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EX-31.1 - EXHIBIT 31.1 - Echo Therapeutics, Inc.ex31-1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013.

or
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________.
 
Commission File Number: 000-23017

 
 
ECHO THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
41-1649949
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)

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

(215) 717-4100
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]  No [   ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X]  No [   ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [   ]
Accelerated filer [X]
Non-accelerated filer [   ]
Smaller reporting company [   ]
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [   ]  No [X]
 
As of May 9, 2013, 60,300,669 shares of the registrant’s Common Stock, $0.01 par value, were issued and outstanding.
 
ECHO THERAPEUTICS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2013
 
TABLE OF CONTENTS
 

 
PART I - FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
ECHO THERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEETS
   
March 31,
2013
   
December 31, 2012
 
   
(Unaudited)
       
ASSETS
 
Current Assets:
           
Cash and cash equivalents
  $ 5,170,251     $ 3,747,210  
Cash restricted pursuant to letters of credit
    657,463       407,463  
Deferred financing costs, current portion
    968,004       968,004  
Prepaid expenses and other current assets
    231,171       75,626  
Total current assets
    7,026,889       5,198,303  
                 
Property and Equipment, at cost:
               
Computer equipment
    293,927       367,854  
Office and laboratory equipment (including assets under capitalized leases)
    668,094       732,296  
Furniture and fixtures
    734,772       728,269  
Manufacturing equipment
    75,993       156,435  
Leasehold improvements
    853,416       818,939  
      2,626,202       2,803,793  
Less-Accumulated depreciation and amortization
    (947,738 )     (1,165,398 )
    Net property and equipment (including assets under capitalized leases)
    1,678,464       1,638,395  
                 
Other Assets:
               
Restricted cash
    9,740       9,740  
Intangible assets, net of accumulated amortization
    9,625,000       9,625,000  
Deferred financing costs, net of current portion
    3,307,327       3,549,328  
Other assets
    826       826  
Total other assets
    12,942,893       13,184,894  
Total assets
  $ 21,648,246     $ 20,021,592  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current Liabilities:
               
Accounts payable
  $ 1,499,294     $ 2,319,219  
Deferred revenue from licensing arrangements
    67,671       90,228  
Capital lease obligation, current portion
    2,591       2,527  
Derivative warrant liability
    3,904,155       5,585,141  
Accrued expenses and other liabilities
    1,759,537       1,581,448  
Total current liabilities
    7,233,248       9,578,563  
Capital lease obligation, net of current portion
    689       1,361  
Note payable, net of discount
          120,834  
Deferred revenue from licensing arrangements, net of current portion
    90,228       90,228  
Total liabilities
    7,324,165       9,790,986  
                 
Commitments
               
                 
Stockholders’ Equity:
               
Convertible Preferred Stock:
               
Series C, $0.01 par value, authorized 10,000 shares, issued and outstanding 9,974.185 shares at March 31, 2013 and December 31, 2012
    100       100  
Series D, $0.01 par value, authorized 3,600,000 shares, issued and outstanding 3,006,000 shares at March 31, 2013 and December 31, 2012 (preference in liquidation of $3,006,000)
    30,060       30,060  
Common Stock, $0.01 par value, authorized 150,000,000 shares, issued and outstanding 60,244,669 and 44,373,461 shares at March 31, 2013 and December 31, 2012, respectively
    602,449       443,737  
Additional paid-in capital
    114,581,812       103,658,724  
Accumulated deficit
    (100,890,340 )     (93,902,015 )
Total stockholders’ equity
    14,324,081       10,230,606  
Total liabilities and stockholders’ equity
  $ 21,648,246     $ 20,021,592  
 
The accompanying notes are an integral part of these consolidated financial statements.

ECHO THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
   
For the Three Months Ended
March 31,
 
 
 
2013
   
2012
 
Licensing revenue
  $ 22,557     $ 30,927  
Total revenues
    22,557       30,927  
                 
Operating Expenses:
               
Research and development
    3,219,723       1,391,645  
Selling, general and administrative
    2,299,447       1,859,404  
Total operating expenses
    5,519,170       3,251,049  
                 
Loss from operations
    (5,496,613 )     (3,220,122 )
                 
Other Income (Expense):
               
Interest income
    1,083       2,959  
Interest expense
    (3,173,781 )     (150 )
Gain on revaluation of derivative warrant liability
    1,680,986       231,543  
Other income (expense), net
    (1,491,712 )     234,352  
                 
Net loss
  $ (6,988,325 )   $ (2,985,770 )
                 
Net loss per common share, basic and diluted
  $ (0.13 )   $ (0.08 )
                 
Basic and diluted weighted average common shares outstanding
    53,734,767       38,742,976  

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


ECHO THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
For the Three Months Ended
March 31,
 
 
 
2013
   
2012
 
Cash Flows From Operating Activities:
           
Net loss
  $ (6,988,325 )   $ (2,985,770 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    90,486       20,409  
Share-based compensation, net
    362,956       200,064  
Fair value of common stock issued for services
    92,745       22,800  
    Gain on revaluation of derivative warrant liability 
    (1,680,986 )     (231,543 )
    Amortization of discount on note payable
    2,879,166        
    Amortization of non-cash deferred financing costs
    242,001        
Changes in assets and liabilities:
               
Accounts receivable
          37,065  
Prepaid expenses and other current assets
    (155,545 )     (43,416 )
Deposits and other assets
          9,749  
Accounts payable
    (819,925 )     271,360  
Deferred revenue from licensing arrangements
    (22,557 )     (30,927 )
Accrued expenses and other liabilities
    178,089       (289,118 )
Net cash used in operating activities
    (5,821,895 )     (3,019,327 )
                 
Cash Flows from Investing Activities:
               
Purchase of furniture, equipment and leasehold improvements
    (130,555 )     (73,227 )
Increase in restricted cash
    (250,000 )      
Net cash used in investing activities
    (380,555 )     (73,227 )
                 
Cash Flows From Financing Activities:
               
Repayment of Platinum note payable
    (3,000,000 )      
Proceeds from issuance of common stock, net of expenses
    10,626,099       6,667  
Principal payments for capital lease obligations
    (608 )     (551 )
Proceeds from exercise of stock options
          1,080  
Net cash provided by financing activities
    7,625,491       7,196  
                 
Net increase (decrease) in cash and cash equivalents
    1,423,041       (3,085,358 )
Cash and cash equivalents, beginning of period
    3,747,210       8,995,571  
Cash and cash equivalents, end of period
  $ 5,170,251     $ 5,910,213  

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


Echo Therapeutics, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
 
Supplemental Disclosure of Cash Flow Information and Non-Cash Financing Transactions:
     
 
 
For the Three Months Ended
March 31,
 
 
 
2013
   
2012
 
             
Cash paid for interest
  $ 113,458     $ 150  
Reduction in fair value of common stock issued in connection with settlement agreement
  $     $ (82,000 )

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


Echo Therapeutics, Inc.
Notes To Consolidated Financial Statements
Quarter Ended March 31, 2013 (Unaudited)
 
(1)
ORGANIZATION AND BASIS OF PRESENTATION
 
    We are a medical device company with expertise in advanced skin permeation technology.  We are developing our Symphony® CGM System (“Symphony”) as a non-invasive, wireless continuous glucose monitoring (“CGM”) system for use in hospital critical care units and for people with diabetes.  The Prelude® SkinPrep System (“Prelude”), a component of our Symphony CGM System, allows for enhanced skin permeation that will enable extraction of analytes such as glucose.  Prelude’s platform skin preparation technology also allows for needle-free, transdermal drug delivery. Additional applications for needle-free analyte extraction and topical and systemic drug delivery are planned.
 
    The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Sontra Medical, Inc., a Delaware corporation. All significant intercompany balances and transactions have been eliminated in consolidation.  These financial statements have been prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States consistent with those applied in, and should be read in conjunction with, the Company’s audited consolidated financial statements and related footnotes for the year ended December 31, 2012 included in the Company’s Annual Report on Form 10-K as filed with the United States Securities and Exchange Commission (“SEC”) on March 18, 2013. These financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the Company’s financial position as of March 31, 2013 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. These interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and allowed by the relevant SEC rules and regulations; however, the Company believes that its disclosures are adequate to ensure that the information presented is not misleading. Certain amounts in prior periods have been reclassified to conform to current presentation.
 
Liquidity and Management's Plans
 
    The accompanying consolidated financial statements have been prepared on a basis assuming that the Company is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  As of March 31, 2013, the Company had cash of approximately $5,170,000, a working capital deficit of approximately $206,000, and an accumulated deficit of approximately $100,890,000.  The Company continues to incur recurring losses from operations.  The Company will require additional capital to fund our product development, research, manufacturing and clinical programs in accordance with our current planned operations.  Management intends to pursue additional financing to fund these operations and the Company has funded its operations in the past primarily through debt and equity issuances.  Management believes that it will be successful in meeting the milestones required under their current financing arrangement and/or raising additional capital.  No assurances can be given that additional capital will be available on terms acceptable to the Company.  The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

(2)      CASH
 
Cash and Cash Equivalents
 
    As of March 31, 2013, the Company held approximately $5,170,000 in cash and cash equivalents. The Company’s cash equivalents consist solely of bank money market funds.  The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits.  The Company has never experienced any losses related to these balances.
 
Restricted Cash
 
    As of March 31, 2013, restricted cash consists of two $250,000 letters of credit issued in favor of one of the Company’s key product development vendors and a $157,463 letter of credit issued in favor of a landlord.  As of December 31, 2012, restricted cash consists of one $250,000 letter of credit issued in favor of one of the Company’s key product development vendors and a $157,463 letter of credit issued in favor of a landlord.  Non-current restricted cash represents a security deposit on the Company’s leased offices.  
 
 
(3)     INTANGIBLE ASSETS
 
    The Company’s intangible assets are related to the acquisition of assets from Durham Pharmaceuticals Ltd. in 2007.  As of March 31, 2013 and 2012, intangible assets related to this acquisition are summarized as follows:

           
2013
   
2012
 
 
Estimated
       
Accumulated
             
 
Life
 
Cost
   
Amortization
   
Net
   
Net
 
Contract related intangible asset:
                         
Cato Research discounted contract
3 years
  $ 355,000     $ 355,000     $     $  
Technology related intangible assets:
                                 
Patents for the AzoneTS-based product candidates and formulation
5.5 years
    1,305,000             1,305,000       1,305,000  
Drug Master Files containing formulation, clinical and safety documentation used by the FDA
5.5 years
    1,500,000             1,500,000       1,500,000  
In-process pharmaceutical products for 2 indications
5.5 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, net
    $ 9,980,000     $ 355,000     $ 9,625,000     $ 9,625,000  
 
    Intangible assets related to technology are expected to be amortized on a straight-line basis over the period ending 2019, when the underlying patents expire, and will commence upon revenue generation which the Company estimates may occur as early as the middle of 2014.  The Cato Research contract related to this intangible asset was amortized over a three year period, which ended in 2010.
 
    Estimated amortization expense for each of the next five calendar years is as follows:
 
 
 
Estimated Amortization Expense
 
2013
  $  
2014
    875,000  
2015
    1,750,000  
2016
    1,750,000  
2017
    1,750,000  

(4)      OPERATING LEASE COMMITMENTS
 
    The Company leases approximately 37,000 square feet of manufacturing, laboratory and office space in a single-story building located in Franklin, Massachusetts under a lease expiring October 31, 2017.
 
    The Company also leases approximately 7,900 square feet of corporate office space in a multi-story building located in Philadelphia, Pennsylvania under a lease expiring May 31, 2017.


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

   
Franklin
   
Philadelphia
   
Total
 
For the period ending March 31,
                 
2013
  $ 319,000     $ 138,000     $ 457,000  
2014
    434,000       187,000       621,000  
2015
    444,000       192,000       636,000  
2016
    454,000       196,000       650,000  
2017
    382,000       82,000       464,000  
Total
  $ 2,033,000     $ 795,000     $ 2,828,000  
 
    The Company’s facilities lease expense, including accruals for lease incentives, was approximately $290,000 and $77,000 for the three months ended March 31, 2013 and 2012, respectively.

(5)      DERIVATIVE WARRANT LIABILITY
 
    At March 31, 2013 and December 31, 2012, the Company had outstanding warrants to purchase 10,504,270 and 12,540,040 shares of its Common Stock, respectively. Included in these outstanding warrants at March 31, 2013 and December 31, 2012 are warrants to purchase 7,000,000 and 7,360,153 shares, respectively, that are considered to be derivative financial instruments because the warrant agreements contain “down round” provisions whereby the number of shares covered by the warrants is subject to change in the event of certain future dilutive stock issuances. The fair value of these derivative instruments at March 31, 2013 and December 31, 2012 was approximately $3,904,000 and $5,585,000, respectively, and is included in Derivative Warrant Liability, a current liability, in the Consolidated Balance Sheet. Changes in fair value of the derivative financial instruments are recognized in the Consolidated Statement of Operations as a Gain on Revaluation of Derivative Warrant Liability. The Gain on Revaluation of Derivative Warrant Liability for the three months ended March 31, 2013 and 2012 was approximately $1,681,000 and $232,000, respectively.
 
    The Derivative Warrant Liability represents the risk exposure pertaining to the warrants and is based on the fair value of the underlying common stock and the Gain on Revaluation of Derivative Warrant Liability is a result of the change in that fair value.  For the three months ended March 31, 2013 and 2012, no derivative warrants were exercised and 451,636 warrants expired.
 
    The table below presents the changes in the Level 3 Derivative Warrant Liability measured for the three months ended March 31, 2013 and 2012:

   
2013
   
2012
 
Derivative Warrant Liability as of January 1
  $ 5,585,141     $ 1,035,337  
Total unrealized losses included in net loss (1) 
    741,682        
Total unrealized gains included in net loss (1) 
    (2,270,000 )     (231,543 )
Total realized gains included in net loss (1) 
    (152,668 )      
Derivative Warrant Liability as of March 31
  $ 3,904,155     $ 803,794  
                 
(1) Included in Gain on Revaluation of Derivative Warrant Liability in the Consolidated Statement of Operations.
 

(6)      PREFERRED STOCK
 
    The Company is authorized to issue up to 40,000,000 shares of preferred stock with such rights, preferences and privileges as are determined by the Board of Directors.
 
Series C Convertible Preferred Stock
 
    The Company has authorized 10,000 shares of Series C Preferred Stock (the “Series C Stock”), of which 9,974.185 shares were issued and outstanding as of March 31, 2013 and December 31, 2012.
 
Series D Convertible Preferred Stock
 
    The Company has authorized 3,600,000 shares of Series D Preferred Stock (the “Series D Stock”), of which 3,006,000 shares were issued and outstanding as of March 31, 2013 and December 31, 2012.

(7)      COMMON STOCK
 
    The Company has authorized 150,000,000 shares of Common Stock, of which 60,244,669 and 44,373,461 shares were issued and outstanding as of March 31, 2013 and December 31, 2012, respectively.

January 2013 Financing
 
    On January 31, 2013 and February 1, 2013, the Company entered into underwriting agreements (collectively, the “Underwriting Agreements”) with Aegis Capital Corp., as a representative of both underwriters (collectively, the “Underwriters”), with respect to the issuance and sale in an underwritten public offering by the Company of an aggregate 15,678,333 shares of the Company’s Common Stock (including 2,045,000 shares sold pursuant to the over-allotment option), at a price to the public of $0.75 per share.
 
    The net proceeds to the Company, after deducting the underwriting discount and other offering expenses payable by the Company, from the sale of 15,678,333 shares in the offering were approximately $10,626,000.  Subsequent to the offering, the Company used a portion of the net proceeds of the offering to pay off the Promissory Note issued to Platinum-Montaur Life Sciences, LLC ("Montaur") in connection with the $20 million non-revolving draw credit facility with Montaur.  The Note will mature on August 31, 2017.  See Note 13.

Stock Issued in Exchange for Services
 
    During the three months ended March 31, 2013 and 2012, the Company issued 74,500 and 12,000 shares, respectively, of Common Stock with a fair value of $92,745 and $22,800, respectively, to vendors in exchange for their services.  Expenses associated with these transactions were included in Selling, General and Administrative Expenses in the Consolidated Statements of Operations.

(8)      EQUITY COMPENSATION PLANS
 
    In March 2003, the Company’s shareholders approved its 2003 Stock Option and Incentive Plan (the “2003 Plan”). Pursuant to the 2003 Plan, the Company’s Board of Directors (or its committees and/or executive officers delegated by the Board of Directors) may grant incentive and nonqualified stock options, restricted stock, and other stock-based awards to the Company’s employees, officers, directors, consultants and advisors. As of March 31, 2013, the maximum aggregate number of shares that is authorized for issuance under the 2003 Plan for all periods is 1,600,000 shares. As of March 31, 2013, there were 311,250 restricted shares of Common Stock issued and options to purchase an aggregate of 821,250 shares of Common Stock outstanding under the 2003 Plan and 422,750 shares available for future grants.
 
    In May 2008, the Company’s shareholders approved the 2008 Equity Compensation Plan (the “2008 Plan”). The 2008 Plan provides for grants of incentive stock options to employees and nonqualified stock options and restricted stock to employees, consultants and non-employee directors of the Company. In July 2010, the Company’s shareholders approved an amendment to the 2008 Plan to increase the maximum number of shares of Common Stock available under the Plan by 2,000,000 shares to 4,700,000 shares.  In June 2012, the Company’s shareholders approved an amendment to the 2008 Plan to increase the maximum number of shares available under the Plan by 5,300,000 shares to 10,000,000 shares.  
 
    The following tables show the remaining shares available for future grant and outstanding shares:
 
   
Equity Compensation Plans
     
   
2003 Plan
   
2008 Plan
     
Shares Available For Issuance
               
Total reserved for stock options and restricted stock
    1,600,000       10,000,000      
Net restricted stock issued net of cancellations
    (311,250 )     (2,687,281 )    
Stock options granted
    (1,544,491 )     (2,660,000 )    
Add back options cancelled before exercise
    678,491       720,000      
Options cancelled by plan vote
               
Remaining shares available for future grants
    422,750       5,372,719      
   
Not Pursuant to a Plan
   
Total granted
    1,544,491       2,660,000       3,100,000  
Less:  Options cancelled
    (678,491 )     (720,000 )     (1,383,334 )
Options exercised
    (356,000 )     (130,000 )     (666,666 )
Net shares outstanding before restricted stock
    510,000       1,810,000       1,050,000  
Net restricted stock issued net of cancellations
    311,250       2,687,281       284,844  
Outstanding shares at March 31, 2013
    821,250       4,497,281       1,334,844  
 
(9)       STOCK OPTIONS
 
    The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model with certain assumptions noted below. Expected volatilities are based on historical volatility of the Common Stock using historical periods consistent with the expected term of the options. The Company uses historical data, as well as subsequent events occurring prior to the issuance of the financial statements, to estimate option exercise and employee termination and forfeitures within the valuation model. The expected term of stock options granted under the Company’s stock plans is based on the average of the contractual term (generally 10 years) and the vesting period (generally 24 to 42 months).  The risk-free rate is based on the yield of a U.S. Treasury security with a term consistent with the option.
 
    The assumptions used principally for stock options granted to employees and members of the Company’s Board of Directors in the three months ended March 31, 2013 and 2012 were as follows:

 
 
2013
   
2012
 
Risk-free interest rate
    1.09% — 1.23 %     1.87% — 2.06 %
Expected dividend yield
           
Expected term
 
6.5 years
   
6.5 years
 
Forfeiture rate (excluding fully vested stock options)
    15 %     15 %
Expected volatility
    140% — 141 %     136% — 137 %
 
    A summary of stock option activity as of and for the three months ended March 31, 2013 is as follows:

 
 
 
 
Stock Options
 
 
 
 
Shares
   
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
 
Aggregate
Intrinsic
Value
 
Outstanding at January 1, 2013
    3,433,333     $ 1.47          
Granted
    115,000       0.82          
Exercised
                   
Forfeited or expired
    (178,333 )     2.58          
Outstanding at March 31, 2013
    3,370,000     $ 1.39  
6.75 years
  $ 476,300  
Exercisable at March 31, 2013
    2,265,501     $ 1.02  
5.63 years
  $ 474,300  
 
    The weighted-average grant-date fair value of stock options granted during the three months ended March 31, 2013 was $0.75 per share. Share-based compensation expense recognized in the three months ended March 31, 2013 and 2012 was approximately $202,000 and $282,000, respectively. As of March 31, 2013, there was approximately $1,867,000 of total unrecognized compensation expense related to non-vested share-based option compensation arrangements. With the exception of the unrecognized share-based compensation related to certain restricted stock grants to officers and employees that contain performance conditions related to United States Food and Drug Administration (“FDA”) approval for Symphony or the sale of substantially all of the stock or assets of the Company (see Note 10 on Restricted Stock, below), unrecognized compensation is expected to be recognized over the next four years.

 
(10) RESTRICTED STOCK
 
    During the three months ended March 31, 2013, the Company granted an aggregate of 118,375 restricted shares of Common Stock to certain officers, employees, directors and consultants of the Company. The grants were issued pursuant to the 2008 Plan. The grant date fair value of these restricted stock grants was approximately $97,324. Share-based compensation expense related to restricted stock recognized in the three months ended March 31, 2013 and March 31, 2012 was approximately $161,000 and $29,000, respectively.
 
    A summary of the Company’s nonvested restricted stock activity as of and for the three months ended March 31, 2013, is as follows:
 
 
 
 
Restricted Stock
 
 
 
Shares
   
Weighted-
Average
Grant-Date
Fair Value
 
Nonvested at January 1, 2013
    3,160,417     $ 1.66  
Granted this period
    118,375       0.82  
Vested
    (100,104 )     2.16  
Forfeited
           
Nonvested at March 31, 2013
    3,178,688     $ 1.68  
 
    Among the 3,178,688 shares of non-vested restricted stock, the various vesting criteria include the following:

·
1,679,594 shares of restricted stock vest upon the FDA approval of Symphony or the sale of the Company;
·
220,000 shares of restricted stock vest upon the sale of the Company; and
·
1,279,094 shares of restricted stock vest over one to four years, at each of the anniversary dates of the grants.
 
    As of March 31, 2013, there was approximately $1,713,000 of total unrecognized compensation expense related to non-vested share-based restricted stock arrangements granted pursuant to the Company’s equity compensation plans that vest over time in the foreseeable future. As of March 31, 2013, the Company cannot estimate the timing of completion of performance vesting requirements required by certain of these restricted stock grant arrangements.  Compensation expense related to these restricted share grants will be recognized when the Company concludes that achievement of the performance vesting conditions is probable.

 
(11)    WARRANTS
 
    At March 31, 2013, the Company had the following outstanding warrants:
 
   
Number of
Shares
Exercisable
   
Exercise Price
 
Date of Expiration
Outstanding warrants accounted for as derivative warrant liability:
             
Granted to debt holder
    4,000,000     $ 2.00  
8/31/2017
Granted to debt holder
    1,000,000       2.13  
9/20/2017
Granted to debt holder
    500,000       2.27  
10/17/2017
Granted to debt holder
    1,500,000       2.11  
11/6/2017
Total outstanding warrants accounted for as derivative warrant liability
    7,000,000            
Weighted average exercise price
          $ 2.06    
Weighted average time to expiration in years
               
4.48 years
                   
Outstanding warrants accounted for as equity:
                 
Granted to investors in private placement of preferred stock
    32,249     $ 1.00  
9/30/2013
Granted to investors in private placement of preferred stock
    198,333       1.50  
10/28/2013
Granted to investors in private placement of preferred stock
    390,000       0.75  
2/28/2014
Granted to vendor
    60,000       0.60  
3/15/2014
Granted to investors in private placement
    400,000       1.59  
6/30/2014
Granted to investors in private placement
    768,000       2.00  
11/13/2014
Granted to placement agent in private placement
    256,906       1.50  
11/13/2014
Granted to investors in private placement
    63,000       2.00  
12/3/2014
Granted to investors in private placement
    341,325       2.25  
2/9/2015
Granted to placement agents in private placement
    28,500       2.25  
2/9/2015
Granted to investor in private placement
    6,375       2.25  
3/18/2015
Granted to investors in private placement
    959,582       3.00  
12/7/2014
Total outstanding warrants accounted for as equity
    3,504,270            
Weighted average exercise price
          $ 2.02    
Weighted average time to expiration in years
               
1.46 years
                   
Totals for all warrants outstanding:
                 
Total
    10,504,270            
Weighted average exercise price
          $ 2.05    
Weighted average time to expiration in years
               
3.47 years
 

    A summary of warrant activity for the three months ended March 31, 2013 is as follows:

 
 
 
Warrants
 
Shares
   
Weighted-
Average
Exercise
Price
 
Outstanding at January 1, 2013
    12,540,040     $ 2.01  
Granted
    91,483       1.26  
Exercised
           
Forfeited or expired
    (2,127,253 )     1.77  
Outstanding at March 31, 2013
    10,504,270     $ 2.05  

Exercise of Common Stock Warrants
 
    During the three months ended March 31, 2013, the Company issued no shares of its Common Stock upon the exercise of warrants.

(12)
LICENSING AND OTHER REVENUE
 
    In 2009, the Company entered into a License Agreement with Handok Pharmaceuticals Co., Ltd. (“Handok”) pursuant to which the Company granted Handok a license to develop, use, market, sell and import Symphony for continuous glucose monitoring for use by medical facilities and/or individual consumers in South Korea (the “Handok License”). The Handok License has a minimum term of 10 years from the date of the first commercial sale of Symphony in South Korea.
 
    The Company received a licensing fee of approximately $500,000 upon execution of the Handok License as well as the right to receive future milestone payments and royalties. The Company recognizes the upfront, nonrefundable payments as revenue on a straight-line basis over the contractual or estimated performance period. During the three months ended March 31, 2013 and 2012, the Company recorded approximately $23,000 and $31,000, respectively, of nonrefundable license revenue.  As of March 31, 2013, approximately $68,000 of deferred revenue remains unrecognized, which is recognizable over the next 12 months and shown as Deferred Revenue From Licensing Arrangements among current liabilities on the Consolidated Balance Sheet.  Approximately $90,000 of the remaining deferred revenue will be earned in excess of 12 months and is shown as non-current Deferred Revenue.

(13)     CREDIT FACILITY WITH PLATINUM-MONTAUR LIFE SCIENCES, LLC
 
    On August 31, 2012, the Company and Montaur entered into a Loan Agreement (the “Loan Agreement”) pursuant to which Montaur made a non-revolving draw credit facility (the “Credit Facility”) of up to $20,000,000 available to the Company, a substantial portion of which is subject to the successful achievement of certain clinical and regulatory milestones set forth in the Loan Agreement, with an initial available principal amount of $5,000,000 (the “Maximum Draw Amount”).  The Company issued to Montaur a Promissory Note dated August 31, 2012 (the “Note”), with a maturity date of five years from the date of closing (the “Maturity Date”).  The Company has used the proceeds from the Credit Facility to fund operations.
 
    The principal balance of each draw will bear interest from the applicable draw date at a rate of 10% per annum, compounded monthly.  The Company is required to make interest payments on the principal amount due in connection with each draw on the first business day of each month until the Maturity Date.  The Company is also required to make a mandatory prepayment on each interest payment date of an amount equal to one-third of its total revenue for the then prior fiscal quarter, up to the maximum amount outstanding under the Note at that time.  The Company is not, however, required to make such interest payment or mandatory prepayment if doing so would reduce the Company’s cash and cash equivalents to less than $5,000,000.  Any amounts not previously paid in full will be due and payable on the Maturity Date.  The Company has the right to permanently prepay any draw, in whole or in part, prior to the Maturity Date.


    The Company’s subsidiary, Sontra Medical, Inc. (“Sontra”), agreed to guarantee the obligations of the Company under the Note pursuant to a guaranty agreement entered into on August 31, 2012 (the “Guaranty”).  Additionally, the Note is secured by the Pledged Revenue (as defined in the Loan Agreement) of the Company and the Company’s subsidiaries pursuant to a Security Agreement dated as of August 31, 2012 by and among the Company, Sontra and Montaur.  Upon the earlier of the Maturity Date of the Note or an event of default, as defined in the Loan Agreement, the Note shall be secured by substantially all of the assets of the Company and any of its subsidiaries, which security interest shall not be effective until such event of default or maturity, pursuant to a Default Security Agreement dated August 31, 2012 by and among the Company, Sontra and Montaur.  The Company also has agreed to pay all costs associated with registering the shares underlying the Warrants (should it choose to register such shares) and to indemnify Montaur from liability resulting from the registration of such shares (subject to certain standard exceptions) in accordance with a Registration Indemnity Agreement between the Company and Montaur.
 
    Pursuant to the Loan Agreement, the Company issued Montaur a warrant to purchase 4,000,000 shares of its Common Stock, with a term of five years and an exercise price of $2.00 per share (the “Commitment Warrant”).  The fair value of the warrant was determined to be approximately $4,840,000 and was recorded as a deferred financing cost that will be amortized to interest expense over the term of the Note.  Of this cost, $968,004 is reflected in Current Assets, representing the portion which will be amortized over the next twelve months. Amortization of the deferred financing cost for the quarter ended March 31, 2013 and for the year ended December 31, 2012 was $242,000 and $323,000, respectively, and is included in interest expense.  In addition, for each $1,000,000 of funds borrowed pursuant to the Credit Facility, the Company will issue Montaur a warrant to purchase 1,000,000 shares of Common Stock, with a term of five years and an exercise price equal to 150% of the market price of the Common Stock at the time of the draw, but in no event less than $2.00 or more than $4.00 per share (together with the Commitment Warrant, the “Warrants”).  All of the Warrants are immediately exercisable and will have a term of five years from the issue date. The exercise price of the Warrants is subject to adjustment for stock splits, combinations or similar events.  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 4.99% ownership limitation upon sixty-one (61) days’ advance written notice to the Company.
 
    On September 14, 2012, the Company submitted a draw request to Montaur in the amount of $3,000,000 in the form required by the Loan Agreement (the “September Request”). The Company ultimately received the $3,000,000 in the following increments: $1,000,000 on September 20, 2012, $500,000 on October 17, 2012, and $1,500,000 on November 6, 2012.  These draws were recorded on the Consolidated Balance Sheet under note payable, net of the initial $3,000,000 in discounts recorded related to the warrants issued.  In accordance with the Loan Agreement and as a result of funding received from Montaur, the Company issued to Montaur separate warrants concurrent with the three draws above to purchase 1,000,000, 500,000 and 1,500,000 shares of Common Stock each with a term of five years, and exercise prices of $2.13, $2.27 and $2.11 per share, respectively.  The fair value of the warrants issued to purchase 3,000,000 shares of Common Stock was determined to be approximately $3,455,000, of which $3,000,000 was treated as a debt discount and was to be accreted to interest expense over the term of the Note, and the balance of approximately $455,000 was charged to interest expense in 2012.
 
    On March 1, 2013, the Company elected to prepay all outstanding draws under the Montaur Credit Facility totaling $3,113,366, which includes interest accrued and unpaid to that date of $113,366.  After such date, no principal amount is outstanding under the Credit Facility.  Concurrent with this prepayment, the Company recorded non-cash interest expense of approximately $2,879,166 in March 2013 relating to the unamortized debt discount on the outstanding draws paid off.

 
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
    The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 and elsewhere in this report. The matters discussed herein contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended, which involve risks and uncertainties. All statements other than statements of historical information provided herein may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes”, “anticipates”, “plans”, “expects” and similar expressions are intended to identify forward-looking statements. The factors that could cause actual future results to differ materially from current expectations include, but are not limited to, risks related to regulatory approvals and the success of our ongoing studies, including the safety and efficacy of Symphony, the failure of future development and preliminary marketing efforts related to Symphony, risks and uncertainties relating to our ability to develop, market and sell diagnostic products based on our skin permeation platform technologies, the availability of substantial additional capital to support our research, development and product commercialization activities, the success of our research, development, and regulatory approval, marketing and distribution plans and strategies, including those plans and strategies related to Symphony and those discussed in “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and elsewhere in this report and the risks discussed in our other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis, judgment, belief or expectation only as of the date hereof. We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof.

Business
 
    We are a medical device company with expertise in advanced skin permeation technology.  We are developing our Symphony CGM System as a non-invasive, wireless continuous glucose monitoring system for use in hospital critical care units and for people with diabetes.  The Prelude SkinPrep System, a component of our Symphony CGM System, allows for enhanced skin permeation that will enable extraction of analytes such as glucose.  Prelude’s platform skin preparation technology also allows for needle-free, transdermal drug delivery.  Additional applications for needle-free analyte extraction and topical and systemic drug delivery are planned.

Research and Development
 
    We believe that ongoing research and development efforts are essential to our success.  A major portion of our operating expenses to date is related to our research and development activities. R&D expenses generally consist of internal salaries and related costs, and third-party vendor expenses for product design and development, product engineering and contract manufacturing. In addition, R&D costs include regulatory consulting, feasibility product testing (internal and external) and conducting nonclinical and clinical studies. R&D expenses were approximately $3,220,000 for the three months ended March 31, 2013 and $8,671,000 for the year ended December 31, 2012. We intend to maintain our strong commitment to R&D as an essential component of our product development efforts. Licensed or acquired technology developed by third parties may be an additional source of potential products; however, our ability to raise sufficient financing may impact our level of R&D spending.

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


    On an ongoing basis, we evaluate our estimates and judgments for all assets and liabilities, including those related to stock-based compensation expense and the fair value of stock purchase warrants classified as derivative liabilities. We base our estimates and judgments on historical experience, current economic and industry conditions and on various other factors that are believed to be reasonable under the circumstances. This forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no changes in our critical accounting policies and estimates subsequent to those disclosed in our Annual Report on Form 10-K as filed with the SEC on March 18, 2013.
 
    We believe that full consideration has been given to all relevant circumstances that we may be subject to, and the consolidated financial statements accurately reflect our best estimate of the results of operations, financial position and cash flows for the periods presented.

Results of Operations

Comparison of the Three Months ended March 31, 2013 and 2012
 
    Licensing Revenue — We signed two licensing agreements during fiscal year 2009, each with a minimum term of ten years, that required non-refundable license payments by the licensees. The non-refundable license payments received in cash totaled $1,250,000 across both transactions. We are recognizing the non-refundable payments as revenue on a straight-line basis over our contractual or estimated performance period. During 2012, 2011 and 2010, we adjusted our amortization period for revenue recognition for each of our license arrangements to reflect a revision in the estimated timing of regulatory approval (or clearance).  Accordingly, we determined that approximately $23,000 and $31,000 of licensing revenue was recognizable in the three months ended March 31, 2013 and 2012, respectively.
 
    Other Revenue — We retain contract engineering and development services in connection with our product development for one of our licensees and such costs are reimbursed by that licensee and recorded as other revenue.  The costs from the contract engineering services are included in research and development expenses on the Statements of Operations. There was no markup on the contract engineering services recorded as other revenue.  We did not have any such other revenue during the three months ended March 31, 2013, and 2012, respectively.
 
    Research and Development Expenses — Research and development expenses increased by approximately $1,828,000, or 131%, to approximately $3,220,000 for the three months ended March 31, 2013 from approximately $1,392,000 for the three months ended March 31, 2012. R&D expenses increased primarily as a result of increased engineering and design expenses incurred with outside contractors and personnel relating to Prelude and Symphony.
 
    R&D expenses for Prelude and Symphony amounted to approximately 58% and 43% of total operating expenses during the three months ended March 31, 2013 and 2012, respectively.  For the three months ended March 31, 2013, expenses consisted of primarily development, clinical and manufacturing of $3,068,000, $80,000 and $25,000, respectively.  For the three months ended March 31, 2012, expenses consisted of primarily development, clinical and manufacturing of $1,289,000, $84,000 and $7,000, respectively.
 
    Selling, General and Administrative Expenses — Selling, general and administrative expenses increased by approximately $440,000, or 24%, to approximately $2,299,000 for the three months ended March 31, 2013 from approximately $1,859,000 for the three months ended March 31, 2012.
 
    Selling, general and administrative expenses represented 42% and 57% of total operating expenses during the three months ended March 31, 2013 and 2012, respectively. We are not engaged in selling activities and, accordingly, general and administrative expenses relate principally to salaries and benefits for our executive, financial and administrative staff, public company costs, investor relations, legal, accounting, public relations, capital-raising and facilities.
 
    Interest Income — Interest income was approximately $1,000 and $3,000 for each of the three months ended March 31, 2013 and 2012, respectively.


    Interest Expense — Interest expense was approximately $3,174,000 and $200 for the three months ended March 31, 2013 and 2012, respectively.  The increase in interest expense in 2013 is due to activities related to our Credit Facility with Montaur.  The $3,174,000 in interest consists of $2,879,000 in unamortized debt discount that resulted from prepaying all outstanding draws on March 1, 2013.  An additional $242,000 in interest represents amortized deferred financing costs for the fair value of the Commitment Warrant issued pursuant to the loan agreement.  The remaining $53,000 in interest represents the interest incurred in 2013 on the $3,000,000 loan prior to paying it off early on March 1, 2013.
 
    Debt Financing Costs  We incur debt financing costs as a result of drawing from our Loan Agreement with Montaur.  We have incurred no such costs in the three months ending March 31, 2013 and 2012.
 
    Gain on Revaluation of Derivative Warrant Liability — Changes in the fair value of derivative financial instruments are recognized in the Consolidated Statement of Operations as a derivative gain or loss. The primary underlying risk exposure pertaining to the warrants is the change in fair value of the underlying common stock. The gain on revaluation of the derivative warrant liability for the three months ended March 31, 2013 and 2012 was approximately $1,681,000 and $232,000, respectively. No such warrant exercises have occurred during the three months ended March 31, 2013 and March 31, 2012.
 
    Net Loss — As a result of the factors described above, we had a net loss of approximately $6,988,000 for the three months ended March 31, 2013 compared to approximately $2,986,000 for the three months ended March 31, 2012.

Liquidity and Capital Resources
 
    We have financed our operations since inception primarily through sales of our Common Stock and preferred stock, the issuance of convertible promissory notes, draws from the Credit Facility, unsecured and secured promissory notes, non-refundable payments received under license agreements and cash received in connection with exercises of Common Stock options and warrants.  As of March 31, 2013, we had approximately $5,170,000 of cash and cash equivalents, with no other short term investments.  During this period, in a public Common Stock offering in January 2013, we raised approximately $10,626,000, after deducting the underwriting discount and other offering expenses payable by the Company.  At the time of the offering, we elected to use a portion of the net proceeds of the offering to pay off the Note we issued to Montaur in connection with the Credit Facility.  The Note will mature on August 31, 2017.  As of March 1, 2013, the entire balance under the Note was $3,113,366, which included $3,000,000 of principal and $113,366 of accrued and unpaid interest, and was repaid to Montaur in full on March 1, 2013.  The Credit Facility could provide an additional $17,000,000 in future financing, a substantial portion of which is subject to the successful achievement of certain clinical and regulatory milestones, provided we have not incurred any events of default under the Loan Agreement.
 
    Net cash used in operating activities was approximately $5,822,000 for the three months ended March 31, 2013.  The use of cash in operating activities was primarily attributable to the net loss of approximately $6,988,000, adjusted for non-cash items and changes in assets and liabilities.
 
    Net cash used in investing activities was approximately $381,000 for the three months ended March 31, 2013.  Cash of approximately $250,000 was used in increasing restricted cash in escrow for the benefit of a vendor during the three month period ended March 31, 2013.  Also, cash of approximately $131,000 was used to purchase furniture and equipment and leasehold improvements during the three months ended March 31, 2013.
 
    Net cash provided by financing activities was approximately $7,625,000 for the three months ended March 31, 2013.  We received approximately $10,626,000 from our public Common Stock offering, offset by the repayment of the entire balance of our Notes issued to Montaur in connection with our Credit Facility.
 
    At March 31, 2013, we had outstanding warrants to purchase 10,504,270 shares of Common Stock at exercise prices ranging from $0.60 per share to $3.00 per share.  If exercised, these could provide cash proceeds to the Company of approximately $21,497,000.


    We continue to aggressively pursue additional financing from existing relationships (current and prior shareholders, investors and lenders) and from new investors through placement agents and investment bankers to support operations, including our product and clinical development programs.
 
    We have demonstrated the ability to manage our costs aggressively and increase our operating efficiencies while advancing our medical device product development and clinical programs.  During the three months ended March 31, 2013, we managed our medical device product development, clinical and operating costs while pursuing necessary funding. In order to advance our product and clinical development programs, establish contract manufacturing and support our licensee for the manufacture of Prelude, pursue CE Marking and FDA approval for Symphony and support our operating activities, we expect our monthly operating costs associated with salaries and benefits, regulatory and public company consulting, contract engineering and manufacturing, legal and other working capital costs to increase. In the past, we have relied primarily on raising capital or issuing debt in order to meet our operating budget and to achieve our business objectives, and we plan to continue that practice in the future. Although we have been successful in the past with raising sufficient capital to conduct our operations, we will continue to vigorously pursue additional financing as necessary to meet our business objectives; however, there can be no guarantee that additional capital will be available in sufficient amounts on terms favorable to us, if at all.
 
    Our ability to fund our future operating requirements will depend on many factors, including the following:

 
our ability to obtain funding from third parties, including any future collaborative partners, on reasonable terms;
•   
our ability to meet milestones and draw on the Credit Facility with Montaur;
 
our progress on research and development programs;
 
the time and costs required to gain regulatory approvals;
 
the costs of manufacturing, marketing and distributing our products, if successfully developed and approved;
 
the costs of filing, prosecuting and enforcing patents, patent applications, patent claims and trademarks;
 
the status of competing products; and
 
the market acceptance and third-party reimbursement of our products, if successfully developed and approved.
 
    The economic conditions occurring during 2011 and continuing through 2013, including the tightening of available funding in the financial markets, had a significant impact on the extent of advancement on our product development and clinical programs in accordance with our original projected level of operations. Although we have successfully raised sufficient capital to conduct our operations in the past, we believe that uncertainties in the financial markets may occur in the future, resulting in fund raising challenges for emerging medical device and pharmaceutical companies. Our future product and clinical development programs and regulatory activities may be dependent on available additional funding from investors. Without sufficient funding for our programs, our plan to obtain regulatory approval for Symphony and other product candidates may be delayed.
 
    Facilities, Property and Equipment — We conduct our operations primarily in leased facilities in Philadelphia, PA and Franklin, MA and have executed leases through May 31, 2017 and October 31, 2017, respectively, for each facility.  Our property and equipment includes laboratory equipment, office furniture, computer equipment and leasehold improvements.

Contractual Obligations
 
    The following table outlines our current contractual obligations:
 
   
Payments Due by Period
 
   
Total
   
Less than
1 Year
   
1-3 Years
   
3-5 Years
     
More than
5 Years
 
Facility lease – Franklin, MA
  $ 2,034,000     $ 426,000     $ 883,000     $ 725,000     $  
Facility lease – Philadelphia, PA
    795,000       184,000       381,000       230,000        
Operating lease obligations
    9,000       8,000       1,000              
Capital lease obligation
    4,000       3,000       1,000              
Total
  $ 2,842,000     $ 621,000     $ 1,266,000     $ 955,000     $
­
 

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

Effect of Inflation and Changes in Prices
 
    We do not believe that inflation and changes in prices will have a material effect on our operations.

ITEM 4.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures
 
    Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operations of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that the information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
    In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Internal Control over Financial Reporting
 
    There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the fiscal quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
PART II - OTHER INFORMATION
ITEM 6.  EXHIBITS
 
    The Exhibits listed in the Exhibit Index immediately preceding such Exhibits are filed with or incorporated by reference in this report, except as noted.

 
    Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
  ECHO THERAPEUTICS, INC.  
Date:  May 10, 2013      
  By: /s/ Patrick T. Mooney  
    Patrick T. Mooney, M.D.  
    President and Chief Executive Officer  
    (Principal Executive Officer)  
       
  By: /s/ Christopher P. Schnittker  
    Christopher P. Schnittker  
    Senior Vice President and Chief Financial Officer  
    (Principal Financial Officer)  
 


Exhibit No.
 
Description 
31.1
 
Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
 
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
 
Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
 
Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*
 
The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, formatted in XBRL (Extensible Business Reporting Language), (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements.
 
*
Pursuant to Rule 406T of Regulation S-T, the XBRL (Extensible Business Reporting Language) information included in Exhibit 101 hereto is deemed furnished and not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.