##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2009.
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to.
 Commission File Number: 000-23017
 
 ECHO THERAPEUTICS, INC.
  
 Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    41-1649949
(I.R.S. Employer Identification Number)
 10 Forge Parkway, Franklin, MA
(Address of principal executive offices)
    
    02038
(Zip code)
 (508) 553-8850
 þ o
 o o
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company þ o þ




---



##### 



ECHO THERAPEUTICS, INC.
Quarterly report on Form 10-Q for the period ended September 30, 2009
 TABLE OF CONTENTS
 Item
    
    PagePART IFINANCIAL INFORMATION1. Consolidated Financial Statements
    
    
    3Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008
    
    
    3Consolidated Statements of Operations for three and nine months ended September 30, 2009 and 2008
    
    
    5Consolidated Statements of Cash Flows for nine months ended September 30, 2009 and 2008
    
    
    6Notes to Consolidated Financial Statements (Unaudited)
    
    
    82. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    214T. Controls and Procedures
    
    
    29PART IIOTHER INFORMATION2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    304. Submission of Matters to a Vote of Security Holders
    
    
    306. Exhibits
    
    
    30SIGNATURES
    
    
    31EXHIBIT INDEX
    
    
    32EX-31.1EX-31.2EX-32.1EX-32.2
  2




---



##### Table of Contents



PART IFINANCIAL INFORMATION
 
 Item 1. Consolidated Financial Statements.
 
 Echo Therapeutics, Inc.
Consolidated Balance Sheets
 As of,September 30,
    
    
    December 31,2009
    
    
    2008UnauditedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    144,464
    
    
    $
    242,867Accounts receivable
    
    
    292,913
    
    
    
    Prepaid expenses and other current assets
    
    
    165,042
    
    
    
    17,132Total current assets
    
    
    602,419
    
    
    
    259,999Property and Equipment, at cost:Computer equipment
    
    
    262,278
    
    
    
    242,495Office and laboratory equipment (including assets under capitalized leases)
    
    
    618,723
    
    
    
    609,029Furniture and fixtures
    
    
    14,288
    
    
    
    14,288Manufacturing equipment
    
    
    129,320
    
    
    
    129,320Leasehold improvements
    
    
    177,768
    
    
    
    177,7681,202,377
    
    
    
    1,172,900Less-Accumulated depreciation and amortization
    
    
    (1,133,403
    )
    
    
    (1,105,330
    )Net property and equipment (including assets under capitalized leases)
    
    
    68,974
    
    
    
    67,570Other Assets:Restricted cash
    
    
    9,749
    
    
    
    10,250Intangible assets, net of accumulated amortization
    
    
    9,738,405
    
    
    
    9,827,154Deferred financing costs, net of amortization
    
    
    93,928
    
    
    
    141,373Deposits and other assets
    
    
    2,000
    
    
    
    2,000Total other assets
    
    
    9,844,082
    
    
    
    9,980,777Total assets
    
    $
    10,515,475
    
    
    $
    10,308,346
  3




---



##### Table of Contents



Echo Therapeutics, Inc.
 Consolidated Balance Sheets
 As of,September 30,
    
    
    December 31,2009
    
    
    2008UnauditedLIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    1,414,489
    
    
    $
    1,177,719Customer deposits
    
    
    100,000
    
    
    
    Deferred revenue
    
    
    843,556
    
    
    
    Current portion of notes payable and capital lease obligation, net of discounts
    
    
    1,828
    
    
    
    2,054,062Derivative warrant liability
    
    
    2,047,412
    
    
    
    Accrued expenses and other liabilities
    
    
    662,920
    
    
    
    174,768Total current liabilities
    
    
    5,070,205
    
    
    
    3,406,549Notes Payable and capital lease obligation, net of current portion and discounts
    
    
    340,418
    
    
    
    300,467Deferred revenue, net of current portion
    
    
    81,081
    
    
    
    Total Long-term Liabilities
    
    
    421,499
    
    
    
    300,467Stockholders Equity:Preferred Stock, $0.01 par value, authorized 40,000,000 shares at
September 30, 2009 and December 31, 2008, respectively :Perpetual Preferred Series:Series B, authorized 40,000 shares, issued and outstanding 200.6031 and none at September 30, 2009
and December 31, 2008, respectively (preference in liquidation of $2,006,031 at September 30, 2009
    
    
    2
    
    
    
    Convertible Preferred Series:Series A, authorized 2,636,363 shares, issued and outstanding none and
1,570,194 shares at September 30, 2009 and December 31, 2008, respectively
    
    
    
    
    
    
    15,702Series A-1, authorized 2,000,000 shares, issued and outstanding none and 778,136
shares at September 30, 2009 and December 31, 2008, respectively
    
    
    
    
    
    
    7,781Series A-2, authorized 4,400,000 and none, issued and outstanding none at
September 30, 2009 and December 31, 2008
    
    
    
    
    
    
    Series C, authorized 10,000 shares, issued and outstanding 4,318.1 and none at September 30, 2009
and December 31, 2008, respectively
    
    
    43
    
    
    
    Common stock, $0.01 par value, authorized 100,000,000 and 60,000,000shares at September 30, 2009
and December 31, 2008, respectively, issued and outstanding 24,279,392 and 19,095,838 shares
at September 30, 2009 and December 31, 2008, respectively
    
    
    242,796
    
    
    
    190,960Additional paid-in capital
    
    
    70,465,703
    
    
    
    64,668,550Accumulated deficit
    
    
    (65,684,773
    )
    
    
    (58,281,663
    )Total stockholders equity
    
    
    5,023,771
    
    
    
    6,601,330Total liabilities and stockholders equity
    
    $
    10,515,475
    
    
    $
    10,308,346
  4




---



##### Table of Contents



Echo Therapeutics, Inc.
Consolidated Statements of Operations
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Licensing Revenue
    
    $
    204,332
    
    
    $
    
    
    
    $
    325,364
    
    
    $
    Other Revenue
    
    
    292,913
    
    
    
    
    
    
    
    292,913
    
    
    
    Total Revenues
    
    
    497,245
    
    
    
    
    
    
    
    618,277
    
    
    
    Operating Expenses:Research and development
    
    
    815,991
    
    
    
    883,916
    
    
    
    1,510,635
    
    
    
    2,425,822Selling, general and administrative
    
    
    834,702
    
    
    
    875,138
    
    
    
    2,256,298
    
    
    
    3,279,522Total operating expenses
    
    
    1,650,693
    
    
    
    1,759,054
    
    
    
    3,766,933
    
    
    
    5,705,344Loss from operations
    
    
    (1,153,448
    )
    
    
    (1,759,054
    )
    
    
    (3,148,656
    )
    
    
    (5,705,344
    )Other Income (Expense):Interest income
    
    
    346
    
    
    
    4,671
    
    
    
    1,272
    
    
    
    21,746Interest expense
    
    
    (16,601
    )
    
    
    (303,473
    )
    
    
    (269,083
    )
    
    
    (861,863
    )Loss on extinguishment of debt
    
    
    
    
    
    
    (844,760
    )
    
    
    (1,851,668
    )
    
    
    (2,056,773
    )Derivatives loss
    
    
    (13,411
    )
    
    
    
    
    
    
    (3,981,159
    )
    
    
    (586,716
    )Other income (expense), net
    
    
    (29,666
    )
    
    
    (1,143,562
    )
    
    
    (6,100,638
    )
    
    
    (3,483,606
    )Net loss
    
    
    (1,183,114
    )
    
    
    (2,902,616
    )
    
    
    (9,249,294
    )
    
    
    (9,188,950
    )Deemed dividend on beneficial conversion of Series A and
A-1 Preferred Stock
    
    
    
    
    
    
    
    
    
    
    (2,426,876
    )
    
    
    Accretion of dividends on Convertible
Preferred Stock
    
    
    
    
    
    
    
    
    
    
    (126,676
    )
    
    
    Net loss applicable to common shareholders
    
    $
    (1,183,114
    )
    
    $
    (2,902,616
    )
    
    $
    (11,802,846
    )
    
    $
    (9,188,950
    )Net loss per common share, basic and diluted
    
    $
    (0.05
    )
    
    $
    (0.15
    )
    
    $
    (0.56
    )
    
    $
    (0.50
    )Basic and diluted weighted average common shares outstanding
    
    
    24,049,135
    
    
    
    18,771,460
    
    
    
    21,182,530
    
    
    
    18,544,093
  5




---



##### Table of Contents



Echo
Therapeutics, Inc.
Consolidated Statements of Cash Flows
 Nine Months Ended September 30,2009
    
    
    2008Cash Flows From Operating Activities:Net loss
    
    $
    (9,249,294
    )
    
    $
    (9,188,950
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    119,271
    
    
    
    147,352Share-based compensation
    
    
    1,075,347
    
    
    
    1,429,688Fair value of common stock and warrants issued for services
    
    
    344,653
    
    
    
    418,610Derivative loss
    
    
    3,981,159
    
    
    
    586,716Non-cash loss on extinguishment of debt
    
    
    1,819,574
    
    
    
    2,056,773Non-cash interest expense
    
    
    250,524
    
    
    
    845,225Changes in assets and liabilities:Accounts receivable
    
    
    (292,913
    )
    
    
    Prepaid expenses and other current assets
    
    
    (147,910
    )
    
    
    (35,637
    )Accounts payable
    
    
    236,770
    
    
    
    302,903Customer deposits
    
    
    100,000
    
    
    
    Deferred revenue
    
    
    924,637
    
    
    
    Accrued expenses and other liabilities
    
    
    181,005
    
    
    
    291,147Net cash used in operating activities
    
    
    (657,177
    )
    
    
    (3,146,173
    )Cash Flows from Investing Activities:Purchase of property and equipment
    
    
    (20,938
    )
    
    
    (29,080
    )Decrease in restricted cash
    
    
    501
    
    
    
    Net cash used in investing activities
    
    
    (20,437
    )
    
    
    (29,080
    )Cash Flows From Financing ActivitiesProceeds from the sale of Series A-2 preferred stock, net of expenses
    
    
    699,576
    
    
    
    Proceeds from investor advances
    
    
    100,000
    
    
    
    Principal payments for capital lease obligations
    
    
    (426
    )
    
    
    Proceeds from Short Term Senior Secured Note
    
    
    1,990,000
    
    
    
    Proceeds from (payments on) Senior Secured Notes and Warrants
    
    
    (2,209,426
    )
    
    
    2,000,000Proceeds from Senior Convertible Promissory Notes
    
    
    
    
    
    
    700,000Deferred financing costs
    
    
    (467
    )
    
    
    (432,309
    )Dividends paid in cash on Series A, A-1 and A-2 preferred stock
    
    
    (46
    )
    
    
    Proceeds from the exercise of warrants
    
    
    
    
    
    
    114,079Net cash provided by financing activities
    
    
    579,211
    
    
    
    2,381,770Net Decrease in Cash and Cash Equivalents
    
    
    (98,403
    )
    
    
    (793,483
    )Cash and Cash Equivalents, beginning of period
    
    
    242,867
    
    
    
    1,193,163Cash and Cash Equivalents, end of period
    
    $
    144,464
    
    
    $
    399,680
  6




---



##### Table of Contents



Nine Months Ended September 30,2009
    
    
    2008Supplemental Disclosure of Cash Flow Information and Non Cash Financing Transactions:Cash paid for interest
    
    $
    18,559
    
    
    $
    9,459Accretion of dividend on Series A, A-1 and A-2 Convertible Preferred Stock
    
    $
    859
    
    
    $
    Beneficial conversion feature on Senior Convertible Notes
    
    $
    
    
    
    $
    121,320Deemed dividend on beneficial conversion of Series A and A-1 Preferred Stock
    
    $
    2,426,876
    
    
    $
    Conversion of Short-term promissory note to Series B and Series C preferred
    
    $
    2,006,031
    
    
    $
    Common stock issued for conversion of Senior Convertible Notes and accrued interest
    
    $
    
    
    
    $
    52,041Fair value of warrants issued for deferred financing costs
    
    $
    
    
    
    $
    185,668Fair value of warrants issued in connection with Senior Convertible Notes included in extinguishment loss
    
    $
    
    
    
    $
    626,480Adjustment to fair value of Bridge Notes exchanged for Senior Convertible notes included in extinguishment loss
    
    $
    
    
    
    $
    585,533Fair value of warrants issued in connection with exchange of Senior Convertible Notes for preferred stock included in extinguishment loss
    
    $
    
    
    
    $
    106,182Intrinsic value of the conversion feature of the Bridge Notes when converted to Senior Convertible Notes recorded as a reduction of additional paid-in capital
    
    $
    
    
    
    $
    212,328Relative fair value of warrants issued with Secured Notes
    
    $
    
    
    
    $
    219,838Derivative warrant liability reclassified from stockholders equity
    
    $
    1,080,118
    
    
    $
    Reclassification of derivative liability to additional paid-in capital
    
    $
    3,270,768
    
    
    $
    919,593Exchange of Series A, A-1 and A-2 Preferred Stock to Series C Preferred Stock and common stock
    
    $
    3,724,529
    
    
    $
    Senior Convertible Notes issued for accrued interest
    
    $
    20,231
    
    
    $
    103,902Conversion of Senior Convertible Notes to preferred stock
    
    $
    
    
    
    $
    2,077,886Asset acquired under Capital Lease Agreement
    
    $
    10,988
    
    
    $
    
  7




---



##### Table of Contents



Echo Therapeutics, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Period Ended September 30, 2009 (Unaudited)
 (1) ORGANIZATION, BASIS OF PRESENTATION AND GOING CONCERN
     (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Use of Estimates
  Accounts Receivable
  8




---



##### Table of Contents



Intangible Assets and Other Long-Lived Assets
      Share-Based Payments
   Derivative Instruments
  Net Loss per Common Share
  9




---



##### Table of Contents



Research and Development Expenses
  Licensing and Other Revenue Recognition
  
    
    persuasive evidence of an arrangement exists;
    
    delivery has occurred and risk of loss has passed;
    
    the price to the buyer is fixed or determinable; and
    
    collectability is reasonably assured.
    Reclassifications
  Recent Accounting Pronouncements
  10




---



##### Table of Contents



(3) INTANGIBLE ASSETS
  Estimated
    
    
    
    
    
    AccumulatedLife
    
    Cost
    
    
    Amortization
    
    
    NetContract related intangible asset:Cato Research discounted contract
    
    3 years
    
    $
    355,000
    
    
    $
    241,595
    
    
    $
    113,405Technology related intangible assets:Patent for the AzoneTS-based product candidates and formulation
    
    8 years
    
    
    1,305,000
    
    
    
    
    
    
    
    1,305,000Drug Master Files containing formulation, clinical and safety
documentation used by the FDA
    
    8 years
    
    
    1,500,000
    
    
    
    
    
    
    
    1,500,000Two (2) in-process Durhalieve-related pharmaceutical products
    
    8 years
    
    
    6,820,000
    
    
    
    
    
    
    
    6,820,000Total technology related intangible assets
    
    
    
    
    9,625,000
    
    
    
    
    
    
    
    9,625,000Total
    
    
    
    $
    9,980,000
    
    
    $
    241,595
    
    
    $
    9,738,405
  11




---



##### Table of Contents



(4) NOTES PAYABLE AND CAPITAL LEASE OBLIGATION
  September 30,
    
    December 31,2009
    
    2008Senior Convertible Notes:Senior convertible notes
    
    $
    351,679
    
    
    $
    331,448Unamortized discount
    
    
    (19,995
    )
    
    
    (30,981
    )331,684
    
    
    
    300,4672008 Senior Secured Notes:Senior secured notes
    
    
    
    
    
    
    2,209,426Unamortized discount
    
    
    
    
    
    
    (155,364
    )
    
    
    
    2,054,062Capital lease obligation
    
    
    10,562
    
    
    
    Total notes payable and capital lease obligation
    
    
    342,246
    
    
    
    2,354,529Less current portion of notes payable and capital lease obligation
    
    
    1,828
    
    
    
    2,054,062Notes payable and capital lease obligation, net of current portion
    
    $
    340,418
    
    
    $
    300,467
 Senior Convertible Notes
 Senior Promissory Bridge Notes
 2008 Senior Secured Notes
 2009 Senior Secured Note
 Capital Lease Obligation
 (5) DERIVATIVE INSTRUMENTS
   12




---



##### Table of Contents



(6) FAIR VALUES OF ASSETS AND LIABILITIES
       13




---



##### Table of Contents



Assets and Liabilities Measured at Fair Value on a Recurring Basis
  September 30, 2009Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Fair ValueLiabilities:Warrants
    
    $
    
    
    
    $
    2,047,412
    
    
    $
    
    
    
    $
    2,047,412
  (7) PREFERRED STOCK
  Series A Convertible Preferred Stock
  Series A-1 Convertible Preferred Stock
  Series A-2 Convertible Preferred Stock
  Series B Perpetual Preferred Stock
   1.
    
    If the Company completes an equity or equity linked financing with gross proceeds
of $8 million or greater, the Company shall redeem 100% of the outstanding Series B
Stock, including all accrued and unpaid dividends thereon;2.
    
    If the Company completes an equity or equity linked financing with gross proceeds
of $5 million or greater, the Company shall redeem an amount of Series B Stock equal to
50% of the original amount of outstanding Series B Stock issued, including all accrued
and unpaid dividends thereon;3.
    
    If the Company completes an equity or equity linked financing with gross proceeds
of less than $5 million, the Company shall use 20% of the gross proceeds of such
financing to redeem outstanding Series B Stock, including all accrued and unpaid
dividends thereon, on a pro rata basis;4.
    
    If the Company receives proceeds from any licensing, partnership or similar
agreement(s) or any milestone payments resulting from such licensing, partnering or
similar agreement(s), the Company shall use 20% of the gross proceeds to redeem
outstanding Series B Stock, including all accrued and unpaid dividends thereon, on a pro
rata basis; and
 14




---



##### Table of Contents



5.
    
    If the Company completes a merger or consolidation of the Company with or into
another corporation, or the sale of all or substantially all of the Companys properties
or assets to any other person, the Company shall use the gross proceeds of such
transaction to redeem the outstanding Series B Stock, including all accrued and unpaid
dividends thereon to the date of redemption.
   Series C Preferred Stock
    (8) COMMON STOCK
  Exercise of Stock Purchase Warrants
   Cancellation of Grant of Restricted Stock
  Grant of Restricted Stock
  15




---



##### Table of Contents



(9) STOCK OPTION PLANS
     Share-Based Compensation
   16




---



##### Table of Contents



2009
    
    2008Risk-free interest rate
    
    
    2.43 - 3.53
    %
    
    
    3.85
    %Expected dividend yield
    
    
    
    
    
    
    Expected term (employee / director grants)
    
    6.75 years
    
    6.75 yearsForfeiture rate (excluding fully vested options)
    
    
    11% - 38
    %
    
    
    33
    %Expected volatility
    
    
    150% - 155
    %
    
    
    152% - 157
    %
  Weighted-Weighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    Shares
    
    
    Price
    
    
    Term
    
    
    ValueOutstanding at January 1, 2009
    
    
    3,944,530
    
    
    $
    1.87Granted
    
    
    345,000
    
    
    $
    0.44Exercised
    
    
    
    
    
    
    Forfeited or expired
    
    
    (1,365,000
    )
    
    $
    2.22Outstanding at September 30, 2009
    
    
    2,924,530
    
    
    $
    0.90
    
    
    8.17 years
    
    $
    2,526,670Exercisable at September 30, 2009
    
    
    1,987,684
    
    
    $
    1.03
    
    
    8.02 years
    
    $
    1,679,241
  Restricted Stock Grants
  Weighted-AverageGrant-DateNonvested Shares
    
    Shares
    
    
    Fair ValueNonvested at January 1, 2009
    
    
    3,750
    
    
    $
    1.77Granted
    
    
    1,649,750
    
    
    
    1.12Vested
    
    
    (81,875
    )
    
    
    (1.21
    )Forfeited
    
    
    (5,000
    )
    
    
    (0.40
    )Nonvested at September 30, 2009
    
    
    1,566,625
    
    
    $
    1.11Vested at September 30, 2009
    
    
    371,000
    
    
    $
    1.63
  17




---



##### Table of Contents



Grant of Restricted Stock to Director and Medical Advisory Board Member
  Cancellation of Grant of Restricted Stock to Employee
  (10) WARRANTS
  Number ofShares
    
    
    Exercise
    
    
    Date ofExercisable
    
    
    Price
    
    
    ExpirationIssued to investors and placement agent in private placement
    
    
    118,620
    
    
    $
    24.50
    
    
    
    12/8/2009Issued to investor in former subsidiary
    
    
    15,000
    
    
    $
    50.00
    
    
    
    2/23/2010Issued to investors and placement agent in private placement
    
    
    476,830
    
    
    $
    5.80
    
    
    
    3/7/2011Issued to investors and placement agent in private placement
    
    
    180,000
    
    
    $
    0.75
    
    
    
    6/15/2012Issued to investors and placement agent in private placement
    
    
    419,250
    
    
    $
    1.34
    
    
    
    6/15-7/16/2012Issued to financial advisor
    
    
    6,000
    
    
    $
    1.48
    
    
    
    7/25/2012Issued to financial advisor in connection with an acquisition
    
    
    80,750
    
    
    $
    1.90
    
    
    
    9/14/2012Issued to financial advisor
    
    
    39,978
    
    
    $
    1.49
    
    
    
    2/11/2013Issued to Senior Convertible Note holders
    
    
    733,412
    
    
    $
    0.50
    
    
    
    2/11/2013Issued to Secured Note holders
    
    
    883,187
    
    
    $
    1.72
    
    
    
    3/14/2013Issued to Senior Convertible Note holders
    
    
    121,663
    
    
    $
    0.75
    
    
    
    9/30/2013Issued to Senior Convertible Note holders
    
    
    32,249
    
    
    $
    1.00
    
    
    
    9/30/2013Issued to investors in private placement
    
    
    198,333
    
    
    $
    1.50
    
    
    
    10/28/2013Issued to investors in private placement
    
    
    70,000
    
    
    $
    0.75
    
    
    
    10/31/2013Issued to investors in private placement
    
    
    640,000
    
    
    $
    0.75
    
    
    
    2/28/2014Issued to vendor
    
    
    50,000
    
    
    $
    0.70
    
    
    
    3/2/2012Issued to vendor
    
    
    60,000
    
    
    $
    0.60
    
    
    
    3/15/2014Issued to financial advisor in connection with an acquisition
    
    
    400,000
    
    
    $
    1.59
    
    
    
    6/30/2014Total
    
    
    4,525,272Weighted average
exercise price
    
    
    
    
    
    $
    2.41Weighted average duration in years
    
    
    
    
    
    
    
    
    
    3.34 years
 Waiver of Anti-Dilution Provisions
  (11) LICENSING AND OTHER REVENUE AND RELATED ACCOUNTS RECEIVABLE
 Ferndale License of Prelude SkinPrep System
  18




---



##### Table of Contents



Other Revenue 
 Handok License of Symphony tCGM System
   (12) BURNHAM HILL PARTNERS AMENDMENT AGREEMENT
  (13) SUBSEQUENT EVENTS
  Issuance of Restricted Stock
  19




---



##### Table of Contents



Issuance of Promissory Demand Notes
  Burnham Hill Partners Engagement Letter
  Common Stock and Warrant Financing
      20




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 The following discussion of our consolidated 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 Form 10-K for the year ended December 31, 2008 and elsewhere in this Form 10-Q .
The matters discussed herein contain forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended (the Exchange Act), and Section 27A of the
Securities Act of 1933, as amended, which involve risks and uncertainties. All statements other
than statements of historical information provided herein may be deemed to be forward-looking
statements. Without limiting the foregoing, the words believes, anticipates, plans, expects
and similar expressions are intended to identify forward-looking statements. The factors that could
cause actual future results to differ materially from current expectations include, but are not
limited to, risks related to regulatory approvals and the success of our ongoing studies, including
the efficacy of our Symphony tCGM System, the failure of future development and preliminary
marketing efforts related to our tCGM system, risks and uncertainties relating to our ability to
develop, market and sell diagnostic products based on our skin permeation platform technologies,
including the Prelude SkinPrep System, the availability of substantial additional equity or debt
capital to support our research, development and product commercialization activities, the success
of our research, development, and regulatory approval, marketing and distribution plans and
strategies, including those plans and strategies related to our tCGM System and those discussed in
Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and
elsewhere in this report and the risks discussed in our other filings with the SEC. Readers are
cautioned not to place undue reliance on these forward-looking statements, which reflect
managements analysis, judgment, belief or expectation only as of the date hereof. We undertake no
obligation to publicly revise these forward-looking statements to reflect events or circumstances
that arise after the date hereof.
 Overview
  Operating Plan
   21




---



##### Table of Contents



Research and Development
   Critical Accounting Policies and Estimates
    Revenue
  22




---



##### Table of Contents




    
    persuasive evidence of an arrangement exists;
    
    delivery has occurred and risk of loss has passed;
    
    the price to the buyer is fixed or determinable; and
    
    collectability is reasonably assured.
    Results of Operations
    Comparison of the nine months ended September 30, 2009 and 2008
 Licensing Revenue
 23




---



##### Table of Contents



Other Revenue
 Research and Development Expenses
 Selling, General and Administrative Expenses
 Other Income (Expense)
 Interest Expense 
 Nine months endedSeptember 30,
    
    September 30,
    
    IncreaseNote Payable Obligation
    
    2009
    
    2008
    
    (Decrease)Senior promissory bridge notes
    
    $
    
    
    
    $
    197,000
    
    
    $
    (197,000
    )Senior convertible notes
    
    
    48,000
    
    
    
    341,000
    
    
    
    (293,000
    )2008 Senior secured notes
    
    
    204,000
    
    
    
    322,000
    
    
    
    (118,000
    )2009 Senior secured note
    
    
    16,000
    
    
    
    
    
    
    
    16,000Other short-term financing
    
    
    1,000
    
    
    
    2,000
    
    
    
    (1,000
    )Total notes payable
    
    $
    269,000
    
    
    $
    862,000
    
    
    $
    (593,000
    )Non-cash Interest included above
    
    $
    251,000
    
    
    $
    835,000
    
    
    $
    (584,000
    )
 24




---



##### Table of Contents



Derivative Loss
  Loss on Extinguishment of Debt
   25




---



##### Table of Contents



Net Loss
 Comparison of the three months ended September 30, 2009 and 2008
 Licensing Revenue
 Other Revenue
 Research and Development Expenses
 Selling, General and Administrative Expenses
 Other Income
 Interest Expense
 26




---



##### Table of Contents



Three months endedSeptember 30,
    
    September 30,
    
    IncreaseNote Payable Obligation
    
    2009
    
    2008
    
    (Decrease)Senior convertible notes
    
    $
    16,000
    
    
    $
    135,000
    
    
    $
    (119,000
    )2008 senior secured notes
    
    
    
    
    
    
    168,000
    
    
    
    (168,000
    )2009 senior secured note
    
    
    
    
    
    
    
    
    
    
    Other short-term financing
    
    
    1,000
    
    
    
    
    
    
    
    1,000Total notes payable
    
    $
    17,000
    
    
    $
    303,000
    
    
    $
    (286,000
    )Non-cash Interest included above
    
    $
    16,000
    
    
    $
    303,000
    
    
    $
    (286,000
    )
  Derivative Loss
 Net Loss
 Liquidity and Capital Resources
     27




---



##### Table of Contents



Common Stock and Warrant Financing
       28




---



##### Table of Contents




    
    our ability to obtain funding from third parties, including any future collaborative
partners, on reasonable terms;
    
    our progress on research and development programs;
    
    the time and costs required to gain regulatory approvals;
    
    the costs of manufacturing, marketing and distributing our products, if successfully
developed and approved;
    
    the costs of filing, prosecuting and enforcing patents, patent applications, patent
claims and trademarks;
    
    the status of competing products; and
    
    the market acceptance and third-party reimbursement of our products, if successfully
developed and approved.
   Off-Balance Sheet Arrangements
  Effect of Inflation and Changes in Prices
  
 Item 4T. Controls and Procedures.
 Disclosure Controls and Procedures
  Internal Control over Financial Reporting
  29




---



##### Table of Contents



PART IIOTHER INFORMATION
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
   
 Item 4. Submission of Matters to a Vote of Security Holders.
       VOTES
    
    
    VOTES AGAINST /
    
    
    
    
    
    
    BROKERFOR
    
    
    WITHHELD
    
    
    ABSTENTIONS
    
    
    NON-VOTESElection of directorsRobert S. Langer, Sc.D.
    
    
    15,567,465
    
    
    
    41,461
    
    
    
    
    
    
    
    Amend Certificate of Incorporation Common Stockholders
    
    
    11,654,427
    
    
    
    150,855
    
    
    
    10,590
    
    
    
    3,793,054 Preferred Stockholders
    
    
    2,654,293
    
    
    
    
    
    
    
    441,363
    
    
    
    Amend 2008 Equity Incentive Plan
    
    
    11,652,812
    
    
    
    152,410
    
    
    
    10,650
    
    
    
    3,793,054Ratify Wolf & Company
    
    
    15,493,224
    
    
    
    26,143
    
    
    
    89,559
    
    
    
    
  
 Item 6. Exhibits.
  30




---



##### Table of Contents



SIGNATURES
  ECHO THERAPEUTICS, INC.Date: November 19, 2009By:
    /s/ Patrick T. Mooney, M.D.Patrick T. Mooney, M.D.Chief Executive Officer and Chairman of the BoardBy:
    /s/ Harry G. Mitchell, CPAHarry G. Mitchell, CPAChief Operating Officer, Chief Financial Officer and Treasurer 31




---



##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Item.4.1
    
    Form of Common Stock Purchase Warrant incorporated herein by reference to Exhibit 4.1 of the Companys
Current Report on Form 8-K dated November 18, 2009.10.1
    
    Common Stock and Warrant Purchase Agreement by and among the Company and the Investors named therein,
dated as of November 13, 2009, is incorporated herein by reference to Exhibit 10.1 of the Companys
Current Report on Form 8-K dated November 18, 2009.31.1
    
    Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of the Chief Operating Officer, Chief Financial Officer and Treasurer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of the Chief 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 Chief Operating Officer, Chief Financial Officer and Treasurer pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 32