10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

________________

FORM 10-Q

________________

R QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015.

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: 000-35218

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)

99 Wood Avenue South, Suite 302, Iselin, NJ	08830
(Address of principal executive offices)	(Zip Code)

732-549-0128

(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 R  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 R  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 £(Do not check if a smaller reporting company) Smaller reporting company R

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes £  No R

As of August 10, 2015, 11,128,275 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 JUNE 30, 2015
	TABLE OF CONTENTS
Item		Page
	PART I - FINANCIAL INFORMATION
1.	Condensed Consolidated Financial Statements (Unaudited):
	Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014	1
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2015 and 2014	2
	Condensed Consolidated Statement of Changes in Stockholders’ Equity (Deficit) for the six months ended June 30, 2015	3
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014	4
	Notes to Condensed Consolidated Financial Statements	5
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
3.	Quantitative and Qualitative Disclosures About Market Risk	16
4.	Controls and Procedures	17
	PART II - OTHER INFORMATION
1.	Legal Proceedings	18
6.	Exhibits	18
SIGNATURES		19
EXHIBIT INDEX		20

-i-

PART I—FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS.

ECHO THERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
	June 30,			December 31,
	2015			2014
ASSETS
Current assets:
Cash and cash equivalents	$	337,423		$	1,278,941
Prepaid and other		342,967			490,824
Total current assets		680,390			1,769,765
Property and equipment, net		443,446			1,138,593
Other assets:
Intangibles, net		—			9,625,000
Cash restricted pursuant to letters of credit		179,456			52,488
Other		250			9,990
Total other assets		179,706			9,687,478
Total assets	$	1,303,542		$	12,595,836
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	1,514,026		$	1,801,469
Accrued and other		650,763			968,392
Premium financing payable		45,947			—
Derivative liabilities		635,000			208,155
Total current liabilities		2,845,736			2,978,016
Deferred revenue, net		95,535			95,535
Total liabilities		2,941,271			3,073,551
Commitments and contingencies
Stockholders’ equity (deficit):
Preferred Stock, $0.01 par value; 40,000,000 shares authorized:
Convertible Series
C - 10,000 shares authorized; issued and outstanding 1,000 shares		10			10
D - 3,600,000 shares authorized; issued and outstanding 1,000,000 shares		10,000			10,000
E - 1,748,613 shares authorized; issued and outstanding		17,486			17,486
F - 5,000,000 shares authorized; issued and outstanding 4,555,179 and 840,336 shares, respectively		45,552			8,403
Common stock, $0.01 par value; 150,000,000 shares authorized; issued and outstanding 11,128,275 and 12,629,695 shares, respectively
		111,281			126,295
Additional paid-in capital		145,256,318			137,292,157
Accumulated deficit		(147,078,376	)		(127,932,066	)
Total stockholders’ equity (deficit)		(1,637,729	)		9,522,285
Total liabilities and stockholders’ equity (deficit)	$	1,303,542		$	12,595,836

See accompanying notes to the condensed consolidated financial statements.

-1-

ECHO THERAPEUTICS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2015			2014			2015			2014
Licensing revenue	$	—		$	19,107		$	—		$	38,214
Total revenues		—			19,107			—			38,214
Operating Expenses:
Research and development		797,761			1,650,761			1,629,094			2,916,963
Selling, general and administrative		1,360,796			2,184,480			2,843,061			3,507,642
Impairment charge		9,625,000			—			9,625,000			—
Loss (gain) on disposal of property and equipment		130,594			(1,500	)		239,434			(1,500	)
Depreciation and amortization		361,616			98,892			448,320			198,792
Total operating expenses		12,275,767			3,932,633			14,784,909			6,621,897
Loss from operations		(12,275,767	)		(3,913,526	)		(14,784,909	)		(6,583,683	)
Other Income (Expense):
Gain (loss) on revaluation of derivative warrant liability		250,000			393,000			(7,845	)		533,000
Financing gain (loss)		1,177,000			—			(4,357,000	)		—
Interest expense		(2,001	)		(243,450	)		(4,726	)		(486,334	)
Other		8,170			—			8,170			—
Other income (expense), net		1,433,169			149,550			(4,361,401	)		46,666
Net loss	$	(10,842,598	)	$	(3,763,976	)	$	(19,146,310	)	$	(6,537,017	)
Net loss per common share, basic and diluted	$	(0.97	)	$	(0.31	)	$	(1.69	)	$	(0.55	)
Basic and diluted weighted average common shares outstanding		11,128,275			12,070,548			11,337,272			11,965,306

See accompanying notes to the condensed consolidated financial statements.

-2-

ECHO THERAPEUTICS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE SIX MONTHS ENDED JUNE 30, 2015 (Unaudited)
	Preferred Stock				Common Stock						Additional Paid-in Capital		Accumulated Deficit			Total Stockholders’ Equity (Deficit)
	Shares		Amount		Shares			Amount
Balance at December 31, 2014		3,589,949	$	35,899		12,629,695		$	126,295		$	137,292,157	$	(127,932,066	)	$	9,522,285
Exchange - Common Stock for Series F		1,500,000		15,000		(1,500,000	)		(15,000	)		—		—			—
Proceeds from issuance of Series F and warrants		1,666,666		16,667		—			—			5,497,333		—			5,514,000
Capital contribution		—		—		—			—			59,325		—			59,325
Issuance of Series F pursuant to Reimbursement Agreement		548,177		5,482		—			—			1,796,518		—			1,802,000
Share-based compensation, net of restricted stock cancellations		—		—		(1,420	)		(14	)		610,985		—			610,971
Net loss		—		—		—			—			—		(19,146,310	)		(19,146,310	)
Balance at June 30, 2015		7,304,792	$	73,048		11,128,275		$	111,281		$	145,256,318	$	(147,078,376	)	$	(1,637,729	)

See accompanying notes to the condensed consolidated financial statements.

-3-

ECHO THERAPEUTICS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
	For the Six Months Ended June 30,
	2015			2014
Cash Flows From Operating Activities:
Net loss	$	(19,146,310	)	$	(6,537,017	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		448,320			198,792
Share-based compensation, net		610,971			591,055
Fair value of common stock issued for services		—			8,404
Loss (gain) on revaluation of derivative warrant liability		7,845			(533,000	)
Warrant repricing charged to legal expense		328,000			—
Loss (gain) on disposal of assets		239,434			(1,500	)
Impairment charge		9,625,000			—
Financing loss		4,357,000			—
Amortization of deferred financing costs		—			484,002
Changes in assets and liabilities:
Prepaid and other		148,280			(159,278	)
Other assets		—			576
Accounts payable		(5,503	)		(3,960	)
Deferred revenue from licensing arrangements		—			(38,214	)
Accrued and other		232,371			(526,906	)
Net cash used in operating activities		(3,154,592	)		(6,517,046	)
Cash Flows from Investing Activities:
Purchase of property and equipment		(12,207	)		(32,911	)
Decrease (increase) in restricted cash		(126,968	)		250,000
Proceeds on disposal of property and equipment		19,600			1,887
Net cash (used in)  provided by investing activities		(119,575	)		218,976
Cash Flows From Financing Activities:
Proceeds from issuances of equity, net		2,500,000			2,350,000
Capital contribution		59,325			—
Principal payments on financing		(226,676	)		(1,361	)
Net cash provided by financing activities		2,332,649			2,348,639
Net decrease in cash and cash equivalents		(941,518	)		(3,949,431	)
Cash and cash equivalents:
Beginning of period		1,278,941			8,055,385
End of period	$	337,423		$	4,105,954
Supplemental disclosure of  cash flow information:
Cash paid during the year:
Interest	$	4,781		$	3,067
Income taxes	$	—		$	—
Supplemental disclosure of non-cash financing transactions:
Prepaid insurance financed	$	272,623		$	—
Director’s fees payable offset against prepaid insurance	$	272,200		$	—
Accrued legal fees settled with stock	$	550,000		$	—
Security deposit offset against accounts payable	$	9,740		$	—
Conversion of Convertible Preferred Stock into Common Stock at par value	$	15,000		$	—

See accompanying notes to the condensed consolidated financial statements.

-4-

Echo Therapeutics, Inc.

Notes to Condensed Consolidated Financial Statements

 (Unaudited)

(1) ORGANIZATION AND BASIS OF PRESENTATION

Echo Therapeutics, Inc. (the "Company") is a medical device company with expertise in advanced skin permeation technology. The Company is developing its non-invasive, wireless continuous glucose monitoring (CGM) system with potential use in the wearable-health consumer market and the diabetes outpatient market. A significant longer-term opportunity may also exist in the hospital setting. Echo has also developed its needle-free skin preparation device as a platform technology that allows for enhanced skin permeation enabling extraction of analytes, such as glucose, enhanced delivery of topical pharmaceuticals and other applications.

The accompanying unaudited condensed 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, 2014 included in the Company’s Annual Report on Form 10-K as filed with the United States Securities and Exchange Commission (“SEC”) on April 15, 2015. Certain amounts in prior periods have been reclassified to conform to the current presentation. 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, 2015 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.

(2)      LIQUIDITY AND MANAGEMENT’S PLANS

The accompanying financial statements have been prepared on a basis that assumes that the Company will continue as a going concern and that contemplates the continuity of operations, the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.  As of June 30, 2015, the Company had cash of approximately $337,000, working capital deficit of approximately $2,165,000 and an accumulated deficit of approximately $147,000,000. 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 accordance with its current planned operations. The Company has funded its operations in the past primarily through debt and equity issuances. Management will continue to pursue financing to fund its operations. No assurances can be given that additional capital will be available on terms acceptable to the Company. The accompanying financial statements do not include any adjustments that might result from the outcome of the uncertainty.

Subsequent to June 30, 2015, the Company received the final installment of cash proceeds of $500,000 from a $4,000,000 equity financing it had arranged in December 2014.

(3)  PROPERTY AND EQUIPMENT

The principal categories and estimated useful lives of property and equipment were:

	2015		2014		Estimated Useful Lives
Computer equipment	$	306,681	$	334,865		3
Office and laboratory equipment		688,804		740,177		3-5
Furniture and fixtures		466,454		755,444		7
Manufacturing equipment		97,986		111,980		5
Leasehold improvements		10,815		825,589		3 - 7
Total property and equipment		1,570,740		2,768,055
Less accumulated depreciation and amortization		1,127,294		1,629,462
Property and equipment, net	$	443,446	$	1,138,593

-5-

The Company recorded a loss on disposal of $239,434, primarily in connection with its corporate office relocation to Iselin, New Jersey in the first quarter and research facility relocation to Littleton, Massachusetts. The Company sold excess furniture to the incoming tenant and this resulted in an increase in the loss on disposal. Additionally, each relocation required the Company to write-off its leasehold improvements. See Note 5.

(4)      IMPAIRMENT OF INTANGIBLES

The Company reviews its intangibles for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company conducts its asset impairment analyses by grouping assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.

In connection with the preparation of the financial statements in the second quarter of fiscal 2015, the Company concluded it had a triggering event requiring assessment of impairment for its intangibles in conjunction with an expected out-licensing strategy that new management had hoped to pursue. Extremely limited financial resources coupled with the remaining short patent lives, discussions with previous consultants regarding their progress with bringing value to the intangibles, a review of competitive formulations and discussions with new consultants to explore out-licensing strategies, led newly-hired corporate management to conclude it was best to abandon its initial hope to garner value from its intangibles.Accordingly, due to this change in strategy, no monies are now expected to be obtained relating to the Azone Drug Master File, the Durhalieve and MAZ Investigational New Drug applications and the MAZ Orphan Drug application (collectively, the AzoneTS-based technology acquired in 2007) intangibles. As a result, the Company reviewed the intangibles for impairment and recorded a $9.625 million impairment charge, or the full value of the intangibles, on the consolidated statement of operations in the second quarter of 2015.

(5)      OPERATING LEASE COMMITMENTS

The Company leased 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. The company terminated this lease early and moved to Iselin, New Jersey on January 15, 2015 where the Company has leased 2,800 square feet of office space for 38 months at a monthly rental of approximately $7,700. The Company posted a $77,000 Letter of Credit to secure the lease which is reduced to $38,500 after nineteen months of occupancy, assuming no defaults, as defined.

The Company leased 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. On July 17, 2015, the Company entered into a Lease Termination Agreement (the “Termination Agreement”), whereby the Company paid a fee of $150,000 to terminate this lease. The lease termination was effective as of May 31, 2015.

 On May 5, 2015, the Company signed a lease for approximately 10,000 square feet for a research and development facility in Littleton, Massachusetts. The lease is for 65 months. Effective base monthly rent over the lease term will be $11,470.  The Company moved to the new facility from its Franklin, Massachusetts location on July 3, 2015. The Company agreed to post a $50,000 Letter of Credit until July 1, 2015 while the Littleton facility was being improved. Such amount was increased to $150,000 on July 1, 2015. The Letter of Credit is expected to be reduced to $50,000 after 24 months of timely lease payments.

(6)  DERIVATIVE LIABILITIES

Derivative warrant liability:

As a result of having warrants which are outstanding, issued in connection with a 2012 Credit Facility (which was terminated in October 2014), we are required to record the changes in the value of these derivative warrants through their expirations in November 2017. The table below presents the changes in the derivative warrant liability, which is measured at fair value on a recurring basis and classified as Level 3 in fair value hierarchy:

	2015		2014
Derivative warrant liability as of January 1	$	208,155	$	1,119,155
Loss (gain) on revaluation		7,845		(533,000	)
Derivative warrant liability as of June 30	$	216,000	$	586,155

-6-

None of the derivative warrants were exercised in 2015 or 2014 pursuant to cashless exercise provisions.

Derivative financing liability:

In December 2014, the Company reached agreement with investors to provide $4,000,000 of installment financing in exchange for Series F Preferred Stock and warrants. The deal was priced at $1.50 per share or the stock price in effect, if lower. At June 30, 2015, installments totaling $500,000 still remained to be paid by investors, potentially representing 333,333 shares of Series F Preferred to be issued in the future with warrants to purchase the same number of common shares at the agreed exercise price of $3.00. Our closing market price at June 30, 2015 of $1.70 per share was $0.20 above the deal price of $1.50. As a result of the market price being higher than the stated deal price, the Company was required to record a charge to financing expense and a corresponding credit to derivative liability representing the potential value to be provided in excess of the potential cash proceeds calculated as follows:

Excess of Market share price over deal share price ($1.70 vs. $1.50)	$	0.20
Potential future share issuance		333,333
	$	66,667
Fair value of warrants utilizing Black-Scholes model		352,333
	$	419,000

As the Company receives subsequent cash installments, the derivative liability will increase or decrease depending on the fair value of the shares and warrants on the date the installments are made.

(7)  EQUITY TRANSACTIONS

Restart of Operations and related option grants

On January 2, 2015, in conjunction with restarting the operations of the Company, stock option grants to purchase 400,000 shares of Common Stock at an exercise price of $1.35 were issued to various employees primarily at our Franklin, Massachusetts research and development facility. On January 5, 2015, an additional stock option grant was made to purchase 50,000 shares of our Common stock at an exercise price of $1.48 to our new Manager of Business Development in Iselin, New Jersey. On March 2, 2015, we issued another stock option grant to purchase 20,000 shares of our Common Stock at $2.34 to a senior technician hired for our Franklin facility. On May 11, 2015 option grants to purchase 55,000 shares at $1.31 were issued to newly hired software and electrical engineers. On May 15, 2015, an option grant to purchase 40,000 shares at $1.29 was issued to a systems engineer. On May 26, 2015 an option grant to purchase 30,000 shares at $1.62 was issued to a newly hired software engineer. All grants vest over three years with one-third vesting immediately and the balance vesting equally at each of the two respective anniversary periods. All grants were made pursuant to the 2008 Equity Compensation Plan.

Board Matters

On January 7, 2015, the Board realigned annual compensation at $30,000 per annum per director. Each director, other than our CEO whose employment agreement precluded him from receiving director compensation the first year, received a stock option to purchase 150,000 shares of our Common Stock at an exercise price of $1.62 vesting 25% immediately and then 25% at the beginning of each quarter thereafter. These options contain a condition where they are only exercisable after the average closing price of the Company’s common stock for the ten (10) days prior to exercise, equals or exceeds $7.50 per share. Such amount was valued using a binomial lattice model and included in share-based compensation expense.

Exchange of Common Stock for Series F Preferred Stock

On January 9, 2015 and again on March 31, 2015, Platinum Partners Value Arbitrage Fund, L.P. (PPVA) and Platinum Partners Liquid Opportunity Fund, L.P. exchanged 843,526 and 208,884 and 356,474 and 91,116, respectively of their common shares held for Series F Preferred Stock. Based on the terms of the Series F (e.g. conversion ratio of 1:1 and no liquidation preference) the Company determined that the value of the Series F is equivalent to the common shares.

-7-

Capital Contribution

Late in the third quarter of 2014, the research and development operations of the Company were suspended and key personnel were laid off. In October 2014, two of the Company’s directors received a non-recourse loan for $500,000 from PPVA. The purpose of this contribution was to provide the directors monies to advance their plan for the Company and attempt to maintain its viability during the suspension of operations. $440,675 was expended in the fourth quarter of 2014 by these directors primarily for salaries of key employees and targeted technology efforts focused on the wearable technology sector. The Company considered this expenditure by two of its directors a capital contribution since the funds were spent on matters specifically related to the operations of the Company. In February 2015, the $440,675 capital contribution together with the balance of monies received in 2015 of $59,325, equivalent to the original $500,000 the two directors had received, was settled in Series F shares by the Company to PPVA. See discussion below.

Settlement of Amounts Owed for Series F Preferred Stock and Warrants

On September 23, 2014, the Company announced that, as it believed that its current liquidity was insufficient to fund its needs beyond September 30, 2014, it was suspending its product development, research, manufacturing and clinical programs and operations to conserve its liquidity and capital resources. The workforce reduction due to the suspension of operations comprised approximately 70% of Echo’s workforce, leaving only administrative personnel.  Affected employees were notified on September 23, 2014. The employees whose employment was terminated as part of the workforce reduction were not offered severance pay. The Company indicated that they could possibly incur additional costs not currently contemplated due to events that may occur as a result of, or that were associated with, the workforce reduction.

At the time of the workforce reduction announcement, Platinum Management (NY) LLC (“Platinum”), together with its affiliates, a significant stockholder of the Company, was in the process of engaging in a proxy contest with the Company pursuant to which it sought to ultimately remove three of the then-current directors of the Company. In conjunction therewith, Platinum provided $500,000 on a non-recourse basis to two of the Company’s directors whose removal Platinum was not seeking, namely Michael Goldberg and Shepard Goldberg, which was recorded as a capital contribution (“Contribution”) in 2014. Proceeds of the Contribution were utilized for retaining certain key employees and for research and technology initiatives, all for the benefit of the Company. A small portion of the monies was not disbursed, which was transferred to the Company. At the time of the Contribution, Shepard Goldberg and Michael Goldberg agreed that, should the Contribution ultimately benefit the Company, they would use their best efforts to cause the Company to issue equity to Platinum as consideration for making the Contribution.

In December 2014, as part of a negotiated settlement agreement, the three directors, whom Platinum sought to remove, resigned as directors and Platinum agreed to make a direct investment in the Company.  In connection with the proxy contest, Platinum expended $550,000 on legal representation and related expenses. In its proxy statement, Platinum advised stockholders that it would pay all the costs associated with the solicitation of proxies, but would seek reimbursement from the Company, and not submit such reimbursement to a vote of stockholders.

On February 12, 2015, the Company agreed to reimburse Platinum for its Contribution and the Expenses it incurred in the proxy fight. In this regard, the Board of Directors of the Company determined that both the Contribution and Expenses together resulted in the Company being able to continue operations and put into place a strong management team.  Pursuant to a Reimbursement Agreement, dated February 12, 2015 (the “Reimbursement Agreement”), Platinum received 548,177 shares of Series F Convertible Preferred Stock (consisting of 333,333 shares of Series F for the $500,000 capital contribution and 214,844 shares of Series F for the $550,000 of legal expenses they incurred, for a Series F share total of 548,177) and Warrants to purchase 333,333 shares of common stock of the Company. These Warrants expire in five years and have a $3.00 per share exercise price. Additionally, the Company agreed to re-price 700,000 warrants, originally disbursed to Platinum in connection with its August 31, 2012 Loan Agreement, and referred to as the Derivative Warrants, then priced in the $20.00 to $22.70 range per share, to $7.50 per share. The Company recorded a non-cash charge to legal expense for $328,000 representing the cost of re-pricing the Derivative Warrants. The Company also recorded a non-cash charge of $7,845 related to the change in the value of the derivative liability. Additionally, the Company recorded a charge to financing expense of $924,000 representing the additional value given to the investors as a result of the closing market price of $2.56 being above the deal price of $1.50 used for the reimbursement of the $500,000 capital contribution. The shares issued for the legal expenses were done at the market close of the Company’s Common Stock on the date of the Reimbursement Agreement.

-8-

Equity Raise

For the three and six months ended June 30, 2015, the Company received $1,500,000 and $2,500,000, respectively, from its $4,000,000 December 2014 financing and issued 1,000,000 and 1,666,666 shares, respectively, of Series F Preferred Stock and warrants to purchase the same number of shares of Common Stock at an exercise price of $3.00 were issued to investors. The Company recorded financing expense of $3,014,000 with a corresponding credit to additional paid in capital since the average market price on the dates the financing was received was above the deal price of $1.50, representing excess value provided to the investors.

(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 June 30, 2015, there were 5,000 restricted shares of Common Stock issued and options to purchase an aggregate of 26,500 shares of Common Stock outstanding under the 2003 Plan and no shares are available for future grants due to the 2003 Plan’s expiration.

In May 2008, the Company’s shareholders approved the 2008 Equity Compensation Plan, as amended (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. The maximum number of shares available under the 2008 Plan is 10,000,000 shares.  As of June 30, 2015, there were 27,805 restricted shares of Common Stock issued and options to purchase 1,640,733 shares of Common Stock outstanding under the 2008 Plan and 8,318,462 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						Not Pursuant
	2003 Plan			2008 Plan			to a 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		(5,000	)		(27,805	)
Stock options granted		(154,449	)		(3,070,883	)
Add back options cancelled before exercise		92,349			1,417,150
Less shares no longer available due to Plan expiration		(92,900	)		—
Remaining shares available for future grants at June 30, 2015		—			8,318,462
Stock options granted		154,449			3,070,883			310,000
Less:Stock options cancelled		(92,349	)		(1,417,150	)		(243,333	)
Stock options exercised		(35,600	)		(13,000	)		(66,667	)
Net shares outstanding before restricted stock		26,500			1,640,733			—
Net restricted stock issued net of cancellations		5,000			27,805			6,485
Outstanding shares at June 30, 2015		31,500			1,668,538			6,485

(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.

For options issued and outstanding during the three month periods ended June 30, 2015 and 2014, the Company recorded additional paid-in capital and non-cash compensation expense of $585,000 and $137,000, respectively, each net of estimated forfeitures.

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The assumptions used principally for stock options granted to employees and members of the Company’s Board of Directors in the six months ended June 30, 2015 and 2014 were as follows:

	2015	2014
Risk-free interest rate %	1.46 - 1.90	0.11 - 2.08
Expected dividend yield	—	—
Expected term -  years	5 – 5.5	1 - 6
Forfeiture rate % (excluding fully vested stock options)	­­7.5 - 15	15
Expected volatility %	92 - 93	129 - 141

A summary of stock option activity for the six months ended June 30, 2015 is as follows:

Stock Options	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding options at January 1, 2015		1,039,900		$	3.00
Granted		895,000		$	1.47
Forfeited or expired		(267,667	)	$	4.06
Outstanding options at June 30, 2015		1,667,233		$	2.01		9.24	$	—
Exercisable options at June 30, 2015		593,750		$	2.56		9.02	$	—

The weighted-average grant-date fair value of stock options granted for the ended June 30, 2015 was $1.47 per share.  As of June 30, 2015, there was approximately $950,000 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 FDA approval for the Company’s CGM system or the sale of substantially all of the stock or assets of the Company, unrecognized compensation is expected to be recognized over the next four years.

(10)           RESTRICTED STOCK

For restricted stock issued and outstanding during the three month periods ended June 30, 2015 and 2014, the Company incurred non-cash compensation expense of approximately $26,000 and $108,000, respectively, each net of estimated forfeitures.

During the three months ended June 30, 2015, the Company did not grant restricted shares of Common Stock to any officers, employees, directors and consultants of the Company.

A summary of non-vested restricted stock activity as of and for the six months ended June 30, 2015 is as follows:

Restricted Stock	Shares			Weighted- Average Grant-Date Fair Value
Non-vested shares at January 1, 2015		47,958		$	9.74
Vested		(6,338	)	$	3.68
Forfeited		(2,330	)	$	6.05
Non-vested shares at June 30, 2015		39,290		$	12.12

Among the 39,290 shares of non-vested restricted stock, the various vesting criteria include the following:

· 14,185 shares of restricted stock vest upon the FDA approval of our CGM system or the sale of the Company;

· 21,480 shares of restricted stock vest over 4 years, at each of the anniversary dates of the grants; and

· 3,625 shares of restricted stock vest over 1 year, at each of the anniversary dates of the grants.

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As of June 30, 2015, there was approximately $213,000 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 June 30, 2015, 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.

(11)       WARRANTS

In the three and six months ended June 30, 2015, the Company issued warrants to purchase 999,999 and 1,666,666 shares of our common stock, respectively, in connection with a partial closing related to the private placement of the Company’s Common Stock as well as the 333,333 shares of our common stock in connection with a Reimbursement Agreement. See Notes 6and7.

The Derivative Warrants to purchase 700,000 shares of our Common Stock, at exercise prices ranging from $20.00 to $22.70, and expiring in 2017, are included in the outstanding warrants at January 1, 2015. On February 12, 2015, these warrants were re-priced to $7.50 to compensate PPVA in connection with the Reimbursement Agreement reached between the Company and PPVA. See Notes 6 and 7.

A summary of warrant activity for the six months ended June 30, 2015 is as follows:

Warrants	Shares			Weighted-Average Exercise Price
Outstanding warrants at January 1, 2015		1,847,066		$	10.04
Granted		1,999,999		$	3.00
Forfeited		(37,638	)	$	22.50
Outstanding warrants at June 30, 2015		3,809,427		$	3.81

At June 30, 2015, the Company had the following outstanding warrants:

Type of Warrant/ Range of Exercise Prices		Expirations	Number Outstanding		Weighted- Average Remaining Contractual Life (years)		Weighted- Average Exercise Price		Number Exercisable
Derivative:
$	7.50	8/31/17 to 11/6/17		700,000		2.23	$	7.50		700,000
Equity:
$	2.75 - $3.00	12/10/18 to 03/09/20		3,109,427		4.59	$	2.98		3,109,427
Total outstanding				3,809,427						3,809,427

The Company uses valuation methods and assumptions that consider among other factors the fair value of the underlying stock, risk-free interest rate, volatility, expected life and dividend rates in estimating fair value for the warrants considered to be derivative instruments. The following assumptions were utilized by the Company:

Risk-free interest rate	.70 %
Expected dividend yield	—
Expected term - years (contractual term)	2.5
Forfeiture rate	—
Expected volatility	92 %

Expected volatilities are based on historical volatility of the Common Stock using historical periods consistent with the expected term of the warrant. The risk-free rate is based on the yield of a U.S. Treasury security with a term consistent with the warrant.

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(12)           LITIGATION & OTHER SIGNIFICANT MATTERS

On July 4, 2015, the Company resolved its legal disputes with Patrick Mooney, its former Chairman, President and Chief Executive Officer, on mutually-agreeable terms and all related litigation was dismissed with prejudice.  On July 27, 2015, the Company made a settlement payment of $150,000 to Dr. Mooney and additional payments were made to Dr. Mooney from the Company’s insurers.

From time to time, in addition to that which is identified above, we are subject to legal proceedings, claims, investigations, and proceedings in the ordinary course of business. In accordance with generally accepted accounting principles, we make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss or range of loss can be reasonably estimated. These provisions, if any, are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. We believe that we have valid defenses with respect to the legal matters pending against us and are vigorously defending these matters. Given the uncertainty surrounding litigation and our inability to assess the likelihood of a favorable or unfavorable outcome in the above noted matters and our inability to reasonably estimate the amount of loss or range of loss, it is possible that the resolution of one or more of these matters could have a material adverse effect on our consolidated financial position, cash flows or results of operations.  At June 30, 2015, no litigation loss is deemed probable or reasonably estimated other than the $150,000 for the Dr. Mooney matter which is included in accrued expenses at June 30, 2015.

NASDAQ Compliance

On January 30, 2015, the Company received a letter from NASDAQ indicating that the Company no longer complies with NASDAQ’s audit committee requirements set forth in NASDAQ Listing Rule 5605.  Such rule requires that the Audit Committee of the Company have a minimum of three members and be composed only of independent directors.  On December 31, 2014, Vincent Enright, William Grieco and James Smith resigned from the Board of Directors of the Company, as well as its Audit Committee. As a result, the Audit Committee had no members as of Decembers 31, 2014.  On January 5, 2015, the Board of Directors appointed Shepard Goldberg and Dr. Michael Goldberg to the Audit Committee, both of whom are independent directors.  

NASDAQ provided to the Company a cure period in order to regain compliance as follows:

· until the earlier of the Company’s next annual shareholders’ meeting or December 31, 2015; or

· if the next annual shareholders’ meeting is held before June 29, 2015, then the Company must evidence compliance no later than June 29, 2015.

The Company intends to add at least one additional independent member to the Audit Committee by the date required by Nasdaq Listing Rule 5605.

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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, 2014 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. This Annual Report on Form 10-K contains 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. Factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, those discussed elsewhere in this report and the risks discussed in our other filings with the Securities and Exchange Commission (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. Except as required by law, 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 a non-invasive, wireless continuous glucose monitoring (CGM) system for initial use in the wearable-health consumer market and the diabetes outpatient market. The transdermal skin preparation component of our CGM System allows for enhanced skin permeation that will enable extraction of analytes such as glucose, enhanced delivery of topical pharmaceuticals and other applications.

Research and Development

We believe that ongoing research and development (“R&D”) efforts are essential to our success. A major portion of our operating expenses to date is related to our research and development activities. R&D expenses generally consist of internal salaries and related costs, and third-party vendor expenses for product design and development. 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 $1,629,000 for the six months ended June 30, 2015. We intend to maintain our strong commitment to R&D as an essential component of our product development efforts. Our ability to raise sufficient financing may impact our level of R&D spending and progress towards milestones.

Critical Accounting Policies and Estimates

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

On an ongoing basis, we evaluate our estimates and judgments for all assets and liabilities, including those related to intangible asset impairment, long-lived asset impairment, 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 April 15, 2015.

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.

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Results of Operations

Comparison of the Three and Six Months ended June 30, 2015 and 2014

Net Loss — As a result of the factors described below, we had a net loss of $10,842,598 and $19,146,310 for the three and six months ended 2015, respectively, compared to $3,763,976 and $6,537,017 for the three and six months ended 2014, respectively.

Impairment Charge — The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analyses by grouping assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.

In connection with the preparation of the financial statements in the second quarter of fiscal 2015, the Company concluded it had a triggering event requiring assessment of impairment for its intangibles in conjunction with an expected out-licensing strategy that new management had hoped to pursue. Extremely limited financial resources coupled with the remaining short patent lives, discussions with previous consultants regarding their progress with bringing value to the intangibles, a review of competitive formulations and discussions with new consultants to explore out-licensing strategies led newly-hired corporate management to conclude it was best to abandon its initial hope to garner value from its intangibles.Accordingly, due to this change in strategy, no monies are now expected to be obtained relating to the Azone Drug Master File, the Durhalieve and MAZ Investigational New Drug applications and the MAZ Orphan Drug application (collectively, the AzoneTS-based technology acquired in 2007) intangibles. As a result, the Company reviewed its intangibles for impairment and recorded a $9.625 million impairment charge, or the full value of the intangibles, on the consolidated statement of operations in the second quarter of 2015.

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. Approximately $95,000 remained unrecognized at June 30, 2015. We have been 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 $0 in 2015 and $19,000 and $38,000 in 2014 of licensing revenue were recognizable for each of the respective three and six month periods ended.

Research and Development Expenses —R&D expenses decreased by approximately $853,000, or 52%, to $797,761 for the three months ended 2015 from $1,650,761 for the same period in 2014. R&D expenses represented 30% and 42% during the three months ended, of total operating expenses (excluding the impairment charge) in 2015 and 2014, respectively. Declines for the quarter were primarily attributable to approximate decreases in: payroll $264,000, contracted services $278,000, consulting $67,000 and prototypes $148,000.

R&D expenses decreased by approximately $1,288,000, or 44%, to $1,629,094 for the six months ended 2015 from $2,916,963 for the same period in 2014. R&D expenses represented 32% and 44% during the six months ended, of total operating expenses (excluding the impairment charge) in 2015 and 2014, respectively.  Declines for the six months were primarily attributable to approximate decreases in: payroll $567,000, contracted services $163,000, consulting $244,000 and prototypes $178,000.

 R&D expenses decreased primarily as a function of the funding available to us in 2015 during the three and six month periods.

For the six months ended June 30, 2015, we concentrated our limited funding on continuing the transformation of our prior ICU product line for use in the wearable-health consumer and diabetes outpatient marketplaces. Specifically, we are developing a new generation of flexible, wearable, non-invasive technology with smartphone applicability.

Additionally, we devoted resources to assist our partner in China, Medical Technologies Innovation Asia Ltd. (MTIA), in meeting the stringent requirements set forth by the China Food and Drug Administration (CFDA).

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During the first half of 2015, we improved our CGM consistency and reliability through improvements to the key components of the system. We successfully demonstrated a Smartphone App and glucose tracking comparison against an industry leading CGM.  With respect to specific components, our progress was as follows:

· Skin Preparation Device: Completed industrial design of new self-exfoliating device and tips, which will be lower cost, easier to use and compatible with our new sensor.

· Sensor: Completed industrial design of new flexible sensor, which will be higher performing, lower cost, smaller and will have a re-usable Bluetooth transmitter.

Selling, General and Administrative Expenses — S,G&A expenses decreased by approximately $824,000, or 38%, to $1,360,796 for the three months ended 2015 from $2,184,480 for the same period in 2014. S,G&A expenses represented 51% and 56% of total operating expenses (excluding the impairment charge) during the three months ended 2015 and 2014, respectively. The decline for the three months was primarily attributable to approximate decreases in: proxy solicitation $598,000, investor relations $60,000, board fees $96,000, salaries and consultant fees of $157,000 and recruiting fees of $153,000, offset by an increase in legal fees of $208,000 primarily related to the Mooney matter which the Company settled in the second quarter of 2015.

S,G&A expenses decreased by approximately $665,000, or 19%, to $2,843,061 for the six months ended 2015 from $3,507,642 for same period in 2014. S,G&A expenses represented 55% and 53% of total operating expenses (excluding the impairment charge) during the six months ended 2015 and 2014, respectively. The decline for the six months was primarily attributable to: approximate decreases in proxy solicitation $605,000, investor relations $110,000, board fees $173,000, recruiting fees of $148,000, salaries and consultant fees $210,000, and franchise taxes of 129,000, offset by an increase in legal fees of $656,000 related to the Mooney matter which the Company settled in the second quarter of 2015.

S,G&A expenses for 2014 reflect the proxy battle that enveloped the Company in 2014 which caused outsized increases in proxy solicitation and investor relations costs. Board fees, which were reduced to $30,000 per director in 2015, from a fee arrangement in 2014 which consisted of $45,000 per director and $95,000 paid to the Lead Director, plus additional meeting fees to each director for attendance and subcommittee chair responsibilities, and reflect the cost of the numerous meetings held primarily by former directors in 2014 when the Company was without a permanent chief executive officer. Recruiting fees in 2014 reflect a large fee for an executive recruiter to conduct a search for a chief executive officer. Mr. Hollander was not sourced by this firm. Offsetting costs for the six month period ended 2015 include legal fees primarily related to the Mooney matter which the Company settled in the second quarter of 2015.

Loss (gain) on disposal of property and equipment — The loss on disposal of $130,594 for the three months ended 2015 primarily reflects the write-down of furniture sold to the incoming tenant of the Franklin, MA facility which we moved out of in the third quarter.  The loss on disposal of $239,434 for the six months ended 2015 reflects the aforementioned loss in addition to losses on furniture and fixtures sold when we relocated from Philadelphia to Iselin, NJ in the first quarter of 2015.

Depreciation and Amortization expense — Depreciation expense increased by approximately $263,000, or 266%, to $361,616 for the three months ended 2015 from $98,892 for the same period in 2014. Depreciation expense increased by approximately $250,000, or 126%, to $448,320 for the three months ended 2015 from $198,792 for the same period in 2014. The large increases in both periods reflected an acceleration of the depreciation on the leasehold improvements which the Company abandoned in Franklin, Massachusetts. The Company had $765,369 of leasehold improvements which it wrote-off in connection with its move to Littleton, Massachusetts.

Gain (loss) on Revaluation of Derivative Warrant Liability — Changes in the fair value of derivative financial instruments are recognized each period 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 (loss) on revaluation of the derivative warrant liability for the three months ended 2015 and 2014 was $250,000 and $393,000, respectively, and ($7,845) and $533,000, respectively, for the six months ended 2015 and 2014.

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Financing gain (loss) — This is a non-cash charge with two components representing: (i) the excess value given to investors in 2015, who received shares of Series F Stock and warrants to purchase the same number of shares of our common stock, when the closing market price was above the $1.50 purchase price they paid for their shares and warrants. We recorded a non-cash charge of $3,938,000 related to these investors, and (ii) the potential excess future value represented by the 333,333 shares and warrants to purchase the same number of shares for the remaining $500,000 of investment still outstanding under our December 2014 financing, based on our closing market price at June 30, 2015 of $1.70. We recorded a non-cash charge of $419,000 related to these future investments. For the three months ended 2015 we recorded a gain of $1,177,000 representing the difference between what we had estimated the value of the derivative transactions would cost the Company at the end of the first quarter and what they actually represented during the second quarter.

Interest Expense — Interest expense decreased by approximately $241,000 to $2,001 from $243,450 for the three months ended 2015 and 2014, respectively.  Interest expense decreased approximately $482,000 to $4,726 from $486,334 for the six months ended 2015 and 2014, respectively. The decrease in both periods represents the amortization in 2014 of deferred financing costs for the fair value of the Commitment Warrant issued pursuant to the Montaur Credit Facility established in August 2012. Such facility was terminated in October 2014.

Liquidity and Capital Resources

We have financed our operations since inception primarily through sales of our equity, the issuance of convertible promissory notes, draws from a non-revolving credit facility, unsecured and secured promissory notes, non-refundable payments received under license agreements and cash received in connection with exercises of Common Stock options and warrants. As of June 30, 2015, we had $337,423 of cash and cash equivalents, with no other short-term investments.

Cash Flows for the Six Months ended June 30, 2015

Net cash used in operating activities was approximately $3,155,000. The use of cash in operating activities was primarily attributable to the net loss of approximately $19,146,000 offset by non-cash expenses of $9,625,000 for an impairment charge,  $448,000 for depreciation and amortization, $611,000 for share-based compensation expense, a $328,000 charge for a warrant re-pricing related to reimbursement for legal expenses of the 2014 proxy battle, a loss on revaluation of $8,000 related to derivative credit facility warrants, $4,357,000 non-cash charges to financing expense in connection with continuing installments from our December 2014 financing as well as the capital contribution repaid on the same terms,  and a $239,000 loss on the sale and disposal of property and equipment resulting from primarily the closing of our Philadelphia office and write-off of various leasehold improvements. Increases in prepaid and other, as well as a net increase in accounts payable and accrued expenses, resulted in an increase in cash available for operations of approximately $375,000.

Net cash used in investing activities was approximately $120,000. Cash of approximately $20,000 was provided by the sales of certain property and equipment in connection with our move from Philadelphia to Iselin, New Jersey.  Also, cash of approximately $12,000 was used to purchase property and equipment during the same 2015 period. The Company used $127,000 to secure letters of credit for its new corporate headquarters and its new research facility in Littleton, Massachusetts.

Net cash provided by financing activities was approximately $2,333,000. We received $2,500,000 in proceeds from the sale of our Series F Preferred Stock with warrants and a capital contribution of approximately $59,000. Principal payments on premium financing used approximately $227,000.

Subsequent to June 30, 2015, the Company received the final installment of cash proceeds of $500,000 from a $4,000,000 equity financing it had arranged in December 2014.

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.

ITEM 3.                      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

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ITEM 4.  CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation and the material weaknesses described below, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as a result of the material weaknesses.

Our Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2015 the following material weaknesses existed:

(1)   We lacked a sufficient complement of personnel with an appropriate level of knowledge and experience in the application of U.S. generally accepted accounting principles, or GAAP, commensurate with our financial reporting requirements. The monitoring of our accounting and reporting functions were either not designed and in place or not operating effectively, and

(2)   We lacked the quantity of resources to implement an appropriate level of review controls to properly evaluate the completeness and accuracy of transactions entered into by our Company.

Our management believes that these weaknesses are due in part to the small size of our staff and limited funding which makes it challenging to maintain adequate disclosure controls. To remediate the material weaknesses in disclosure controls and procedures, we will attempt to seek assistance with complex filing matters and to take additional steps to improve our financial reporting systems and implement new policies, procedures and controls.

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.

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PART II—OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

On July 4, 2015, we resolved our legal disputes with Patrick Mooney, our former Chairman, President and Chief Executive Officer, on mutually-agreeable terms and all related litigation was dismissed with prejudice. On July 27, 2015, we made a settlement payment of $150,000 to Dr. Mooney and additional payments were made to Dr. Mooney from our insurers.

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: August 14, 2015	By:	/s/ Scott W. Hollander
		Scott W. Hollander
		President and Chief Executive Officer
		(Principal Executive Officer)
		/s/ Alan W. Schoenbart
		Alan W. Schoenbart
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit No.	Description
10.1	Lease, dated May 5, 2015, between Echo Therapeutics, Inc. and Ferris Development 352 Turnpike Road, LLC is incorporated by reference to Exhibit 10.3 on the Company’s Quarterly Report on Form 10-Q filed May 15, 2015.
10.2	Lease Termination Agreement, dated July 17, 2015, between Exeter 10 Forge Park, LLC and Echo Therapeutics, Inc., is incorporated by reference to Exhibit 10.1 on the Company’s Current Report on Form 8-K filed July 20, 2015.
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 June 30, 2015, 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.

-20-

EX-31.1

Exhibit 31.1

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

I, Scott W. Hollander, certify that:

1.     I have reviewed this Quarterly Report on Form 10-Q of Echo Therapeutics, Inc. (the “Company”) for the quarter ended June 30, 2015;

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: August 14, 2015

/s/ Scott W. Hollander                                                                           

Scott W. Hollander

President and 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, Alan W. Schoenbart, certify that:

1.     I have reviewed this Quarterly Report on Form 10-Q of Echo Therapeutics, Inc. (the “Company”) for the quarter ended June 30, 2015;

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: August 14, 2015

/s/ Alan W. Schoenbart                                                                           

Alan W. Schoenbart

Chief Financial Officer

(Principal Financial and Accounting 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 June 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Scott W. Hollander, President and 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/ Scott W. Hollander                                                                           

Scott W. Hollander

President and Chief Executive Officer

(Principal Executive Officer)

Date: August 14, 2015

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 June 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Alan W. Schoenbart, 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/ Alan W. Schoenbart                                                                                

Alan W. Schoenbart

Chief Financial Officer

(Principal Financial and Accounting Officer)

Date: August 14, 2015

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RESTRICTED STOCK (Details Narrative) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015
Non-cash restricted stock compensation expense	$ 26,000	$ 108,000
Restricted stock	39,290		39,290
Unrecognized compensation expense	$ 213,000		$ 213,000
FDA Approval [Member]
Vesting criteria			14,185 shares of restricted stock vest upon the FDA approval of our CGM system or the sale of the Company
4Years [Member]
Vesting criteria			21,480 shares of restricted stock vest over 4 years, at each of the anniversary dates of the grants
1Year [Member]
Vesting criteria			3,625 shares of restricted stock vest over 1 year, at each of the anniversary dates of the grants

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EQUITY COMPENSATION PLANS (Details) - 6 months ended Jun. 30, 2015 - USD ($)	Total
Shares Available For Issuance
Add back options cancelled before exercise	(267,667)
Outstanding Options and Restricted Stock
Ending Balance	3,809,427
Plan2003Member
Shares Available For Issuance
Total reserved for stock options and restricted stock	$ 160,000
Net restricted stock issued net of cancellations	$ (5,000)
Stock options granted	(154,449)
Add back options cancelled before exercise	92,349
Options cancelled by plan vote	$ (92,900)
Remaining shares available for future grants
Outstanding Options and Restricted Stock
Total granted	$ 154,449
Options cancelled	$ (92,349)
Options exercised	(35,600)
Net shares outstanding before restricted stock	26,500
Net restricted stock issued net of cancellations	5,000
Ending Balance	31,500
Plan2008Member
Shares Available For Issuance
Total reserved for stock options and restricted stock	$ 10,000,000
Net restricted stock issued net of cancellations	$ (27,391)
Stock options granted	(3,070,883)
Add back options cancelled before exercise	1,417,150
Options cancelled by plan vote
Remaining shares available for future grants	8,318,462
Outstanding Options and Restricted Stock
Total granted	$ 3,070,883
Options cancelled	$ (1,417,150)
Options exercised	(13,000)
Net shares outstanding before restricted stock	1,640,733
Net restricted stock issued net of cancellations	27,805
Ending Balance	1,668,538
Not Pursuant to a Plan [Member]
Outstanding Options and Restricted Stock
Total granted	$ 310,000
Options cancelled	$ (243,333)
Options exercised	(66,667)
Net shares outstanding before restricted stock
Net restricted stock issued net of cancellations	6,485
Ending Balance	6,485

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LIQUIDITY AND MANAGEMENT'S PLANS (Details Narrative) - USD ($)	6 Months Ended
	Jun. 30, 2015	Dec. 31, 2014
Liquidity And Managements Plans Details Narrative
Cash	$ 337,000
Working capital deficit	2,165,000
Accumulated deficit	(147,078,376)	$ (127,932,066)
Net cash proceeds from financing	500,000
First stage financing amount	$ 4,000,000

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WARRANTS (Details 2) - 6 months ended Jun. 30, 2015	Total
Warrants
Risk-free interest rate	0.70%
Expected dividend yield	0.00%
Expected term (contractual term)	2 years 6 months
Forfeiture rate	0.00%
Expected volatility	92.00%

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STOCK OPTIONS (Details Narrative) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015
Stock Options Details Narrative
Additional paid-in capital	$ 585,000	$ 137,000
Unrecognized compensation expense related to non			1,950,000
Granted			$ 1.47

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PROPERTY AND EQUIPMENT

6 Months Ended

Jun. 30, 2015

Property And Equipment

PROPERTY AND EQUIPMENT

(3)  PROPERTY AND EQUIPMENT

The principal categories and estimated useful lives of property and equipment were:

	2015		2014		Estimated Useful Lives
Computer equipment	$	306,681	$	334,865		3
Office and laboratory equipment		688,804		740,177		3-5
Furniture and fixtures		466,454		755,444		7
Manufacturing equipment		97,986		111,980		5
Leasehold improvements		10,815		825,589		3 - 7
Total property and equipment		1,570,740		2,768,055
Less accumulated depreciation and amortization		1,127,294		1,629,462
Property and equipment, net	$	443,446	$	1,138,593

The Company recorded a loss on disposal of $239,434, primarily in connection with its corporate office relocation to Iselin, New Jersey in the first quarter and research facility relocation to Littleton, Massachusetts. The Company sold excess furniture to the incoming tenant and this resulted in an increase in the loss on disposal. Additionally, each relocation required the Company to write-off its leasehold improvements. See Note 5.

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WARRANTS (Details Narrative) - Jun. 30, 2015 - shares	Total	Total
Warrants Details Narrative
Warrants issued in connection with private placement	999,999	1,666,666
Shares issued with reimbursement agreement		333,333

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IMPAIRMENT OF INTANGIBLES (Details Narrative) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Accounting Policies [Abstract]
Asset impairment charge	$ 9,625,000		$ 9,625,000

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PROPERTY AND EQUIPMENT (Details Narrative) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Property And Equipment Details Narrative
Loss on disposal of property and equipment	$ 130,594	$ (1,500)	$ 239,434	$ (1,500)

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LITIGATION & OTHER SIGNIFICANT MATTERS (Details Narrative)	1 Months Ended
	Aug. 10, 2015 USD ($)
Litigation Other Significant Matters
Settlement payment	$ 150,000

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DERIVATIVE LIABILITIES (Details) - USD ($)	6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014
Derivative Liabilities Details
Derivative warrant liability as of January 1	$ 208,155	$ 1,119,155
Loss (gain) on revaluation	27,845	(533,000)
Derivative warrant liability as of June 30	$ 216,000	$ 586,155

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DERIVATIVE LIABILITIES (Details 1) - Jun. 30, 2015 - USD ($)	Total
Derivative Liabilities Details 1
Excess of Market share price over deal share price ($2.13 vs. $1.50)	$ .20
Future share issuance	333,333
Fair Value, Measurement with Unobservable Inputs Reconciliation, Liability, Issuances	$ 66,667
Relative fair value of warrants utilizing	352,333
Excess value represented by the future issuance	$ 419,000

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LIQUIDITY AND MANAGEMENT'S PLANS

6 Months Ended

Jun. 30, 2015

Liquidity And Managements Plans

LIQUIDITY AND MANAGEMENT'S PLANS

(2)      LIQUIDITY AND MANAGEMENT’S PLANS

The accompanying financial statements have been prepared on a basis that assumes that the Company will continue as a going concern and that contemplates the continuity of operations, the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.  As of June 30, 2015, the Company had cash of approximately $337,000, working capital deficit of approximately $2,165,000 and an accumulated deficit of approximately $147,000,000. 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 accordance with its current planned operations. The Company has funded its operations in the past primarily through debt and equity issuances. Management will continue to pursue financing to fund its operations. No assurances can be given that additional capital will be available on terms acceptable to the Company. The accompanying financial statements do not include any adjustments that might result from the outcome of the uncertainty.

Subsequent to June 30, 2015, the Company received the final installment of cash proceeds of $500,000 from a $4,000,000 equity financing it had arranged in December 2014.

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DERIVATIVE LIABILITIES (Details Narrative) - USD ($)	1 Months Ended	6 Months Ended
	Aug. 10, 2015	Jun. 30, 2015
Excess of Market share price over deal share price ($2.13 vs. $1.50)		$ .20
Future share issuance		333,333
Series F Preferred Stock [Member]
Proceeds from financing		$ 4,000,000
Per share price		$ 1.50
Installments receivable		$ 500,000
Proceeds from installment payments	$ 200,000

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WARRANTS (Details) - 6 months ended Jun. 30, 2015 - $ / shares	Total
Shares
Beginning Balance	1,847,066
Granted	1,999,999
Forfeited	(37,638)
Ending Balance	3,809,427
Weighted-Average Exercise Price
Beginning Balance	$ 10.04
Granted	3.00
Forfeited	22.50
Ending Balance	$ 3.81

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Consolidated Balance Sheets - USD ($)	Jun. 30, 2015	Dec. 31, 2014
Current Assets:
Cash and cash equivalents	$ 337,423	$ 1,278,941
Prepaid and other	342,967	490,824
Total current assets	680,390	1,769,765
Property and equipment, net	$ 443,446	1,138,593
Other Assets:
Intangibles, net		9,625,000
Cash restricted pursuant to letters of credit	$ 179,456	52,488
Other	250	9,990
Total other assets	179,706	9,687,478
Total assets	1,303,542	12,595,836
Current Liabilities:
Accounts payable	1,514,026	1,801,469
Accrued and other	650,763	$ 968,392
Premium financing payable	45,947
Derivative liabilities	635,000	$ 208,155
Total current liabilities	2,845,736	2,978,016
Deferred revenue, net	95,535	95,535
Total liabilities	2,941,271	3,073,551
Stockholders’ equity: (deficit):
Common Stock, $0.01 par value, authorized 150,000,000 shares, issued and outstanding 11,128,275 and 12,629,695 shares, respectively	111,281	126,295
Additional paid-in capital	145,256,318	137,292,157
Accumulated deficit	(147,078,376)	(127,932,066)
Total stockholders’ equity (deficit):	(1,689,729)	9,522,285
Total liabilities and stockholders' (deficit)	1,303,542	12,595,836
Series C Preferred Stock [Member]
Stockholders’ equity: (deficit):
Preferred Stock, $0.01 par value; 40,000,000 shares authorized: Convertible Series C, D, E, F	10	10
Series D Preferred Stock [Member]
Stockholders’ equity: (deficit):
Preferred Stock, $0.01 par value; 40,000,000 shares authorized: Convertible Series C, D, E, F	10,000	10,000
Series E Preferred Stock [Member]
Stockholders’ equity: (deficit):
Preferred Stock, $0.01 par value; 40,000,000 shares authorized: Convertible Series C, D, E, F	17,486	17,486
Series F Preferred Stock [Member]
Stockholders’ equity: (deficit):
Preferred Stock, $0.01 par value; 40,000,000 shares authorized: Convertible Series C, D, E, F	$ 45,552	$ 8,403

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Consolidated Statements of Cash Flows (Unaudited) - USD ($)	6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014
Cash Flows From Operating Activities:
Net loss	$ (19,146,310)	$ (6,537,017)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	448,320	198,792
Share-based compensation, net	$ 610,971	591,055
Fair value of common stock issued for services		8,404
Loss (gain) on revaluation of derivative warrant liability	$ 7,845	$ (533,000)
Warrant repricing charged to legal expense	328,000
Loss (gain) on disposal of assets	239,434	$ (1,500)
Impairment charge	9,625,000
Financing loss	$ 4,357,000
Amortization of deferred financing costs		$ 484,002
Changes in assets and liabilities:
Prepaid and other	$ 148,280	(159,278)
Other assets		576
Accounts payable	$ (5,503)	(3,960)
Deferred revenue from licensing arrangements		(38,214)
Accrued and other	$ 232,371	(526,906)
Net cash used in operating activities	(3,154,592)	(6,517,046)
Cash Flows from Investing Activities:
Purchase of property and equipment	(12,207)	(32,911)
Decrease (increase) in restricted cash	(126,968)	250,000
Proceeds from disposal of property and equipment	19,600	1,887
Net cash (used in) provided by investing activities	(119,575)	218,976
Cash Flows From Financing Activities:
Proceeds from issuances of equity, net	2,500,000	$ 2,350,000
Capital contribution	59,325
Principal payments on financing	(226,676)	$ (1,361)
Net cash provided by financing activities	2,332,649	2,348,639
Net decrease in cash and cash equivalents	(941,518)	(3,949,431)
Cash and cash equivalents, beginning of period	1,278,941	8,055,385
Cash and cash equivalents, end of period	337,423	4,105,954
Supplemental disclosure of cash flow information:
Cash paid for interest	$ 4,781	$ 3,067
Cash paid for Income taxes
Supplemental disclosure of non-cash financing transactions:
Prepaid insurance financed	$ 272,623
Director's fees payable offset against prepaid insurance	272,200
Accrued legal fees settled with stock	550,000
Security deposit offset against accounts payable	9,740
Conversion of convertible preferred stock into Common Stock at par value	$ 15,000

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STOCK OPTIONS (Details) - USD ($) None in scaling factor is -9223372036854775296	6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014
STOCK OPTIONS AND RESTRICTED STOCK
Expected term - years	2 years 6 months
Forfeiture rate (excluding fully vested stock options)	0.00%
Expected volatility	92.00%
Director [Member]
STOCK OPTIONS AND RESTRICTED STOCK
Risk-free interest rate minimum	1.46%	0.11%
Risk-free interest rate maximum	1.90%	2.08%
Expected dividend yield
Forfeiture rate (excluding fully vested stock options)		15.00%
Director [Member] | Minimum [Member]
STOCK OPTIONS AND RESTRICTED STOCK
Expected term - years	5 years	1 year
Forfeiture rate (excluding fully vested stock options)	7.50%
Expected volatility	92.00%	129.00%
Director [Member] | Maximum [Member]
STOCK OPTIONS AND RESTRICTED STOCK
Expected term - years	5 years 6 months	6 years
Forfeiture rate (excluding fully vested stock options)	15.00%
Expected volatility	93.00%	141.00%

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STOCK OPTIONS (Tables)

6 Months Ended

Jun. 30, 2015

Stock Options Tables

Assumption used for stock option granted

The assumptions used principally for stock options granted to employees and members of the Company’s Board of Directors in the six months ended June 30, 2015 and 2014 were as follows:

	2015	2014
Risk-free interest rate %	1.46 - 1.90	0.11 - 2.08
Expected dividend yield	—	—
Expected term -  years	5 – 5.5	1 - 6
Forfeiture rate % (excluding fully vested stock options)	7.5 - 15	15
Expected volatility %	92 - 93	129 - 141

Stock option activity

A summary of stock option activity for the six months ended June 30, 2015 is as follows:

Stock Options	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding options at January 1, 2015		1,039,900		$	3.00
Granted		895,000		$	1.47
Forfeited or expired		(267,667	)	$	4.06
Outstanding options at June 30, 2015		1,667,233		$	2.01		9.24	$	—
Exercisable options at June 30, 2015		593,750		$	2.56		9.02	$	—

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STOCK OPTIONS (Details1) - 6 months ended Jun. 30, 2015 - USD ($) None in scaling factor is -9223372036854775296	Total
Shares
Beginning Balance	1,039,900
Granted	895,000
Forfeited or expired	(267,667)
Ending Balance	1,667,233
Exercisable at March 31, 2014	593,750
Weighted-Average Exercise Price
Beginning Balance	$ 3.00
Weighted-average stock options granted	1.47
Forfeited or expired	4.06
Ending Balance	2.01
Exercisable at March 31, 2014	$ 2.56
Weighted-Average Remaining Contractual Term
Outstanding remaining term	9 years 2 months 26 days
Exercisable remaining term	9 years 6 days
Aggregate Intrinsic Value
Beginning Balance
Ending Balance

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WARRANTS (Tables)

6 Months Ended

Jun. 30, 2015

Warrants Tables

Warrants assumptions utilized by the Company

A summary of warrant activity for the six months ended June 30, 2015 is as follows:

Warrants	Shares			Weighted-Average Exercise Price
Outstanding warrants at January 1, 2015		1,847,066		$	10.04
Granted		1,999,999		$	3.00
Forfeited		(37,638	)	$	22.50
Outstanding warrants at June 30, 2015		3,809,427		$	3.81

Outstanding Warrants

At June 30, 2015, the Company had the following outstanding warrants:

Type of Warrant/ Range of Exercise Prices		Expirations	Number Outstanding		Weighted- Average Remaining Contractual Life (years)		Weighted- Average Exercise Price		Number Exercisable
Derivative:
$	7.50	8/31/17 to 11/6/17		700,000		2.23	$	7.50		700,000
Equity:
$	2.75 - $3.00	12/10/18 to 03/09/20		3,109,427		4.59	$	2.98		3,109,427
Total outstanding				3,809,427						3,809,427

Warrant Activity

Risk-free interest rate	.70 %
Expected dividend yield	—
Expected term - years (contractual term)	2.5
Forfeiture rate	—
Expected volatility	92 %

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ORGANIZATION AND BASIS OF PRESENTATION

6 Months Ended

Jun. 30, 2015

Organization And Basis Of Presentation

ORGANIZATION AND BASIS OF PRESENTATION

(1) ORGANIZATION AND BASIS OF PRESENTATION

Echo Therapeutics, Inc. (the "Company") is a medical device company with expertise in advanced skin permeation technology. The Company is developing its non-invasive, wireless continuous glucose monitoring (CGM) system with potential use in the wearable-health consumer market and the diabetes outpatient market. A significant longer-term opportunity may also exist in the hospital setting. Echo has also developed its needle-free skin preparation device as a platform technology that allows for enhanced skin permeation enabling extraction of analytes, such as glucose, enhanced delivery of topical pharmaceuticals and other applications.

The accompanying unaudited condensed 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, 2014 included in the Company’s Annual Report on Form 10-K as filed with the United States Securities and Exchange Commission (“SEC”) on April 15, 2015. Certain amounts in prior periods have been reclassified to conform to the current presentation. 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, 2015 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.

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Consolidated Balance Sheets (Parenthetical) - $ / shares	Jun. 30, 2015	Dec. 31, 2014
Stockholders' Equity:
Common stock, par value	$ 0.01	$ 0.01
Common stock, authorized	150,000,000	150,000,000
Common stock, outstanding	11,128,275	12,629,695
Common stock, Share Issued	11,128,275	12,629,695
Series C Preferred Stock [Member]
Stockholders' Equity:
Convertible Preferred Stock, par value	$ 0.01	$ 0.01
Convertible Preferred Stock, authorized	10,000	10,000
Convertible Preferred Stock, outstanding	1,000	1,000
Convertible Preferred Stock, Share Issued	1,000	1,000
Series D Preferred Stock [Member]
Stockholders' Equity:
Convertible Preferred Stock, par value	$ 0.01	$ 0.01
Convertible Preferred Stock, authorized	3,600,000	3,600,000
Convertible Preferred Stock, outstanding	1,000,000	1,000,000
Convertible Preferred Stock, Share Issued	1,000,000	1,000,000
Series E Preferred Stock [Member]
Stockholders' Equity:
Convertible Preferred Stock, par value	$ 0.01	$ 0.01
Convertible Preferred Stock, authorized	1,748,613	1,748,613
Convertible Preferred Stock, outstanding	1,748,613	1,748,613
Convertible Preferred Stock, Share Issued	1,748,613	1,748,613
Series F Preferred Stock [Member]
Stockholders' Equity:
Convertible Preferred Stock, par value	$ 0.01	$ 0.01
Convertible Preferred Stock, authorized	5,000,000	5,000,000
Convertible Preferred Stock, outstanding	4,555,179	840,336
Convertible Preferred Stock, Share Issued	4,555,179	840,336

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WARRANTS

6 Months Ended

Jun. 30, 2015

Warrants

WARRANTS

(11)       WARRANTS

In the three and six months ended June 30, 2015, the Company issued warrants to purchase 999,999 and 1,666,666 shares of our common stock, respectively, in connection with a partial closing related to the private placement of the Company’s Common Stock as well as the 333,333 shares of our common stock in connection with a Reimbursement Agreement. See Notes 6and7.

The Derivative Warrants to purchase 700,000 shares of our Common Stock, at exercise prices ranging from $20.00 to $22.70, and expiring in 2017, are included in the outstanding warrants at January 1, 2015. On February 12, 2015, these warrants were re-priced to $7.50 to compensate PPVA in connection with the Reimbursement Agreement reached between the Company and PPVA. See Notes 6 and 7.

A summary of warrant activity for the six months ended June 30, 2015 is as follows:

Warrants	Shares			Weighted-Average Exercise Price
Outstanding warrants at January 1, 2015		1,847,066		$	10.04
Granted		1,999,999		$	3.00
Forfeited		(37,638	)	$	22.50
Outstanding warrants at June 30, 2015		3,809,427		$	3.81

At June 30, 2015, the Company had the following outstanding warrants:

Type of Warrant/ Range of Exercise Prices		Expirations	Number Outstanding		Weighted- Average Remaining Contractual Life (years)		Weighted- Average Exercise Price		Number Exercisable
Derivative:
$	7.50	8/31/17 to 11/6/17		700,000		2.23	$	7.50		700,000
Equity:
$	2.75 - $3.00	12/10/18 to 03/09/20		3,109,427		4.59	$	2.98		3,109,427
Total outstanding				3,809,427						3,809,427

The Company uses valuation methods and assumptions that consider among other factors the fair value of the underlying stock, risk-free interest rate, volatility, expected life and dividend rates in estimating fair value for the warrants considered to be derivative instruments. The following assumptions were utilized by the Company:

Risk-free interest rate	.70 %
Expected dividend yield	—
Expected term - years (contractual term)	2.5
Forfeiture rate	—
Expected volatility	92 %

Expected volatilities are based on historical volatility of the Common Stock using historical periods consistent with the expected term of the warrant. The risk-free rate is based on the yield of a U.S. Treasury security with a term consistent with the warrant.

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2015	Aug. 10, 2015
Document And Entity Information
Entity Registrant Name	Echo Therapeutics, Inc.
Entity Central Index Key	0001031927
Document Type	10-Q
Document Period End Date	Jun. 30, 2015
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
Trading Symbol	ECTE
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		11,128,275
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2015

XML

LITIGATION & OTHER SIGNIFICANT MATTERS

6 Months Ended

Jun. 30, 2015

Litigation Other Significant Matters

LITIGATION & OTHER SIGNIFICANT MATTERS

(12)           LITIGATION & OTHER SIGNIFICANT MATTERS

On July 4, 2015, the Company resolved its legal disputes with Patrick Mooney, its former Chairman, President and Chief Executive Officer, on mutually-agreeable terms and all related litigation was dismissed with prejudice.  On July 27, 2015, the Company made a settlement payment of $150,000 to Dr. Mooney and additional payments were made to Dr. Mooney from the Company’s insurers.

From time to time, in addition to that which is identified above, we are subject to legal proceedings, claims, investigations, and proceedings in the ordinary course of business. In accordance with generally accepted accounting principles, we make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss or range of loss can be reasonably estimated. These provisions, if any, are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. We believe that we have valid defenses with respect to the legal matters pending against us and are vigorously defending these matters. Given the uncertainty surrounding litigation and our inability to assess the likelihood of a favorable or unfavorable outcome in the above noted matters and our inability to reasonably estimate the amount of loss or range of loss, it is possible that the resolution of one or more of these matters could have a material adverse effect on our consolidated financial position, cash flows or results of operations.  At June 30, 2015, no litigation loss is deemed probable or reasonably estimated other than the $150,000 for the Dr. Mooney matter which is included in accrued expenses at June 30, 2015.

NASDAQ Compliance

On January 30, 2015, the Company received a letter from NASDAQ indicating that the Company no longer complies with NASDAQ’s audit committee requirements set forth in NASDAQ Listing Rule 5605.  Such rule requires that the Audit Committee of the Company have a minimum of three members and be composed only of independent directors.  On December 31, 2014, Vincent Enright, William Grieco and James Smith resigned from the Board of Directors of the Company, as well as its Audit Committee. As a result, the Audit Committee had no members as of Decembers 31, 2014.  On January 5, 2015, the Board of Directors appointed Shepard Goldberg and Dr. Michael Goldberg to the Audit Committee, both of whom are independent directors.  

NASDAQ provided to the Company a cure period in order to regain compliance as follows:

· until the earlier of the Company’s next annual shareholders’ meeting or December 31, 2015; or

· if the next annual shareholders’ meeting is held before June 29, 2015, then the Company must evidence compliance no later than June 29, 2015.

The Company intends to add at least one additional independent member to the Audit Committee by the date required by Nasdaq Listing Rule 5605.

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Consolidated Statements of Operations (Unaudited) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Income Statement [Abstract]
Licensing revenue		$ 19,107		$ 38,214
Total revenues		19,107		38,214
Operating Expenses:
Research and development	$ 797,761	1,650,761	$ 1,629,094	2,916,963
Selling, general and administrative	1,360,796	$ 2,184,480	2,843,061	$ 3,507,642
Impairment charge	9,625,000		9,625,000
Loss (gain) on disposal of property and equipment	130,594	$ (1,500)	239,434	$ (1,500)
Depreciation and amortization	361,616	98,892	448,320	198,792
Total operating expenses	12,275,767	3,932,633	14,784,909	6,621,897
Loss from operations	(12,275,767)	(3,913,526)	(14,784,909)	(6,583,683)
Other Income (Expense):
Gain (loss) on revaluation of derivative warrant liability	250,000	$ 393,000	(7,845)	$ 533,000
Financing gain (loss)	1,177,000		(4,357,000)
Interest expense	(2,001)	$ (243,450)	(4,726)	$ (486,334)
Other	8,170		8,170
Other income (expense), net	1,433,169	$ 149,550	(4,361,401)	$ 46,666
Net loss	$ (10,842,598)	$ (3,763,976)	$ (19,146,310)	$ (6,537,017)
Net loss per common share, basic and diluted	$ (0.97)	$ (0.31)	$ (1.69)	$ (0.55)
Basic and diluted weighted average common shares outstanding	11,128,275	12,070,548	11,337,272	11,965,306

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DERIVATIVE LIABILITY

6 Months Ended

Jun. 30, 2015

Derivative Liability

DERIVATIVE LIABILITY

(6)  DERIVATIVE LIABILITIES

Derivative warrant liability:

As a result of having warrants which are outstanding, issued in connection with a 2012 Credit Facility (which was terminated in October 2014), we are required to record the changes in the value of these derivative warrants through their expirations in November 2017. The table below presents the changes in the derivative warrant liability, which is measured at fair value on a recurring basis and classified as Level 3 in fair value hierarchy:

	2015		2014
Derivative warrant liability as of January 1	$	208,155	$	1,119,155
Loss (gain) on revaluation		7,845		(533,000	)
Derivative warrant liability as of June 30	$	216,000	$	586,155

None of the derivative warrants were exercised in 2015 or 2014 pursuant to cashless exercise provisions.

Derivative financing liability:

In December 2014, the Company reached agreement with investors to provide $4,000,000 of installment financing in exchange for Series F Preferred Stock and warrants. The deal was priced at $1.50 per share or the stock price in effect, if lower. At June 30, 2015, installments totaling $500,000 still remained to be paid by investors, potentially representing 333,333 shares of Series F Preferred to be issued in the future with warrants to purchase the same number of common shares at the agreed exercise price of $3.00. Our closing market price at June 30, 2015 of $1.70 per share was $0.20 above the deal price of $1.50. As a result of the market price being higher than the stated deal price, the Company was required to record a charge to financing expense and a corresponding credit to derivative liability representing the potential value to be provided in excess of the potential cash proceeds calculated as follows:

Excess of Market share price over deal share price ($1.70 vs. $1.50)	$	0.20
Potential future share issuance		333,333
	$	66,667
Fair value of warrants utilizing Black-Scholes model		352,333
	$	419,000

As the Company receives subsequent cash installments, the derivative liability will increase or decrease depending on the fair value of the shares and warrants on the date the installments are made.

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OPERATING LEASE COMMITMENTS

6 Months Ended

Jun. 30, 2015

Operating Lease Commitments

OPERATING LEASE COMMITMENTS

(5)      OPERATING LEASE COMMITMENTS

The Company leased 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. The company terminated this lease early and moved to Iselin, New Jersey on January 15, 2015 where the Company has leased 2,800 square feet of office space for 38 months at a monthly rental of approximately $7,700. The Company posted a $77,000 Letter of Credit to secure the lease which is reduced to $38,500 after nineteen months of occupancy, assuming no defaults, as defined.

The Company leased 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. On July 17, 2015, the Company entered into a Lease Termination Agreement (the “Termination Agreement”), whereby the Company paid a fee of $150,000 to terminate this lease. The lease termination was effective as of May 31, 2015.

 On May 5, 2015, the Company signed a lease for approximately 10,000 square feet for a research and development facility in Littleton, Massachusetts. The lease is for 65 months. Effective base monthly rent over the lease term will be $11,470.  The Company moved to the new facility from its Franklin, Massachusetts location on July 3, 2015. The Company agreed to post a $50,000 Letter of Credit until July 1, 2015 while the Littleton facility was being improved. Such amount was increased to $150,000 on July 1, 2015. The Letter of Credit is expected to be reduced to $50,000 after 24 months of timely lease payments.

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RESTRICTED STOCK (Tables)

6 Months Ended

Jun. 30, 2015

Notes to Financial Statements

Nonvested restricted stock activity

A summary of non-vested restricted stock activity as of and for the six months ended June 30, 2015 is as follows:

Restricted Stock	Shares			Weighted- Average Grant-Date Fair Value
Non-vested shares at January 1, 2015		47,958		$	9.74
Vested		(6,338	)	$	3.68
Forfeited		(2,330	)	$	6.05
Non-vested shares at June 30, 2015		39,290		$	12.12

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PROPERTY AND EQUIPMENT (Tables)

6 Months Ended

Jun. 30, 2015

Property And Equipment Tables

PROPERTY AND EQUIPMENT

The principal categories and estimated useful lives of property and equipment were:

	2015		2014		Estimated Useful Lives
Computer equipment	$	306,681	$	334,865		3
Office and laboratory equipment		688,804		740,177		3-5
Furniture and fixtures		466,454		755,444		7
Manufacturing equipment		97,986		111,980		5
Leasehold improvements		10,815		825,589		3 - 7
Total property and equipment		1,570,740		2,768,055
Less accumulated depreciation and amortization		1,127,294		1,629,462
Property and equipment, net	$	443,446	$	1,138,593

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STOCK OPTIONS

6 Months Ended

Jun. 30, 2015

Stock Options

STOCK OPTIONS

(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.

For options issued and outstanding during the three month periods ended June 30, 2015 and 2014, the Company recorded additional paid-in capital and non-cash compensation expense of $585,000 and $137,000, respectively, each net of estimated forfeitures.

The assumptions used principally for stock options granted to employees and members of the Company’s Board of Directors in the six months ended June 30, 2015 and 2014 were as follows:

	2015	2014
Risk-free interest rate %	1.46 - 1.90	0.11 - 2.08
Expected dividend yield	—	—
Expected term -  years	5 – 5.5	1 - 6
Forfeiture rate % (excluding fully vested stock options)	7.5 - 15	15
Expected volatility %	92 - 93	129 - 141

A summary of stock option activity for the six months ended June 30, 2015 is as follows:

Stock Options	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding options at January 1, 2015		1,039,900		$	3.00
Granted		895,000		$	1.47
Forfeited or expired		(267,667	)	$	4.06
Outstanding options at June 30, 2015		1,667,233		$	2.01		9.24	$	—
Exercisable options at June 30, 2015		593,750		$	2.56		9.02	$	—

The weighted-average grant-date fair value of stock options granted for the ended June 30, 2015 was $1.47 per share.  As of June 30, 2015, there was approximately $950,000 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 FDA approval for the Company’s CGM system or the sale of substantially all of the stock or assets of the Company, unrecognized compensation is expected to be recognized over the next four years.

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EQUITY TRANSACTIONS

6 Months Ended

Jun. 30, 2015

Equity Transactions

EQUITY TRANSACTIONS

(7)  EQUITY TRANSACTIONS

Restart of Operations and related option grants

On January 2, 2015, in conjunction with restarting the operations of the Company, stock option grants to purchase 400,000 shares of Common Stock at an exercise price of $1.35 were issued to various employees primarily at our Franklin, Massachusetts research and development facility. On January 5, 2015, an additional stock option grant was made to purchase 50,000 shares of our Common stock at an exercise price of $1.48 to our new Manager of Business Development in Iselin, New Jersey. On March 2, 2015, we issued another stock option grant to purchase 20,000 shares of our Common Stock at $2.34 to a senior technician hired for our Franklin facility. On May 11, 2015 option grants to purchase 55,000 shares at $1.31 were issued to newly hired software and electrical engineers. On May 15, 2015, an option grant to purchase 40,000 shares at $1.29 was issued to a systems engineer. On May 26, 2015 an option grant to purchase 30,000 shares at $1.62 was issued to a newly hired software engineer. All grants vest over three years with one-third vesting immediately and the balance vesting equally at each of the two respective anniversary periods. All grants were made pursuant to the 2008 Equity Compensation Plan.

Board Matters

On January 7, 2015, the Board realigned annual compensation at $30,000 per annum per director. Each director, other than our CEO whose employment agreement precluded him from receiving director compensation the first year, received a stock option to purchase 150,000 shares of our Common Stock at an exercise price of $1.62 vesting 25% immediately and then 25% at the beginning of each quarter thereafter. These options contain a condition where they are only exercisable after the average closing price of the Company’s common stock for the ten (10) days prior to exercise, equals or exceeds $7.50 per share. Such amount was valued using a binomial lattice model and included in share-based compensation expense.

Exchange of Common Stock for Series F Preferred Stock

On January 9, 2015 and again on March 31, 2015, Platinum Partners Value Arbitrage Fund, L.P. (PPVA) and Platinum Partners Liquid Opportunity Fund, L.P. exchanged 843,526 and 208,884 and 356,474 and 91,116, respectively of their common shares held for Series F Preferred Stock. Based on the terms of the Series F (e.g. conversion ratio of 1:1 and no liquidation preference) the Company determined that the value of the Series F is equivalent to the common shares.

Capital Contribution

Late in the third quarter of 2014, the research and development operations of the Company were suspended and key personnel were laid off. In October 2014, two of the Company’s directors received a non-recourse loan for $500,000 from PPVA. The purpose of this contribution was to provide the directors monies to advance their plan for the Company and attempt to maintain its viability during the suspension of operations. $440,675 was expended in the fourth quarter of 2014 by these directors primarily for salaries of key employees and targeted technology efforts focused on the wearable technology sector. The Company considered this expenditure by two of its directors a capital contribution since the funds were spent on matters specifically related to the operations of the Company. In February 2015, the $440,675 capital contribution together with the balance of monies received in 2015 of $59,325, equivalent to the original $500,000 the two directors had received, was settled in Series F shares by the Company to PPVA. See discussion below.

Settlement of Amounts Owed for Series F Preferred Stock and Warrants

On September 23, 2014, the Company announced that, as it believed that its current liquidity was insufficient to fund its needs beyond September 30, 2014, it was suspending its product development, research, manufacturing and clinical programs and operations to conserve its liquidity and capital resources. The workforce reduction due to the suspension of operations comprised approximately 70% of Echo’s workforce, leaving only administrative personnel.  Affected employees were notified on September 23, 2014. The employees whose employment was terminated as part of the workforce reduction were not offered severance pay. The Company indicated that they could possibly incur additional costs not currently contemplated due to events that may occur as a result of, or that were associated with, the workforce reduction.

At the time of the workforce reduction announcement, Platinum Management (NY) LLC (“Platinum”), together with its affiliates, a significant stockholder of the Company, was in the process of engaging in a proxy contest with the Company pursuant to which it sought to ultimately remove three of the then-current directors of the Company. In conjunction therewith, Platinum provided $500,000 on a non-recourse basis to two of the Company’s directors whose removal Platinum was not seeking, namely Michael Goldberg and Shepard Goldberg, which was recorded as a capital contribution (“Contribution”) in 2014. Proceeds of the Contribution were utilized for retaining certain key employees and for research and technology initiatives, all for the benefit of the Company. A small portion of the monies was not disbursed, which was transferred to the Company. At the time of the Contribution, Shepard Goldberg and Michael Goldberg agreed that, should the Contribution ultimately benefit the Company, they would use their best efforts to cause the Company to issue equity to Platinum as consideration for making the Contribution.

In December 2014, as part of a negotiated settlement agreement, the three directors, whom Platinum sought to remove, resigned as directors and Platinum agreed to make a direct investment in the Company.  In connection with the proxy contest, Platinum expended $550,000 on legal representation and related expenses. In its proxy statement, Platinum advised stockholders that it would pay all the costs associated with the solicitation of proxies, but would seek reimbursement from the Company, and not submit such reimbursement to a vote of stockholders.

On February 12, 2015, the Company agreed to reimburse Platinum for its Contribution and the Expenses it incurred in the proxy fight. In this regard, the Board of Directors of the Company determined that both the Contribution and Expenses together resulted in the Company being able to continue operations and put into place a strong management team.  Pursuant to a Reimbursement Agreement, dated February 12, 2015 (the “Reimbursement Agreement”), Platinum received 548,177 shares of Series F Convertible Preferred Stock (consisting of 333,333 shares of Series F for the $500,000 capital contribution and 214,844 shares of Series F for the $550,000 of legal expenses they incurred, for a Series F share total of 548,177) and Warrants to purchase 333,333 shares of common stock of the Company. These Warrants expire in five years and have a $3.00 per share exercise price. Additionally, the Company agreed to re-price 700,000 warrants, originally disbursed to Platinum in connection with its August 31, 2012 Loan Agreement, and referred to as the Derivative Warrants, then priced in the $20.00 to $22.70 range per share, to $7.50 per share. The Company recorded a non-cash charge to legal expense for $328,000 representing the cost of re-pricing the Derivative Warrants. The Company also recorded a non-cash charge of $7,845 related to the change in the value of the derivative liability. Additionally, the Company recorded a charge to financing expense of $924,000 representing the additional value given to the investors as a result of the closing market price of $2.56 being above the deal price of $1.50 used for the reimbursement of the $500,000 capital contribution. The shares issued for the legal expenses were done at the market close of the Company’s Common Stock on the date of the Reimbursement Agreement.

Equity Raise

For the three and six months ended June 30, 2015, the Company received $1,500,000 and $2,500,000, respectively, from its $4,000,000 December 2014 financing and issued 1,000,000 and 1,666,666 shares, respectively, of Series F Preferred Stock and warrants to purchase the same number of shares of Common Stock at an exercise price of $3.00 were issued to investors. The Company recorded financing expense of $3,014,000 with a corresponding credit to additional paid in capital since the average market price on the dates the financing was received was above the deal price of $1.50, representing excess value provided to the investors.

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EQUITY COMPENSATION PLANS

6 Months Ended

Jun. 30, 2015

Equity Compensation Plans

EQUITY COMPENSATION PLANS

(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 June 30, 2015, there were 5,000 restricted shares of Common Stock issued and options to purchase an aggregate of 26,500 shares of Common Stock outstanding under the 2003 Plan and no shares are available for future grants due to the 2003 Plan’s expiration.

In May 2008, the Company’s shareholders approved the 2008 Equity Compensation Plan, as amended (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. The maximum number of shares available under the 2008 Plan is 10,000,000 shares.  As of June 30, 2015, there were 27,805 restricted shares of Common Stock issued and options to purchase 1,640,733 shares of Common Stock outstanding under the 2008 Plan and 8,318,462 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						Not Pursuant
	2003 Plan			2008 Plan			to a 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		(5,000	)		(27,805	)
Stock options granted		(154,449	)		(3,070,883	)
Add back options cancelled before exercise		92,349			1,417,150
Less shares no longer available due to Plan expiration		(92,900	)		—
Remaining shares available for future grants at June 30, 2015		—			8,318,462
Stock options granted		154,449			3,070,883			310,000
Less:Stock options cancelled		(92,349	)		(1,417,150	)		(243,333	)
Stock options exercised		(35,600	)		(13,000	)		(66,667	)
Net shares outstanding before restricted stock		26,500			1,640,733			—
Net restricted stock issued net of cancellations		5,000			27,805			6,485
Outstanding shares at June 30, 2015		31,500			1,668,538			6,485

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RESTRICTED STOCK

6 Months Ended

Jun. 30, 2015

Restricted Stock

RESTRICTED STOCK

(10)            RESTRICTED STOCK

For restricted stock issued and outstanding during the three month periods ended June 30, 2015 and 2014, the Company incurred non-cash compensation expense of approximately $26,000 and $108,000, respectively, each net of estimated forfeitures.

During the three months ended June 30, 2015, the Company did not grant restricted shares of Common Stock to any officers, employees, directors and consultants of the Company.

A summary of non-vested restricted stock activity as of and for the six months ended June 30, 2015 is as follows:

Restricted Stock	Shares			Weighted- Average Grant-Date Fair Value
Non-vested shares at January 1, 2015		47,958		$	9.74
Vested		(6,338	)	$	3.68
Forfeited		(2,330	)	$	6.05
Non-vested shares at June 30, 2015		39,290		$	12.12

Among the 39,290 shares of non-vested restricted stock, the various vesting criteria include the following:

· 14,185 shares of restricted stock vest upon the FDA approval of our CGM system or the sale of the Company;

· 21,480 shares of restricted stock vest over 4 years, at each of the anniversary dates of the grants; and

· 3,625 shares of restricted stock vest over 1 year, at each of the anniversary dates of the grants.

As of June 30, 2015, there was approximately $213,000 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 June 30, 2015, 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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EQUITY COMPENSATION PLANS (Details Narrative) - shares	Jun. 30, 2015	Dec. 31, 2014
Restricted stock	39,290	47,958
Options to purchase an aggregate of shares	593,750
Plan2003Member
Restricted stock	5,000
Options to purchase an aggregate of shares	26,500
Shares available for future grant
Plan2008Member
Restricted stock	27,805
Options to purchase an aggregate of shares	1,640,733
Shares available for future grant	8,318,462

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EQUITY COMPENSATION PLANS (Tables)

6 Months Ended

Jun. 30, 2015

Equity Compensation Plans Tables

EQUITY COMPENSATION PLANS

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

	Equity Compensation Plans						Not Pursuant
	2003 Plan			2008 Plan			to a 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		(5,000	)		(27,805	)
Stock options granted		(154,449	)		(3,070,883	)
Add back options cancelled before exercise		92,349			1,417,150
Less shares no longer available due to Plan expiration		(92,900	)		—
Remaining shares available for future grants at June 30, 2015		—			8,318,462
Stock options granted		154,449			3,070,883			310,000
Less:Stock options cancelled		(92,349	)		(1,417,150	)		(243,333	)
Stock options exercised		(35,600	)		(13,000	)		(66,667	)
Net shares outstanding before restricted stock		26,500			1,640,733			—
Net restricted stock issued net of cancellations		5,000			27,805			6,485
Outstanding shares at June 30, 2015		31,500			1,668,538			6,485

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PROPERTY AND EQUIPMENT (Details) - USD ($)	6 Months Ended
	Jun. 30, 2015	Dec. 31, 2014
Useful lives of property and equipment	$ 1,570,740	$ 2,768,055
Computer Equipment [Member]
Useful lives of property and equipment	$ 306,681	334,865
Estimated Useful Lives	3 years
Office and laboratory equipment [Member]
Useful lives of property and equipment	$ 688,804	740,177
Office and laboratory equipment [Member] | Minimum [Member]
Estimated Useful Lives	3 years
Office and laboratory equipment [Member] | Maximum [Member]
Estimated Useful Lives	5 years
Furniture and fixtures [Member]
Useful lives of property and equipment	$ 466,454	755,444
Estimated Useful Lives	7 years
Manufacturing equipment [Member]
Useful lives of property and equipment	$ 97,986	111,980
Estimated Useful Lives	5 years
Leasehold improvements [Member]
Useful lives of property and equipment	$ 10,815	825,589
Leasehold improvements [Member] | Minimum [Member]
Estimated Useful Lives	3 years
Leasehold improvements [Member] | Maximum [Member]
Estimated Useful Lives	7 years
Less accumulated depreciation and amortization [Member]
Useful lives of property and equipment	$ 127,294	1,629,462
Property and equipment, net [Member]
Useful lives of property and equipment	$ 443,446	$ 1,138,593

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WARRANTS (Details 1) - Jun. 30, 2015 - $ / shares	Total
Warrants
Number Outstanding	3,809,427
Number Exercisable	3,809,427
Derivative: $7.50 [Member]
Warrants
Expirations	8/31/17 to 11/6/17
Weighted- Average Remaining Contractual Life (years)	2 years 2 months 23 days
Equity: $2.75 - $3.00 [Member]
Warrants
Expirations	12/10/18 to 03/09/20
Weighted- Average Remaining Contractual Life (years)	4 years 7 months 2 days
Derivative: $7.50 [Member]
Warrants
Number Outstanding	700,000
Weighted- Average Exercise Pric	$ 7.50
Number Exercisable	700,000
Equity: $2.75 - $3.00 [Member]
Warrants
Number Outstanding	3,109,427
Weighted- Average Exercise Pric	$ 2.98
Number Exercisable	3,109,427

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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) - 6 months ended Jun. 30, 2015 - USD ($)	Preferred Stock	Common Stock	Additional Paid-In Capital	Accumulated Deficit	Total
Beginning Balance, Shares at Dec. 31, 2014	3,589,949	12,629,695
Beginning Balance, Amount at Dec. 31, 2014	$ 35,899	$ 126,295	$ 137,292,157	$ (127,932,066)	$ 9,522,285
Exchange - Common Stock for Series F, Shares	1,500,000	(1,500,000)
Exchange - Common Stock for Series F, Amount	$ 15,000	$ (15,000)
Proceeds from issuance of Series F and warrants, Shares	1,666,667
Proceeds from issuance of Series F and warrants, Amount	$ 16,667		$ 5,497,333		$ 5,514,000
Capital contribution			59,325		59,325
Issuance of Series F pursuant to Reimbursement Agreement, Shares	548,177
Issuance of Series F pursuant to Reimbursement Agreement, Amount	$ 5,482		1,796,518		1,802,000
Share-based compensation, net of restricted stock cancellations, Shares		(1,420)
Share-based compensation, net of restricted stock cancellations, Amount		$ (14)	$ 610,985		610,971
Net loss				$ (19,198,310)	(19,146,310)
Ending Balance, Shares at Jun. 30, 2015	7,304,792	11,128,275
Ending balance, Amount at Jun. 30, 2015	$ 73,048	$ 111,281	$ 145,256,318	$ (147,130,376)	$ (1,689,729)

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IMPAIRMENT OF INTANGIBLES

6 Months Ended

Jun. 30, 2015

Accounting Policies [Abstract]

IMPAIRMENT OF INTANGIBLES

(4)      IMPAIRMENT OF INTANGIBLES

The Company reviews its intangibles for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company conducts its asset impairment analyses by grouping assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.

In connection with the preparation of the financial statements in the second quarter of fiscal 2015, the Company concluded it had a triggering event requiring assessment of impairment for its intangibles in conjunction with an expected out-licensing strategy that new management had hoped to pursue. Extremely limited financial resources coupled with the remaining short patent lives, discussions with previous consultants regarding their progress with bringing value to the intangibles, a review of competitive formulations and discussions with new consultants to explore out-licensing strategies, led newly-hired corporate management to conclude it was best to abandon its initial hope to garner value from its intangibles. Accordingly, due to this change in strategy, no monies are now expected to be obtained relating to the Azone Drug Master File, the Durhalieve and MAZ Investigational New Drug applications and the MAZ Orphan Drug application (collectively, the AzoneTS-based technology acquired in 2007) intangibles. As a result, the Company reviewed the intangibles for impairment and recorded a $9.625 million impairment charge, or the full value of the intangibles, on the consolidated statement of operations in the second quarter of 2015.

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OPERATING LEASE COMMITMENTS (Details Narrative)	6 Months Ended
	Jun. 30, 2015 USD ($)
N J
Monthly rental	$ 7,700
Letter of credit	77,000
Letter of credit, after introductory period	38,500
MASSACHUSETTS
Termination fee	150,000
MASSACHUSETTS 2
Monthly rental	11,470
Letter of credit	50,000
Letter of credit, after introductory period	$ 150,000

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RESTRICTED STOCK (Details) - 6 months ended Jun. 30, 2015 - $ / shares	Total
Shares
Restricted stock beginning of period	47,958
Vested	(6,338)
Forfeited	(2,330)
Restricted stock	39,290
Weighted- Average Grant-DateFair Value
Nonvested beginning of period	$ 9.74
Vested	3.68
Forfeited	6.05
Nonvested	$ 12.12

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DERIVATIVE LIABILITIES (Tables)

6 Months Ended

Jun. 30, 2015

Derivative Liabilities Tables

Derivative warrant liability

	2015		2014
Derivative warrant liability as of January 1	$	208,155	$	1,119,155
Loss (gain) on revaluation		7,845		(533,000	)
Derivative warrant liability as of June 30	$	216,000	$	586,155

Derivative financing liability

Excess of Market share price over deal share price ($1.70 vs. $1.50)	$	0.20
Potential future share issuance		333,333
	$	66,667
Fair value of warrants utilizing Black-Scholes model		352,333
	$	419,000