ORGANIZATION AND BASIS OF PRESENTATION

6 Months Ended

Jun. 30, 2014

Notes to Financial Statements

Note 1. ORGANIZATION AND BASIS OF PRESENTATION

Echo Therapeutics, Inc. (the “Company” or “Echo”) is a medical device company with expertise in advanced skin permeation technology.  The Company is developing its Symphony® CGM System (“Symphony”) as a non-invasive, wireless continuous glucose monitoring (“CGM”) system for use in hospital critical care units.  The Symphony SkinPrep System (“SkinPrep”), a component of Symphony, allows for enhanced skin permeation that enables extraction of analytes such as glucose and enhanced delivery of topical pharmaceuticals.

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, 2013 included in the Company’s Annual Report on Form 10-K as filed with the United States Securities and Exchange Commission (“SEC”) on March 28, 2014.  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 June 30, 2014 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 as 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.

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, Going Concern 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 June 30, 2014, the Company had cash of approximately $4,106,000, working capital of approximately $2,756,000 and an accumulated deficit of approximately $119,506,000.  While Management continues its efforts to reduce expenses, the Company continues to incur recurring losses from operations.  The Company will need to secure additional capital to fund its product development, research, manufacturing and clinical programs in its current planned operations.  In the past, the Company has funded its operations primarily through debt and equity issuances.  Management intends to actively pursue additional financing to fund its operations.  However, no assurances can be given that funding will be available to the Company and, if funding is available, that it will be available on terms acceptable to the Company.  If additional funding is not available on terms that are acceptable to the Company, no assurances can be given that the Company’s operations will be funded beyond November 30, 2014, as projected with our recently enacted cost reductions (see Note 15).  The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

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

Reclassifications

Certain expenses in first quarter of 2014 were reclassified to correspond with the current quarter’s presentation.