##### 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 June 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
    
    02038(Address of principal executive offices)
    
    (Zip code)
 (508) 553-8850
  
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### 



ECHO THERAPEUTICS, INC.
Quarterly report on Form 10-Q for the period ended June 30, 2009
 TABLE OF CONTENTS
  
 Item
    
    
    PagePART IFINANCIAL INFORMATION1. Consolidated Financial StatementsConsolidated Balance Sheets as of June 30, 2009 and December 31, 2008
    
    
    3Consolidated Statements of Operations for three and six months ended June 30, 2009
and 2008
    
    
    4Consolidated Statements of Cash Flows for six months ended June 30, 2009 and 2008
    
    
    5Notes to Consolidated Financial Statements (Unaudited)
    
    
    77. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    234T. Controls and Procedures
    
    
    35PART IIOTHER INFORMATION2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    356. Exhibits
    
    
    35SIGNATURES
    
    
    36EXHIBIT INDEX
    
    
    37EX-3.(I)EX-31.1EX-31.2EX-32.1EX-32.2




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##### Table of Contents



PART IFINANCIAL INFORMATION
 
 Item 1. Consolidated Financial Statements.
 Echo Therapeutics, Inc.
 
 Consolidated Balance Sheets
 As of,June 30,
    
    
    December 31,2009
    
    
    2008UnauditedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    907,537
    
    
    $
    242,867Prepaid expenses and other current assets
    
    
    18,537
    
    
    
    17,132Total current assets
    
    
    926,074
    
    
    
    259,999Property and Equipment, at cost:Computer equipment
    
    
    242,495
    
    
    
    242,495Office and laboratory equipment
    
    
    609,029
    
    
    
    609,029Furniture and fixtures
    
    
    14,288
    
    
    
    14,288Manufacturing equipment
    
    
    129,320
    
    
    
    129,320Leasehold improvements
    
    
    177,768
    
    
    
    177,7681,172,900
    
    
    
    1,172,900Less-Accumulated depreciation and amortization
    
    
    (1,126,313
    )
    
    
    (1,105,330
    )Net property and equipment
    
    
    46,587
    
    
    
    67,570Other Assets:Restricted cash
    
    
    9,749
    
    
    
    10,250Intangible assets, net of accumulated amortization
    
    
    9,767,988
    
    
    
    9,827,154Deferred financing costs, net of amortization
    
    
    99,394
    
    
    
    141,373Deposits and other assets
    
    
    2,000
    
    
    
    2,000Total other assets
    
    
    9,879,131
    
    
    
    9,980,777Total assets
    
    $
    10,851,792
    
    
    $
    10,308,346LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    1,173,004
    
    
    $
    1,177,719Deferred revenue
    
    
    966,806
    
    
    
    Current portion of notes payable, net of discounts
    
    
    
    
    
    
    2,054,062Derivative warrant liability
    
    
    2,238,887
    
    
    
    Accrued expenses
    
    
    463,894
    
    
    
    174,768Total current liabilities
    
    
    4,842,591
    
    
    
    3,406,549Notes Payable, net of current portion and discounts
    
    
    321,071
    
    
    
    300,467Deferred Revenue, net of current portion
    
    
    162,162
    
    
    
    Total Long-term Liabilities
    
    
    483,233
    
    
    
    300,467Stockholders Equity:Preferred Stock, $0.01 par value, authorized 10,000,000 shares at June 30, 2009 and
December 31, 2008:Perpetual Preferred Series:Series B, authorized 40,000 shares, issued and outstanding 200.6031 and none at June 30,
2009
and December 31, 2008, respectively (preference in liquidation of $2,006,031 at June 30,
2009)
    
    
    2
    
    
    
    Convertible Preferred Series:Series A, authorized 2,636,363 shares, issued and outstanding none and
1,570,194 shares at June 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 June 30, 2009 and December 31, 2008, respectively
    
    
    
    
    
    
    7,781Series A-2, authorized 4,400,000 and none, issued and outstanding  none at
June 30, 2009 and December 31, 2008
    
    
    
    
    
    
    Series C, authorized 10,000 shares, issued and outstanding 4,318.1 and none at June 30, 2009
and December 31, 2008, respectively
    
    
    43
    
    
    
    Common stock, $0.01 par value, authorized 60,000,000 shares, issued and outstanding
23,417,250 and 19,095,838 shares at June 30, 2009 and December 31, 2008, respectively
    
    
    234,174
    
    
    
    190,960Additional paid-in capital
    
    
    69,793,408
    
    
    
    64,668,550Accumulated deficit
    
    
    (64,501,659
    )
    
    
    (58,281,663
    )Total stockholders equity
    
    
    5,525,968
    
    
    
    6,601,330Total liabilities and stockholders equity
    
    $
    10,851,792
    
    
    $
    10,308,346




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##### Table of Contents



Echo Therapeutics, Inc.
 
 Consolidated Statements of Operations
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Licensing Revenue
    
    $
    121,032
    
    
    $
    
    
    
    $
    121,032
    
    
    $
    Operating Expenses:Research and development
    
    
    406,428
    
    
    
    771,699
    
    
    
    694,644
    
    
    
    1,541,906Selling, general and administrative
    
    
    848,232
    
    
    
    1,213,966
    
    
    
    1,421,596
    
    
    
    2,404,384Total operating expenses
    
    
    1,254,660
    
    
    
    1,985,665
    
    
    
    2,116,240
    
    
    
    3,946,290Loss from operations
    
    
    (1,133,628
    )
    
    
    (1,985,665
    )
    
    
    (1,995,208
    )
    
    
    (3,946,290
    )Other Income (Expense):Interest income
    
    
    537
    
    
    
    6,607
    
    
    
    926
    
    
    
    17,075Interest expense
    
    
    (73,775
    )
    
    
    (278,157
    )
    
    
    (252,482
    )
    
    
    (558,390
    )Loss on extinguishment of debt
    
    
    (1,851,668
    )
    
    
    
    
    
    
    (1,851,668
    )
    
    
    (1,212,013
    )Derivatives loss
    
    
    (3,716,316
    )
    
    
    (48,018
    )
    
    
    (3,967,748
    )
    
    
    (586,716
    )Other income (expense), net
    
    
    (5,641,222
    )
    
    
    (319,568
    )
    
    
    (6,070,972
    )
    
    
    (2,340,044
    )Net loss
    
    
    (6,774,850
    )
    
    
    (2,305,233
    )
    
    
    (8,066,180
    )
    
    
    (6,286,334
    )Deemed
dividend on beneficial conversion of Series A and A-1 Preferred Stock
    
    
    (2,426,876
    )
    
    
    
    
    
    
    (2,426,876
    )
    
    
    Accretion of
dividends on Convertible Preferred Stock
    
    
    (69,003
    )
    
    
    
    
    
    
    (126,676
    )
    
    
    Net loss applicable to common shareholders
    
    $
    (9,270,729
    )
    
    $
    (2,305,233
    )
    
    $
    (10,619,732
    )
    
    $
    (6,286,334
    )Net loss per common share, basic and diluted
    
    $
    (0.46
    )
    
    $
    (0.12
    )
    
    $
    (0.54
    )
    
    $
    (0.34
    )Basic and diluted weighted average common shares outstanding
    
    
    20,067,002
    
    
    
    18,543,955
    
    
    
    19,725,471
    
    
    
    18,429,319
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Echo Therapeutics, Inc.
 
 Consolidated Statements of Cash Flows
 Six Months Ended June 30,2009
    
    
    2008Cash Flows From Operating Activities:Net loss
    
    $
    (8,066,180
    )
    
    $
    (6,286,334
    )Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    80,149
    
    
    
    102,358Share-based compensation
    
    
    667,117
    
    
    
    990,183Fair value of common stock and warrants issued for services
    
    
    276,853
    
    
    
    353,610Derivative loss
    
    
    3,967,748
    
    
    
    586,716Non-cash loss on extinguishment of debt
    
    
    1,819,574
    
    
    
    1,212,013Non-cash interest expense
    
    
    234,444
    
    
    
    502,451Changes in assets and liabilities:Prepaid expenses and other current assets
    
    
    (1,405
    )
    
    
    (38,046
    )Accounts payable
    
    
    (4,715
    )
    
    
    43,657Deferred revenue
    
    
    1,128,968
    
    
    
    Accrued expenses
    
    
    81,979
    
    
    
    299,315Net cash provided by (used in) operating activities
    
    
    184,532
    
    
    
    (2,234,077
    )Cash Flows from Investing Activities:Purchase of property and equipment
    
    
    
    
    
    
    (24,956
    )Decrease in restricted cash
    
    
    501
    
    
    
    Net cash provided by (used in) investing activities
    
    
    501
    
    
    
    (24,956
    )Cash Flows From Financing ActivitiesProceeds from the sale of Series A-2 preferred stock, net of expenses
    
    
    699,576
    
    
    
    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 on Series A, A-1 and A-2 preferred stock
    
    
    (46
    )
    
    
    Proceeds from the exercise of warrants
    
    
    
    
    
    
    114,080Net cash provided by financing activities
    
    
    479,637
    
    
    
    2,381,771Net Increase in Cash and Cash Equivalents
    
    
    664,670
    
    
    
    122,738Cash and Cash Equivalents, beginning of period
    
    
    242,867
    
    
    
    1,193,163Cash and Cash Equivalents, end of period
    
    $
    907,537
    
    
    $
    1,315,901
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Six Months Ended June 30,2009
    
    
    2008Supplemental Disclosure of Cash Flow Information and Non Cash Financing Transactions:Cash paid for interest
    
    $
    18,038
    
    
    $
    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 Stock
    
    $
    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
    
    $
    
    
    
    $
    585,533Intrinsic value of the conversion feature of the Bridge Notes when converted to Senior Convertible Notes recorded as a reduction of additional paid-in capital
    
    $
    
    
    
    $
    212,938Relative 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
    
    $
    3,063,165
    
    
    $
    919,593Exchange of Series A, A-1 and A-2 Preferred Stock to Series C Preferred StockExchange 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
    
    $
    13,279
    
    
    $
    70,678
 The accompanying notes are an integral part of these consolidated financial statements.
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##### Table of Contents



Echo Therapeutics, Inc.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Period Ended June 30, 2009 (Unaudited)
 (1) ORGANIZATION, BASIS OF PRESENTATION AND GOING CONCERN
     (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Use of Estimates
  Intangible Assets and Other Long-Lived Assets
  - 7 -




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Accounting for the Impairment and Disposal of Long-Lived
Assets
    Share-Based Payments
  Derivative Instruments
  Net Loss per Common Share
 Earnings per Share
 - 8 -




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Research and Development Expenses
  Licensing 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
 Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133.
 - 9 -




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Determining Whether an Instrument (or an
Embedded Feature) Is Indexed to an Entitys Own Stock
 Subsequent Events
 The FASB Accounting Standards
Codification  and the Hierarchy of Generally Accepted Accounting Principles
 a replacement of FASB Statement No. 162 
 (3) INTANGIBLE ASSETS
  Estimated
    
    
    
    
    
    
    AccumulatedLife
    
    
    Cost
    
    
    Amortization
    
    
    NetContract related intangible asset:Cato Research discounted contract
    
    3 years
    
    $
    355,000
    
    
    $
    212,012
    
    
    $
    142,988Technology 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
    
    
    $
    212,012
    
    
    $
    9,767,988
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##### Table of Contents



(4) NOTES PAYABLE
  June 30,
    
    December 31,2009
    
    2008Senior Convertible Notes:Senior convertible notes
    
    $
    344,727
    
    
    $
    331,448Unamortized discount
    
    
    (23,656
    )
    
    
    (30,981
    )321,071
    
    
    
    300,467Senior Secured Notes:Senior secured notes
    
    
    
    
    
    
    2,209,426Unamortized discount
    
    
    
    
    
    
    (155,364
    )
    
    
    
    2,054,062Total notes payable
    
    
    321,071
    
    
    
    2,354,529Less current portion of notes payable
    
    
    
    
    
    
    2,054,062Notes payable, net of current portion
    
    $
    321,071
    
    
    $
    300,467
 Senior Convertible Notes
 Senior Promissory Bridge Notes
 2008 Senior Secured Notes
   2009 Senior Secured Note
 - 11 -




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(5) DERIVATIVE INSTRUMENTS
    (6) FAIR VALUES OF ASSETS AND LIABILITIES
 Fair Value
Measurements
   - 12 -




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Assets and Liabilities Measured at Fair Value on a Recurring Basis
  June 30, 2009Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Fair ValueLiabilities:Warrants
    
    $
    
    
    
    $
    2,238,887
    
    
    $
    
    
    
    $
    2,238,887
  (7) PREFERRED STOCK
  Series A Preferred Stock Exchange
   - 13 -




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Series A-1 Preferred Stock Exchange
    Series A-2 Preferred Stock and Warrant Financing and Exchange
   - 14 -




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Series B Perpetual Preferred Stock and Warrant Financing
     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
pursuant to the Purchase Agreement, 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; and5.
    
    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.
 - 16 -




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Series C Preferred Stock
    (8) COMMON STOCK
  Exercise of Stock Purchase Warrants
  Grant of Restricted Stock
  - 17 -




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(9) STOCK OPTION PLANS
     Share-Based Compensation
   - 18 -




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2009
    
    2008Risk-free interest rate
    
    
    2.43 - 3.53
    %
    
    
    3.99
    %Expected dividend yield
    
    
    
    
    
    
    Expected term (employee / director grants)
    
    6.75 years
    
    6.75 yearsForfeiture rate (excluding fully vested options)
    
    
    11% - 33
    %
    
    
    39
    %Expected volatility
    
    
    150% - 155
    %
    
    
    154% - 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
    
    
    (1,250,000
    )
    
    $
    2.39Outstanding at June 30, 2009
    
    
    3,039,530
    
    
    $
    0.88
    
    
    8.43 years
    
    $
    2,628,460Exercisable at June 30, 2009
    
    
    1,981,649
    
    
    $
    1.03
    
    
    8.27  years
    
    $
    1,671,189
  Repricing of Certain Nonqualified Stock Options
  - 19 -




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Restricted Stock Grants
  Weighted-AverageGrant-DateNonvested Shares
    
    Shares
    
    
    Fair ValueNonvested at January 1, 2009
    
    
    3,750
    
    
    $
    1.77Granted
    
    
    1,529,750
    
    
    
    1.08Vested
    
    
    (35,000
    )
    
    
    (0.90
    )Forfeited
    
    
    
    
    
    
    Nonvested at June 30, 2009
    
    
    1,498,500
    
    
    $
    0.93Vested at June 30, 2009
    
    
    324,125
    
    
    $
    1.65
  Grant of Restricted Stock to Officers and Certain Employees
   - 20 -




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##### Table of Contents



(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
    
    
    54,000
    
    
    $
    0.55
    
    
    
    1/30/2014Issued to financial advisor in connection with an acquisition
    
    
    80,750
    
    
    $
    1.90
    
    
    
    9/14/2012Issued to financial advisor in connection with an acquisition
    
    
    344,250
    
    
    $
    0.55
    
    
    
    1/30/2014Issued to financial advisor
    
    
    39,978
    
    
    $
    1.49
    
    
    
    2/11/2013Issued to financial advisor
    
    
    135,035
    
    
    $
    0.55
    
    
    
    1/30/2014Issued to Senior Convertible Note holders
    
    
    849,059
    
    
    $
    0.50
    
    
    
    2/11/2013Issued to Secured Note holders
    
    
    883,187
    
    
    $
    1.72
    
    
    
    3/14/2013Issued to financial advisor
    
    
    26,833
    
    
    $
    0.55
    
    
    
    1/30/2014Issued 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
    
    
    360,000
    
    
    $
    0.55
    
    
    
    1/30/2014Issued to financial advisor in connection with an acquisition
    
    
    400,000
    
    
    $
    1.59
    
    
    
    6/30/2014Total
    
    
    5,561,037Weighted average exercise price
    
    
    
    
    
    $
    2.06Weighted average duration in years
    
    
    
    
    
    
    
    
    
    3.75  years
 Waiver of Anti-Dilution Provisions
  Issuances of Warrants to Service Providers
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Issuance of Warrants for Financing
  Re-pricing of Warrants to Investor
  (11)
    
    LICENSING REVENUE
 Ferndale License of Prelude SkinPrep System
  Handok License of Symphony tCGM System
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(12)
    
    SUBSEQUENT EVENTS
  Warrant Exercises
 Increase in Authorized Common and Preferred Shares
 Increase in Authorized Shares for 2008 Equity Incentive Plan
 
 ITEM 7.
    
    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
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Operating Plan
     Research and Development
   - 24 -




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Critical Accounting Policies and Estimates
    Results of Operations
    Comparison of the six months ended June 30, 2009 and 2008
 Licensing Revenue
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Research and Development Expenses
 Selling, General and Administrative Expenses
 Other Income (Expense)
 - 26 -




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Interest Expense 
 Six months endedJune 30,
    
    June 30,
    
    IncreaseNote Payable Obligation
    
    2009
    
    2008
    
    (Decrease)Senior promissory bridge notes
    
    $
    
    
    
    $
    197,000
    
    
    $
    (197,000
    )Senior convertible notes
    
    
    31,000
    
    
    
    206,000
    
    
    
    (175,000
    )2008 Senior secured notes
    
    
    204,000
    
    
    
    154,000
    
    
    
    50,0002009 Senior secured note
    
    
    16,000
    
    
    
    
    
    
    
    16,000Other short-term financing
    
    
    1,000
    
    
    
    1,000
    
    
    
    Total notes payable
    
    $
    252,000
    
    
    $
    558,000
    
    
    $
    (306,000
    )Non-cash Interest included above
    
    $
    234,000
    
    
    $
    502,000
    
    
    $
    (298,000
    )
    Derivative Loss
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Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Companys Own Stock.
 Loss
on Extinguishment of Debt
 Debtors Accounting for a
Modification or Exchange of Debt Instruments,
 Net Loss
 Comparison of the quarters ended June 30, 2009 and 2008
 Licensing Revenue
 Research and Development Expenses
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##### Table of Contents



Selling, General and Administrative Expenses
 Other Income
 Interest Expense
 Three months endedJune 30,
    
    June 30,
    
    IncreaseNote Payable Obligation
    
    2009
    
    2008
    
    (Decrease)Senior convertible notes
    
    $
    16,000
    
    
    $
    133,000
    
    
    $
    (117,000
    )2008 senior secured notes
    
    
    41,000
    
    
    
    144,000
    
    
    
    (103,000
    )2009 senior secured note
    
    
    16,000
    
    
    
    
    
    
    
    16,000Other short-term financing
    
    
    1,000
    
    
    
    1,000
    
    
    
    Total notes payable
    
    $
    74,000
    
    
    $
    278,000
    
    
    $
    (204,000
    )Non-cash Interest included above
    
    $
    58,000
    
    
    $
    277,000
    
    
    $
    (219,000
    )
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Derivative Loss
 Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Companys Own Stock.
 Loss on Extinguishment of Debt
 Net Loss
 Liquidity and Capital Resources
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
    
    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;
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##### Table of Contents




    
    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.
 Series A-2 Preferred Stock and Warrant Financing
   2009 Senior Secured Note
 Repayment of Senior Secured Notes
 Exchange of Series A, Series A-1 and Series A-2 Preferred Stock for Common Stock and Series C
Preferred Stock
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Series B Preferred Stock and Warrant Financing
 - 33 -




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Off-Balance Sheet Arrangements
  Effect of Inflation and Changes in Prices
  - 34 -




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Item 4T. Controls and Procedures.
 Disclosure Controls and Procedures
  Internal Control over Financial Reporting
  
 PART IIOTHER INFORMATION
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
   
 Item 6. Exhibits.
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SIGNATURES
  ECHO THERAPEUTICS, INC.Date:  August 13, 2009
    By:

/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 - 36 -




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EXHIBIT INDEX
 Exhibit No.
    
    Item.3(i)
    
    Amended and Restated Certificate of Incorporation dated August
7, 2009 is attached hereto and incorporated herein by
reference.4.1
    
    Form of Warrant to Purchase Common Stock is incorporated
herein by reference to Exhibit 4.1 of the Companys Current
Report on Form 8-K dated April 14, 2009.4.2
    
    Form of Restricted Stock Agreement is incorporated herein by
reference to Exhibit 10.2 to the Companys Current Report on
Form 8-K dated May 20, 2008.10.1
    
    Amended and Restated Stock and Warrant Purchase Agreement by
and among the Company and the Investors named therein, dated
as of April 2, 2009, is incorporated herein by reference to
Exhibit 10.1 of the Companys Current Report on Form 8-K dated
April 14, 2009.10.2
    
    Letter agreement between the Company and Imperium Master Fund,
Ltd. dated April 23, 2009 is incorporated herein by reference
to Exhibit 10.1 to the Companys Current Report on Form 8-K
dated April 24, 2009.10.3
    
    License Agreement between the Company and Ferndale Pharma
Group, Inc. dated as of May 27, 2009 is incorporated herein by
reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K dated May 27, 2009.10.4
    
    License Agreement between the Company and Handok
Pharmaceuticals Co., Ltd. dated as of June 15, 2009 is
incorporated herein by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K dated June 15, 2009.10.5
    
    Exchange Agreement between the Company and Series A Holders
dated June 29, 2009 is incorporated herein by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K dated
June 29, 2009.10.6
    
    Stock Purchase Agreement by and between the Company and
Platinum dated as of June 30, 2009 is incorporated herein by
reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K dated July 7, 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
2002.99.1
    
    Certificate of Designation, Rights and Preferences of Series
A-2 Preferred Stock is incorporated herein by reference to
Exhibit 99.1 of the Companys Current Report on Form 8-K dated
April 14, 2009.99.2
    
    Certificate of Designation, Rights and Preferences of Series
B Perpetual Preferred Stock is incorporated herein by reference to
Exhibit 99.1 of the Companys Current Report on Form 8-K dated
July 7, 2009.99.3
    
    Certificate of Designation, Rights and Preferences of Series
C Preferred Stock is incorporated herein by reference to
Exhibit 99.1 of the Companys Current Report on Form 8-K dated
June 29, 2009.
 - 37 -