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ECTE > SEC Filings for ECTE > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for ECHO THERAPEUTICS, INC.

Form 10-Q for ECHO THERAPEUTICS, INC.


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the related notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011 and elsewhere in this report. The matters discussed herein contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
Section 27A of the Securities Act of 1933, as amended, which involve risks and uncertainties. All statements other than statements of historical information provided herein may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes", "anticipates", "plans", "expects" and similar expressions are intended to identify forward-looking statements. The factors that could cause actual future results to differ materially from current expectations include, but are not limited to, risks related to regulatory approvals and the success of our ongoing studies, including the safety and efficacy of Symphony and Prelude, the failure of future development and preliminary marketing efforts related to Symphony and Prelude, risks and uncertainties relating to our ability to develop, market and sell diagnostic products based on our skin permeation platform technologies, the availability of substantial additional capital to support our research, development and product commercialization activities, the success of our research, development, and regulatory approval, marketing and distribution plans and strategies, including those plans and strategies related to Symphony and Prelude and those discussed in "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and elsewhere in this report and the risks discussed in our other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis, judgment, belief or expectation only as of the date hereof. We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof.

Business

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

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

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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 $5,731,000 for the nine months ended September 30, 2012 and $3,796,000 for the year ended December 31, 2011. We intend to maintain our strong commitment to R&D as an essential component of our product development efforts. Licensed or acquired technology developed by third parties may be an additional source of potential products; however, our ability to raise sufficient financing may impact our level of R&D spending.

Critical Accounting Policies and Estimates

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

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

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

Results of Operations

Comparison of the Three Months ended September 30, 2012 and 2011

Licensing Revenue - We signed two licensing agreements during fiscal year 2009, each with a minimum term of ten years, that required non-refundable license payments by the licensees. The non-refundable license payments received in cash totaled $1,250,000 across both transactions. We are recognizing the non-refundable payments as revenue on a straight-line basis over our contractual or estimated performance period. During 2011 and 2010, we adjusted our amortization period for revenue recognition for each of our license arrangements to reflect a revision in the estimated timing of regulatory approval (or clearance). Accordingly, we determined that approximately $31,000 of licensing revenue was recognizable in the three months ended September 30, 2012 and approximately $44,000 charge against licensing revenue was recognizable for the three months ended September 30, 2011.

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 September 30, 2012, and 2011, respectively.

Research and Development Expenses - Research and development expenses increased by approximately $1,444,000, or 208%, to approximately $2,139,000 for the three months ended September 30, 2012 from approximately $695,000 for the three months ended September 30, 2011. R&D expenses increased primarily as a result of increased engineering and design expenses incurred with outside contractors and personnel relating to Prelude and Symphony.

R&D expenses for Prelude and Symphony amounted to approximately 59% and 31% of total operating expenses during the three months ended September 30, 2012 and 2011, respectively. For the three months ended September 30, 2012, expenses consisted of primarily development, clinical and manufacturing of $2,037,000, $87,000 and $7,000, respectively. For the three months ended September 30, 2011, expenses consisted of primarily development, clinical and manufacturing of $593,000, $76,000 and $5,000, respectively.

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Selling, General and Administrative Expenses - Selling, general and administrative expenses decreased by approximately $19,000, or 1%, to approximately $1,508,000 for the three months ended September 30, 2012 from approximately $1,527,000 for the three months ended September 30, 2011.

Selling, general and administrative expenses represented 41% and 69% of total operating expenses during the three months ended September 30, 2012 and 2011, respectively. We are not engaged in selling activities and, accordingly, general and administrative expenses relate principally to salaries and benefits for our executive, financial and administrative staff, public company costs, investor relations, legal, accounting, public relations, capital-raising and facilities.

Interest Income - Interest income was approximately $600 for each of the three months ended September 30, 2012 and 2011.

Interest Expense - Interest expense was approximately $89,000 and $400 for the three months ended September 30, 2012 and 2011, respectively.

Debt Financing Costs - Debt financing costs incurred in connection with the Montaur note payable was approximately $160,000 for the three months ended September 30, 2012.

Gain (Loss) 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 loss on revaluation of the derivative warrant liability for the three months ended September 30, 2012 was approximately $400,000. The gain on revaluation of the derivative warrant liability for the three months ended September 30, 2011 was approximately $893,000. During the three months ended September 30, 2012, derivative warrants were exercised to purchase 46,951 shares of common stock, which resulted in a $20,000 reclassification from the Derivative Warrant Liability to Additional Paid-in Capital. During the three months ended September 30, 2011, derivative warrants were exercised to purchase 29,625 shares of common stock, which resulted in a $71,000 reclassification from the Derivative Warrant Liability to Additional Paid-in Capital.

Net Loss Applicable to Common Shareholders - As a result of the factors described above, we had a net loss applicable to common shareholders of approximately $4,265,000 for the three months ended September 30, 2012 compared to approximately $1,510,000 for the three months ended September 30, 2011.

Comparison of the Nine Months ended September 30, 2012 and 2011

Licensing Revenue - We signed two licensing agreements during fiscal year 2009, each with a minimum term of ten years, that required non-refundable license payments by the licensees. The non-refundable license payments received in cash totaled $1,250,000 across both transactions. We are recognizing the non-refundable payments as revenue on a straight-line basis over our contractual or estimated performance period. During 2011 and 2010, we adjusted our amortization period for revenue recognition for each of our license arrangements to reflect a revision in the estimated timing of regulatory approval (or clearance). Accordingly, we determined that approximately $93,000 and $199,000 of licensing revenue was recognizable in the nine months ended September 30, 2012 and 2011, respectively.

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

Research and Development Expenses - Research and development expenses increased by approximately $3,174,000, or 124%, to approximately $5,731,000 for the nine months ended September 30, 2012 from approximately $2,557,000 for the nine months ended September 30, 2011. R&D expenses increased primarily as a result of increased engineering and design expenses incurred with outside contractors and personnel relating to Prelude and Symphony.

R&D expenses for Prelude and Symphony amounted to approximately 55% and 43% of total operating expenses during the nine months ended September 30, 2012 and 2011, respectively. For the nine months ended September 30, 2012, expenses consisted of primarily development, clinical and manufacturing of $5,219,000, $459,000 and $21,000, respectively. For the nine months ended September 30, 2011, expenses consisted of primarily development, regulatory and clinical of $2,350,000, $99,000 and $22,000, respectively.

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Selling, General and Administrative Expenses - Selling, general and administrative expenses increased by approximately $1,274,000, or 37%, to approximately $4,702,000 for the nine months ended September 30, 2012 from approximately $3,427,000 for the nine months ended September 30, 2011. We have experienced increases in personnel costs, legal costs, and expenses related to the addition of the corporate office in Philadelphia.

Selling, general and administrative expenses represented 45% and 57% of total operating expenses during the nine months ended September 30, 2012 and 2011, respectively. We are not engaged in selling activities and, accordingly, general and administrative expenses relate principally to salaries and benefits for our executive, financial and administrative staff, public company costs, investor relations, legal, accounting, public relations, capital-raising costs and facilities costs.

Interest Income - Interest income was approximately $5,000 and $4,000 for the nine months ended September 30, 2012 and 2011, respectively.

Interest Expense - Interest expense was approximately $89,000 and $14,000 for the nine months ended September 30, 2012 and 2011, respectively.

Debt Financing Costs - Debt financing costs incurred in connection with the Montaur note payable was approximately $160,000 for the nine months ended September 30, 2012.

Gain (Loss) 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 nine months ended September 30, 2012 was approximately $201,000. The loss on revaluation of the derivative warrant liability for the nine months ended September 30, 2011 was approximately $2,259,000. During the nine months ended September 30, 2012, derivative warrants were exercised to purchase 165,451 shares of common stock, which resulted in a $62,000 reclassification from the Derivative Warrant Liability to Additional Paid-in Capital. During the nine months ended September 30, 2011, derivative warrants were exercised to purchase 632,318 shares of common stock, which resulted in a $2,242,000 reclassification from the Derivative Warrant Liability to Additional Paid-in Capital.

Net Loss Applicable to Common Shareholders - As a result of the factors described above, we had a net loss applicable to common shareholders of approximately $10,405,000 for the nine months ended September 30, 2012 compared to approximately $10,116,000 for the nine months ended September 30, 2011.

Liquidity and Capital Resources

We have financed our operations since inception primarily through issuances of our Common Stock and preferred stock, issuances of debt, payments received under license agreements, and cash received in connection with the exercises of options and warrants to purchase our Common Stock by their holders. As of September 30, 2012, we had approximately $1,396,000 of cash and cash equivalents, with no other short term investments.

Net cash used in operating activities was approximately $7,869,000 for the nine months ended September 30, 2012. The use of cash in operating activities was primarily attributable to the net loss of approximately $10,405,000, adjusted for non-cash items and changes in assets and liabilities.

Net cash used in investing activities of approximately $1,143,000 for the nine months ended September 30, 2012. Cash of approximately $157,000 was used in increasing restricted cash in escrow for the benefit of a vendor and a facility leaseholder during the nine month period ended September 30, 2012. Also, cash of approximately $985,000 was used to purchase furniture and equipment and leasehold improvements during the nine months ended September 30, 2012.

Net cash provided by financing activities was approximately $1,412,000 for the nine months ended September 30, 2012. We received approximately $407,000 from the exercise of warrants and options to purchase our Common Stock and approximately $1,000,000 in cash proceeds under the Montaur note payable. Subsequent to the September 30, 2012, we have received an additional $2,000,000 in cash proceeds from Montaur under this facility.

The Montaur credit facility executed in August 2012 could provide an additional $17,000,000 in future proceeds, a substantial portion of which is subject to the successful achievement of certain clinical and regulatory milestones.

At September 30, 2012, we had outstanding warrants to purchase 12,092,201 shares of Common Stock at exercise prices ranging from $0.50 per share to $3.00 per share. If exercised, these could provide cash proceeds to the Company of approximately $24,018,000.

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In August 2011, we filed a universal shelf registration statement on Form S-3 with the SEC to raise up to $75,000,000 in capital. This registration statement was declared effective on October 28, 2011 and remains effective today. In December 2011, we raised $5,400,000 in capital pursuant to this shelf registration statement, thereby reducing the amount available remaining under the shelf registration statement to $69,600,000.

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

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 nine months ended September 30, 2012, we managed our medical device product development, clinical and operating costs while pursuing necessary funding. In order to advance our product and clinical development programs, establish contract manufacturing and support our licensee for the manufacture of Prelude, pursue FDA approval for Symphony and support our operating activities, we expect our monthly operating costs associated with salaries and benefits, regulatory and public company consulting, contract engineering and manufacturing, legal and other working capital costs to increase. In the past, we have relied primarily on raising capital 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 progress on research and development programs;

• the time and costs required to gain regulatory approvals;

• the costs of manufacturing, marketing and distributing our products, if successfully developed and approved;

• the costs of filing, prosecuting and enforcing patents, patent applications, patent claims and trademarks;

• the status of competing products; and

• the market acceptance and third-party reimbursement of our products, if successfully developed and approved.

The economic conditions occurring during 2011 and continuing in 2012, including the tightening of available funding in the financial markets, had a significant impact on the extent of advancement on our product development and clinical programs in accordance with our original projected level of operations. Although we have 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
                                                      Less than                                       More than
                                        Total           1 Year        1-3 Years       3-5 Years        5 Years
Facility lease - Franklin, MA        $  2,243,000     $  421,000     $   873,000     $   911,000     $    38,000
Facility lease - Philadelphia, PA         885,000        182,000         377,000         326,000               -
Operating lease obligations                13,000          8,000           5,000               -               -
Capital lease obligation                    5,000          3,000           2,000               -               -
Total                                $  3,146,000     $  614,000     $ 1,257,000     $ 1,237,000     $­38,000

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Off-Balance Sheet Arrangements

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

Effect of Inflation and Changes in Prices

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

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