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ECTE > SEC Filings for ECTE > Form 10-Q on 14-Aug-2014All Recent SEC Filings

Show all filings for ECHO THERAPEUTICS, INC.

Form 10-Q for ECHO THERAPEUTICS, INC.


14-Aug-2014

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, 2013 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 the outcome of current litigation and those discussed in "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 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 the Symphony CGM System as a non-invasive, wireless, continuous glucose monitoring system for use initially in the critical care setting. A significant longer-term opportunity may also exist for Symphony to be used in the hospital beyond the critical care setting, as well as in patients with diabetes in the outpatient setting. We have also developed our needle-free skin preparation device, the Symphony SkinPrep System, as a platform technology to enhance extraction of analytes and delivery of topical pharmaceuticals.

Research and Development

We believe that ongoing research and development ("R&D") 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 $3,148,000 for the six months ended June 30, 2014 and $11,299,000 for the year ended December 31, 2013. 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.

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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 28, 2014.

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 June 30, 2014 and 2013

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. Periodically, we have adjusted our amortization period for revenue recognition for each of our license arrangements to reflect a revision in the estimated timing of regulatory approval. We determined that approximately $19,000 and $23,000 of licensing revenue was recognizable in the three months ended June 30, 2014 and 2013, respectively.

Research and Development Expenses - Research and development expenses decreased by approximately $2,272,000, or 57%, to approximately $1,747,000 for the three months ended June 30, 2014 from approximately $4,019,000 for the three months ended June 30, 2013. R&D expenses decreased primarily as a result of engineering and design expenses incurred in 2013 with outside contractors and personnel relating to Symphony that did not reoccur in 2014.

R&D expenses for Symphony amounted to approximately 44% and 66% of total operating expenses during the three months ended June 30, 2014 and 2013, respectively. For the three months ended June 30, 2014, expenses consisted of primarily development, clinical and manufacturing of $1,171,000, $125,000 and $184,000, respectively. For the three months ended June 30, 2013, expenses consisted of primarily development, clinical and manufacturing of $3,016,000, $762,000 and $201,000, respectively.

Selling, General and Administrative Expenses - Selling, general and administrative expenses increased by approximately $89,000, or 4%, to approximately $2,187,000 for the three months ended June 30, 2014 from approximately $2,098,000 for the three months ended June 30, 2013. Selling, general and administrative expenses represented 56% and 34% of total operating expenses during the three months ended June 30, 2014 and 2013, respectively.

As a result of Management's effort at reducing cost, during the three months ended June 30, 2014, the Company experienced a decrease of approximately $823,000 in expenses as compared to the same period during 2013, for which the majority of the savings were related to personnel costs of approximately $330,000, investor relations of approximately $130,000 and public company filing fees of approximately $190,000. However, these expense savings during the three months ended June 30, 2014 were offset by approximately $910,000 in expenses, many of which were unplanned and were primarily related to an increase in costs associated with our proxy advisory solicitation services for approximately $286,000, legal and intellectual property expense of approximately $180,000, other proxy and contested stockholder election costs of approximately $274,000, and recruiting costs of approximately $170,000.

Interest Income - Interest income was approximately $1,000 and $1,000 for each of the three months ended June 30, 2014 and 2013, respectively.

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Interest Expense - Interest expense was approximately $244,000 and $242,000 for the three months ended June 30, 2014 and 2013, respectively. The increase in interest expense in for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 is a result of an insurance premium financing arrangement established in 2014. The remaining 2014 and the entire 2013 interest expense represents the amortization of deferred financing costs for the fair value of the Commitment Warrant issued pursuant to the Montaur Credit Facility established in August 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 June 30, 2014 and 2013 was approximately $393,000 and $2,995,000, respectively.

Net Loss - As a result of the factors described above, we had a net loss of approximately $3,764,000 for the three months ended June 30, 2014 compared to approximately $3,341,000 for the three months ended June 30, 2013.

Comparison of the Six Months ended June 30, 2014 and 2013

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. Periodically, we have adjusted our amortization period for revenue recognition for each of our license arrangements to reflect a revision in the estimated timing of regulatory approval. We determined that approximately $38,000 and $45,000 of licensing revenue was recognizable in the six months ended June 30, 2014 and 2013, respectively.

Research and Development Expenses - Research and development expenses decreased by approximately $4,091,000, or 57%, to approximately $3,148,000 for the six months ended June 30, 2014 from approximately $7,239,000 for the six months ended June 30, 2013. R&D expenses decreased primarily as a result of engineering and design expenses incurred in 2013 with outside contractors and personnel relating to Symphony that did not reoccur in 2014.

R&D expenses for Symphony amounted to approximately 48% and 62% of total operating expenses during the six months ended June 30, 2014 and 2013, respectively. For the six months ended June 30, 2014, expenses consisted of primarily development, clinical and manufacturing of $1,766,000, $288,000 and $401,000 respectively. For the six months ended June 30, 2013, expenses consisted of primarily development, clinical and manufacturing of $6,084,000, $842,000 and $226,000, respectively.

Selling, General and Administrative Expenses - Selling, general and administrative expenses decreased by approximately $923,000, or 21%, to approximately $3,475,000 for the six months ended June 30, 2014 from approximately $4,398,000 for the six months ended June 30, 2013. Selling, general and administrative expenses represented 52% and 38% of total operating expenses during the six months ended June 30, 2014 and 2013, respectively.

As a result of Management's effort at reducing cost, during the first six months of 2014 the Company experienced a decrease of approximately $1,664,000 in expenses as compared to the same period in 2013, for which the majority of the savings were related to personnel costs of approximately $800,000, investor relations cost reductions of approximately $380,000, public company filing fees of approximately $204,000 and marketing cost reductions of $280,000. However these expense savings were partially offset by approximately $740,000 in expenses, many of which were unplanned and primarily related to an increase in costs associated with our proxy advisory solicitation services of approximately $286,000, legal expenses of approximately $20,000, other proxy and contested stockholder election costs of approximately $274,000, and overall recruiting costs of approximately $160,000.

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Interest Income - Interest income was approximately $1,000 and $2,000 for each of the six months ended June 30, 2014 and 2013, respectively.

Interest Expense - Interest expense was approximately $487,000 and $3,416,000 for the six months ended June 30, 2014 and 2013, respectively. The decrease in interest expense in 2014 over 2013 was related to noncash deferred financing costs in 2013 incurred in conjunction with our Credit Facility with Montaur that did not reoccur in 2014. The 2013 interest expense represents the amortization of deferred financing costs for the fair value of the Commitment Warrant issued pursuant to the Montaur Credit Facility and interest incurred on the outstanding notes repaid in March 2013. The 2014 expense represents primarily amortization of the same deferred financing costs plus other interest expense resulting from the insurance premium financing arrangement established in 2014.

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 six months ended June 30, 2014 and 2013 was approximately $533,000 and $4,676,000, respectively.

Net Loss - As a result of the factors described above, we had a net loss of approximately $6,537,000 for the six months ended June 30, 2014 compared to approximately $10,330,000 for the six months ended June 30, 2013.

Recent Management Changes

Effective at midnight on June 30, 2014, Robert F. Doman's consulting contract with Echo expired in accordance with its terms and, accordingly, he no longer serves as the Interim Chief Executive Officer of Echo. On June 30, 2014, the Board appointed Kimberly A. Burke to serve as Interim Chief Executive Officer of Echo, effective July 1, 2014 and continuing for the sixty-day period expiring on August 30, 2014 or, if earlier, such date as a candidate is identified and appointed by the Board to serve as Echo's Chief Executive Officer. Ms. Burke also serves as Echo's Principal Executive Officer and continues to serve the Company as General Counsel and Chief Compliance Officer. The Board continues to work with a retained executive search firm to hire a well-qualified Chief Executive Officer. William Grieco, the Chairman of the Company's Nominating and Corporate Governance Committee, is leading this search for the Board.

Effective July 15, 2014, Christopher P. Schnittker resigned as Senior Vice President and Chief Financial Officer of Echo to accept another opportunity. Effective July 16, 2014, the Board appointed Charles T. Bernhardt to serve as Interim Chief Financial Officer of Echo.

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 our non-revolving Montaur 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 June 30, 2014, we had approximately $4,106,000 of cash and cash equivalents, with no other short term investments. Management intends to actively pursue additional financing to fund its operations. In the case that additional funding or financing is not available or acceptable to the Company, no assurances can be given that operations will be funded beyond November 30, 2014, as projected with our recently enacted cost reductions (see Note 15).

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Pursuant to the SPA between the Company and MTIA, as amended on January 30, 2014, in March 2014 and on June 17, 2014, the Company would sell 1,818,182 shares of its Common Stock and 181,818 Warrants to purchase its Common Stock to MTIA for an aggregate purchase price of $5,000,000, such sales to be made in three installments through March 27, 2014. From February 4, 2014 through April 15, 2014, the Company received gross proceeds of $2,400,000 of the anticipated $5,000,000 in connection with the SPA. In connection with the receipt of those proceeds, the Company has issued to MTIA 872,728 shares of its Common Stock and 87,274 Warrants to purchase its Common Stock (see Note 8). Based on representations made by MTIA to the Company, the Company had anticipated the receipt of the full $5,000,000 from MTIA despite the fact that the funding dates in the SPA, as amended, have passed without receipt of funds from MTIA. MTIA's failure to provide funds in a timely manner resulted in its material breach of the SPA, which has subsequently expired. The Company remains in discussions with MTIA regarding MTIA's purchase of the additional $2,600,000 in Company securities and MTIA continues to reiterate its interest in the Company's Symphony CGM System, to which MTIA is entitled only after completing its investment in the Company. No assurances can be given, however, that the Company will be successful in entering into a new agreement with MTIA.

Net cash used in operating activities was approximately $6,517,000 for the six months ended June 30, 2014. The use of cash in operating activities was primarily attributable to the net loss of approximately $6,537,000, adjusted for non-cash items and changes in assets and liabilities.

Net cash provided by investing activities was approximately $219,000 for the six months ended June 30, 2014. Cash of approximately $250,000 was released for restricted cash held in escrow under a letter of credit for the benefit of a vendor during the six month period ended June 30, 2014 at the end of that vendor relationship.

Net cash provided by financing activities was approximately $2,350,000 for the six months ended June 30, 2014, which consisted of $2,400,000 in proceeds less $50,000 in issuance costs during the period from our private placement with MTIA less related financing expenses.

At June 30, 2014, we had outstanding Warrants to purchase 1,211,485 shares of Common Stock at exercise prices ranging from $2.75 per share to $30.00 per share with a weighted average exercise price of $17.29 per share. If exercised in full, these could future provide cash proceeds to the Company of approximately $20,943,000.

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

We endeavor to manage our costs aggressively and increase our operating efficiencies while advancing our medical device product development and clinical programs. During the six months ended June 30, 2014, 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, pursue CE Marking and FDA approval for Symphony and support our operating activities, our monthly operating costs associated with salaries and benefits, regulatory and public company, consulting, contract engineering and manufacturing, legal and other working capital costs may increase. In the past, we have relied primarily on raising capital or issuing debt in order to meet our operating budget needs 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.

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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.

We have generated limited revenue and have had operating losses since inception, including a net loss of approximately $19,067,000 and $6,537,000 for the year ended December 31, 2013 and six months ended June 30, 2014, respectively. As of June 30, 2014, we had an accumulated deficit of approximately $119,506,000. We have no current sources of material ongoing revenue, other than the recognition of revenue from upfront license fees and potential future milestone payments and royalties under our current license and collaboration agreements. Our losses have resulted principally from costs incurred in connection with our research and development activities and from general and administrative costs associated with our operations. We also expect to have negative cash flows for the foreseeable future as we fund our operating losses and capital expenditures. This will result in decreases in our working capital, total assets and stockholders' equity, which may not be offset by future funding.

Continued operating losses would impair our ability to continue operations. We have operating and liquidity concerns due to our significant net losses and negative cash flows from operations. Our ability to continue as a going concern is dependent upon generating sufficient cash flow to conduct operations or obtaining additional financing. Historically, we have had difficulty in meeting our cash requirements for operations. There can be no assurances that we will obtain the necessary funding, reduce the level of historical losses and achieve successful commercialization of any of our drug product candidates. If we cannot obtain additional funding, we may be required to revise our operating plans, and there can be no assurance that we will be able to change our operating plan successfully.

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 a large number of Warrants and stock 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.

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