of business. As of March 31, 2010, we had cash of approximately $1,897,000, a working
capital deficit of approximately $1,085,000 and an accumulated deficit of approximately
$69,275,000. Through March 31, 2010, we have not been able to generate sufficient revenues from
operations to cover 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. Additional financing is
necessary to fund operations for the remainder of 2010 and beyond. We are currently pursuing
additional private equity financing, and such financing is planned to be completed during 2010;
however, no assurances can be given as to the success of these plans. The financial statements do
not include any adjustments that might result from the outcome of these uncertainties.
Operating Plan
We are principally involved with product development, pursuing contract manufacturing,
supporting our product licensees and planning clinical studies for our Symphony tCGM System and our
Prelude SkinPrep System. Symphony is a next-generation, non-invasive (needle-free), wireless
transdermal continuous glucose monitoring (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 Prelude, 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 in prior
years 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
16
product development, clinical development programs and to obtain regulatory approval for
Symphony, we need to raise substantial additional financing.
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 lidocaine cream for fast-acting, local dermal anesthesia prior to a
wide-range of needle-based medical procedures. Currently, the Prelude System is being
tested in connection with the delivery of lidocaine in a clinical trial.
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 candidates 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 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 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. There have been no changes in our critical accounting policies and estimates as filed
with the SEC on March 31, 2010.
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.
17
Revenue
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:
|
|
|
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, 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 our intellectual
property upon the signing of a license agreement. We believe that these payments generally are not
separable from the payments we receive for providing research and development services because the
license does not have stand-alone value 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 have not had any Other Revenue
during the three months ended March 31, 2010.
We believe that full consideration has been given to all relevant circumstances that we may be
subject to, and the consolidated financial statements accurately reflect our best estimate of the
results of operations, financial position and cash flows for the periods presented.
Results of Operations
As of March 31, 2010, we had ten (10) employees and used the services of three (3) independent
contractors. Of this group of employees and contractors, seven (7) 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. Further, 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 engineering, clinical research and testing, regulatory and
quality assurance.
As of March 31, 2009 we had eleven (11) employees and used the services of two (2) independent
contractors.
We conduct our operations in leased facilities pursuant to a lease that expires in 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 and software and
employee desk top systems). Except for the purchase (possibly through capital lease financing) of
tooling, 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.
18
Comparison of the three months ended March 31, 2010 and 2009
Licensing Revenue We signed two licensing agreements, each with a minimum term of ten
years, during 2009 that required up-front non-refundable license payments. The total up-front
non-refundable license payments received in cash totaled $1,250,000. We are recognizing the
upfront, nonrefundable payments as revenue on a straight-line basis over our contractual or
estimated performance period. Accordingly, we determined that approximately $14,000 of the
non-refundable license revenue was recognizable in the three months ended March 31, 2010.
Approximately $552,000 is recognizable over the next 12 months and is shown as current deferred
revenue and approximately $148,000 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
three months ended March 31, 2009.
Research and Development Expenses Research and development expenses increased by
approximately $825,000 to approximately $1,113,000 for the three months ended March 31, 2010 from
approximately $288,000 for the three months ended March 31, 2009. Research and development expenses
increased primarily as a result of our increased product development activity for Symphony and
Prelude, primarily due to increases in outside contract engineering and manufacturing costs.
During the three months ended March 31, 2009, our operations were at less than full capacity due to
the pursuit of necessary funding for normal operation levels. Research and development expenses
amounted to approximately 47% and 33% of total operating expenses during the three months ended
March 31, 2010 and 2009, respectively, and included product development expenses for Prelude and
Symphony, activities with contract engineering and manufacturing firms relating principally to the
Prelude System and regulatory consulting expenses related to Symphony and Prelude. We used the
services of several engineering and product development firms during the three months ended March
31, 2009 for the purposes of developing Symphony and Prelude to be used for obtaining marketing
approval from the FDA.
Selling, General and Administrative Expenses Selling, general and administrative expenses
increased by approximately $705,000 to approximately $1,278,000 for the three months ended March
31, 2010 from approximately $573,000 for the three months ended March 31, 2009. The net increase
was due to the combination of a decrease of approximately $338,000 in share-based compensation
expenses from approximately $398,000 in 2009 to approximately $60,000 in 2010, an increase of
approximately $113,000 in salaries and payroll taxes, an increase of approximately $732,000
($693,000 relates to non-cash expenses) in outside investor relations services, an increase in
legal expenses of approximately of $10,000, an increase of
approximately $113,000 in non-cash charitable
contributions and an increase of approximately $35,000 in corporate excise and payroll taxes, and a
net increase of approximately $39,000 in other expenses. Selling, general and administrative
expenses represented 53% and 67% of total operating expenses during the three months ended March
31, 2010 and 2009, 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 $1,000 for the three months ended
March 31, 2010 compared to effectively no interest income for the three months ended March 31,
2009, an increase of approximately $1,000. The increase in interest income was attributable to our
higher average amount of cash equivalents on hand during the three months ended March 31, 2010
compared to the same period in 2009.
Interest Expense Interest expense was approximately $1,000 for the three months ended March
31, 2010, compared to interest expense of approximately $179,000 for the same period in 2009, a
decrease of $178,000. The decrease in interest expense was due to the payment or conversion to
equity securities of debt obligations during 2009. The approximate net decrease in interest expense
for each note payable obligation is shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
March 31, |
|
March 31, |
|
Increase |
Note Payable Obligation |
|
2010 |
|
2009 |
|
(Decrease) |
Senior promissory bridge notes |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
) |
Senior convertible notes |
|
|
|
|
|
|
16,000 |
|
|
|
(16,000 |
) |
2008 Senior secured notes |
|
|
|
|
|
|
162,000 |
|
|
|
(162,000 |
) |
Other short-term financing |
|
|
1,000 |
|
|
|
1,000 |
|
|
|
|
) |
|
|
|
Total notes payable |
|
$ |
1,000 |
|
|
$ |
179,000 |
|
|
$ |
(178,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash Interest included above |
|
None |
|
$ |
177,000 |
|
|
$ |
(177,000 |
) |
|
|
|
19
We entered into a series of senior secured notes with a single investor during 2008 borrowing
up to an approximate amount of $2,209,000 (including interest). These senior secured notes were
paid off in June 2009. For the three months ended March 31, 2009, we incurred non-cash interest
expense of approximately $161,000 related primarily to the amortization of discounts on notes
payable, the amortization of deferred financing costs and interest satisfied through the issuance
of promissory notes.
Derivative
Gain (Loss) At March 31, 2010, we had outstanding warrants to purchase 8,282,198 shares
of our common stock. Included in these warrants are outstanding warrants to purchase 1,342,195
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 March 31,
2010 was approximately $1,620,000 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 Derivative Gain (Loss). The primary underlying risk exposure
pertaining to the warrants is the change in fair value of the underlying common stock. The
Derivative gain on warrants subject to down round provisions for the three months ended March 31,
2010 amounted to approximately $296,000. During the three months ended March 31, 2010, warrants to
purchase 143,793 shares of common stock were exercised which resulted in a reclassification to
additional paid-in capital in the amount of approximately $200,000. The Derivative loss on
warrants subject to down round provisions for the three months ended March 31, 2009 amounted to
approximately $251,000.
Gain on Extinguishment of Financial Advisory Fee Payable On September 30, 2009, we entered
into the Letter with BHP extending the due date of the Fee payable by us to BHP in connection
with placement agent services provided by BHP pursuant to an engagement letter dated June 30, 2009.
The Fee was originally due upon the earlier of (i) our net cash balance exceeding $2,000,000 or
(ii) October 1, 2009. The Letter provides that the Fee is due and payable by us upon the earlier
of (i) our net cash balance exceeding $2,000,000 or (ii) March 31, 2010. On March 16, 2010, BHP
agreed that we do not owe BHP any fees pursuant to any and all previous agreements between BHP and
us. Accordingly, the Fee was waived and we recorded a gain on extinguishment of financing fee
payable of $200,000 in March 2010.
Net Loss As a result of the factors described above, we had a net loss of approximately
$1,882,000 for the three months ended March 31, 2010 compared to approximately $1,291,000 for the
three months ended March 31, 2009.
Liquidity and Capital Resources
We have financed our operations since inception primarily through private sales of our common
stock and preferred stock, the issuance of convertible promissory notes and secured promissory
notes, the issuance of intellectual property and product licenses and cash received in connection
with exercises of common stock purchase options and warrants. As of March 31, 2010, we had
approximately $1,897,000 of cash and cash equivalents, with no other short term investments.
Net cash used in operating activities was approximately $1,580,000 for the three months ended
March 31, 2010. The use of cash in operating activities was primarily attributable to the net loss
of approximately $1,882,000 for the three months ended March 31, 2010. The net loss was offset by
non-cash expenses of approximately $38,000 for depreciation and amortization, approximately $60,000
for share-based compensation expense, approximately $620,000 for fair value of warrants and common
stock provided to outside service providers, approximately $46,000 for fair value of options
provided to outside service providers, and approximately $113,000 for fair value of common stock
granted as a charitable contribution. The net loss was positively impacted by a non-cash gain on
extinguishment of financial advisory fee payable in the amount of $200,000 and a non-cash gain of
approximately $296,000 related to a fair value adjustment to the derivative liability balance. Net
cash was used due to a decrease in accounts payable of approximately $24,000, a decrease in
deferred revenue of approximately $14,000, a decrease in accrued expenses and other liabilities of
approximately $115,000 and an increase in prepaid expenses and other current assets in the amount of
$57,000. A decrease in accounts receivable provided approximately $130,000 of cash.
Net cash used by investing activities was approximately $1,000 for the three months ended
March 31, 2010 and related to the purchase office equipment.
Net cash provided by financing activities was approximately $2,311,000 for the three months
ended March 31, 2010, primarily attributable to approximately $2,311,000 (net of cash financing
costs) from the sale of common stock and warrants in February 2010 less approximately $451 for a
capital lease payment.
At
March 31, 2010, we had outstanding warrants to purchase 8,282,198 shares of common stock at
exercise prices ranging from $0.50 to $5.80.
20
As of May 7, 2010, we had cash and cash equivalents of approximately $958,000.
We continue to aggressively pursue additional financing from existing relationships (prior
shareholders, investors and lenders) and from new investors. We have engaged investment banking
firms to assist us with these efforts.
As of February 4, 2010, we entered into a Common Stock and Warrant Purchase Agreement (the
February Agreement) with certain strategic institutional and accredited investors in connection
with a private placement (the February Financing) of shares of our 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).
We received gross proceeds of approximately $2,455,000 in connection with the February
Financing.
Pursuant to the February Agreement, we issued an aggregate of 818,362 February Warrants to the
investors with a fair value of approximately $1,379,000. 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 applicable state securities laws. We are 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.
We manage our costs aggressively and have increased our operating efficiencies while advancing
our product development and clinical programs, thereby maximizing the time available to obtain
additional financing. In order to continue to advance our product development, clinical programs,
pursuit of FDA approval for Symphony and financing activities, and support of our intellectual
property and product licensing arrangements, we have seen an increase in our monthly operating
costs associated with salaries and benefits, product development and contract manufacturing, legal
costs (including costs associated with intellectual property monitoring) and other working capital
costs. In order to fund these activities and achieve our business objectives, we plan to rely
primarily on raising equity capital. Financing delays in the future could cause us to 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 current economic conditions have had a significant impact on our ability to raise
necessary capital to fund our product development and clinical programs in accordance with our
original projected level of operations. We believe that uncertainties in the financial markets have
had an impact on the availability of financing for us. Our product development, clinical programs
and FDA meetings and communication plans 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 our specialty pharmaceutical candidate 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 our product research,
development and clinical programs, commercialize our product candidates and achieve profitability.
Our ability to fund our future operating requirements will depend on many factors, including the
following:
|
|
|
our ability to obtain funding from third parties, including any future collaborative
partners, on reasonable terms; |
|
|
|
|
our progress on research and development programs; |
|
|
|
|
the time and costs required to gain regulatory approvals; |
|
|
|
|
the costs of manufacturing, marketing and distributing our products, if successfully
developed and approved; |
21
|
|
|
the costs of filing, prosecuting and enforcing patents, patent applications, patent
claims and trademarks; |
|
|
|
|
the status of competing products; and |
|
|
|
|
the market acceptance and third-party reimbursement of our products, if successfully
developed and approved. |
We conduct our operations in leased facilities pursuant to a lease that expires in 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 and software and
employee desk top systems). Except for the purchase (possibly through capital lease financing) of
tooling, 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.
Item 4T. Controls and Procedures.
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that
evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our
disclosure controls and procedures as of the end of the period covered by this report were
effective in ensuring that information required to be disclosed by us in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms and that the information required to be disclosed by
us in such reports is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rule
13a-15(f) of the Exchange Act) that occurred during the fiscal quarter to which this report relates
that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART IIOTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On January 21, 2010, we issued 60,000 shares of common stock as a charitable contribution. 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.
Item 6. Exhibits.
The Exhibits listed in the Exhibit Index immediately preceding such Exhibits are filed with or
incorporated by reference in this report.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
ECHO THERAPEUTICS, INC.
|
|
Date: May 17, 2010 |
|
|
|
By: |
/s/ Patrick T. Mooney, M.D.
|
|
|
|
Patrick T. Mooney, M.D. |
|
|
|
Chief Executive Officer and Chairman of the Board |
|
|
|
|
|
|
By: |
/s/ Harry G. Mitchell, CPA
|
|
|
|
Harry G. Mitchell, CPA |
|
|
|
Chief Operating Officer, Chief Financial Officer and Treasurer |
|
23
EXHIBIT INDEX
|
|
|
|
|
Exhibit No. |
|
Item. |
|
10.1 |
|
|
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 of the Companys
Current Report on Form 8-K dated February 4, 2010. |
|
|
|
|
|
|
10.2 |
|
|
Form of Common Stock Purchase Warrant incorporated herein by reference to Exhibit 4.1 of the Companys
Current Report on Form 8-K dated February 4, 2010. |
|
|
|
|
|
|
31.1 |
|
|
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
31.2 |
|
|
Certification of the Chief Operating Officer, Chief Financial Officer and Treasurer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.1 |
|
|
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.2 |
|
|
Certification of the Chief Operating Officer, Chief Financial Officer and Treasurer pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
24