10-Q

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 September 30, 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 [  ]	Non-accelerated filer [  ]	Smaller reporting company [X]
(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 November 6, 2013, 10,556,281 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 SEPTEMBER 30, 2013
TABLE OF CONTENTS

Item		Page
	PART I - FINANCIAL INFORMATION
1.	Consolidated Financial Statements (Unaudited):
	Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012	1
	Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012	2
	Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2013 and 2012	3
	Notes to Consolidated Financial Statements	5
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
4.	Controls and Procedures	21
	PART II - OTHER INFORMATION
1.	Legal Proceedings	21
6.	Exhibits	21
SIGNATURES		22
EXHIBIT INDEX

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PART I—FINANCIAL INFORMATION

SPECIAL NOTE

All share numbers and share prices presented in this Quarterly Report on Form 10-Q have been adjusted to reflect the 1-for-10 reverse stock split of Echo Therapeutics, Inc.’s common stock effected on June 7, 2013.

ITEM 1.  FINANCIAL STATEMENTS.

ECHO THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30, 2013			December 31, 2012
ASSETS
Current Assets:
Cash and cash equivalents	$	6,068,469		$	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		127,110			75,626
Total current assets		7,821,046			5,198,303
Property and Equipment, at cost:
Computer equipment		323,489			367,854
Office and laboratory equipment (including assets under capitalized leases)		716,531			732,296
Furniture and fixtures		755,444			728,269
Manufacturing equipment		111,980			156,435
Leasehold improvements		825,589			818,939
		2,733,033			2,803,793
Less-Accumulated depreciation and amortization		(1,146,135	)		(1,165,398	)
Net property and equipment (including assets under capitalized leases)		1,586,898			1,638,395
Other Assets:
Intangible assets, net of accumulated amortization		9,625,000			9,625,000
Deferred financing costs, net of current portion		2,823,325			3,549,328
Other assets		12,066			10,566
Total other assets		12,460,391			13,184,894
Total assets	$	21,868,335		$	20,021,592
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	1,551,092		$	2,319,219
Deferred revenue from licensing arrangements, current portion		90,228			90,228
Capital lease obligation, current portion		2,017			2,527
Derivative warrant liability		979,155			5,585,141
Accrued expenses and other current liabilities		1,595,920			1,581,448
Total current liabilities		4,218,412			9,578,563
Capital lease obligation, net of current portion		—			1,361
Note payable, net of discount		—			120,834
Deferred revenue from licensing arrangements, net of current portion		22,557			90,228
Total liabilities		4,240,969			9,790,986
Commitments and contingencies
Stockholders’ Equity:
Convertible Preferred Stock:
Series C, $0.01 par value, authorized 10,000 shares, issued and outstanding 9,974.185 shares at September 30, 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 September 30, 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 10,699,990 and 4,437,346 shares at September 30, 2013 and December 31, 2012, respectively		107,003			44,374
Additional paid-in capital		126,958,986			104,058,087
Accumulated deficit		(109,468,783	)		(93,902,015	)
Total stockholders’ equity		17,627,366			10,230,606
Total liabilities and stockholders’ equity	$	21,868,335		$	20,021,592

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

(Reflects 1-for-10 reverse stock split effective June 7, 2013)

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Echo Therapeutics, Inc.

Consolidated Statements of Operations

(Unaudited)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2013			2012			2013				2012
Licensing revenue	$	22,557		$	30,927		$	67,671		$	92,781
Total revenues		22,557			30,927			67,671			92,781
Operating Expenses:
Research and development		2,756,005			2,139,465			9,994,877			5,731,417
Selling, general and administrative		2,192,412			1,508,069			6,590,206			4,702,325
Total operating expenses		4,948,417			3,647,534			16,585,083			10,433,742
Loss from operations		(4,925,860	)		(3,616,607	)		(16,517,412	)		(10,340,961	)
Other Income (Expense):
Interest income		877			635			2,580			5,150
Interest expense		(242,062	)		(89,123	)		(3,657,921	)		(89,407	)
Debt financing costs		−			(160,000	)		−			(160,000	)
Loss on disposals of assets		−			−			−			(21,272	)
Gain (loss) on revaluation of derivative warrant liability		(70,000	)		(400,000	)		4,605,986			201,281
Other income (expense), net		(311,185	)		(648,488	)		950,645			(64,248	)
Net loss	$	(5,237,045	)	$	(4,265,095	)	$	(15,566,767	)	$	(10,405,209	)
Net loss per common share, basic and diluted	$	(0.49	)	$	(1.07	)	$	(2.06	)	$	(2.65	)
Basic and diluted weighted average common shares outstanding		10,688,781			3,985,888			7,571,733			3,925,637

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

(Reflects 1-for-10 reverse stock split effective June 7, 2013)

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ECHO THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Nine Months Ended September 30,
	2013			2012
Cash Flows From Operating Activities:
Net loss	$	(15,566,767	)	$	(10,405,209	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property and equipment		288,883			75,772
Share-based compensation, net		908,983			920,251
Fair value of common stock issued for services		89,970			118,465
Gain on revaluation of derivative warrant liability		(4,605,986	)		(201,281	)
Amortization of discount on note payable		2,879,166			5,556
Amortization of non-cash deferred financing costs		726,003			80,667
Non-cash loss on disposals of assets		—			21,272
Non-cash debt financing costs		—			160,000
Changes in assets and liabilities:
Accounts receivable		—			37,065
Prepaid expenses and other current assets		(51,484	)		99,041
Other assets		(1,500	)		9,999
Accounts payable		(768,127	)		664,190
Deferred revenue from licensing arrangements		(67,671	)		(92,781	)
Accrued expenses and other liabilities		14,472			637,633
Net cash used in operating activities		(16,154,058	)		(7,869,360	)
Cash Flows from Investing Activities:
Purchase of furniture, equipment and leasehold improvements		(237,387	)		(985,158	)
Increase in restricted cash		(250,000	)		(157,463	)
Net cash used in investing activities		(487,387	)		(1,142,621	)
Cash Flows From Financing Activities:
Proceeds from issuances of common stock, net of expenses		21,964,575			6,667
Proceeds from Platinum note payable		—			1,000,000
Repayment of Platinum note payable		(3,000,000	)		—
Principal payments on capital lease obligations		(1,871	)		(1,694	)
Proceeds from exercise of warrants		—			212,017
Proceeds from exercise of stock options		—			195,260
Net cash provided by financing activities		18,962,704			1,412,250
Net increase (decrease) in cash and cash equivalents		2,321,259			(7,599,731	)
Cash and cash equivalents, beginning of period		3,747,210			8,995,571
Cash and cash equivalents, end of period	$	6,068,469		$	1,395,840

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

-3-

Echo Therapeutics, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

Supplemental Disclosure of Cash Flow Information and Non-Cash Financing Transactions:
	For the Nine Months Ended September 30,
	2013		2012
Cash paid for interest	$	114,082	$	408
Reclassification of derivative warrant liability to additional paid-in capital	$	—	$	61,520
Fair value of common stock issued in connection with settlement agreement	$	—	$	208,000
Fair value of Commitment Warrant issued in connection with debt financing	$	—	$	4,840,000
Fair value of Draw Warrant issued for note payable recorded as discount	$	—	$	1,000,000
Fair value of Draw Warrant issued for note payable recorded as debt financing costs	$	—	$	160,000

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

-4-

Echo Therapeutics, Inc.

Notes To Consolidated Financial Statements

Quarter Ended September 30, 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.  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.

 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 September 30, 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.

 On June 7, 2013, the Company effected a 1-for-10 reverse stock split of its common stock. All share and per share information has been retroactively restated to reflect this reverse stock split.

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 September 30, 2013, the Company had cash of approximately $6,068,000, working capital of approximately $3,603,000, and an accumulated deficit of approximately $109,469,000.  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, securing collaborative arrangements with strategic partners, 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 September 30, 2013, the Company held approximately $6,068,000 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.

-5-

Restricted Cash

 As of September 30, 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 one of its landlords.  As of December 31, 2012, restricted cash consisted 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 one of its landlords.

(3)  INTANGIBLE ASSETS

 The Company’s intangible assets are related to the acquisition of certain assets related to AzoneTS-based technology from Durham Pharmaceuticals Ltd. in 2007.  Following the acquisition in 2007, the Company has modestly advanced the development programs for DurhalieveTM for the treatment of corticosteroid-responsive dermatoses and for the early stage AzoneTS reformulation drug candidates. Among other things, the Company has monitored stability on new drug formulations, worked on a complete response on the Durhalieve New Drug Application, met with the FDA on  development status, assembled a response for the methotrexate-AzoneTS ‘end of Phase 2’ meeting with the FDA, engaged consultants to review and recommend new product candidates and formulations, and conducted partnering activities around the technology.  In addition, the Company has made applicable regulatory filings necessary to maintain the active status of the AzoneTS Drug Master File, the Durhalieve and MAZ Investigational New Drug applications and the MAZ Orphan Drug application with the FDA.

 As of September 30, 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	4.5 years		1,305,000		—		1,305,000		1,305,000
Drug Master Files containing formulation, clinical and safety documentation used by the FDA	4.5 years		1,500,000		—		1,500,000		1,500,000
In-process pharmaceutical products for 2 indications	4.5 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 could occur as early as the middle of 2015.  The Cato Research contract included above 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		—
2015		1,069,000
2016		2,139,000
2017		2,139,000

-6-

 In periodically reviewing the carrying value of intangible assets, the Company considered if there have been events or circumstances that would indicate that the carrying amount of the intangible assets may not be recoverable.  If such events or circumstances existed, the Company performed an impairment test in accordance with FASB ASC 360-10. Under that standard, the first step in the impairment analysis is to compare the undiscounted cash flows to the carrying value of the intangibles.  The project’s undiscounted cash flows exceeded the carrying value at each of the Company’s assessment dates following acquisition, including December 31, 2012.  As a result, it was not necessary for the Company to conduct further analysis or to make a determination of the fair value of the intangible assets and thereby the Company concluded that there was no impairment.  It is the Company’s policy to evaluate intangible assets for impairment at least annually in connection with its year end financial statement preparation.

(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 and approximately 1,060 square feet of residential space as a corporate apartment in Franklin, Massachusetts under a lease expiring July 24, 2014.

 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 September 30,
2013	$	113,000	$	46,000	$	159,000
2014		447,000		187,000		634,000
2015		444,000		192,000		636,000
2016		454,000		196,000		650,000
2017		382,000		82,000		464,000
Total	$	1,840,000	$	703,000	$	2,543,000

 The Company’s facilities lease expense, including accruals for lease incentives, was approximately $141,000 and $56,000 for the three months ended September 30, 2013 and 2012, respectively, and $530,000 and $207,000 for the nine months ended September 30, 2013 and 2012, respectively.

(5)  DERIVATIVE WARRANT LIABILITY

 At September 30, 2013 and December 31, 2012, the Company had outstanding warrants to purchase 1,050,454 and 1,254,004 shares of its Common Stock, respectively. Included in these outstanding warrants at September 30, 2013 and December 31, 2012 are warrants to purchase 700,000 and 736,015 shares, respectively, that are considered to be derivative financial instruments. The fair value of these derivative instruments at September 30, 2013 and December 31, 2012 was approximately $979,000 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 or loss on revaluation of derivative warrant liability. The Loss on Revaluation of Derivative Warrant Liability for the three months ended September 30, 2013 was approximately $70,000.  The Gain on Revaluation of Derivative Warrant Liability for the nine months ended September 31, 2013 was approximately $4,606,000.  The Gain (Loss) on Revaluation of Derivative Warrant Liability for the three and nine months ended September 30, 2012 was approximately a loss of $400,000 and a gain of $201,281, respectively.

-7-

 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 (Loss) on Revaluation of Derivative Warrant Liability is a result of the change in that fair value.  For the three months ended September 30, 2013, no derivative warrants were exercised and none expired. For the nine months ended September 30, 2013, no derivative warrants were exercised and 45,164 expired. For the nine months ended September 30, 2012, 16,545 derivative warrants were exercised, which resulted in a reclassification of approximately $61,000 from the Derivative Warrant Liability to Additional Paid-in Capital.

 The table below presents the changes in the Level 3 Derivative Warrant Liability measured for the nine months ended September 30, 2013 and 2012:

	2013			2012
Derivative Warrant Liability as of January 1	$	5,585,141		$	1,035,337
Warrants issued under Montaur credit facility		—			6,000,000
Total unrealized losses included in net loss (1)		1,061,682			500,000
Total realized losses included in net loss(1)		—			1,438
Total unrealized gains included in net loss (1)		(5,515,000	)		(595,038	)
Total realized gains included in net loss (1)		(152,668	)		(107,681	)
Reclassification of derivative warrant liability to additional paid-in capital for derivative warrants exercised		—			(61,520	)
Derivative Warrant Liability as of September 30	$	979,155		$	6,772,536

(1)Included in Gain (Loss) 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 September 30, 2013 and December 31, 2012.

Series D Convertible Preferred Stock

 The Company has authorized 3,600,000 shares of Series D Convertible Preferred Stock (the “Series D Stock”), of which 3,006,000 shares were issued and outstanding as of September 30, 2013 and December 31, 2012.

(7)  COMMON STOCK

 The Company has authorized 150,000,000 shares of Common Stock, of which 10,699,990 and 4,437,346 shares were issued and outstanding as of September 30, 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. (“Aegis”), as a representative of several underwriters, with respect to the issuance and sale in an underwritten public offering by the Company of an aggregate of 1,567,833 shares of the Company’s Common Stock (including 204,500 shares sold pursuant to the over-allotment option), at a price to the public of $7.50 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 the 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.

-8-

June 2013 Financing

 On June 13, 2013, the Company entered into an underwriting agreement with Aegis, as a representative of several underwriters, with respect to the issuance and sale in an underwritten public offering by the Company of an aggregate of 4,628,750 shares of the Company’s Common Stock (including 603,750 shares sold pursuant to the over-allotment option), at a price to the public of $2.70 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 the shares in the offering were approximately $11,338,000.

Stock Issued in Exchange for Services

 During the nine months ended September 30, 2013 and 2012, the Company issued 7,450 and 7,033 shares, respectively, of Common Stock with a fair value of $89,970 and $118,465, 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 September 30, 2013, there were 31,125 restricted shares of Common Stock issued and options to purchase an aggregate of 82,125 shares of Common Stock outstanding under the 2003 Plan and none are available for future grants due to the expiration of the 2003 Plan.

 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 May 2013, the Company’s shareholders approved an amendment to the 2008 Plan to fix the maximum number of shares available under the 2008 Plan at 10,000,000 shares following shareholder approval of a 1-for-10 reverse stock split effective June 7, 2013.  As of September 30, 2013, there were 155,761 restricted shares of Common Stock issued and options to purchase an aggregate of 394,011 shares of Common Stock outstanding under the 2008 Plan and 9,592,989 shares available for future grants.

 The following table shows the remaining shares available for future grants for each plan and outstanding shares:

	Equity Compensation Plans
	2003 Plan			2008 Plan
Shares Available For Issuance
Total reserved for stock options and restricted stock		160,000			10,000,000
Net restricted stock issued net of cancellations		(31,125	)		(320,978	)
Stock options granted		(154,449	)		(326,750	)
Add back options cancelled before exercise		67,849			75,500
Less shares no longer available due to Plan expiration		(42,275	)		—
Remaining shares available for future grants at September 30, 2013		—			9,427,772
							Not Pursuant to a Plan
Stock options granted		154,449			326,750			310,000
Less:  Stock options cancelled		(67,849	)		(75,500	)		(138,333	)
Stock options exercised		(35,600	)		(13,000	)		(66,667	)
Net shares outstanding before restricted stock		51,000			238,250			105,000
Net restricted stock issued net of cancellations		31,125			320,978			28,484
Outstanding shares at September 30, 2013		82,125			559,228			133,484

-9-

(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 nine months ended September 30, 2013 and 2012 were as follows:

	2013			2012
Risk-free interest rate		0.13% - 1.89	%		0.94% - 2.05	%
Expected dividend yield		—			—
Expected term	1 - 6.5 years			6.5 years
Forfeiture rate (excluding fully vested stock options)		15	%		15	%
Expected volatility		129% - 141	%		129% - 137	%

 A summary of stock option activity as of and for the nine months ended September 30, 2013 is as follows:

Stock Options	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2013		343,334		$	14.75
Granted		78,250			4.43
Exercised		—			—
Forfeited or expired		(71,916	)		13.38
Outstanding at September 30, 2013		349,668		$	12.45	5.80 years	$	—
Exercisable at September 30, 2013		243,592		$	11.34	4.86 years	$	—

 The weighted-average grant-date fair value of stock options granted during the nine months ended September 30, 2013 was $3.37 per share. Share-based compensation expense related to stock options recognized in the nine months ended September 30, 2013 and 2012 was approximately $554,000 and $720,000, respectively. As of September 30, 2013, there was approximately $1,149,000 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 nine months ended September 30, 2013, the Company granted an aggregate of 64,088 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 $313,000.  Share-based compensation expense related to restricted stock recognized in the nine months ended September 30, 2013 and September 30, 2012 was approximately $355,000 and $200,000, respectively.

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 A summary of the Company’s non-vested restricted stock activity as of and for the nine months ended September 30, 2013, is as follows:

Restricted Stock	Shares			Weighted- Average Grant-Date Fair Value
Non-vested at January 1, 2013		316,044		$	16.60
Granted		64,088			4.88
Vested		(33,042	)		18.38
Forfeited		(24,500	)		9.94
Non-vested at September 30, 2013		322,590		$	14.40

 Among the 322,590 shares of non-vested restricted stock, the various vesting criteria include the following:

· 165,460 shares of restricted stock vest upon the FDA approval of Symphony or the sale of the Company or its assets; and

· 157,130 shares of restricted stock vest over one to four years, at each of the anniversary dates of the grants.

 As of September 30, 2013, there was approximately $863,000 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 September 30, 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.

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(11)  WARRANTS

 At September 30, 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		400,000	$	20.00	8/31/2017
Granted to debt holder		100,000		21.30	9/20/2017
Granted to debt holder		50,000		22.70	10/17/2017
Granted to debt holder		150,000		21.10	11/6/2017
Total outstanding warrants accounted for as derivative warrant liability		700,000
Weighted average exercise price			$	20.61
Weighted average time to expiration in years					3.98 years
Outstanding warrants accounted for as equity:
Granted to investors in private placement of preferred stock		3,228	$	10.00	9/30/2013
Granted to investors in private placement of preferred stock		19,834		15.00	10/28/2013
Granted to investors in private placement of preferred stock		39,000		7.50	2/28/2014
Granted to vendor		6,000		6.00	3/15/2014
Granted to investors in private placement		40,000		15.90	6/30/2014
Granted to investors in private placement		76,800		20.00	11/13/2014
Granted to placement agent in private placement		25,695		15.00	11/13/2014
Granted to investors in private placement		6,300		20.00	12/3/2014
Granted to investors in private placement		34,146		22.50	2/9/2015
Granted to placement agents in private placement		2,853		22.50	2/9/2015
Granted to investor in private placement		638		22.50	3/18/2015
Granted to investors in private placement		95,960		30.00	12/7/2014
Total outstanding warrants accounted for as equity		350,454
Weighted average exercise price			$	20.17
Weighted average time to expiration in years					0.96 years
Totals for all warrants outstanding:
Total		1,050,454
Weighted average exercise price			$	20.46
Weighted average time to expiration in years					2.97 years

 A summary of warrant activity for the nine months ended September 30, 2013 is as follows:

Warrants	Shares			Weighted- Average Exercise Price
Outstanding at January 1, 2013		1,254,004		$	20.08
Granted		9,175			12.60
Exercised		—			—
Forfeited or expired		(212,725	)		17.69
Outstanding at September 30, 2013		1,050,454		$	20.46

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Exercise of Common Stock Warrants

 During the nine months ended September 30, 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 and the right to receive future milestone payments and royalties. The Company recognizes these upfront, nonrefundable payments as revenue on a straight-line basis over the contractual or estimated performance period. During the three months ended September 30, 2013 and 2012, the Company recorded approximately $23,000 and $31,000, respectively, of nonrefundable license revenue.  During the nine months ended September 30, 2013 and 2012, the Company recorded approximately $68,000 and $93,000, respectively, of nonrefundable license revenue.  As of September 30, 2013, approximately $90,000 of deferred revenue remains unrecognized, which will be recognized over the next 12 months and is shown as Deferred Revenue From Licensing Arrangements among current liabilities on the Consolidated Balance Sheet.  Approximately $23,000 of the remaining deferred revenue will be recognized over the period subsequent to the next 12 months and is shown as Deferred Revenue From Licensing Arrangements among non-current liabilities.

(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.

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 Pursuant to the Loan Agreement, the Company issued Montaur a warrant to purchase 400,000 shares of its Common Stock, with a term of five years and an exercise price of $20.00 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 three and nine months ended September 30, 2013 was $242,000 and $726,000, 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 100,000 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 $20.00 or more than $40.00 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 100,000, 50,000 and 150,000 shares of Common Stock, each with a term of five years, and having exercise prices of $21.30, $22.70 and $21.10 per share, respectively.  The fair value of the warrants issued to purchase 300,000 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 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 recorded at the original draws under the balance repaid.

(14)  LITIGATION

 In August 2013, a shareholder derivative action was filed in the Court of Common Pleas of Philadelphia County naming as defendant the Company, its directors and certain of its officers.  The complaint seeks unspecified amount of damages and principally alleges breaches of fiduciary duty and gross mismanagement related to the Loan Agreement and the Company’s prepayment of the outstanding balance under the Montaur Promissory Note.  Based on a preliminary review and analysis of the complaints, the Company believes that this lawsuit is without merit and intends to defend it vigorously. The Company is not presently able to estimate the potential losses, if any, related to this lawsuit.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS.

 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.  The PreludeSkinPrep 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.

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 $9,995,000 for the nine months ended September 30, 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.

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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 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 September 30, 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. 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 $23,000 and $31,000 of licensing revenue was recognizable in the three months ended September 30, 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 September 30, 2013, and 2012, respectively.

 Research and Development Expenses — Research and development expenses increased by approximately $617,000, or 29%, to approximately $2,756,000 for the three months ended September 30, 2013 from approximately $2,139,000 for the three months ended September 30, 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 56% and 59% of total operating expenses during the three months ended September 30, 2013 and 2012, respectively.  For the three months ended September 30, 2013, expenses consisted of primarily development, clinical and manufacturing of $2,274,000, $240,000 and $157,000, 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.

 Selling, General and Administrative Expenses — Selling, general and administrative expenses increased by approximately $684,000, or 45%, to approximately $2,192,000 for the three months ended September 30, 2013 from approximately $1,508,000 for the three months ended September 30, 2012.

 Selling, general and administrative expenses represented 44% and 41% of total operating expenses during the three months ended September 30, 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.  We have also begun prelaunch marketing and manufacturing activities and added related personnel, which accounts for much of the increase period over period to date.

 Interest Income — Interest income was approximately $900 and $600 for each of the three months ended September 30, 2013 and 2012, respectively.

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 Interest Expense — Interest expense was approximately $242,000 and $89,000 for the three months ended September 30, 2013 and 2012, respectively.  The increase in interest expense in 2013 is related to our Credit Facility with Montaur.  The 2013 interest expense represents the amortization of deferred financing costs for the fair value of the Commitment Warrant issued pursuant to the loan agreement.

 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, 2013 and 2012 was approximately $70,000 and $400,000, respectively.

 Net Loss — As a result of the factors described above, we had a net loss of approximately $5,237,000 for the three months ended September 30, 2013 compared to approximately $4,265,000 for the three months ended September 30, 2012.

Comparison of the Nine Months ended September 30, 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. 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 $68,000 and $93,000 of licensing revenue was recognizable in the nine months ended September 30, 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 nine months ended September 30, 2013, and 2012, respectively.

 Research and Development Expenses — Research and development expenses increased by approximately $4,264,000, or 74%, to approximately $9,995,000 for the nine months ended September 30, 2013 from approximately $5,731,000 for the nine months ended September 30, 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 60% and 55% of total operating expenses during the nine months ended September 30, 2013 and 2012, respectively.  For the nine months ended September 30, 2013, expenses consisted of primarily development, clinical and manufacturing of $8,358,000, $1,082,000 and $383,000, 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.

 Selling, General and Administrative Expenses — Selling, general and administrative expenses increased by approximately $1,888,000, or 40%, to approximately $6,590,000 for the nine months ended September 30, 2013 from approximately $4,702,000 for the nine months ended September 30, 2012.

 Selling, general and administrative expenses represented 40% and 45% of total operating expenses during the nine months ended September 30, 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.  We have also begun prelaunch marketing and manufacturing activities and added related personnel, which accounts for much of the increase period over period to date.

 Interest Income — Interest income was approximately $3,000 and $5,000 for each of the nine months ended September 30, 2013 and 2012, respectively.

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 Interest Expense — Interest expense was approximately $3,658,000 and $5,000 for the nine months ended September 30, 2013 and 2012, respectively.  The increase in interest expense in 2013 is related to our Credit Facility with Montaur.  This interest expense is primarily comprised of $2,879,000 in unamortized debt discount that was recognized at the prepayment of all outstanding draws on March 1, 2013.  An additional $726,000 in interest expense represents the amortization of deferred financing costs for the fair value of the Commitment Warrant issued pursuant to the loan agreement.  The remaining $53,000 in interest expense represents the interest incurred in 2013 on the $3,000,000 loan prior to its repayment.

 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, 2013 and 2012 was approximately $4,606,000 and $201,000, respectively.

 Net Loss — As a result of the factors described above, we had a net loss of approximately $15,567,000 for the nine months ended September 30, 2013 compared to approximately $10,405,000 for the nine months ended September 30, 2012.

Recent Management Changes

On August 26, 2013, we announced that Robert F. Doman will serve as the Company’s Executive Chairman and Interim Chief Executive Officer pursuant to a consulting agreement and that the Company’s then current Chief Executive Officer, President and Chairman of the Board, Dr. Patrick Mooney, will be taking an immediate leave of absence.

On September 28, 2013, Dr. Mooney’s employment as Chief Executive Officer and President was terminated effective as of September 27, 2013.  Accordingly, the Employment Agreement by and between the Company and Dr. Mooney dated September 14, 2007 (the “Employment Agreement”) was terminated as of September 27, 2013.  Neither Dr. Mooney’s termination nor the termination of the Employment Agreement resulted in any severance payments or severance benefits.

Cost Reduction Initiatives

 During the quarter ended September 30, 2013, we implemented a number of substantial cost reduction measures in ways that will not diminish our ability to execute on our short-term objectives as part of a restructuring plan recommended by our Executive Chairman and Interim CEO and approved by Echo’s Independent Board of Directors on September 30, 2013. This will be achieved through cost-cutting initiatives aimed at reducing future operating costs, particularly marketing and manufacturing expenditures and corporate general and administrative costs. While improving operating efficiency and containing costs are on-going priorities, we have targeted cost reductions across all aspects of our operations in both external spend and head count. On September 30, 2013, we implemented a staff reduction of approximately 33% of our workforce. As a result of these initiatives, the burn rate for the quarter ended December 31, 2013 is expected to decrease by approximately 35-40% from the quarterly burn rate experienced during the first three quarters of 2013.

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 September 30, 2013, we had approximately $6,068,000 of cash and cash equivalents, with no other short term investments.  During the nine months ended September 30, 2013, in two public Common Stock offerings in January 2013 and June 2013, we raised approximately $21,965,000, after deducting underwriting discounts and other offering expenses payable by the Company.  At the time of the January 2013 offering, we stated our intention to use a portion of the net proceeds of the offering to prepay the outstanding balance of the Note we issued to Montaur in connection with the Credit Facility.  As of March 1, 2013, the balance under the Note was $3,113,366, which was comprised of $3,000,000 of principal and $113,366 of accrued and unpaid interest.  We paid the balance under the Note 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 remain eligible to make draws in accordance with the Loan Agreement.  At this time, we have no plans to utilize the Credit Facility to fund our future operations.

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 Net cash used in operating activities was approximately $16,154,000 for the nine months ended September 30, 2013.  The use of cash in operating activities was primarily attributable to the net loss of approximately $15,567,000, adjusted for non-cash items and changes in assets and liabilities.

 Net cash used in investing activities was approximately $487,000 for the nine months ended September 30, 2013.  Cash of approximately $250,000 was used in increasing restricted cash held in escrow under a letter of credit for the benefit of a vendor during the nine month period ended September 30, 2013.  Also, cash of approximately $237,000 was used to purchase furniture, equipment and leasehold improvements during the nine months ended September 30, 2013.

 Net cash provided by financing activities was approximately $18,963,000 for the nine months ended September 30, 2013.  We received approximately $21,965,000 from our two public Common Stock offerings, offset by the repayment of the entire $3,000,000 principal balance of our Note issued to Montaur in connection with our Credit Facility.

 At September 30, 2013, we had outstanding warrants to purchase 1,050,454 shares of Common Stock at exercise prices ranging from $6.00 per share to $30.00 per share.  If exercised in full, these could future 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 endeavor 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, 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, 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.

 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.

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 The economic conditions occurring since 2007, 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 fundraising challenges for emerging medical device and pharmaceutical companies. Our future product and clinical development programs and regulatory activities are dependent on obtaining additional funding from investors or lenders. 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 main operating facility.  We have also executed a lease for residential space for use as a corporate apartment in Franklin, Massachusetts through July 24, 2014.  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 leases – Franklin, MA	$	1,841,000	$	450,000	$	894,000	$	497,000	$	—
Facility lease – Philadelphia, PA		703,000		186,000		385,000		132,000		—
Operating lease obligations		5,000		5,000		—		—		—
Capital lease obligation		2,000		2,000		—		—		—
Total	$	2,551,000	$	643,000	$	1,279,000	$	629,000	$	—

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.

-20-

ITEM 4.  CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

 Our management, with the participation of our Interim 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 Interim 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 Interim 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 1.  LEGAL PROCEEDINGS.

 The information set forth in Part II, Item 1 of the Company’s Quarterly Report on Form 10-Q filed on August 9, 2013 is incorporated herein by reference.

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.

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SIGNATURES

 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ECHO THERAPEUTICS, INC.
Date: November 7, 2013
	By:  /s/ Robert F. Doman
	Robert F. Doman Interim Chief Executive Officer (Principal Executive Officer)
	By:  /s/ Christopher P. Schnittker
	Christopher P. Schnittker, CPA Senior Vice President and Chief Financial Officer (Principal Financial Officer)

-22-

EXHIBIT INDEX

Exhibit No.	Description
10.1	First Amendment to the Consulting Agreement entered into as of October 3, 2013 by and between the Registrant and Robert F. Doman.
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 September 30, 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.

EX-10.1

Exhibit 10.1

FIRST AMENDMENT

TO CONSULTING AGREEMENT

 This FIRST AMENDMENT TO CONSULTING AGREEMENT is entered into as of October 3, 2013 (the “Amendment”) by and between Echo Therapeutics, Inc., a Delaware corporation (the “Company”), and Robert F. Doman, an individual (“Consultant”).

RECITALS

 WHEREAS, reference is hereby made to the Consulting Agreement entered into as of August 26, 2013 (as amended, restated, supplemented or otherwise modified, the “Agreement”) by and between Consultant and the Company; and

 WHEREAS, Consultant and the Company have mutually agreed that the financial terms of the Agreement be amended as set forth herein.

 NOW, THEREFORE, the parties hereto agree as follows:

 1. DefinedTerms.  Unless otherwise defined herein, terms used herein are used as defined in the Agreement, as amended hereby.

 2. Amendment of the Agreement.  Section 3(a) of the Agreement is hereby amended by replacing the phrase “$2,500 per day” with “$8,000 per calendar week”.  Except as expressly modified herein, all other provisions of the Agreement shall remain unchanged and in full force and effect.

 3. Effective Date.  This Amendment shall be effective as of August 26, 2013.

 4. Governing Law.  This Amendment shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania.

 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written.

ECHO THERAPEUTICS, INC.

By: /s/ William Grieco

William Grieco

Chairman, Nominating and Corporate Governance Committee of the Board of Directors

Dated:  October 3, 2013

ROBERT F. DOMAN

By: /s/ Robert F. Doman

Dated: October 3, 2013

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Robert F. Doman, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Echo Therapeutics, Inc. (the “Company”) for the quarter ended September 30, 2013;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of and for the periods presented in this report;

4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

(a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period on which this report is being prepared;

(b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)   Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

(d)   Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors:

(a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date: November 7, 2013

/s/ Robert F. Doman                                                                           

Robert F. Doman

Interim Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Christopher P. Schnittker, CPA, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Echo Therapeutics, Inc. (the “Company”) for the quarter ended September 30, 2013;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of and for the periods presented in this report;

4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

(a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period on which this report is being prepared;

(b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)   Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

(d)   Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors:

(a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date: November 7, 2013

/s/ Christopher P. Schnittker                                                                           

Christopher P. Schnittker, CPA

Senior Vice President and Chief Financial Officer

(Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 In connection with the Quarterly Report on Form 10-Q of Echo Therapeutics, Inc. (the “Company”) for the quarter ended September 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert F. Doman, Interim Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002:

 1.  The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 2.  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Robert F. Doman                                                                           

Robert F. Doman

Interim Chief Executive Officer

(Principal Executive Officer)

November 7, 2013

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 In connection with the Quarterly Report on Form 10-Q of Echo Therapeutics, Inc. (the “Company”) for the quarter ended September 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Christopher P. Schnittker, CPA, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002:

 1.  The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 2.  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Christopher P. Schnittker                                                                                

Christopher P. Schnittker, CPA

Senior Vice President and Chief Financial Officer

(Principal Financial Officer)

November 7, 2013

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LICENSING AND OTHER REVENUE

9 Months Ended

Sep. 30, 2013

Notes to Financial Statements

Note 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 and the right to receive future milestone payments and royalties. The Company recognizes these upfront, nonrefundable payments as revenue on a straight-line basis over the contractual or estimated performance period. During the three months ended September 30, 2013 and 2012, the Company recorded approximately $23,000 and $31,000, respectively, of nonrefundable license revenue.  During the nine months ended September 30, 2013 and 2012, the Company recorded approximately $68,000 and $93,000, respectively, of nonrefundable license revenue.  As of September 30, 2013, approximately $90,000 of deferred revenue remains unrecognized, which will be recognized over the next 12 months and is shown as Deferred Revenue From Licensing Arrangements among current liabilities on the Consolidated Balance Sheet.  Approximately $23,000 of the remaining deferred revenue will be recognized over the period subsequent to the next 12 months and is shown as Deferred Revenue From Licensing Arrangements among non-current liabilities.

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Consolidated Statements of Operations (Unaudited) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Income Statement [Abstract]
Licensing revenue	$ 22,557	$ 30,927	$ 67,671	$ 92,781
Total revenues	22,557	30,927	67,671	92,781
Operating Expenses:
Research and development	2,756,005	2,139,465	9,994,877	5,731,417
Selling, general and administrative	2,192,412	1,508,069	6,590,206	4,702,325
Total operating expenses	4,948,417	3,647,534	16,585,083	10,433,742
Loss from operations	(4,925,860)	(3,616,607)	(16,517,412)	(10,340,961)
Other Income (Expense):
Interest income	877	635	2,580	5,150
Interest expense	(242,062)	(89,123)	(3,657,921)	(89,407)
Debt financing costs		(160,000)		(160,000)
Loss on disposals of assets				(21,272)
Gain (loss) on revaluation of derivative warrant liability	(70,000)	(400,000)	4,605,986	201,281
Other income (expense), net	(311,185)	(648,488)	950,645	(64,248)
Net loss	$ (5,237,045)	$ (4,265,095)	$ (15,566,767)	$ (10,405,209)
Net loss per common share, basic and diluted	$ (0.49)	$ (1.07)	$ (2.06)	$ (2.65)
Basic and diluted weighted average common shares outstanding	10,688,781	3,985,888	7,571,733	3,925,637

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DERIVATIVE WARRANT LIABILITY

9 Months Ended

Sep. 30, 2013

Notes to Financial Statements

Note 5. DERIVATIVE WARRANT LIABILITY

 At September 30, 2013 and December 31, 2012, the Company had outstanding warrants to purchase 1,050,454 and 1,254,004 shares of its Common Stock, respectively. Included in these outstanding warrants at September 30, 2013 and December 31, 2012 are warrants to purchase 700,000 and 736,015 shares, respectively, that are considered to be derivative financial instruments. The fair value of these derivative instruments at September 30, 2013 and December 31, 2012 was approximately $979,000 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 or loss on revaluation of derivative warrant liability. The Loss on Revaluation of Derivative Warrant Liability for the three months ended September 30, 2013 was approximately $70,000.  The Gain on Revaluation of Derivative Warrant Liability for the nine months ended September 31, 2013 was approximately $4,606,000.  The Gain (Loss) on Revaluation of Derivative Warrant Liability for the three and nine months ended September 30, 2012 was approximately a loss of $400,000 and a gain of $201,281, 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 (Loss) on Revaluation of Derivative Warrant Liability is a result of the change in that fair value.  For the three months ended September 30, 2013, no derivative warrants were exercised and none expired. For the nine months ended September 30, 2013, no derivative warrants were exercised and 45,164 expired. For the nine months ended September 30, 2012, 16,545 derivative warrants were exercised, which resulted in a reclassification of approximately $61,000 from the Derivative Warrant Liability to Additional Paid-in Capital.

 The table below presents the changes in the Level 3 Derivative Warrant Liability measured for the nine months ended September 30, 2013 and 2012:

	2013			2012
Derivative Warrant Liability as of January 1	$	5,585,141		$	1,035,337
Warrants issued under Montaur credit facility		—			6,000,000
Total unrealized losses included in net loss (1)		1,061,682			500,000
Total realized losses included in net loss(1)		—			1,438
Total unrealized gains included in net loss (1)		(5,515,000	)		(595,038	)
Total realized gains included in net loss (1)		(152,668	)		(107,681	)
Reclassification of derivative warrant liability to additional paid-in capital for derivative warrants exercised		—			(61,520	)
Derivative Warrant Liability as of September 30	$	979,155		$	6,772,536
______________________
(1) Included in Gain (Loss) on Revaluation of Derivative Warrant Liability in the Consolidated Statement of Operations.

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EQUITY COMPENSATION PLANS (Tables)

9 Months Ended

Sep. 30, 2013

Compensation and Retirement Disclosure [Abstract]

Share based compensation options

 The following table shows the remaining shares available for future grants for each plan and outstanding shares:

	Equity Compensation Plans
	2003 Plan			2008 Plan
Shares Available For Issuance
Total reserved for stock options and restricted stock		160,000			10,000,000
Net restricted stock issued net of cancellations		(31,125	)		(320,978	)
Stock options granted		(154,449	)		(326,750	)
Add back options cancelled before exercise		67,849			75,500
Less shares no longer available due to Plan expiration		(42,275	)		—
Remaining shares available for future grants at September 30, 2013		—			9,427,772
							Not Pursuant to a Plan
Stock options granted		154,449			326,750			310,000
Less:   Stock options cancelled		(67,849	)		(75,500	)		(138,333	)
Stock options exercised		(35,600	)		(13,000	)		(66,667	)
Net shares outstanding before restricted stock		51,000			238,250			105,000
Net restricted stock issued net of cancellations		31,125			320,978			28,484
Outstanding shares at September 30, 2013		82,125			559,228			133,484

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CREDIT FACILITY WITH PLATINUM-MONTAUR LIFE SCIENCES, LLC

9 Months Ended

Sep. 30, 2013

Notes to Financial Statements

NOTE 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 400,000 shares of its Common Stock, with a term of five years and an exercise price of $20.00 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 three and nine months ended September 30, 2013 was $242,000 and $726,000, 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 100,000 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 $20.00 or more than $40.00 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 100,000, 50,000 and 150,000 shares of Common Stock, each with a term of five years, and having exercise prices of $21.30, $22.70 and $21.10 per share, respectively.  The fair value of the warrants issued to purchase 300,000 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 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 recorded at the original draws under the balance repaid.

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CREDIT FACILITY WITH PLATINUM-MONTAUR LIFE SCIENCES, LLC (Details Narrative) (USD $)	9 Months Ended		12 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012	Nov. 06, 2012	Oct. 17, 2012	Sep. 20, 2012	Sep. 14, 2012	Aug. 31, 2012
Notes to Financial Statements
Loan agreement initial credit facility								$ 20,000,000
Loan agreement Maximum Draw Amount								5,000,000
Promissory note period								5 years
Principal interest rate per annum								10.00%
Accrued interest expenses	3,000	3,000
Cash and cash equivalent minimum requirements on credit facility								5,000,000
Commitment warrant value, shares								400,000
Fair value Commitment warrant, recorded as deferred financing costs								4,840,000
Commitment warrant period								5 years
Commitment warrant exercise price								$ 20.00
Fair value Commitment warrant, current portion								968,004
Fair value Commitment warrant, current portion period								1 year
Amortization of fair value Commitment warrant	242,000	726,000	323,000
Funds borrowed pursuant to the Credit Facility								1,000,000
Purchase warrant value per 1,000,000 borrowed amount, shares								100,000
Purchase warrant value term								5 years
Commitment Warrant exercise price maximimum								$ 40.00
Commitment Warrant exercise price minimum								$ 20.00
Commitment Warrant beneficial ownership maximum								49.90%
Commitment Warrant beneficial ownership minimum								99.90%
Loan agreement September Request							3,000,000
September Request amount received				1,500,000	500,000	1,000,000
September Request warrant issued				150,000	50,000	100,000
September Request warrant term				5 years	5 years	5 years
Warrant exercise price September Request				$ 21.10	$ 22.70	$ 21.30
Fair value September Request						3,455,000
Debt Discount						3,000,000
Interest Expense						455,000
Amortization September request	5,556	5,556
Repayment of outstanding draws	3,113,366
Interest accrued	113,366
Non-cash interest expense	$ 2,879,166

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EQUITY COMPENSATION PLANS (Details Narrative)	Dec. 31, 2012	Sep. 30, 2013 EqPlan 2003 [Member]	Sep. 30, 2013 EqPlan 2008 [Member]
Stock Options And Restricted Stock
Restricted shares of Common Stock issued		31,125	155,761
Options to purchase an aggregate of shares		82,125	394,011
Maximum authorized shares	150,000,000		10,000,000
Shares Future grants			9,592,989

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WARRANTS (Tables)

9 Months Ended

Sep. 30, 2013

Warrants Tables

Outstanding Warrants

	Number of Shares Exercisable		Exercise Price		Date of Expiration
Outstanding warrants accounted for as derivative warrant liability:
Granted to debt holder		400,000	$	20.00	8/31/2017
Granted to debt holder		100,000		21.30	9/20/2017
Granted to debt holder		50,000		22.70	10/17/2017
Granted to debt holder		150,000		21.10	11/6/2017
Total outstanding warrants accounted for as derivative warrant liability		700,000
Weighted average exercise price			$	20.61
Weighted average time to expiration in years					3.98 years
Outstanding warrants accounted for as equity:
Granted to investors in private placement of preferred stock		3,228	$	10.00	9/30/2013
Granted to investors in private placement of preferred stock		19,834		15.00	10/28/2013
Granted to investors in private placement of preferred stock		39,000		7.50	2/28/2014
Granted to vendor		6,000		6.00	3/15/2014
Granted to investors in private placement		40,000		15.90	6/30/2014
Granted to investors in private placement		76,800		20.00	11/13/2014
Granted to placement agent in private placement		25,695		15.00	11/13/2014
Granted to investors in private placement		6,300		20.00	12/3/2014
Granted to investors in private placement		34,146		22.50	2/9/2015
Granted to placement agents in private placement		2,853		22.50	2/9/2015
Granted to investor in private placement		638		22.50	3/18/2015
Granted to investors in private placement		95,960		30.00	12/7/2014
Total outstanding warrants accounted for as equity		350,454
Weighted average exercise price			$	20.17
Weighted average time to expiration in years					0.96 years
Totals for all warrants outstanding:
Total		1,050,454
Weighted average exercise price			$	20.46
Weighted average time to expiration in years					2.97 years

Warrant Activity

Warrants	Shares			Weighted- Average Exercise Price
Outstanding at January 1, 2013		1,254,004		$	20.08
Granted		9,175			12.60
Exercised		—			—
Forfeited or expired		(212,725	)		17.69
Outstanding at September 30, 2013		1,050,454		$	20.46

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RESTRICTED STOCK (Tables)

9 Months Ended

Sep. 30, 2013

Notes to Financial Statements

Nonvested restricted stock activity

A summary of the Company’s non-vested restricted stock activity as of and for the nine months ended September 30, 2013, is as follows:

Restricted Stock	Shares			Weighted- Average Grant-Date Fair Value
Non-vested at January 1, 2013		316,044		$	16.60
Granted		64,088			4.88
Vested		(33,042	)		18.38
Forfeited		(24,500	)		9.94
Non-vested at September 30, 2013		157,373		$	14.40

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WARRANTS (Details 2) (USD $)	9 Months Ended
	Sep. 30, 2013
Shares
Beginning Balance	1,254,004
Granted	9,175
Exercised
Forfeited or expired	(212,725)
Ending Balance	1,050,454
Weighted-Average Exercise Price
Beginning Balance	$ 20.08
Granted	12.60
Exercised
Forfeited or expired	17.69
Ending Balance	$ 20.46

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DERIVATIVE WARRANT LIABILITY (Details Narrative) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Dec. 31, 2012
Derivative Warrant Liability Details Narrative
Outstanding warrants			$ 1,254,004		$ 1,050,454
Derivative financial instruments	700,000		700,000			736,015
Fair value of derivative instruments on recurring basis	979,000		979,000			5,585,000
Loss on Revaluation of Derivative Warrant Liability	70,000
Derivative Warrant Liability Gain		400,000	4,606,000
Exercised warrants Shares				$ 16,545
Derivative warrants expired			45,164
Increase in additional paid-in capital from reclassifaication		42,000
Reclassification from Derivative Warrant Liability to Additional Paid-in Capital				$ 61,520

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STOCK OPTIONS (Details 2) (USD $)	3 Months Ended	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2013	Sep. 30, 2012
Shares
Beginning Balance		343,334
Granted		78,250
Exercised
Forfeited or expired		(71,916)
Ending Balance	349,668	349,668
Exercisable at June 30, 2013	243,592	243,592
Weighted-Average Exercise Price
Beginning Balance		$ 14.75
Granted		$ 4.43
Exercised			$ 16,545
Forfeited or expired		$ 13.38
Ending Balance	$ 12.45	$ 12.45
Exercisable at June 30, 2013	$ 11.34	$ 11.34
Weighted-Average Remaining Contractual Term
Beginning Balance		6 years 9 months
Ending Balance	4 years 10 months 10 days	4 years 10 months 10 days
Aggregate Intrinsic Value
Beginning Balance
Ending Balance

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OPERATING LEASE COMMITMENTS (Details) (USD $)	Sep. 30, 2013
OPERATING LEASE COMMITMENTS
Period Ending September 30, 2013	$ 159,000
Period Ending September 30, 2014	634,000
Period Ending September 30, 2015	636,000
Period Ending September 30, 2016	650,000
Period Ending September 30, 2017	464,000
Total	2,543,000
Franklin [Member]
OPERATING LEASE COMMITMENTS
Period Ending September 30, 2013	113,000
Period Ending September 30, 2014	447,000
Period Ending September 30, 2015	444,000
Period Ending September 30, 2016	454,000
Period Ending September 30, 2017	382,000
Total	1,840,000
Philadelphia [Member]
OPERATING LEASE COMMITMENTS
Period Ending September 30, 2013	46,000
Period Ending September 30, 2014	187,000
Period Ending September 30, 2015	192,000
Period Ending September 30, 2016	196,000
Period Ending September 30, 2017	82,000
Total	$ 703,000

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RESTRICTED STOCK (Details Narrative 1) (USD $)	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Stock Options And Restricted Stock
Aggregate restricted shares of Common Stock pursuant to 2008 plan	64,088
Fair Value of restricted stock	$ 313,000
Share-based compensation expense	355,000	200,000
Shares of non-vested restricted stock	322,590
Total unrecognized compensation expense	$ 863,000
FDA Approval [Member]
Stock Options And Restricted Stock
Restricted stock to vest upon FDA approval	165,460
Yearly [Member]
Stock Options And Restricted Stock
Restricted stock to vest upon FDA approval	157,130

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STOCK OPTIONS (Tables)

9 Months Ended

Sep. 30, 2013

Stock Options Tables

Assumption used for stock option granted

	2013			2012
Risk-free interest rate		0.13% - 1.89	%		0.94% - 2.05	%
Expected dividend yield		—			—
Expected term	1 - 6.5 years			6.5 years
Forfeiture rate (excluding fully vested stock options)		15	%		15	%
Expected volatility		129% - 141	%		129% - 137	%

Stock option activity

Stock Options	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2013		343,334		$	14.75
Granted		78,250			4.43
Exercised		—			—
Forfeited or expired		(71,916	)		13.38
Outstanding at September 30, 2013		349,668		$	12.45	5.80 years	$	—
Exercisable at September 30, 2013		243,592		$	11.34	4.86 years	$	—

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ORGANIZATION AND BASIS OF PRESENTATION

9 Months Ended

Sep. 30, 2013

Notes to Financial Statements

Note 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.  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.

 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 September 30, 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.

 On June 7, 2013, the Company effected a 1-for-10 reverse stock split of its common stock. All share and per share information has been retroactively restated to reflect this reverse stock split.

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 September 30, 2013, the Company had cash of approximately $6,068,000, working capital of approximately $3,603,000, and an accumulated deficit of approximately $109,469,000.  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, securing collaborative arrangements with strategic partners, 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.

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INTANGIBLE ASSETS

9 Months Ended

Sep. 30, 2013

Notes to Financial Statements

Note 3. INTANGIBLE ASSETS

 The Company’s intangible assets are related to the acquisition of certain assets related to AzoneTS-based technology from Durham Pharmaceuticals Ltd. in 2007.  Following the acquisition in 2007, the Company has modestly advanced the development programs for DurhalieveTM for the treatment of corticosteroid-responsive dermatoses and for the early stage AzoneTS reformulation drug candidates. Among other things, the Company has monitored stability on new drug formulations, worked on a complete response on the Durhalieve New Drug Application, met with the FDA on  development status, assembled a response for the methotrexate-AzoneTS ‘end of Phase 2’ meeting with the FDA, engaged consultants to review and recommend new product candidates and formulations, and conducted partnering activities around the technology.  In addition, the Company has made applicable regulatory filings necessary to maintain the active status of the AzoneTS Drug Master File, the Durhalieve and MAZ Investigational New Drug applications and the MAZ Orphan Drug application with the FDA.

 As of September 30, 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	4.5 years		1,305,000		—		1,305,000		1,305,000
Drug Master Files containing formulation, clinical and safety documentation used by the FDA	4.5 years		1,500,000		—		1,500,000		1,500,000
In-process pharmaceutical products for 2 indications	4.5 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 could occur as early as the middle of 2015.  The Cato Research contract included above 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		—
2015		1,069,000
2016		2,139,000
2017		2,139,000

 In periodically reviewing the carrying value of intangible assets, the Company considered if there have been events or circumstances that would indicate that the carrying amount of the intangible assets may not be recoverable.  If such events or circumstances existed, the Company performed an impairment test in accordance with FASB ASC 360-10. Under that standard, the first step in the impairment analysis is to compare the undiscounted cash flows to the carrying value of the intangibles.  The project’s undiscounted cash flows exceeded the carrying value at each of the Company’s assessment dates following acquisition, including December 31, 2012.  As a result, it was not necessary for the Company to conduct further analysis or to make a determination of the fair value of the intangible assets and thereby the Company concluded that there was no impairment.  It is the Company’s policy to evaluate intangible assets for impairment at least annually in connection with its year end financial statement preparation.

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PREFERRED STOCK

9 Months Ended

Sep. 30, 2013

Notes to Financial Statements

Note 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.

 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 September 30, 2013 and December 31, 2012.

Series D Convertible Preferred Stock

 The Company has authorized 3,600,000 shares of Series D Convertible Preferred Stock (the “Series D Stock”), of which 3,006,000 shares were issued and outstanding as of September 30, 2013 and December 31, 2012.

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OPERATING LEASE COMMITMENTS

9 Months Ended

Sep. 30, 2013

Notes to Financial Statements

Note 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 and approximately 1,060 square feet of residential space as a corporate apartment in Franklin, Massachusetts under a lease expiring July 24, 2014.

 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 September 30,
2013	$	113,000	$	46,000	$	159,000
2014		447,000		187,000		634,000
2015		444,000		192,000		636,000
2016		454,000		196,000		650,000
2017		382,000		82,000		464,000
Total	$	1,840,000	$	703,000	$	2,543,000

 The Company’s facilities lease expense, including accruals for lease incentives, was approximately $141,000 and $56,000 for the three months ended September 30, 2013 and 2012, respectively, and $530,000 and $207,000 for the nine months ended September 30, 2013 and 2012, respectively.

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STOCK OPTIONS (Details Narrative) (USD $)	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Stock Options And Restricted Stock
Weighted-average grant-date fair value of stock options granted	$ 3.37
Share-based compensation expense	$ 554,000	$ 720,000
Total unrecognized compensation expense	$ 1,149,000

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ORGANIZATION AND BASIS OF PRESENTATION (Details Narrative) (USD $)	3 Months Ended
	Sep. 30, 2013	Dec. 31, 2012	Sep. 30, 2012	Dec. 31, 2011
Organization And Basis Of Presentation
Reverse stock split ratio	1-for-10
Liquidity and Management's Plans
Cash	$ 6,068,469	$ 3,747,210	$ 1,395,840	$ 8,995,571
Working capital deficit	3,603,000
Accumulated deficit	$ 109,469,000

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OPERATING LEASE COMMITMENTS (Details Narrative) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Operating Lease Commitments
Facilities lease expense	$ 141,000	$ 56,000	$ 530,000	$ 207,000
Manfc Lab Office [Member]
Operating Lease Commitments
Leased space square footage	37,000		37,000
Office lease expiry date	Oct. 31, 2017		Oct. 31, 2017
Apartment [Member]
Operating Lease Commitments
Leased space square footage	1,060		1,060
Office lease expiry date	Jul. 24, 2014		Jul. 24, 2014
Philadelphia [Member]
Operating Lease Commitments
Leased space square footage	7,900		7,900
Office lease expiry date	May 31, 2017		May 31, 2017

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EQUITY COMPENSATION PLANS (Details) (USD $)	9 Months Ended
	Sep. 30, 2013
Shares Available For Issuance
Total reserved for stock options and restricted stock	$ 313,000
Add back options cancelled before exercise	(71,916)
Outstanding Options and Restricted Stock
Options exercised
Ending Balance	133,484
Plan2003Member
Shares Available For Issuance
Total reserved for stock options and restricted stock	160,000
Net restricted stock issued net of cancellations	(31,125)
Stock options granted	(154,449)
Add back options cancelled before exercise	67,849
Options cancelled by plan vote	(42,275)
Remaining shares available for future grants
Outstanding Options and Restricted Stock
Total granted	154,449
Options cancelled	(67,849)
Options exercised	(35,600)
Net shares outstanding before restricted stock	51,000
Net restricted stock issued net of cancellations	31,125
Ending Balance	82,125
Plan2008Member
Shares Available For Issuance
Total reserved for stock options and restricted stock	10,000,000
Net restricted stock issued net of cancellations	(320,978)
Stock options granted	(326,750)
Add back options cancelled before exercise	75,500
Options cancelled by plan vote
Remaining shares available for future grants	9,427,772
Outstanding Options and Restricted Stock
Total granted	326,750
Options cancelled	(75,500)
Options exercised	(13,000)
Net shares outstanding before restricted stock	238,250
Net restricted stock issued net of cancellations	320,978
Ending Balance	559,228
NotPursuanttoaPlanMember
Outstanding Options and Restricted Stock
Total granted	310,000
Options cancelled	$ (138,333)
Options exercised	(66,667)
Net shares outstanding before restricted stock	105,000
Net restricted stock issued net of cancellations	28,484

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WARRANTS (Details 1) (USD $)	Sep. 30, 2013
Warrants
Total Warrants Outstanding	1,050,454
Total Weighted average exercise price	$ 20.46
Total Weighted average time to expiration in years	2 years 11 months 19 days
PreferredStock1 [Member]
Warrants
Number of Shares Exercisable	3,228
Exercise Price	$ 10
Date of Expiration	2013-09-30
PreferredStock2 [Member]
Warrants
Number of Shares Exercisable	19,834
Exercise Price	$ 15.00
Date of Expiration	2013-10-28
PreferredStock3 [Member]
Warrants
Number of Shares Exercisable	39,000
Exercise Price	$ 7.50
Date of Expiration	2014-02-28
Vendor1 [Member]
Warrants
Number of Shares Exercisable	6,000
Exercise Price	$ 6.00
Date of Expiration	2014-03-15
Investors1 [Member]
Warrants
Number of Shares Exercisable	40,000
Exercise Price	$ 15.90
Date of Expiration	2014-06-30
Investors2 [Member]
Warrants
Number of Shares Exercisable	76,800
Exercise Price	$ 20.00
Date of Expiration	2014-11-13
Investors3 [Member]
Warrants
Number of Shares Exercisable	25,695
Exercise Price	$ 15.00
Date of Expiration	2014-11-13
Investors4 [Member]
Warrants
Number of Shares Exercisable	6,300
Exercise Price	$ 20
Date of Expiration	2014-12-03
Investors5 [Member]
Warrants
Number of Shares Exercisable	34,146
Exercise Price	$ 22.50
Date of Expiration	2015-02-09
PlacementAgents1 [Member]
Warrants
Number of Shares Exercisable	2,853
Exercise Price	$ 22.50
Date of Expiration	2015-02-09
Investors6 [Member]
Warrants
Number of Shares Exercisable	638
Exercise Price	$ 22.50
Date of Expiration	2015-03-18
Investors19 [Member]
Warrants
Number of Shares Exercisable	95,960
Exercise Price	$ 30.00
Date of Expiration	2014-12-07
TotaloutstandingwarrantsaccountedforasequityMember
Warrants
Number of Shares Exercisable	350,454
WeightedaverageexercisepriceMember
Warrants
Exercise Price	$ 20.17
WeightedaveragetimetoexpirationinyearsMember
Warrants
Expiration period	0 years 11 months 16 days

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Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $)	Sep. 30, 2013	Dec. 31, 2012
Stockholders' Equity:
Convertible Preferred Stock: Series C, par value	0.01	0.01
Convertible Preferred Stock:Series C, authorized	10,000	10,000
Convertible Preferred Stock:Series C, outstanding	9,974.185	9,974.185
Convertible Preferred Stock:Series C, Share Issued	9,974.185	9,974.185
Convertible Preferred Stock:Series D, par value	$ 0.01	$ 0.01
Convertible Preferred Stock:Series D, authorized	3,600,000	3,600,000
Convertible Preferred Stock:Series D, outstanding	3,006,000	3,006,000
Convertible Preferred Stock:Series D, Share Issued	3,006,000	3,006,000
Convertible Preferred Stock:Series D,preference in liquidation	3,006,000	3,006,000
Common stock, par value	$ 0.01	$ 0.01
Common stock, authorized		150,000,000
Common stock, outstanding	4,437,346	4,437,346
Common stock, Share Issued	10,699,990	10,699,990

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STOCK OPTIONS

9 Months Ended

Sep. 30, 2013

Notes to Financial Statements

Note 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 nine months ended September 30, 2013 and 2012 were as follows:

	2013			2012
Risk-free interest rate		0.13% - 1.89	%		0.94% - 2.05	%
Expected dividend yield		—			—
Expected term	1 - 6.5 years			6.5 years
Forfeiture rate (excluding fully vested stock options)		15	%		15	%
Expected volatility		129% - 141	%		129% - 137	%

 A summary of stock option activity as of and for the nine months ended September 30, 2013 is as follows:

Stock Options	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2013		343,334		$	14.75
Granted		78,250			4.43
Exercised		—			—
Forfeited or expired		(71,916	)		13.38
Outstanding at September 30, 2013		349,668		$	12.45	5.80 years	$	—
Exercisable at September 30, 2013		243,592		$	11.34	4.86 years	$	—

 The weighted-average grant-date fair value of stock options granted during the nine months ended September 30, 2013 was $3.37 per share. Share-based compensation expense related to stock options recognized in the nine months ended September 30, 2013 and 2012 was approximately $554,000 and $720,000, respectively. As of September 30, 2013, there was approximately $1,149,000 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.

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Consolidated Statements of Cash Flows (Unaudited) (USD $)	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Cash Flows From Operating Activities:
Net loss	$ (15,566,767)	$ (10,405,209)
Depreciation and amortization	288,883	75,772
Share-based compensation, net	908,983	920,251
Fair value of common stock and warrants issued for services	89,970	118,465
Gain on revaluation of derivative warrant liability	(4,605,986)	(201,281)
Amortization of discount on note payable	2,879,166	5,556
Amortization of non-cash deferred financing costs	726,003	80,667
Non-cash loss on disposals of assets		21,272
Non-cash debt financing costs		160,000
Accounts receivable		37,065
Prepaid expenses and other current assets	(51,484)	99,041
Other assets	(1,500)	9,999
Accounts payable	(768,127)	664,190
Deferred revenue from licensing arrangements	(67,671)	(92,781)
Accrued expenses and other liabilities	14,472	637,633
Net cash used in operating activities	(16,154,058)	(7,869,360)
Cash Flows from Investing Activities:
Purchase of furniture, equipment and leasehold improvements	(237,387)	(985,158)
Increase in restricted cash	(250,000)	(157,463)
Net cash used in investing activities	(487,387)	(1,142,621)
Cash Flows From Financing Activities:
Proceeds from issuance of common stock, net of expenses	21,964,575	6,667
Proceeds from Platinum note payable		1,000,000
Repayment of Platinum note payable	(3,000,000)
Principal payments for capital lease obligations	(1,871)	(1,694)
Proceeds from exercise of warrants		212,017
Proceeds from exercise of stock options		195,260
Net cash provided by financing activities	18,962,704	1,412,250
Net increase (decrease) in cash and cash equivalents	2,321,259	(7,599,731)
Cash and cash equivalents, beginning of period	3,747,210	8,995,571
Cash and cash equivalents, end of period	6,068,469	1,395,840
Supplemental Disclosure of Cash Flow Information and Non Cash Financing Transactions:
Cash paid for interest	114,082	408
Reclassification of derivative warrant liability to additional paid-in capital		61,520
Fair value of common stock issued in connection with settlement agreement		208,000
Fair value of Commitment Warrant issued in connection with debt financing		4,840,000
Fair value of Draw Warrant issued for note payable recorded as discount		1,000,000
Fair value of Draw Warrant issued for note payable recorded s debt financing costs		$ 160,000

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Consolidated Balance Sheets (Unaudited) (USD $)	Sep. 30, 2013	Dec. 31, 2012
Current Assets:
Cash and cash equivalents	$ 6,068,469	$ 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	127,110	75,626
Total current assets	7,821,046	5,198,303
Property and Equipment, at cost:
Computer equipment	323,489	367,854
Office and laboratory equipment (including assets under capitalized leases)	716,531	732,296
Furniture and fixtures	755,444	728,269
Manufacturing equipment	111,980	156,435
Leasehold improvements	825,589	818,939
Property and equipment, at cost	2,733,033	2,803,793
Less-Accumulated depreciation and amortization	(1,146,135)	(1,165,398)
Net property and equipment (including assets under capitalized leases)	1,586,898	1,638,395
Other Assets:
Intangible assets, net of accumulated amortization	9,625,000	9,625,000
Deferred financing costs, net of current portion	2,823,325	3,549,328
Other assets	12,066	10,566
Total other assets	12,460,391	13,184,894
Total assets	21,868,335	20,021,592
Current Liabilities:
Accounts payable	1,551,092	2,319,219
Deferred revenue from licensing arrangements, current portion	90,228	90,228
Capital lease obligation, current portion	2,017	2,527
Derivative warrant liability	979,155	5,585,141
Accrued expenses and other current liabilities	1,595,920	1,581,448
Total current liabilities	4,218,412	9,578,563
Capital lease obligation, net of current portion		1,361
Note payable, net of discount		120,834
Deferred revenue from licensing arrangements, net of current portion	22,557	90,228
Total liabilities	4,240,969	9,790,986
Convertible Preferred Stock:
Series C, $0.01 par value, authorized 10,000 shares, issued and outstanding 9,974.185 shares at September 30, 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 September 30, 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 10,699,990 and 4,437,346 shares at September 30, 2013 and December 31, 2012, respectively	107,003	44,374
Additional paid-in capital	126,958,986	104,058,087
Accumulated deficit	(109,468,783)	(93,902,015)
Total stockholders' equity	17,627,366	10,230,606
Total liabilities and stockholders' equity	$ 21,868,335	$ 20,021,592

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CASH (Details Narrative) (USD $)	Sep. 30, 2013	Dec. 31, 2012	Sep. 30, 2012	Dec. 31, 2011
Cash And Cash Equivalents
Cash and cash equivalents	$ 6,068,469	$ 3,747,210	$ 1,395,840	$ 8,995,571
ProductDevelopment [Member]
Cash And Cash Equivalents
Letter of credit	250,000	250,000
Product Development 2 [Member]
Cash And Cash Equivalents
Letter of credit	250,000
Landlord [Member]
Cash And Cash Equivalents
Letter of credit	$ 157,463	$ 157,463

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DERIVATIVE WARRANT LIABILITY (Tables)

9 Months Ended

Sep. 30, 2013

Derivative Warrant Liability Tables

Derivative warrant liability

	2013			2012
Derivative Warrant Liability as of January 1	$	5,585,141		$	1,035,337
Warrants issued under Montaur credit facility		—			6,000,000
Total unrealized losses included in net loss (1)		1,061,682			500,000
Total realized losses included in net loss(1)		—			1,438
Total unrealized gains included in net loss (1)		(5,515,000	)		(595,038	)
Total realized gains included in net loss (1)		(152,668	)		(107,681	)
Reclassification of derivative warrant liability to additional paid-in capital for derivative warrants exercised		—			(61,520	)
Derivative Warrant Liability as of September 30	$	979,155		$	6,772,536
__________________
(1) Included in Gain (Loss) on Revaluation of Derivative Warrant Liability in the Consolidated Statement of Operations.

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WARRANTS (Details) (USD $)	Sep. 30, 2013
Warrants
Total outstanding warrants accounted for as derivative warrant liability	700,000
Weighted average exercise price	$ 20.61
Weighted average time to expiration in years	3 years 11 months 23 days
DebtHolderAcquisition1 [Member]
Warrants
Number of Shares Exercisable	400,000
Exercise Price	$ 20.00
Date of Expiration	Aug. 31, 2017
DebtHolderAcquisition2 [Member]
Warrants
Number of Shares Exercisable	100,000
Exercise Price	$ 21.30
Date of Expiration	Sep. 20, 2017
Investors1 [Member]
Warrants
Number of Shares Exercisable	50,000
Exercise Price	$ 22.70
Date of Expiration	Oct. 17, 2017
Investors2 [Member]
Warrants
Number of Shares Exercisable	150,000
Exercise Price	$ 21.10
Date of Expiration	Nov. 06, 2017

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STOCK OPTIONS (Details 1) (USD $)	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
STOCK OPTIONS AND RESTRICTED STOCK
Risk-free interest rate minimum	0.13%	0.94%
Risk-free interest rate maximum	1.89%	2.05%
Expected dividend yield
Expected term, minimum	1 year
Expected term, maximum	6 years 6 months	6 years 6 months
Forfeiture rate (excluding fully vested stock options) minimum	15.00%	15.00%
Forfeiture rate (excluding fully vested stock options) maximum	15.00%	15.00%
Expected volatility	129.00%	131.00%
Expected volatility	141.00%	137.00%

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PREFERRED STOCK (Details Narrative)	Sep. 30, 2013	Dec. 31, 2012
Class of Stock [Line Items]
Authorized Preferred Stock	40,000,000
SeriesCPreferredStock [Member]
Class of Stock [Line Items]
Authorized Preferred Stock	10,000	10,000
Issued and outstanding	9,974.185	9,974.185
SeriesDPreferredStock [Member]
Class of Stock [Line Items]
Authorized Preferred Stock	3,600,000	3,600,000
Issued and outstanding	3,006,000	3,006,000

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COMMON STOCK (Details Narrative) (USD $)	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Common stock, shares authorized			150,000,000
Common stock, Shares issued	10,699,990		10,699,990
Common stock, Shares outstanding	4,437,346		4,437,346
Stock issued in exchange for services	7,450	7,033
Fair value of stock issued in exchange for services	$ 89,970	$ 118,465
January [Member]
Common Stock public offering	1,567,833
Shares sold pursuant to over-allotment	204,500
Share sale price	$ 7.50
Net proceeds from sale of shares in public offering	10,626,000
June [Member]
Common Stock public offering	4,628,750
Shares sold pursuant to over-allotment	603,750
Share sale price	$ 2.70
Net proceeds from sale of shares in public offering	$ 11,338,000

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EQUITY COMPENSATION PLANS

9 Months Ended

Sep. 30, 2013

Compensation and Retirement Disclosure [Abstract]

Note 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 September 30, 2013, there were 31,125 restricted shares of Common Stock issued and options to purchase an aggregate of 82,125 shares of Common Stock outstanding under the 2003 Plan and none are available for future grants due to the expiration of the 2003 Plan.

 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 May 2013, the Company’s shareholders approved an amendment to the 2008 Plan to fix the maximum number of shares available under the 2008 Plan at 10,000,000 shares following shareholder approval of a 1-for-10 reverse stock split effective June 7, 2013.  As of September 30, 2013, there were 155,761 restricted shares of Common Stock issued and options to purchase an aggregate of 394,011 shares of Common Stock outstanding under the 2008 Plan and 9,592,989 shares available for future grants.

 The following table shows the remaining shares available for future grants for each plan and outstanding shares:

	Equity Compensation Plans
	2003 Plan			2008 Plan
Shares Available For Issuance
Total reserved for stock options and restricted stock		160,000			10,000,000
Net restricted stock issued net of cancellations		(31,125	)		(320,978	)
Stock options granted		(154,449	)		(326,750	)
Add back options cancelled before exercise		67,849			75,500
Less shares no longer available due to Plan expiration		(42,275	)		—
Remaining shares available for future grants at September 30, 2013		—			9,427,772
							Not Pursuant to a Plan
Stock options granted		154,449			326,750			310,000
Less:   Stock options cancelled		(67,849	)		(75,500	)		(138,333	)
Stock options exercised		(35,600	)		(13,000	)		(66,667	)
Net shares outstanding before restricted stock		51,000			238,250			105,000
Net restricted stock issued net of cancellations		31,125			320,978			28,484
Outstanding shares at September 30, 2013		82,125			559,228			133,484

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INTANGIBLE ASSETS (Details) (USD $)	9 Months Ended
	Sep. 30, 2013	Dec. 31, 2012
Finite-Lived Intangible Assets [Line Items]
Cost	$ 9,980,000
Accumulated Amortization	355,000
Total	9,625,000	9,625,000
Estimated amortization expense
2013
2014
2015	1,069,000
2016	2,139,000
2017	2,139,000
ResearchMember
Finite-Lived Intangible Assets [Line Items]
Cost	355,000
Accumulated Amortization	355,000
Total
PatentsMember
Finite-Lived Intangible Assets [Line Items]
Cost	1,305,000
Accumulated Amortization
Total	1,305,000
DrugMember
Finite-Lived Intangible Assets [Line Items]
Cost	1,500,000
Accumulated Amortization
Total	1,500,000
PharmaceuticalMember
Finite-Lived Intangible Assets [Line Items]
Cost	6,820,000
Accumulated Amortization
Total	6,820,000
PatentedTechnologyMember
Finite-Lived Intangible Assets [Line Items]
Cost	9,625,000
Accumulated Amortization
Total	9,625,000
IntangibleassetsMember
Finite-Lived Intangible Assets [Line Items]
Cost	9,980,000
Accumulated Amortization	355,000
Total	$ 9,625,000

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RESTRICTED STOCK (Details) (USD $)	9 Months Ended
	Sep. 30, 2013
Shares
Nonvested at January 1, 2013	316,044
Granted	64,088
Vested	(33,042)
Forfeited	(24,500)
Nonvested at September 30, 2013	322,590
Weighted- Average Grant-DateFair Value
Nonvested at January 1, 2013	$ 16.60
Granted	$ 4.48
Vested	$ 18.38
Forfeited	$ 9.94
Nonvested at September 30, 2013	$ 14.40

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WARRANTS

9 Months Ended

Sep. 30, 2013

Notes to Financial Statements

Note 11. WARRANTS

 At September 30, 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		400,000	$	20.00	8/31/2017
Granted to debt holder		100,000		21.30	9/20/2017
Granted to debt holder		50,000		22.70	10/17/2017
Granted to debt holder		150,000		21.10	11/6/2017
Total outstanding warrants accounted for as derivative warrant liability		700,000
Weighted average exercise price			$	20.61
Weighted average time to expiration in years					3.98 years
Outstanding warrants accounted for as equity:
Granted to investors in private placement of preferred stock		3,228	$	10.00	9/30/2013
Granted to investors in private placement of preferred stock		19,834		15.00	10/28/2013
Granted to investors in private placement of preferred stock		39,000		7.50	2/28/2014
Granted to vendor		6,000		6.00	3/15/2014
Granted to investors in private placement		40,000		15.90	6/30/2014
Granted to investors in private placement		76,800		20.00	11/13/2014
Granted to placement agent in private placement		25,695		15.00	11/13/2014
Granted to investors in private placement		6,300		20.00	12/3/2014
Granted to investors in private placement		34,146		22.50	2/9/2015
Granted to placement agents in private placement		2,853		22.50	2/9/2015
Granted to investor in private placement		638		22.50	3/18/2015
Granted to investors in private placement		95,960		30.00	12/7/2014
Total outstanding warrants accounted for as equity		350,454
Weighted average exercise price			$	20.17
Weighted average time to expiration in years					0.96 years
Totals for all warrants outstanding:
Total		1,050,454
Weighted average exercise price			$	20.46
Weighted average time to expiration in years					2.97 years

 A summary of warrant activity for the nine months ended September 30, 2013 is as follows:

Warrants	Shares			Weighted- Average Exercise Price
Outstanding at January 1, 2013		1,254,004		$	20.08
Granted		9,175			12.60
Exercised		—			—
Forfeited or expired		(212,725	)		17.69
Outstanding at September 30, 2013		1,050,454		$	20.46

Exercise of Common Stock Warrants

 During the nine months ended September 30, 2013, the Company issued no shares of its Common Stock upon the exercise of warrants.

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COMMON STOCK

9 Months Ended

Sep. 30, 2013

Notes to Financial Statements

Note 7. COMMON STOCK

 The Company has authorized 150,000,000 shares of Common Stock, of which 10,699,990 and 4,437,346 shares were issued and outstanding as of September 30, 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. (“Aegis”), as a representative of several underwriters, with respect to the issuance and sale in an underwritten public offering by the Company of an aggregate of 1,567,833 shares of the Company’s Common Stock (including 204,500 shares sold pursuant to the over-allotment option), at a price to the public of $7.50 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 the 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.

June 2013 Financing

 On June 13, 2013, the Company entered into an underwriting agreement with Aegis, as a representative of several underwriters, with respect to the issuance and sale in an underwritten public offering by the Company of an aggregate of 4,628,750 shares of the Company’s Common Stock (including 603,750 shares sold pursuant to the over-allotment option), at a price to the public of $2.70 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 the shares in the offering were approximately $11,338,000.

Stock Issued in Exchange for Services

 During the nine months ended September 30, 2013 and 2012, the Company issued 7,450 and 7,033 shares, respectively, of Common Stock with a fair value of $89,970 and $118,465, 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.

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CASH

9 Months Ended

Sep. 30, 2013

Notes to Financial Statements

Note 2. CASH

Cash and Cash Equivalents

 As of September 30, 2013, the Company held approximately $6,068,000 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 September 30, 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 one of its landlords.  As of December 31, 2012, restricted cash consisted 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 one of its landlords.

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LICENSING AND OTHER REVENUE (Details Narrative) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Licensing and Other Revenue
Nonrefundable license revenue	$ 22,557	$ 30,927	$ 67,671	$ 92,781
Deferred revenue recognized over next twelve months	90,228		90,228		90,228
Deferred revenue to be recognized after next twelve months	22,557		22,557		90,228
Handok [Member]
Licensing and Other Revenue
Minimum licensing term	10 years
Initial licensing fee	500,000		500,000
Nonrefundable license revenue	23,000	31,000	68,000	93,000
Deferred revenue recognized over next twelve months	90,000		90,000
Deferred revenue to be recognized after next twelve months	$ 23,000		$ 23,000

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DERIVATIVE WARRANT LIABILITY (Details) (USD $)	9 Months Ended
	Sep. 30, 2013		Sep. 30, 2012
DERIVATIVE WARRANT LIABILITY
Beginning balance	$ 5,585,141		$ 1,035,237
Warrants issued under Montaur credit facility			6,000,000
Total unrealized losses included in net loss	1,061,682		500,000
Total realized losses included in net loss			1,438
Total unrealized gains included in net loss	(5,515,000)	[1]	(595,038)	[1]
Total realized gains included in net loss	(152,668)	[1]	(107,681)	[1]
Reclassification of derivative warrant liability to additional paid-in capital for derivative warrants exercised			(61,520)
Ending balance	$ 979,155		$ 6,772,536

[1] Included in Gain (Loss) on Revaluation of Derivative Warrant Liability in the Consolidated Statement of Operations.

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LITIGATION

9 Months Ended

Sep. 30, 2013

Commitments and Contingencies Disclosure [Abstract]

NOTE 14. LITIGATION

 In August 2013, a shareholder derivative action was filed in the Court of Common Pleas of Philadelphia County naming as defendant the Company, its directors and certain of its officers.  The complaint seeks unspecified amount of damages and principally alleges breaches of fiduciary duty and gross mismanagement related to the Loan Agreement and the Company’s prepayment of the outstanding balance under the Montaur Promissory Note.  Based on a preliminary review and analysis of the complaints, the Company believes that this lawsuit is without merit and intends to defend it vigorously. The Company is not presently able to estimate the potential losses, if any, related to this lawsuit.

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RESTRICTED STOCK

9 Months Ended

Sep. 30, 2013

Notes to Financial Statements

Note 10. RESTRICTED STOCK

 During the nine months ended September 30, 2013, the Company granted an aggregate of 64,088 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 $313,000.  Share-based compensation expense related to restricted stock recognized in the nine months ended September 30, 2013 and September 30, 2012 was approximately $355,000 and $200,000, respectively.

 A summary of the Company’s non-vested restricted stock activity as of and for the nine months ended September 30, 2013, is as follows:

Restricted Stock	Shares			Weighted- Average Grant-Date Fair Value
Non-vested at January 1, 2013		316,044		$	16.60
Granted		64,088			4.88
Vested		(33,042	)		18.38
Forfeited		(24,500	)		9.94
Non-vested at September 30, 2013		157,373		$	14.40

 Among the 322,590 shares of non-vested restricted stock, the various vesting criteria include the following:

· 165,460 shares of restricted stock vest upon the FDA approval of Symphony or the sale of the Company or its assets; and

· 157,130 shares of restricted stock vest over one to four years, at each of the anniversary dates of the grants.

 As of September 30, 2013, there was approximately $863,000 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 September 30, 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.

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OPERATING LEASE COMMITMENTS (Tables)

9 Months Ended

Sep. 30, 2013

Operating Lease Commitments Tables

Future minimum lease payments

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 September 30,
2013	$	113,000	$	46,000	$	159,000
2014		447,000		187,000		634,000
2015		444,000		192,000		636,000
2016		454,000		196,000		650,000
2017		382,000		82,000		464,000
Total	$	1,840,000	$	703,000	$	2,543,000

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ORGANIZATION AND BASIS OF PRESENTATION (Policies)

9 Months Ended

Sep. 30, 2013

Organization And Basis Of Presentation Policies

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.  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.

 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 September 30, 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.

 On June 7, 2013, the Company effected a 1-for-10 reverse stock split of its common stock. All share and per share information has been retroactively restated to reflect this reverse stock split.

LIQUIDITY AND MANAGEMENT'S PLAN

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 September 30, 2013, the Company had cash of approximately $6,068,000, working capital of approximately $3,603,000, and an accumulated deficit of approximately $109,469,000.  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, securing collaborative arrangements with strategic partners, 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.

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Document and Entity Information (USD $)	9 Months Ended
	Sep. 30, 2013	Nov. 06, 2013	Jun. 30, 2013
Document And Entity Information
Entity Registrant Name	Echo Therapeutics, Inc.
Entity Central Index Key	0001031927
Document Type	10-Q
Document Period End Date	Sep. 30, 2013
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Accelerated Filer
Entity Public Float			$ 58,426,479
Entity Common Stock, Shares Outstanding		10,556,281
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2013

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INTANGIBLE ASSETS (Tables)

9 Months Ended

Sep. 30, 2013

Intangible Assets Tables

Intangible assets

As of September 30, 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	4.5 years		1,305,000		—		1,305,000		1,305,000
Drug Master Files containing formulation, clinical and safety documentation used by the FDA	4.5 years		1,500,000		—		1,500,000		1,500,000
In-process pharmaceutical products for 2 indications	4.5 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

Amortization expense

Estimated amortization expense for each of the next five calendar years is as follows:

	Estimated Amortization Expense
2013	$	—
2014		—
2015		1,069,000
2016		2,139,000
2017		2,139,000