ORGANIZATION AND BASIS OF PRESENTATION	9 Months Ended
Sep. 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 was developing its Symphony® CGM System (“Symphony”) as a non-invasive, wireless continuous glucose monitoring (“CGM”) system for use initially 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 September 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 September 30, 2014, the Company had cash of approximately $1,469,000, a negative working capital of approximately $109,000 and an accumulated deficit of approximately $125,011,000. In the past, the Company has funded its operations primarily through debt and equity issuances. In August 2014, the Company announced that it had taken steps to substantially reduce operating costs and preserve cash while further refining its development efforts and resources needed to implement key product performance enhancements to its Symphony CGM System. The Company implemented significant cost reductions across all aspects of its operations in both external spend and workforce, including reductions in general and administrative, manufacturing, clinical and product development expenditures. The Company anticipated a meaningful decrease in expenses as a result of the cost reduction efforts. As a result of these August 2014 initiatives, which included a 35% reduction in employees, the burn rate in September 2014 was decreased by 40%-50% as compared to the average monthly burn rate experienced during the first six months of 2014. At that time, the Company continued to explore a variety of funding alternatives which it believed, together with the cost reduction initiatives, would be necessary to permit the Company to ultimately achieve its clinical trial and regulatory approval objectives. Additionally, the Company publicly stated that in the absence of a financing or strategic transaction, Echo’s ability to achieve its previously stated product development timelines would be negatively impacted by the Company’s effort to preserve cash and reduce expenses. On September 23, 2014, the Company announced that it believed that its liquidity was insufficient to fund its needs beyond September 30, 2014 if its operations continued as they were at that time. Accordingly, it suspended its product development, research, manufacturing and clinical programs and operations to conserve its liquidity and capital resources. The actions followed a strategic review of the Company’s current financial position, funding alternatives, and projected product development costs and timelines. The workforce reduction that resulted from the suspension of operations comprised approximately 70% of Echo's workforce. Additionally, events such as the lawsuits filed or threatened by Platinum Management (NY) LLC (“Platinum”) and its affiliates and the ongoing interference by Platinum to damage Echo, its prospects and its relationships with its vendors and employees, have caused, and are expected to continue to cause, a significant liquidity strain on the Company. Any resumption of operations would be dependent on Echo’s ability to identify a strategic or financial alternative that would provide the Company with timely, committed and sufficient third-party funding. No assurances can be given that Echo will be able to identify a strategic or financial alternative that would provide the Company with funding sufficient to enable the resumption of its operations. On October 2, 2014, the Company announced that it had retained PricewaterhouseCoopers LLP’s Restructuring and Recovery Services Practice (“PwC”) as a financial and restructuring consultant to assist the Company in exploring financial and strategic alternatives that could sufficiently address its liquidity needs and allow it to resume operations. Such financial and strategic alternatives include, but are not limited to, a sale and/or license of intellectual property and other assets, a merger or sale of the Company in entirety, other business combination, a capital transaction and/or a voluntary petition for reorganization or liquidation pursuant to the U.S. Bankruptcy Code. Echo with PwC’s support, continues to proceed in an orderly and timely manner to consider possible financial and strategic alternatives for the Company and their implications. However, no assurances can be given as to whether any particular financial or strategic alternative for Echo will be recommended or undertaken or, if so, upon what terms and conditions. If Echo is unable to identify an acceptable financial or strategic alternative that sufficiently addresses Echo’s liquidity needs, the Company could be forced to file for protection under the U.S. Bankruptcy Code. Echo continues to aggressively pursue additional financing from existing relationships (current and prior stockholders, investors and lenders) and from new investors to support operations, including its product and clinical development programs. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties including the possible write-down of the intangible assets or other assets as of September 30, 2014. 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, had 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 and has a negative impact on Company’s operations and planned development efforts. The Company met with representatives of MTIA on October 22 and 23, 2014, regarding MTIA’s possible investment in the Company. At the conclusion of the meeting, MTIA proposed an offer with an approximate 24-hour lifespan that upon execution of a convertible note purchase agreement with a first stage financing amount of $1,500,000, Echo would be required to turn-over all relevant technical product information and samples of our Generation 1 Symphony product to MTIA as well as dedicate personnel to support their consumer based business plan. As the MTIA offer did not include the previously agreed purchase of the additional $2,600,000 in Company securities as a prerequisite for the release and support of technical product information, the Company deemed the offer inadequate to warrant a response. On October 24, 2014, the Managing Director of MTIA communicated to PwC that they “have no intention to provide any so-called better offer.” Accordingly, the Company has ceased pursuing funding from MTIA. *Management’s Structure, Staffing and Facilities* Effective at midnight on June 30, 2014, Robert F. Doman’s consulting contract with the Company expired in accordance with its terms and, accordingly, he no longer serves as the Company’s Executive Chairman and Interim Chief Executive Officer. On June 30, 2014, the Board appointed Kimberly A. Burke to serve as Interim Chief Executive Officer of Echo, for a sixty-day period beginning on July 1, 2014 and ending on August 30, 2014. Ms. Burke has served as Echo’s General Counsel and Senior Vice President since January 2011, as Chief Compliance Officer since April 2012, and she has served as Echo’s Secretary since 2010. Ms. Burke joined the Company as Vice President, Corporate Counsel in 2008. On September 12, 2014, Kimberly A. Burke informed the Company of her decision to resign as Senior Vice President, General Counsel and Chief Compliance Officer of Echo to pursue other opportunities. Ms. Burke agreed to transition matters appropriately and the effective date of her resignation will be determined once an effective transition has occurred. At this time, Ms. Burke continues to serve Echo as its Senior Vice President, General Counsel, Chief Compliance Officer and Secretary. Effective July 16, 2014, the Board appointed Charles T. Bernhardt to serve as Interim Chief Financial Officer of Echo. As the Company continues to explore financial and strategic alternatives that could sufficiently address its liquidity needs and allow it to resume operations, it has drastically reduced its workforce to conserve cash. The Company retained a team of seven key employees to enable it to explore its financial and strategic alternatives. The Company leases approximately 37,000 square feet of manufacturing, laboratory and office space in a single-story building located in Franklin, Massachusetts under a lease expiring October 31, 2017. The Company is actively attempting to sublease, some or all, of this space to conserve cash as well as more efficiently accommodate its projected facilities needs. 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, with the right to terminate the lease on November 30, 2014. The Company has reached an understanding with the landlord that, as of November 1, 2014, the lease will become month-to-month and the monthly rent will be reduced by 50% while the landlord attempts to rent some, or all, of the current space occupied by the Company. The Company expects to be provided 60 days’ notice to vacate its current office space and the landlord has pledged to assist Echo in locating office space in one of the landlord’s Philadelphia area office buildings that would better fit the Company’s current needs on a month-to-month basis. *Reclassifications* Certain expenses prior to the second quarter of 2014 were reclassified to correspond with the current reporting structure for the nine months ended 2014. In prior periods, Research & Development (“R&D”) facilities expense and related personnel benefits were recognized as Sales, General and Administrative (“SG&A”) expenses. Where relevant, recognition is given to the impact of this reclassification. *Recently Issued Accounting Standards* In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers”, which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosures. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016. We are currently in the process of evaluating the impact of the adoption of this ASU on the financial statements. In April 2014, the FASB issued ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” which changes the criteria for determining which disposals can be presented as discontinued operations and modifies the related disclosure requirements. Under the new guidance, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results and is disposed of or classified as held for sale. The standard also introduces several new disclosures. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. ASU 2014-08 is effective for annual and interim periods beginning after December 15, 2014, with early adoption permitted. We are currently in the process of evaluating the impact of adoption of this ASU on the financial statements. In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements—Going Concern (Subtopic 205-40); Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” which applies should a company be facing probable liquidation within one year of the issuance of the financial statements, but is not actually in liquidation at the time of issuance. The applicable accounting basis for presentation remains as a going concern, but if liquidation within one year is probable, then certain disclosures must be included in the financial statement presentation. ASU 2014-15 is effective for annual and interim periods beginning after December 15, 2016, with early adoption permitted. We are currently in the process of evaluating the impact of adoption of this ASU on the financial statements.

ORGANIZATION AND BASIS OF PRESENTATION

9 Months Ended

Sep. 30, 2014

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 was developing its Symphony® CGM System (“Symphony”) as a non-invasive, wireless continuous glucose monitoring (“CGM”) system for use initially 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 September 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 September 30, 2014, the Company had cash of approximately $1,469,000, a negative working capital of approximately $109,000 and an accumulated deficit of approximately $125,011,000. In the past, the Company has funded its operations primarily through debt and equity issuances.

In August 2014, the Company announced that it had taken steps to substantially reduce operating costs and preserve cash while further refining its development efforts and resources needed to implement key product performance enhancements to its Symphony CGM System. The Company implemented significant cost reductions across all aspects of its operations in both external spend and workforce, including reductions in general and administrative, manufacturing, clinical and product development expenditures. The Company anticipated a meaningful decrease in expenses as a result of the cost reduction efforts. As a result of these August 2014 initiatives, which included a 35% reduction in employees, the burn rate in September 2014 was decreased by 40%-50% as compared to the average monthly burn rate experienced during the first six months of 2014. At that time, the Company continued to explore a variety of funding alternatives which it believed, together with the cost reduction initiatives, would be necessary to permit the Company to ultimately achieve its clinical trial and regulatory approval objectives. Additionally, the Company publicly stated that in the absence of a financing or strategic transaction, Echo’s ability to achieve its previously stated product development timelines would be negatively impacted by the Company’s effort to preserve cash and reduce expenses.

On September 23, 2014, the Company announced that it believed that its liquidity was insufficient to fund its needs beyond September 30, 2014 if its operations continued as they were at that time. Accordingly, it suspended its product development, research, manufacturing and clinical programs and operations to conserve its liquidity and capital resources. The actions followed a strategic review of the Company’s current financial position, funding alternatives, and projected product development costs and timelines. The workforce reduction that resulted from the suspension of operations comprised approximately 70% of Echo's workforce. Additionally, events such as the lawsuits filed or threatened by Platinum Management (NY) LLC (“Platinum”) and its affiliates and the ongoing interference by Platinum to damage Echo, its prospects and its relationships with its vendors and employees, have caused, and are expected to continue to cause, a significant liquidity strain on the Company. Any resumption of operations would be dependent on Echo’s ability to identify a strategic or financial alternative that would provide the Company with timely, committed and sufficient third-party funding. No assurances can be given that Echo will be able to identify a strategic or financial alternative that would provide the Company with funding sufficient to enable the resumption of its operations.

On October 2, 2014, the Company announced that it had retained PricewaterhouseCoopers LLP’s Restructuring and Recovery Services Practice (“PwC”) as a financial and restructuring consultant to assist the Company in exploring financial and strategic alternatives that could sufficiently address its liquidity needs and allow it to resume operations. Such financial and strategic alternatives include, but are not limited to, a sale and/or license of intellectual property and other assets, a merger or sale of the Company in entirety, other business combination, a capital transaction and/or a voluntary petition for reorganization or liquidation pursuant to the U.S. Bankruptcy Code. Echo with PwC’s support, continues to proceed in an orderly and timely manner to consider possible financial and strategic alternatives for the Company and their implications. However, no assurances can be given as to whether any particular financial or strategic alternative for Echo will be recommended or undertaken or, if so, upon what terms and conditions. If Echo is unable to identify an acceptable financial or strategic alternative that sufficiently addresses Echo’s liquidity needs, the Company could be forced to file for protection under the U.S. Bankruptcy Code. Echo continues to aggressively pursue additional financing from existing relationships (current and prior stockholders, investors and lenders) and from new investors to support operations, including its product and clinical development programs. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties including the possible write-down of the intangible assets or other assets as of September 30, 2014.

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, had 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 and has a negative impact on Company’s operations and planned development efforts. The Company met with representatives of MTIA on October 22 and 23, 2014, regarding MTIA’s possible investment in the Company. At the conclusion of the meeting, MTIA proposed an offer with an approximate 24-hour lifespan that upon execution of a convertible note purchase agreement with a first stage financing amount of $1,500,000, Echo would be required to turn-over all relevant technical product information and samples of our Generation 1 Symphony product to MTIA as well as dedicate personnel to support their consumer based business plan. As the MTIA offer did not include the previously agreed purchase of the additional $2,600,000 in Company securities as a prerequisite for the release and support of technical product information, the Company deemed the offer inadequate to warrant a response. On October 24, 2014, the Managing Director of MTIA communicated to PwC that they “have no intention to provide any so-called better offer.” Accordingly, the Company has ceased pursuing funding from MTIA.

Management’s Structure, Staffing and Facilities

Effective at midnight on June 30, 2014, Robert F. Doman’s consulting contract with the Company expired in accordance with its terms and, accordingly, he no longer serves as the Company’s Executive Chairman and Interim Chief Executive Officer. On June 30, 2014, the Board appointed Kimberly A. Burke to serve as Interim Chief Executive Officer of Echo, for a sixty-day period beginning on July 1, 2014 and ending on August 30, 2014. Ms. Burke has served as Echo’s General Counsel and Senior Vice President since January 2011, as Chief Compliance Officer since April 2012, and she has served as Echo’s Secretary since 2010. Ms. Burke joined the Company as Vice President, Corporate Counsel in 2008.

On September 12, 2014, Kimberly A. Burke informed the Company of her decision to resign as Senior Vice President, General Counsel and Chief Compliance Officer of Echo to pursue other opportunities. Ms. Burke agreed to transition matters appropriately and the effective date of her resignation will be determined once an effective transition has occurred. At this time, Ms. Burke continues to serve Echo as its Senior Vice President, General Counsel, Chief Compliance Officer and Secretary.

Effective July 16, 2014, the Board appointed Charles T. Bernhardt to serve as Interim Chief Financial Officer of Echo. As the Company continues to explore financial and strategic alternatives that could sufficiently address its liquidity needs and allow it to resume operations, it has drastically reduced its workforce to conserve cash. The Company retained a team of seven key employees to enable it to explore its financial and strategic alternatives.

The Company leases approximately 37,000 square feet of manufacturing, laboratory and office space in a single-story building located in Franklin, Massachusetts under a lease expiring October 31, 2017. The Company is actively attempting to sublease, some or all, of this space to conserve cash as well as more efficiently accommodate its projected facilities needs.

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, with the right to terminate the lease on November 30, 2014. The Company has reached an understanding with the landlord that, as of November 1, 2014, the lease will become month-to-month and the monthly rent will be reduced by 50% while the landlord attempts to rent some, or all, of the current space occupied by the Company. The Company expects to be provided 60 days’ notice to vacate its current office space and the landlord has pledged to assist Echo in locating office space in one of the landlord’s Philadelphia area office buildings that would better fit the Company’s current needs on a month-to-month basis.

Reclassifications

Certain expenses prior to the second quarter of 2014 were reclassified to correspond with the current reporting structure for the nine months ended 2014. In prior periods, Research & Development (“R&D”) facilities expense and related personnel benefits were recognized as Sales, General and Administrative (“SG&A”) expenses. Where relevant, recognition is given to the impact of this reclassification.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers”, which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosures. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016. We are currently in the process of evaluating the impact of the adoption of this ASU on the financial statements.

In April 2014, the FASB issued ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” which changes the criteria for determining which disposals can be presented as discontinued operations and modifies the related disclosure requirements. Under the new guidance, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results and is disposed of or classified as held for sale. The standard also introduces several new disclosures. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. ASU 2014-08 is effective for annual and interim periods beginning after December 15, 2014, with early adoption permitted. We are currently in the process of evaluating the impact of adoption of this ASU on the financial statements.

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements—Going Concern (Subtopic 205-40); Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” which applies should a company be facing probable liquidation within one year of the issuance of the financial statements, but is not actually in liquidation at the time of issuance. The applicable accounting basis for presentation remains as a going concern, but if liquidation within one year is probable, then certain disclosures must be included in the financial statement presentation. ASU 2014-15 is effective for annual and interim periods beginning after December 15, 2016, with early adoption permitted. We are currently in the process of evaluating the impact of adoption of this ASU on the financial statements.

- Definition

The entire disclosure for organization, consolidation and basis of presentation of financial statements disclosure.

+ References+ Details