##### 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 March 31, 2008.
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF  THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from 
to  .
 For the quarterly period ended March 31, 2008
 Commission File Number:  000-23017
 
 ECHO THERAPEUTICS, INC.
 (Exact name of registrant  as specified in its charter)
 
 Minnesota
    
    41-1649949(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification Number)10 Forge Parkway, Franklin, MA
    
    02038(Address of principal executive offices)
    
    (Zip code)
 (508) 553-8850
(Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report)
 
 þ o
  Large accelerated filer oAccelerated filer oNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company þ o þ




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##### 



FORM 10-Q INDEX
 PageNumberPART I. FINANCIAL INFORMATION
    
    2Item 1. Consolidated Financial Statements
    
    2Consolidated Balance Sheets as of  March 31, 2008 and December 31, 2007
    
    2Consolidated Statements of Operations for three months ended March 31, 2008 and 2007
    
    3Consolidated Statements of Cash Flows for three months ended March 31, 2008 and 2007
    
    4Notes to Consolidated Financial Statements (Unaudited)
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    17Item 4T. Controls and Procedures
    
    22PART II. OTHER INFORMATION
    
    22Item 1. Legal Proceedings
    
    22Item 6. Exhibits
    
    22SIGNATURES
    
    24Certification of Chief Executive OfficerCertification of Chief Operating Officer and Chief Financial OfficerCertification of Chief Executive OfficerCertification of Chief Operating Officer and Chief Financial Officer
  1




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##### Table of Contents



PART IFINANCIAL INFORMATION
 
 Item 1. Consolidated Financial Statements.
 
 Echo Therapeutics, Inc.
(Formerly Sontra Medical Corporation)
Consolidated Balance Sheets
 As of,March 31,
    
    
    December 31,2008
    
    
    2007(unaudited)
    
    
    (audited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    1,177,058
    
    
    $
    1,193,163Prepaid expenses and other current assets
    
    
    96,914
    
    
    
    25,263Total current assets
    
    
    1,273,972
    
    
    
    1,218,426Property and Equipment, at cost:Computer equipment
    
    
    239,546
    
    
    
    233,946Office and laboratory equipment
    
    
    588,498
    
    
    
    588,498Furniture and fixtures
    
    
    14,288
    
    
    
    14,288Manufacturing equipment
    
    
    197,888
    
    
    
    197,888Leasehold improvements
    
    
    177,768
    
    
    
    177,7681,217,988
    
    
    
    1,212,388Less-Accumulated depreciation and amortization
    
    
    (1,128,206
    )
    
    
    (1,100,507
    )Net property and equipment
    
    
    89,782
    
    
    
    111,881Other Assets:Restricted cash
    
    
    10,250
    
    
    
    10,250Intangible assets, net of accumulated amortization
    
    
    9,915,903
    
    
    
    9,945,486Deferred financing costs, net
    
    
    593,266
    
    
    
    Deposits and other assets
    
    
    2,000
    
    
    
    2,000Total other assets
    
    
    10,521,419
    
    
    
    9,957,736Total assets
    
    $
    11,885,173
    
    
    $
    11,288,043LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    554,185
    
    
    $
    382,308Derivative liability
    
    
    871,575
    
    
    
    Current portion of notes payable, net of discounts
    
    
    174,328
    
    
    
    386,458Accrued expenses
    
    
    679,966
    
    
    
    451,136Total current liabilities
    
    
    2,280,054
    
    
    
    1,219,902Notes Payable, net of current portion and discounts
    
    
    1,752,626
    
    
    
    CommitmentsStockholders Equity:Series A Convertible Preferred Stock, $0.01 par value, authorized 7,000,000 shares,
none issued and outstanding at March 31, 2008 and December 31, 2007
    
    
    
    
    
    
    Common stock, $0.01 par value, authorized 60,000,000 shares, issued and outstanding
18,510,581 shares and 17,870,804 shares at March 31, 2008 and December 31, 2007,
respectively
    
    
    185,108
    
    
    
    178,710Additional paid-in capital
    
    
    59,334,648
    
    
    
    57,575,593Accumulated deficit
    
    
    (51,667,263
    )
    
    
    (47,686,162
    )Total stockholders equity
    
    
    7,852,493
    
    
    
    10,068,141Total liabilities and stockholders equity
    
    $
    11,885,173
    
    
    $
    11,288,043
 The
accompanying notes are an integral part of these consolidated
financial statements.
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Echo Therapeutics, Inc.
(Formerly Sontra Medical Corporation)
Consolidated Statements of Operations
(Unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007Revenue:Product revenue
    
    $
    
    
    
    $
    9,767Licensing revenue
    
    
    
    
    
    
    12,500Total revenue
    
    
    
    
    
    
    22,267Operating Expenses:Cost of product revenue
    
    
    
    
    
    
    1,556Research and development
    
    
    770,207
    
    
    
    307,023Selling, general and administrative
    
    
    1,190,418
    
    
    
    304,214Total operating expenses
    
    
    1,960,625
    
    
    
    612,793Loss from operations
    
    
    (1,960,625
    )
    
    
    (590,526
    )Other Income (Expense):Interest income
    
    
    10,468
    
    
    
    6,326Interest expense
    
    
    (280,233
    )
    
    
    (2,766
    )Loss on extinguishment of debt
    
    
    (1,212,013
    )
    
    
    Derivatives loss
    
    
    (538,698
    )
    
    
    Other income (expense), net
    
    
    (2,020,476
    )
    
    
    3,560Net loss
    
    
    (3,981,101
    )
    
    
    (586,966
    )Accretion of dividend on Series A Convertible
Preferred Stock
    
    
    
    
    
    
    (483
    )Net loss applicable to common shareholders
    
    $
    (3,981,101
    )
    
    $
    (587,449
    )Net loss per common share, basic and diluted
    
    $
    (0.22
    )
    
    $
    (0.08
    )Basic and diluted weighted average common
shares outstanding
    
    
    18,314,683
    
    
    
    7,178,683
 The
accompanying notes are an integral part of these consolidated
financial statements.
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Echo Therapeutics, Inc
(Formerly Sontra Medical Corporation)
Consolidated Statements of Cash Flows
(Unaudited)
 Three
Months Ended March31,2008
    
    
    2007Cash Flows From Operating Activities:Net loss
    
    $
    (3,981,101
    )
    
    $
    (586,966
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    57,282
    
    
    
    30,748Share-based compensation
    
    
    486,000
    
    
    
    87,367Fair value of common stock and warrants issued for services
    
    
    180,227
    
    
    
    Derivative loss
    
    
    538,698
    
    
    
    Loss on extinguishment of debt
    
    
    1,212,013
    
    
    
    Non-cash interest expense
    
    
    254,579
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    
    
    
    
    (1,607
    )Inventory
    
    
    
    
    
    
    1,556Prepaid expenses and other current assets
    
    
    (71,651
    )
    
    
    (17,897
    )Deferred financing costs
    
    
    (432,309
    )
    
    
    Accounts payable
    
    
    171,877
    
    
    
    122,918Deferred revenue
    
    
    
    
    
    
    (12,500
    )Accrued expenses
    
    
    267,673
    
    
    
    58,381Net cash used in operating activities
    
    
    (1,316,712
    )
    
    
    (318,000
    )Cash Flows from Investing Activities:Purchase of property and equipment
    
    
    (5,600
    )
    
    
    Increase in restricted cash
    
    
    
    
    
    
    (500
    )Net cash used in investing activities
    
    
    (5,600
    )
    
    
    (500
    )Cash Flows From Financing ActivitiesRepurchase of Series A preferred stock
    
    
    
    
    
    
    (73,334
    )Proceeds from the sale of common stock, net of expenses
    
    
    
    
    
    
    584,570Proceeds from Senior Convertible Notes and Warrants
    
    
    700,000
    
    
    
    Proceeds from Secured Notes and Warrants
    
    
    500,000Payments on equipment note payable
    
    
    
    
    
    
    (27,319
    )Proceeds from the exercise of warrants
    
    
    106,207
    
    
    
    Net cash provided by financing activities
    
    
    1,306,207
    
    
    
    483,917Net (Decrease) Increase in Cash and Cash Equivalents
    
    
    (16,105
    )
    
    
    165,417Cash and Cash Equivalents, beginning of period
    
    $
    1,193,163
    
    
    
    559,017Cash and Cash Equivalents, end of period
    
    $
    1,177,058
    
    
    $
    724,434Supplemental Disclosure of Cash Flow Information and Non Cash Financing
Transactions:Cash paid for interest
    
    $
    613
    
    
    $
    2,765Accretion of dividend on Series A Convertible Preferred Stock
    
    $
    
    
    
    $
    483Common stock issued for dividends on Series A Convertible Preferred Stock
    
    $
    
    
    
    $
    3,440Common stock issued for conversion of Senior Convertible Notes and
accrued interest
    
    $
    52,041
    
    
    $
    Fair value of common stock issued for deferred financing costs
    
    $
    185,668
    
    
    $
    Beneficial conversion feature on Senior Convertible Notes
    
    $
    121,320
    
    
    $
    Fair value of warrants issued in connection with Senior Convertible Notes
included in extinguishment loss
    
    $
    626,480
    
    
    $
    Adjustment to fair value of Bridge Notes exchanged for Senior Convertible
Notes included in extinguishment loss
    
    $
    585,533
    
    
    $
    Intrinsic value of the conversion feature of the Bridge Notes when
converted to Senior Convertible Notes recorded as a reduction of
additional paid-in capital
    
    $
    212,938
    
    
    $
    Relative fair value of warrants issued with Secured Notes
    
    $
    219,838
    
    
    $
    
 The accompanying notes are an integral part of these consolidated financial statements.
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ECHO THERAPEUTICS, INC.
(Formerly Sontra Medical Corporation)
Notes to Consolidated Financial Statements
Period Ended March 31, 2008(Unaudited)
 (1) ORGANIZATION, BASIS OF PRESENTATION AND GOING CONCERN
 Organization and Basis of Presentation
      (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Use of Estimates
  5




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Intangible Assets and Other Long-Lived Assets
  Accounting for the Impairment and Disposal of Long-Lived
Assets
   Share-Based Payments
   Derivative Instruments
  Reclassifications
  Recent Accounting Pronouncements
 Fair Value Measurements.
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The Fair Value Option for Financial Assets
and Financial Liabilities Including an Amendment of FASB Statement No. 115
 Business
Combinations
 Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133.
 (3) ACQUISITION OF DURHAM PHARMACEUTICALS, LTD.
 ,  
 (4) INTANGIBLE ASSETS
  Estimated
    
    
    
    
    
    
    AccumulatedLife
    
    
    Cost
    
    
    Amortization
    
    
    NetContract related intangible asset:Cato Research discounted contract
    
    3 years
    
    $
    355,000
    
    
    $
    64,097
    
    
    $
    290,903Technology related intangible assets:Patent for the AzoneTS-based product
candidates and formulation
    
    9 years
    
    
    1,305,000
    
    
    
    
    
    
    
    1,305,000
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##### Table of Contents



Estimated
    
    
    
    
    
    
    AccumulatedLife
    
    
    Cost
    
    
    Amortization
    
    
    NetDrug Master Files containing formulation,
clinical and safety documentation used by
the FDA
    
    9 years
    
    
    1,500,000
    
    
    
    
    
    
    
    1,500,000Two(2) in-process Durhalieve-related
pharmaceutical products
    
    9 years
    
    
    6,820,000
    
    
    
    
    
    
    
    6,820,000Total technology related intangible assets
    
    
    
    
    
    
    9,625,000
    
    
    
    
    
    
    
    9,625,000Total
    
    
    
    
    
    $
    9,980,000
    
    
    $
    64,097
    
    
    $
    9,915,903
  (5) NOTES PAYABLE
  March 31,
    
    
    December 31,2008
    
    
    2007Secured Notes
    
    $
    552,357
    
    
    $
    Unamortized discounts
    
    
    (378,029
    )
    
    
    174,328
    
    
    
    Senior Convertible Notes
    
    
    2,292,459
    
    
    
    Unamortized discount
    
    
    (539,833
    )
    
    
    1,752,626
    
    
    
    Senior Promissory Bridge Notes
    
    
    
    
    
    
    1,325,000Unamortized discount
    
    
    
    
    
    
    (938,542
    )
    
    
    
    386,458Total notes payable
    
    
    1,926,954
    
    
    
    386,458Less current portion of notes payable
    
    
    174,328
    
    
    
    386,458Notes payable, net of current portion
    
    $
    1,752,626
    
    
    $
    
 2008 Senior Secured Note and Warrant Financing
    8




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2007 and 2008 Senior Note Financings
  9




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Debtors Accounting for a
Modification or Exchange of Debt Instruments
   10




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(6) Fair Values of Assets and Liabilities
 Fair Value Measurements
       Quarter endedMarch 31,2008Balance as of January 1, 2008
    
    $
    Total unrealized gain included
in net loss
    
    
    (30,669
    )(1)Purchases, sales, issuances
and settlements
    
    
    902,244Balance as of March 31, 2008
    
    $
    871,575Change in unrealized gains/(losses)
relating to instruments still held
at the reporting date
    
    $
    30,669
 
 (1)
    
    Included in derivative loss on the statement of operations.  (7) COMMON STOCK
  11




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Exercise of Warrants
  Restricted Common Stock issued for Services
  12




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(8) STOCK OPTION PLANS
    13




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Share-Based Compensation
    2008
    
    2007Risk-free interest rate
    
    3.45%
    
    4.72%Expected dividend yield
    
    
    
    Expected term (employee / director grants)
    
    6 years
    
    6.75 yearsForfeiture rate (excluding fully vested options)
    
    11%
    
    54%Expected volatility
    
    156%
    
    118%  126%
  Weighted-Weighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    Shares
    
    
    Price
    
    
    Term
    
    
    ValueOutstanding at January 1, 2008
    
    
    4,066,271
    
    
    $
    1.99Granted
    
    
    120,000
    
    
    
    1.43Exercised
    
    
    
    
    
    
    Forfeited or expired
    
    
    (148,334
    )
    
    
    1.46Outstanding at March 31, 2008
    
    
    4,037,937
    
    
    $
    2.00
    
    
    9.45 years
    
    $
    552,533Exercisable at March 31, 2008
    
    
    1,722,767
    
    
    $
    2.27
    
    
    9.25 years
    
    $
    365,341
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Restricted Stock Grants
  Weighted-AverageNonvested Shares
    
    Shares
    
    Grant-Date Fair ValueNonvested at January 1, 2008
    
    
    16,875
    
    
    $
    1.77Granted
    
    
    25,000
    
    
    
    1.50Vested
    
    
    (25,000
    )
    
    
    1.50Forfeited
    
    
    (11,250
    )
    
    
    1.77Nonvested at March 31, 2008
    
    
    5,625
    
    
    $
    1.77
   (9) WARRANTS
  Number ofShares
    
    
    Exercise
    
    
    Date ofExercisable
    
    
    Price
    
    
    ExpirationIssued to investors in private placement
    
    
    501,200
    
    
    $
    15.00
    
    
    
    9/15-10/15/2008Issued to placement agent in private placement
    
    
    41,059
    
    
    $
    12.00
    
    
    
    9/15-10/15/2008Issued to investors and placement agent in private placement
    
    
    118,620
    
    
    $
    24.50
    
    
    
    12/8-10/15/2009Issued to investor in former subsidiary
    
    
    15,000
    
    
    $
    50.00
    
    
    
    2/23/2010Issued to investors and placement agent in private placement
    
    
    476,829
    
    
    $
    5.80
    
    
    
    3/16/2016Issued to investors in private placement
    
    
    755,000
    
    
    $
    0.21
    
    
    
    1/30/09Issued to investors and placement agent in private placement
    
    
    599,250
    
    
    $
    1.40
    
    
    
    6/15-7/16/2012Issued to financial advisor
    
    
    60,000
    
    
    $
    1.61
    
    
    
    7/25/2012Issued to financial advisor in connection with an acquisition
    
    
    425,000
    
    
    $
    2.26
    
    
    
    9/14/2012Issued to financial advisor
    
    
    175,013
    
    
    $
    1.49
    
    
    
    2/11/2013Issued to Senior Convertible Note holders
    
    
    849,059
    
    
    $
    1.69
    
    
    
    2/11/2013Issued to Secured Note holders
    
    
    634,920
    
    
    $
    2.00
    
    
    
    3/14/2013Issued to consultant
    
    
    25,000
    
    
    $
    2.50
    
    
    
    3/25/2010Issued to consultant
    
    
    80,000
    
    
    $
    2.50
    
    
    
    3/25/2013Total
    
    
    4,755,950Weighted average exercise price
    
    
    
    
    
    $
    4.15Weighted average duration in years
    
    
    
    
    
    
    
    
    
    3.32 years
 Issuances to Consultants
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Issuance of Warrants for Financing
  (10) SUBSEQUENT EVENTS
 2008 Senior Secured Note and Warrant Financing
  Grant of Non-Qualified Stock Options
  Dermatology Product Candidate with Cato BioVentures
  16




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Overview
 Strategic Acquisition of Durham Pharmaceuticals Ltd
  
   Results of Operations
  Comparison of the three months ended March 31, 2008 and 2007
 Licensing Revenue
 17




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Product Revenue and Cost of Product Revenue
 Research and Development Expenses
 Selling, General and Administrative Expenses
 Other Income (Expense)
   Derivative Loss 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,
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Liquidity and Capital Resources
       Senior Convertible Notes 
      19




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2008 Secured Note and Warrant Financing
        20




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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;
    
    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.
 Strategic Product Development Agreement with Cato Research 
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Dermatology Product Candidate with Cato BioVentures  
 
 Item 4T. Controls and Procedures.
 Disclosure Controls and Procedures.
 Internal Control over Financial Reporting.
 
 PART IIOTHER INFORMATION
 
 Item 1. Legal Proceedings
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 6. Exhibits.
 10.1
    
    Form of Warrant to Purchase Shares of Common Stock issued to the Registrants financial advisor is
incorporated herein by reference to Exhibit 10.1 of the Registrants Quarterly Report on Form 10-QSB
for the period ended September 30, 2007.31.1
    
    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 and Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
 22




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##### Table of Contents



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 and Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 23




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SIGNATURES
  ECHO THERAPEUTICS, INC.Date:  May 13, 2008
    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 24




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EXHIBIT INDEX
 Exhibit No.
    
    Item.10.1
    
    Form of Warrant to Purchase Shares of Common Stock issued to the Registrants financial advisor is
incorporated herein by reference to Exhibit 10.1 of the Registrants Quarterly Report on Form 10-QSB
for the period ended September 30, 2007.31.1
    
    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 and Chief Financial Officer 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 and Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 25