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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 Form 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended: December 31, 2009
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 COMMISSION FILE NUMBER 000-23017
 ECHO THERAPEUTICS, INC.
  DELAWARE(State or other jurisdiction of 
incorporation or organization)
    
    41-1649949(I.R.S. Employer
Identification No.)10 Forge Parkway, Franklin, Massachusetts(Address of principal executive offices)
    
    02038(Zip Code)
 (Registrants telephone number, including area code)
(508) 553-8850
 Securities registered pursuant to Section 12(b) of the Act:
None
 Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
 o þ
 o þ
 þ o
 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
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



ECHO THERAPEUTICS, INC.
2009 Annual Report on Form 10-K
 TABLE OF CONTENTS
 Item
    
    
    
    PagePART I1.
    
    Business
    
    
    31A.
    
    Risk Factors
    
    
    112.
    
    Properties
    
    
    213.
    
    Legal Proceedings
    
    
    21PART II5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity  Securities
    
    
    217.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    228.
    
    Financial Statements and  Supplementary Data
    
    
    359.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    669A(T).
    
    Controls and  Procedures
    
    
    66PART III10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    6711.
    
    Executive   Compensation
    
    
    6712.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    6713.
    
    Certain Relationships and  Related Transactions, and Director Independence
    
    
    6714.
    
    Principal Accounting Fees and Services
    
    
    67PART IV15.
    
    Exhibits, Financial Statement Schedules
    
    
    67SIGNATURES
    
    
    68EX-21EX-23EX-31.1EX-31.2EX-32.1EX-32.2
  2




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tm tm tm tm
  
 PART I
 
 ITEM 1.
    
    BUSINESS.
  Medical Device Overview
  
    
    Analyte extraction, with the Symphony tCGM System (Symphony) for needle-free,
continuous glucose monitoring in hospital patients as the first application; and
 
    
    Needle-free drug delivery, with the delivery of lidocaine as the first application.
Additional applications for painless, needle-free delivery of drugs are planned.
   Preludetm SkinPrep System
  3




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Partnership with Ferndale Pharma Group for Prelude for the Delivery of Lidocaine
  Skin Permeation Control Feedback Technology
  Symphonytm
tCGM System
  Symphony tm Transdermal Glucose Sensor Technology
    4




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Symphony tm Wireless Transmitter
  Symphony tm Monitor
   Partnership with Handok Pharmaceutical for Symphony tm in South Korea
  Symphony tm Market Opportunities
 Importance of Continuous Blood Glucose Monitoring
   Hospital Critical Care Market
  5




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Diabetes Home Use Market
     Specialty Pharmaceutical Overview
 tm
 6




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Durhalieve tm
   Government Regulation
  FDA Approval Process for Medical Devices
  7




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FDA Approval Process for Pharmaceutical Products
  
    
    completion of preclinical laboratory tests, animal studies and formulation studies under
the FDAs current good laboratory practices;
    
    submission to the FDA of an investigational new drug for human clinical testing, which
must become effective before human clinical trials may begin and must include independent
institutional review board approval at each clinical site before the trial is initiated;
    
    performance of adequate and well-controlled clinical trials to establish the safety and
efficacy of the product for each indication;
    
    submission to the FDA of a New Drug Application (NDA);
    
    satisfactory completion of an FDA Advisory Committee review, if applicable;
    
    satisfactory completion of an FDA inspection of the manufacturing facility or facilities
at which the product is produced to assess compliance with current Good Manufacturing
Practices (GMP) to assure that the facilities, methods and controls are adequate to
preserve the drugs identity, strength, quality and purity; and
    
    FDA review and approval of the NDA.
    8




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Post-Approval Requirements
    Foreign Regulation
  9




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Related Matters
  Research and Development
  Manufacturing
    Competition
   Intellectual Property
  10




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Employees
   Company Information
   
 ITEM 1A.
    
    RISK FACTORS.
 Risk Factors
  If we fail to raise additional capital, we will be unable to continue our business.
   11




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We have a history of operating losses, we expect our operating losses to continue for the
foreseeable future and we may not continue as a going concern.
  Our principal shareholders own a significant percentage of our stock and will be able to exercise
significant influence.
  Our future success is dependent upon successful collaborations with strategic partners.
   Our stock price has been volatile and may fluctuate in the future.
  12




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
    
    our financial condition, performance and prospects;
    
    the depth and liquidity of the market for our Common Stock;
    
    our ability to enter into successful collaborative arrangements with strategic
partners for research and development, clinical testing, and sales and marketing;
    
    sales by selling shareholders of shares issued and issuable in connection with our
private placements;
    
    investor perception of us and the industry in which we operate;
    
    general financial and other market conditions; and
    
    domestic and international economic conditions.
  Securities we issue to fund our operations could dilute or otherwise adversely affect our
shareholders.
  Risks related to our discovery, development and commercialization of new medical products
 Our medical device products are based on new technologies and may not be successfully developed or
achieve market acceptance.
    13




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Our future success may be dependent in part upon successful development of
Symphony tm for the hospital critical care market.
  Our pharmaceutical products are in various stages of development and may not be successfully
developed or obtain regulatory approval.
    Our results to date provide no basis for predicting whether many of our pharmaceutical products
will be safe or effective, or receive regulatory approval.
  We may not be able to gain market acceptance of our product candidates, which would prevent us
from becoming profitable.
  
    
    Our establishment and demonstration to the medical community of the clinical efficacy and
safety of our product candidates;
    
    Our ability to create products that are superior to alternatives currently on the market;
and
 14




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
    
    Our ability to establish in the medical community the potential advantage of our
treatments over alternative treatment methods.
   We may not be able to obtain and maintain the third party relationships that are necessary to
develop, commercialize and manufacture some or all of our product candidates.
     We have no experience in sales, marketing and distribution and may have to enter into agreements
with third parties to perform these functions, which could prevent us from successfully
commercializing our product candidates.
  15




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If we are not able to retain our current senior management team and our scientific and medical
advisors or continue to attract and retain qualified scientific, technical and business personnel,
our business will suffer.
  Disputes under key agreements or conflicts of interest with our scientific advisors clinical
investigators or other third party collaborators could delay or prevent development or
commercialization of our product candidates.
   We may have challenges in managing our outside contractors for product and regulatory
accomplishments.
  Risks related to regulatory approvals
 None of our product candidates has received regulatory approval. If we are unable to obtain
regulatory approval to market one or more of our product candidates, our business will be
adversely affected.
  16




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If we are unable to successfully complete the preclinical studies or clinical trials necessary to
support PMA or NDA submissions to the FDA, we may be unable to commercialize
Symphony tm , Prelude tm or AzoneTS tm products under development, which could impair our financial position.
   
    
    the FDA or other regulatory authorities do not approve a clinical trial protocol or a
clinical trial, or place a clinical trial on hold;
    
    patients do not enroll in clinical trials at the rate we expect;
    
    patients do not comply with trial protocols;
    
    patient follow-up is not at the rate we expect;
    
    patients experience adverse side effects;
    
    patients die during a clinical trial, even though their death may not be related to our
products;
    
    institutional review boards (IRBs) and third-party clinical investigators may delay or
reject our trial protocol;
    
    third-party clinical investigators decline to participate in a trial or do not perform a
trial on our anticipated schedule or consistent with the investigator agreements, clinical
trial protocol, good clinical practices or other FDA or IRB requirements;
    
    third-party organizations do not perform data collection, monitoring and analysis in a
timely or accurate manner or consistent with the clinical trial protocol or investigational
or statistical plans;
    
    regulatory inspections of our clinical trials or manufacturing facilities may, among
other things, require us to undertake corrective action or suspend or terminate our clinical
trials;
    
    changes in governmental regulations or administrative actions;
    
    the interim or final results of the clinical trial are inconclusive or unfavorable as to
safety or efficacy; or
    
    the FDA concludes that our trial design is inadequate to demonstrate safety and efficacy.
 17




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We depend on clinical investigators and clinical sites to enroll patients in our clinical trials
and other third parties to manage the trials and to perform related data collection and analysis
and, as a result, we may face costs and delays that are outside of our control.
  The regulatory approval process is costly and lengthy and we may not be able to successfully
obtain all required regulatory approvals.
  
    
    failure of our product candidates to meet a regulatory entitys requirements for safety,
efficacy and quality;
    
    limitation on the indicated uses for which a product may be marketed;
    
    unforeseen safety issues or side effects; and
    
    governmental or regulatory delays and changes in regulatory requirements and guidelines.
 If we fail to obtain adequate reimbursement for our product candidates, the use of our potential
products could be severely limited.
  18




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Risks related to competition
 We operate in highly competitive medical device and specialty pharmaceuticals markets and face
competition from large, well-established companies with significantly more resources, and, as a
result, we may not be able to compete effectively.
   
    
    significantly greater name recognition;
    
    established relations with healthcare professionals, customers and third-party payors;
    
    established distribution networks;
    
    additional lines of products, and the ability to offer rebates or bundle products to
offer higher discounts or incentives to gain a competitive advantage;
    
    greater experience in conducting research and development, manufacturing, clinical
trials, obtaining regulatory approval for products and marketing approved products; and
    
    greater financial and human resources for product development, sales and marketing, and
patent litigation.
  No continuous glucose monitoring system has yet received FDA clearance as a replacement for
single-point finger stick devices, and Symphony tm may never be approved for
that indication.
  19




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Technological breakthroughs in the glucose monitoring market could render our product obsolete.
  Risks related to products liability exposure
 We may have significant product liability exposure which may harm our business and our reputation.
  Risks related to our intellectual property
 Our inability to adequately protect our intellectual property could allow our competitors and
others to produce products based on our technology, which could substantially impair our ability
to compete.
    We are subject to claims of infringement or misappropriation of the intellectual property rights
of others, which could prohibit us from commercializing our product candidates, require us to
obtain licenses from third parties or to develop non-infringing alternatives, and subject us to
substantial monetary damages and injunctive relief.
 20




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ITEM 2.
    
    PROPERTIES.
  
 ITEM 3.
    
    LEGAL PROCEEDINGS.
  
 PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES.
  Fiscal Year Ended December 31, 2008
    
    High
    
    
    LowFirst Quarter
    
    $
    1.90
    
    
    $
    1.10Second Quarter
    
    $
    2.14
    
    
    $
    1.00Third Quarter
    
    $
    1.94
    
    
    $
    0.66Fourth Quarter
    
    $
    0.81
    
    
    $
    0.35
 Fiscal Year Ended December 31, 2009
    
    High
    
    
    LowFirst Quarter
    
    $
    0.70
    
    
    $
    0.25Second Quarter
    
    $
    1.69
    
    
    $
    0.35Third Quarter
    
    $
    1.96
    
    
    $
    1.36Fourth Quarter
    
    $
    1.70
    
    
    $
    1.22
 
 *
    
    The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions. 21




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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 consolidated financial statements and the related notes
thereto included elsewhere in this Form 10-K . The matters discussed herein contain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
and Section 27A of the Securities Act of 1933, as amended, which involve risks and uncertainties.
All statements other than statements of historical information provided herein may be deemed to be
forward-looking statements. Without limiting the foregoing, the words believes, anticipates,
plans, expects and similar expressions are intended to identify forward-looking statements.
Factors that could cause actual results to differ materially from those reflected in the
forward-looking statements include, but are not limited to, those discussed in Risk Factors 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.
 Organization
   Operating Plan
  22




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Research and Development
    Critical Accounting Policies and Estimates
   Summary of Significant Accounting Policies.
 Intangible Assets and Other Long-Lived Assets 
 23




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Accounting for Impairment and Disposal of Long-Lived Assets 
    Share-based Payments
 Derivative Instruments
 24




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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.
     Results of Operations
 Comparison of the years ended December 31, 2009 and 2008
 Licensing Revenue
 Other Revenue
 25




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Research and Development Expenses
 Selling, General and Administrative Expenses
 Other Income (Expense)
 Interest Expense
 Years endedDecember 31,
    
    
    December 31,
    
    
    IncreaseNote Payable Obligations
    
    2009
    
    
    2008
    
    
    (Decrease)Senior promissory bridge notes
    
    $
    
    
    
    $
    197,000
    
    
    
    ($197,000
    )Senior convertible notes
    
    
    55,000
    
    
    
    359,000
    
    
    
    ($304,000
    )2008 Senior secured notes
    
    
    204,000
    
    
    
    492,000
    
    
    
    ($288,000
    )2009 Senior secured note
    
    
    16,000
    
    
    
    
    
    
    $
    16,000Capitalized Leases
    
    
    1,000
    
    
    
    
    
    
    $
    1,000Other short-term financing
    
    
    56,000
    
    
    
    2,000
    
    
    $
    54,000Total notes payable
    
    $
    332,000
    
    
    $
    1,050,000
    
    
    
    ($718,000
    )Non-cash Interest included above
    
    $
    313,000
    
    
    $
    1,037,000
    
    
    
    ($724,000
    )
  Loss on Extinguishment of Debt
 26




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Derivative Loss
  Net Loss
 Liquidity and Capital Resources
   27




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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;
 28




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
    
    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.
  Senior Convertible Notes
  2008 Secured Note and Warrant Financing 
   2008 Series A Preferred Stock Exchange Agreement 
   29




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2008 Vendor Obligation Conversion 
 2008 Series A-1 Preferred Stock Financing 
 2009 Series A-2 Preferred Stock Financing 
     2009 Senior Secured Note
  Series A Preferred Stock Exchange 
 30




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Series A-1 Preferred Stock Exchange 
   Series A-2 Preferred Stock Exchange 
  Series B Perpetual Preferred Stock and Warrant Financing 
 31




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1.
    
    If we complete an equity or equity linked financing with gross proceeds of $8
million or greater, we shall redeem 100% of the outstanding Series B Stock, including
all accrued and unpaid dividends thereon;2.
    
    If we complete an equity or equity linked financing with gross proceeds of $5
million or greater, we shall redeem an amount of Series B Stock equal to 50% of the
original amount of outstanding Series B Stock issued pursuant to the Series B
Agreement, including all accrued and unpaid dividends thereon;3.
    
    If we complete an equity or equity linked financing with gross proceeds of
less than $5 million, we 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 we receive proceeds from any licensing, partnership or similar
agreement(s) or any milestone payments resulting from such licensing, partnering or
similar agreement(s), we 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 we completes a merger or consolidation with or into another corporation,
or the sale of all or substantially all of our properties or assets to any other
person, we 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.
    32




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November 2009 Common Stock and Warrant Financing 
    December 2009 Common Stock and Warrant Financing 
    33




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Facilities, Property and Equipment 
 Off-Balance Sheet Arrangements
  Effect of Inflation and Changes in Prices
  34




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Echo Therapeutics, Inc. Consolidated Financial Statements
 PageReport of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Balance Sheets as of December 31, 2009 and 2008
    
    
    F-2Consolidated Statements of Operations for the years ended December 31, 2009 and 2008
    
    
    F-3Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 2009 and 2008
    
    
    F-4Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008
    
    
    F-5Notes to Consolidated Financial Statements
    
    
    F-7
 35




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     /s/ WOLF & COMPANY, P.C.Boston, MassachusettsMarch 31, 2010 F-1




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Echo Therapeutics, Inc.
Consolidated Balance Sheets
 As of,December 31,
    
    
    December 31,2009
    
    
    2008ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    1,166,858
    
    
    $
    242,867Accounts receivable
    
    
    130,036
    
    
    
    Prepaid expenses and other current assets
    
    
    226,641
    
    
    
    17,132Total current assets
    
    
    1,523,535
    
    
    
    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
    
    
    (1,143,167
    )
    
    
    (1,105,330
    )Net property and equipment (including assets under capitalized leases)
    
    
    59,210
    
    
    
    67,570Other Assets:Restricted cash
    
    
    9,749
    
    
    
    10,250Intangible assets, net of accumulated amortization
    
    
    9,708,822
    
    
    
    9,827,154Deferred financing costs, net of accumulated amortization
    
    
    
    
    
    
    141,373Deposits and other assets
    
    
    2,000
    
    
    
    2,000Total other assets
    
    
    9,720,571
    
    
    
    9,980,777Total assets
    
    $
    11,303,316
    
    
    $
    10,308,346LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    948,712
    
    
    $
    1,177,719Deferred revenue
    
    
    591,051
    
    
    
    Current portion of notes payable and capital lease obligation, net of discounts
    
    
    1,874
    
    
    
    2,054,062Derivative warrant liability
    
    
    2,116,696
    
    
    
    Accrued expenses and other liabilities
    
    
    481,679
    
    
    
    174,768Total current liabilities
    
    
    4,140,012
    
    
    
    3,406,549Notes Payable and capital lease obligation, net of current portion and discounts
    
    
    8,247
    
    
    
    300,467Deferred Revenue, net of current portion
    
    
    122,451
    
    
    
    Total liabilities
    
    
    4,270,710
    
    
    
    3,707,016CommitmentsStockholders Equity:Perpetual, Redeemable Preferred Stock:Series B, authorized 40,000 shares, issued and outstanding 141.2281 and none
at December 31, 2009 and 2008, respectively (preference in liquidation of
$1,412,281 at December 31, 2009)
    
    
    2
    
    
    
    Convertible Preferred Series:Series A, authorized 2,636,363 shares, issued and outstanding none and
1,570,194 shares at December 31, 2009 and 2008, respectively
    
    
    
    
    
    
    15,702Series A-1, authorized 2,000,000 shares, issued and outstanding none and 778,136
shares at December 31, 2009 and 2008, respectively
    
    
    
    
    
    
    7,781Series A-2, authorized 4,400,000 and none at December 31, 2009 and 2008,
respectively, issued and outstanding none at
December 31, 2009 and 2008
    
    
    
    
    
    
    Series C, authorized 10,000 shares, issued and outstanding 4,918.1 and none
at December 31, 2009 and 2008, respectively
    
    
    49
    
    
    
    Common stock, $0.01 par value, authorized 100,000,000 and 60,000,000 shares at
December 31, 2009 and 2008, respectively, issued and outstanding 27,045,792
and 19,095,838 shares at December 31, 2009 and 2008, respectively
    
    
    270,459
    
    
    
    190,960Additional paid-in capital
    
    
    74,155,716
    
    
    
    64,668,550Accumulated deficit
    
    
    (67,393,620
    )
    
    
    (58,281,663
    )Total stockholders equity
    
    
    7,032,606
    
    
    
    6,601,330Total liabilities and stockholders equity
    
    $
    11,303,316
    
    
    $
    10,308,346
  F-2




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Echo Therapeutics, Inc.
 
 Consolidated Statements of Operations
 For the Years endedDecember 31,2009
    
    
    2008Licensing revenue
    
    $
    536,497
    
    
    $
    Other revenue
    
    
    795,424
    
    
    
    Total Revenues
    
    
    1,331,921
    
    
    
    Operating Expenses:Research and development
    
    
    2,807,405
    
    
    
    3,191,060Selling, general and administrative
    
    
    3,054,984
    
    
    
    3,735,640Total operating expenses
    
    
    5,862,389
    
    
    
    6,926,700Loss from operations
    
    
    (4,530,468
    )
    
    
    (6,926,700
    )Other Income (Expense):Interest income
    
    
    1,562
    
    
    
    24,641Interest expense
    
    
    (331,500
    )
    
    
    (1,049,953
    )Loss on extinguishment of debt
    
    
    (2,047,292
    )
    
    
    (2,056,773
    )Derivatives loss
    
    
    (4,050,443
    )
    
    
    (586,716
    )Other income (expense), net
    
    
    (6,427,673
    )
    
    
    (3,668,801
    )Net loss
    
    
    (10,958,141
    )
    
    
    (10,595,501
    )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
    )
    
    
    (53,371
    )Net loss applicable to common shareholders
    
    $
    (13,511,693
    )
    
    $
    (10,648,872
    )Net loss per common share, basic and diluted
    
    $
    (0.61
    )
    
    $
    (0.57
    )Basic and diluted weighted average common shares outstanding
    
    
    22,290,956
    
    
    
    18,608,905
  F-3




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Echo Therapeutics, Inc.
 
 Consolidated Statements of Changes in Stockholders Equity
Years Ended December 31, 2009 and 2008
 Preferred Stock
    
    
    Common  Stock
    
    
    Additional
    
    
    
    
    
    
    TotalNumber of
    
    
    Carrying
    
    
    Number of
    
    
    Carrying
    
    
    Paid-in
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Value
    
    
    Shares
    
    
    Value
    
    
    Capital
    
    
    Deficit
    
    
    EquityBalance at December 31, 2007
    
    
    
    
    
    $
    
    
    
    
    17,870,804
    
    
    $
    178,710
    
    
    $
    57,575,593
    
    
    $
    (47,686,162
    )
    
    $
    10,068,141Issuance of Common Stock for certain Bridge Notes issued in 2007
    
    
    
    
    
    
    
    
    
    
    52,041
    
    
    
    520
    
    
    
    51,521
    
    
    
    
    
    
    
    52,041Issuance of Common Stock in settlement of accounts payable and accrued
expenses
    
    
    
    
    
    
    
    
    
    
    318,905
    
    
    
    3,189
    
    
    
    137,129
    
    
    
    
    
    
    
    140,318Intrinsic value of conversion feature on Bridge Notes upon conversion to
Senior Convertible Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (212,328
    )
    
    
    
    
    
    
    (212,328
    )Beneficial Conversion Feature  Senior Convertible Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    121,320
    
    
    
    
    
    
    
    121,320Issuance of Series A Preferred
    
    
    1,539,161
    
    
    
    15,392
    
    
    
    
    
    
    
    
    
    
    
    2,062,476
    
    
    
    
    
    
    
    2,077,868Issuance of Series A-1 Preferred, net of issuance cost of $63,333
    
    
    766,667
    
    
    
    7,667
    
    
    
    
    
    
    
    
    
    
    
    697,667
    
    
    
    
    
    
    
    705,334Dividends on Preferred Stock
    
    
    42,502
    
    
    
    424
    
    
    
    
    
    
    
    
    
    
    
    (433
    )
    
    
    
    
    
    
    (9
    )Exercise of January 2007 PIPE warrants
    
    
    
    
    
    
    
    
    
    
    705,873
    
    
    
    7,059
    
    
    
    107,020
    
    
    
    
    
    
    
    114,079Exercise of Stock Options
    
    
    
    
    
    
    
    
    
    
    9,465
    
    
    
    95
    
    
    
    (95
    )
    
    
    
    
    
    
    Warrants issued to Bridge Note holders upon conversion to Senior
Convertible Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    626,480
    
    
    
    
    
    
    
    626,480Warrants issued to Senior Convertible Note holders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    219,838
    
    
    
    
    
    
    
    219,838Fair value of warrants issued in connection with exchange of Senior
Convertible Notes for Series A Preferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    106,182
    
    
    
    
    
    
    
    106,182Fair value of warrants reclassified from derivative liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    919,593
    
    
    
    
    
    
    
    919,593Fair value of warrants issued for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    185,667
    
    
    
    
    
    
    
    185,667Share-based payments  restricted stock for services, net of forfeitures
    
    
    
    
    
    
    
    
    
    
    138,750
    
    
    
    1,387
    
    
    
    246,113
    
    
    
    
    
    
    
    247,500Share-based payments  options and restricted stock, net of forfeitures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,824,807
    
    
    
    
    
    
    
    1,824,807Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,595,501
    )
    
    
    (10,595,501
    )Balance at December 31, 2008
    
    
    2,348,330
    
    
    
    23,483
    
    
    
    19,095,838
    
    
    
    190,960
    
    
    
    64,668,550
    
    
    
    (58,281,663
    )
    
    
    6,601,330Reclassification of warrants to derivative liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,926,302
    )
    
    
    1,846,184
    
    
    
    (1,080,118
    )Issuance of Series A-2 Preferred Stock
    
    
    1,400,000
    
    
    
    14,000
    
    
    
    
    
    
    
    
    
    
    
    685,576
    
    
    
    
    
    
    
    699,576Dividends on Series A, A-1 and A-2 Preferred Stock
    
    
    115,960
    
    
    
    1,160
    
    
    
    
    
    
    
    
    
    
    
    (1,206
    )
    
    
    
    
    
    
    (46
    )Exercise of warrants
    
    
    
    
    
    
    
    
    
    
    1,211,704
    
    
    
    12,117
    
    
    
    (12,117
    )
    
    
    
    
    
    
    Share-based payments  restricted stock, net of forfeitures
    
    
    
    
    
    
    
    
    
    
    1,992,094
    
    
    
    19,921
    
    
    
    289,837
    
    
    
    
    
    
    
    309,758Share-based payments  options, net of forfeitures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,298,789
    
    
    
    
    
    
    
    1,298,789Fair value of warrants issued for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    173,726
    
    
    
    
    
    
    
    173,726Redemption of Series B Preferred Stock
    
    
    (59
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (593,749
    )
    
    
    
    
    
    
    (593,750
    )Issuance of Common Stock and Series C Preferred Stock, net of cash
issuance costs of $229,048
    
    
    600
    
    
    
    6
    
    
    
    2,419,056
    
    
    
    24,190
    
    
    
    3,670,774
    
    
    
    
    
    
    
    3,694,970Exchange of Series A, A-1 and A-2 Preferred Stock for Series C Preferred
Stock and common stock
    
    
    (3,861,178
    )
    
    
    (38,611
    )
    
    
    2,327,100
    
    
    
    23,271
    
    
    
    15,340
    
    
    
    
    
    
    
    Exchange of Senior Secured Note and accrued interest for Series B and C
Preferred Stock, net of cash issuance costs of $207,148
    
    
    1,406
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    3,618,445
    
    
    
    
    
    
    
    3,618,459Fair value of derivative warrant liabilities reclassified to additional
paid-in capital
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,268,053
    
    
    
    
    
    
    
    3,268,053Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,958,141
    )
    
    
    (10,958,141
    )Balance at December 31, 2009
    
    
    5,059
    
    
    $
    51
    
    
    
    27,045,792
    
    
    $
    270,459
    
    
    $
    74,155,716
    
    
    $
    (67,393,620
    )
    
    $
    7,032,606
  F-4




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##### Table of Contents



Echo Therapeutics, Inc
 
 Consolidated Statements of Cash Flows
 Years Ended December 31,2009
    
    
    2008Cash Flows From Operating Activities:Net loss
    
    $
    (10,958,141
    )
    
    $
    (10,595,501
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    158,618
    
    
    
    191,723Share-based compensation
    
    
    1,298,789
    
    
    
    1,824,807Fair value of common stock and warrants issued for services
    
    
    429,093
    
    
    
    247,500Fair value of derivative warrant liability issued for services
    
    
    245,369
    
    
    
    Derivative loss
    
    
    4,050,443
    
    
    
    586,716Non-cash loss on extinguishment of debt
    
    
    2,024,031
    
    
    
    2,056,773Non-cash interest expense
    
    
    312,652
    
    
    
    1,037,019Other non-cash expense
    
    
    64,136
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    (130,036
    )
    
    
    Prepaid expenses and other current assets
    
    
    (209,509
    )
    
    
    8,131Accounts payable
    
    
    (229,007
    )
    
    
    933,049Deferred revenue
    
    
    713,502
    
    
    
    Accrued expenses and other liabilities
    
    
    (43,986
    )
    
    
    (234,858
    )Net cash used in operating activities
    
    
    (2,274,046
    )
    
    
    (3,944,641
    )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-1 preferred stock, net of expenses
    
    
    
    
    
    
    705,334Proceeds from bridge notes
    
    
    125,000
    
    
    
    Repayment of bridge notes
    
    
    (125,000
    )
    
    
    Proceeds from the sale of Series A-2 preferred stock, net of expenses
    
    
    699,576
    
    
    
    Proceeds from the sale of common stock, net of expenses
    
    
    2,739,703
    
    
    
    Principal payments for capital lease obligations
    
    
    (866
    )
    
    
    Proceeds from Senior Secured Note
    
    
    1,990,000
    
    
    
    Proceeds (payments) from (on) Senior Secured Convertible Notes and
Warrants
    
    
    (2,209,426
    )
    
    
    2,000,000Proceeds from Senior Convertible Promissory Notes
    
    
    
    
    
    
    700,000Deferred financing costs
    
    
    (467
    )
    
    
    (495,979
    )Dividends paid in cash on Series A, A-1 and A-2 preferred stock
    
    
    (46
    )
    
    
    (9
    )Proceeds from the exercise of warrants
    
    
    
    
    
    
    114,079Net cash provided by financing activities
    
    
    3,218,474
    
    
    
    3,023,425Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    923,991
    
    
    
    (950,296
    )Cash and Cash Equivalents, beginning of period
    
    
    242,867
    
    
    
    1,193,163Cash and Cash Equivalents, end of period
    
    $
    1,166,858
    
    
    $
    242,867
  F-5




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##### Table of Contents



Echo Therapeutics, Inc

Consolidated Statements of Cash Flows
 Years Ended December 31,2009
    
    
    2008Supplemental Disclosure of Cash Flow Information and Non Cash Financing
Transactions:Cash paid for interest
    
    $
    18,848
    
    
    $
    9,831Accretion of dividend on Series A, A-1 and A-2 Convertible Preferred
Stock
    
    $
    126,676
    
    
    $
    53,371Derivative warrant liability reclassified from stockholders equity
    
    $
    1,080,118
    
    
    $
    919,593Senior Convertible Notes issued for accrued interest
    
    $
    23,622
    
    
    $
    116,875Fair Value of common stock and warrants issued for equity financing
costs
    
    $
    
    
    
    $
    166,901Beneficial conversion feature on Senior Convertible Notes
    
    $
    
    
    
    $
    121,320Common stock issued for conversion of Senior Convertible Notes and
accrued interest
    
    $
    
    
    
    $
    52,041Fair value of warrants issued for deferred financing costs
    
    $
    
    
    
    $
    185,667Excess of fair value of the Series A Convertible Preferred Stock
over the carrying value of the Senior Convertible Notes included in
the extinguishment loss
    
    $
    
    
    
    $
    738,578Fair 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
    
    $
    
    
    
    $
    219,838Conversion of Senior Convertible Notes to preferred stock
    
    $
    
    
    
    $
    2,077,868Issuance of common stock in settlement of accounts payable and
accrued expenses
    
    $
    83,000
    
    
    $
    140,318Deemed dividend on beneficial conversion of Series A and A1
Preferred Stock
    
    $
    2,426,876
    
    
    $
    Conversion of Senior Secured Note to Series B and Series C preferred
    
    $
    2,006,031
    
    
    $
    Redemption of Series B Preferred Stock included in accrued expenses
    
    $
    143,750
    
    
    $
    Redemption liability satisfied through offset of proceeds due in
connection with November 2009 Financing
    
    $
    450,000
    
    
    $
    Senior Convertible Note exchanged for Common Stock and warrants
    
    $
    355,070
    
    
    $
    Reclassification of derivative liability to additional paid-in capital
    
    $
    3,268,053
    
    
    $
    Fair value of warrants included in stock issuance costs
    
    $
    869,484
    
    
    $
    Exchange of Series A, A-1 and A-2 Preferred Stock to Series C
Preferred Stock and common stock
    
    $
    3,724,529
    
    
    $
    Asset acquired under Capital Lease Agreement
    
    $
    10,988
    
    
    $
    
 
 F-6




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##### Table of Contents



ECHO THERAPEUTICS, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Years Ended December 31, 2009 and 2008
 (1) ORGANIZATION, BASIS OF PRESENTATION AND GOING CONCERN
   Going Concern
  (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
   Use of Estimates
  Cash and Cash Equivalents
  F-7




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##### Table of Contents



Accounts Receivable
  Intangible Assets and Other Long-Lived Assets
      Depreciation and Amortization
  Asset Classification
    
    Estimated Useful LifeComputer equipment.
    
    3 yearsOffice and laboratory equipment
    
    3-5 yearsFurniture and fixtures.
    
    7 yearsManufacturing equipment.
    
    5 yearsLeasehold improvements.
    
    Life of lease
 Share-Based Payments
   F-8




---



##### Table of Contents



Derivative Instruments
  Concentration of Credit Risk
  Financial Instruments
  Net Loss per Common Share
  Segment Information
  Research and Development Expenses
  Income Taxes
   F-9




---



##### Table of Contents



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.
    F-10




---



##### Table of Contents



Recent Accounting Pronouncements
       F-11




---



##### Table of Contents



(3) INTANGIBLE ASSETS
  2009
    
    
    2008Estimated
    
    
    
    
    
    AccumulatedLife
    
    Cost
    
    
    Amortization
    
    
    Net
    
    
    NetContract related intangible asset:Cato Research discounted contract
    
    3 years
    
    $
    355,000
    
    
    $
    271,178
    
    
    $
    83,822
    
    
    $
    202,154Technology related intangible assets:Patents for the AzoneTS-based product candidates and formulation
    
    8 years
    
    
    1,305,000
    
    
    
    
    
    
    
    1,305,000
    
    
    
    1,305,000Drug Master Files containing formulation, clinical and safety
documentation used by the FDA
    
    8 years
    
    
    1,500,000
    
    
    
    
    
    
    
    1,500,000
    
    
    
    1,500,000In-process pharmaceutical products for two (2) indications
    
    8 years
    
    
    6,820,000
    
    
    
    
    
    
    
    6,820,000
    
    
    
    6,820,000Total technology related intangible assets
    
    
    
    
    9,625,000
    
    
    
    
    
    
    
    9,625,000
    
    
    
    9,625,000Total
    
    
    
    $
    9,980,000
    
    
    $
    271,178
    
    
    $
    9,708,822
    
    
    $
    9,827,154
   EstimatedAmortizationYear Ending December 31:
    
    Expense2010
    
    $
    84,0002011
    
    
    1,203,0002012
    
    
    1,203,0002013
    
    
    1,203,0002014
    
    
    1,203,000
 (4) OPERATING AND CAPITAL LEASE COMMITMENTS
 Operating Lease 
 AmountFor the years ended December 31,2010
    
    $
    189,0002011
    
    
    47,000Total
    
    $
    236,000
  Capital Lease 
 F-12




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##### Table of Contents



(5) NOTES
PAYABLE AND CAPITAL LEASE OBLIGATION
  2009
    
    
    2008Senior Convertible Notes:Senior Convertible notes
    
    
    
    
    
    
    331,448Unamortized Discount
    
    
    
    
    
    
    (30,981
    )
    
    
    
    300,467Senior Secured Notes:Senior Secured notes
    
    
    
    
    
    
    2,209,426Unamortized Discounts
    
    
    
    
    
    
    (155,364
    )
    
    
    
    2,054,062Capital lease obligation
    
    
    10,121
    
    
    
    Total notes payable and capital lease obligation
    
    
    10,121
    
    
    
    2,354,529Less current portion of notes payable and capital lease obligation
    
    
    1,874
    
    
    
    2,054,062Notes Payable and capital lease obligation, net of current portion
    
    $
    8,247
    
    
    $
    300,467
 2007 and 2008 Senior Promissory Bridge Notes and Senior Convertible Notes
      F-13




---



##### Table of Contents



2008 Senior Secured Note and Warrant Financing
         F-14




---



##### Table of Contents



2008 Exchange Agreement
     2009 Senior Secured Note
   2009 Promissory Demand Notes
  F-15




---



##### Table of Contents



(6) DERIVATIVE INSTRUMENTS
     (7) FAIR VALUES OF ASSETS AND LIABILITIES
  Level 1  Valuation is based on quoted prices in active markets for identical assets or
liabilities. Level 1 assets and liabilities generally include debt and equity securities
that are traded in an active exchange market. Valuations are obtained from readily
available pricing sources for market transactions involving identical assets or
liabilities.Level 2  Valuation is based on observable inputs other than Level 1 prices, such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not active; or
other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities. For example, Level 2 assets and
liabilities may include debt securities with quoted prices that are traded less frequently
than exchange-traded instruments or mortgage loans held for sale, for which the fair value
is based on what the securitization market is currently offering for mortgage loans with
similar characteristics.Level 3  Valuation is based on unobservable inputs that are supported by little or no
market activity and that are significant to the fair value of the assets or liabilities.
Level 3 assets and liabilities include financial instruments whose value is determined
using pricing models, discounted cash flow methodologies, or similar techniques, as well as
instruments for which the determination of fair value requires significant management
judgment or estimation. This category generally includes certain asset-backed securities,
certain private equity investments, residential mortgage servicing rights, and long-term
derivative contracts.
   F-16




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##### Table of Contents



Assets and Liabilities Measured at Fair Value on a Recurring Basis
  December 31, 2009Level 1
    
    Level 2
    
    Level 3
    
    Fair ValueLiabilities:Derivative warrant liability
    
    $       
    
    $
    2,116,696



    
    $        
    
    $
    2,116,696
  (8) PREFERRED STOCK
  Series A Convertible Preferred Stock
  Series A-1 Convertible Preferred Stock
  Series A-2 Convertible Preferred Stock
  Series A Preferred Stock Exchange
   F-17




---



##### Table of Contents



Series A-1 Preferred Stock Exchange
    Series A-2 Preferred Stock Financing and Exchange
    F-18




---



##### Table of Contents



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 Series B 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;
 F-19




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##### Table of Contents



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.
    Series C Preferred Stock
    (9) COMMON STOCK
  2008 Private Placements of Common Stock
  F-20




---



##### Table of Contents



November 2009 Common Stock and Warrant Financing
    December 2009 Common Stock and Warrant Financing
    F-21




---



##### Table of Contents



Burnham Hill Partners Engagement Letters
     Boenning & Scattergood Engagement Letter
  2009 Exercise of Common Stock Warrants
  F-22




---



##### Table of Contents



Cancellation of Grant of Restricted Stock
  Common Stock Reserves
  Reserve for exercise of warrants
    
    
    7,356,502Reserve for the issuance of restricted stock grants
    
    
    2,218,250Reserve for the issuance of stock options outside of a qualified plan
    
    
    1,650,000Reserve for the exercise of stock options
    
    
    4,518,138Total Reserves
    
    
    15,742,890
 (10) STOCK OPTION PLANS
     Share-Based Compensation
   F-23




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##### Table of Contents



2009
    
    2008Risk-free interest rate
    
    2.43% - 2.78%
    
    2.25% - 4.11%Expected dividend yield
    
    
    
    Expected term (employee grants)
    
    6  years
    
    6 - 6.75 yearsForfeiture rate (excluding fully vested options)
    
    12.54%
    
    11% - 33%Expected volatility
    
    150% - 151%
    
    151% - 156%
  Weighted-Weighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    Shares
    
    
    Price
    
    
    Term
    
    
    ValueOutstanding at January 1, 2008
    
    
    3,944,530
    
    
    $
    1.87Granted
    
    
    345,000
    
    
    $
    0.44Exercised
    
    
    
    
    
    $
    Forfeited or expired
    
    
    (1,365,000
    )
    
    $
    2.22Outstanding at December 31, 2009
    
    
    2,924,530
    
    
    $
    0.90
    
    
    7.91 years
    
    $
    3,039,650Exercisable at December 31, 2009
    
    
    2,609,868
    
    
    $
    0.95
    
    
    7.82 years
    
    $
    2,664,559
   Weighted-AverageGrant-DateNonvested Shares
    
    Shares
    
    
    Fair ValueNonvested at January 1, 2009
    
    
    3,750
    
    
    $
    1.77Granted
    
    
    1,992,125
    
    
    $
    1.08Vested
    
    
    (274,250
    )
    
    $
    0.74Forfeited
    
    
    (6,875
    )
    
    $
    0.77Nonvested at December 31, 2009
    
    
    1,714,750
    
    
    $
    1.13Vested at December 31, 2009
    
    
    568,344
    
    
    $
    1.39
   F-24




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##### Table of Contents



Grant of Restricted Stock and Re-pricing of Certain Nonqualified Stock Options
        Repricing of Certain Nonqualified Stock Options
  F-25




---



##### Table of Contents



(11) WARRANTS
  2009
    
    2008Risk-free interest rate
    
    2.87% - 3.80%
    
    3.34%Expected dividend yield
    
    
    
    Expected term (contractual term)
    
    3 - 5 years
    
    5 yearsForfeiture rate
    
    0%
    
    0%Expected volatility
    
    150% - 153%
    
    155%
    Number ofShares
    
    
    ExerciseExercisable
    
    
    Price
    
    
    Date of ExpirationGranted to investor in former subsidiary
    
    
    15,000
    
    
    $
    0.50
    
    
    
    2/23/2010Granted to investors and placement agent in private placement.
    
    
    476,830
    
    
    $
    5.80
    
    
    
    3/16/2016Granted to investors and placement agent in private placement.
    
    
    419,250
    
    
    $
    1.32
    
    
    
    6/15-7/16/2012Granted to investors and placement agent in private placement.
    
    
    180,000
    
    
    $
    0.75
    
    
    
    6/15/2012Granted to financial investment advisor
    
    
    6,000
    
    
    $
    1.46
    
    
    
    7/25/2012Granted to financial advisor in connection with an acquisition
    
    
    80,750
    
    
    $
    1.90
    
    
    
    9/14/2012Granted to financial investment advisor
    
    
    39,978
    
    
    $
    1.36
    
    
    
    2/11/2013Granted to investors in private placement
    
    
    733,412
    
    
    $
    0.50
    
    
    
    2/11/2013Granted to investors in private placement
    
    
    767,792
    
    
    $
    1.62
    
    
    
    3/24/2013Granted to investors in private placement of preferred stock
    
    
    121,663
    
    
    $
    0.75
    
    
    
    9/30/2013Granted to investors in private placement of preferred stock
    
    
    32,249
    
    
    $
    1.00
    
    
    
    9/30/2013Granted to investors in private placement of preferred stock
    
    
    198,333
    
    
    $
    1.50
    
    
    
    10/28/2013Granted to investors in private placement of preferred stock
    
    
    70,000
    
    
    $
    0.75
    
    
    
    10/31/2013Granted to investors in private placement of preferred stock
    
    
    640,000
    
    
    $
    0.75
    
    
    
    2/28/2014Granted to vendor
    
    
    50,000
    
    
    $
    0.70
    
    
    
    3/2/2012Granted to vendor
    
    
    60,000
    
    
    $
    0.60
    
    
    
    3/15/2014Granted to investors in private placement
    
    
    400,000
    
    
    $
    1.59
    
    
    
    6/30/2014Granted to investors in private placement
    
    
    1,598,339
    
    
    $
    2.00
    
    
    
    11/13/2014Granted to investors in private placement
    
    
    800,000
    
    
    $
    1.60
    
    
    
    11/13/2014Granted to placement agent in private placement
    
    
    256,906
    
    
    $
    1.50
    
    
    
    11/13/2014Granted to vendor
    
    
    50,000
    
    
    $
    2.00
    
    
    
    12/1/2012Granted to investors in private placement
    
    
    315,000
    
    
    $
    2.00
    
    
    
    12/3/2014Granted to placement agent in private placement
    
    
    45,000
    
    
    $
    1.38
    
    
    
    12/3/2014Total
    
    
    7,356,502Weighted average exercise price
    
    
    
    
    
    $
    1.71Weighted average duration in years
    
    
    
    
    
    
    
    
    
    3.87 years
  Weighted-AverageExerciseWarrants
    
    Shares
    
    
    PriceOutstanding at January 1, 2009
    
    
    4,432,828
    
    
    $
    2.57Granted
    
    
    4,804,704
    
    
    $
    1.54Exercised
    
    
    (1,584,515
    )
    
    $
    0.43Forfeited or expired
    
    
    (296,515
    )
    
    $
    10.48Outstanding at December 31, 2009
    
    
    7,356,502
    
    
    $
    1.71
 F-26




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##### Table of Contents



Re-pricing of Warrants to Financial Advisor and Affiliates
   Issuances of Warrants to Service Providers
   Re-pricing of Warrants to Investor
  Waiver of Anti-Dilution Provisions
  (12) INCOME TAXES
   F-27




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##### Table of Contents



December 31,2009
    
    
    2008Deferred Tax Assets/(Liabilities)Net operating loss carryforwards
    
    $
    17,001,000
    
    
    $
    16,842,000Research credit carryforward
    
    
    1,378,000
    
    
    
    827,000Acquired intangible assets, net
    
    
    (3,814,000
    )
    
    
    (3,785,000
    )Other temporary differences
    
    
    117,000
    
    
    
    132,000Total deferred tax assets, net
    
    
    14,682,000
    
    
    
    14,016,000Valuation allowance
    
    
    (14,682,000
    )
    
    
    (14,016,000
    )Net deferred tax asset
    
    $
    
    
    
    $
    
    Years Ended December 31,2009
    
    
    2008Income taxes (benefit) at statutory rate
    
    
    35.0
    %
    
    
    35.0
    %State income tax, net of federal benefit
    
    
    0.9
    %
    
    
    2.4
    %Permanent DifferencesDerivative loss
    
    
    (13.1
    )%
    
    
    (1.9
    )%Loss on extinguishment of debt
    
    
    (6.4
    )%
    
    
    (6.8
    )%Stock compensation expense
    
    
    (4.3
    )%
    
    
    (5.2
    )%Other
    
    
    (2.6
    )%
    
    
    (3.5
    )%R&D credits
    
    
    1.1
    %
    
    
    (0.5
    )%Change in valuation allowance
    
    
    (10.6
    )%
    
    
    (20.5
    )%0.0
    %
    
    
    0.0
    %
 (13) LICENSING AND OTHER REVENUE AND RELATED ACCOUNTS RECEIVABLE
 Ferndale License of Prelude SkinPrep System
   Other Revenue 
 F-28




---



##### Table of Contents



Handok License of Symphony tCGM System
   (14) SUBSEQUENT EVENTS
    February 2010 Common Stock and Warrant February Financing
     F-29




---



##### Table of Contents



Placement Agent Agreements
  Series B Redemption Agreements
   Other Agreements
      F-30




---



##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
  
 ITEM 9A(T). CONTROLS AND PROCEDURES.
  Changes in Internal Control over Financial Reporting
  Managements Annual Report on Internal Control over Financial Reporting
  
    
    pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets;
    
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and
    
    provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on the
financial statements.
     66




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##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
  www.echotx.com.
 
 ITEM 11. EXECUTIVE COMPENSATION.
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
  
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
  
 PART IV
 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
  67




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##### Table of Contents



SIGNATURES
  ECHO THERAPEUTICS, INC.By:
    /s/  Patrick T. MooneyName:
    Patrick T. Mooney, M.D.Title:
    Chief Executive Officer   By:
    
    /s/ Patrick T. Mooney
    
    By:
    
    /s/ Shawn K. SinghName:
    
    Patrick T. Mooney, M.D.
    
    
    
    Name:
    
    Shawn K. Singh, J.D.Title:
    
    Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
    
    
    
    Title:
    
    President and DirectorBy:
    
    /s/ Walter W. Witoshkin
    
    By:
    
    /s/ Vincent D. EnrightName:
    
    Walter W. Witoshkin
    
    
    
    Name:
    
    Vincent D. EnrightTitle:
    
    Director
    
    
    
    Title:
    
    DirectorBy:
    
    /s/ Harry G. MitchellName:
    
    Harry G. MitchellTitle:
    
    Chief Operating Officer,
Chief Financial Officer
and Treasurer
(Principal Financial
Officer and
Principal Accounting Officer)
 68




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description of Document3.1
    
    Certificate of Incorporation of the Registrant is incorporated herein by reference to Exhibit
3.1 of the Registrants Quarterly Report on Form 10-Q for the period ended June 30, 2009.3.2
    
    Certificate of Designation, Rights and Preferences of Series A Convertible Preferred Stock is
incorporated herein by reference to Exhibit 99.1 of the Registrants Current Report on Form
8-K dated September 30, 2008.3.3
    
    Certificate of Designation, Rights and Preferences of Series A-1 Convertible Preferred Stock
is incorporated herein by reference to Exhibit 99.1 of the Registrants Current Report on
Form 8-K dated October 28, 2008.3.4
    
    Certificate of Designation, Rights and Preferences of Series A-2 Convertible Preferred Stock
is incorporated herein by reference to Exhibit 99.1 of the Registrants Current Report on
Form 8-K dated April 8, 2009.3.5
    
    Certificate of Designation, Rights and Preferences of Series B Preferred Stock is
incorporated herein by reference to Exhibit 99.1 of the Registrants Current Report on Form
8-K dated July 7, 2009.3.6
    
    Certificate of Designation, Rights and Preferences of Series C Preferred Stock is
incorporated herein by reference to Exhibit 10.2 of the Registrants Current Report on Form
8-K dated June 29, 2009.3.7
    
    Bylaws of the Registrant is incorporated herein by reference to Exhibit 3.2 to the
Registrants Current Report on Form 8-K dated June 9, 2008.
 69




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##### Table of Contents



ExhibitNumber
    
    Description of Document10.1*
    
    1997 Long-Term Incentive and Stock Option Plan, as amended, is incorporated herein by
reference to Exhibit 10.3 of the Registrants Quarterly Report on Form 10-QSB for the period
ended June 30, 2002.10.2*
    
    1999 Stock Option and Incentive Plan is incorporated herein by reference to Exhibit 10.31 of
the Registrants Registration Statement on Form S-4 filed on April 24, 2002.10.3
    
    Lease Agreement between the Registrant and Forge Park Investors LLC dated January 24, 2003 is
incorporated herein by reference to Exhibit 10.13 to the Registrants Annual Report on
Form 10-K for the fiscal year ended December 31, 2002.10.4
    
    Common Stock and Warrant Purchase Agreement dated as of March 7, 2006 by and among the
Registrant and the investors listed on Schedule 1 thereto is incorporated herein by reference
to Exhibit 99.1 to the Registrants Current Report on Form 8-K dated March 7, 2006.10.5
    
    Form of Common Stock Purchase Warrant is incorporated herein by reference to Exhibit 99.2 to
the Registrants Current Report on Form 8-K dated March 7, 2006.10.6*
    
    2003 Stock Option and Incentive Plan, as amended, is incorporated herein by reference to
Appendix I of the Registrants Definitive Schedule 14A filed on April 17, 2007.10.7*
    
    Form of Restricted Stock Agreement for use under the Registrants 2003 Stock Option and
Incentive Plan is incorporated herein by reference to Exhibit 99.1 to the Registrants
Current Report on Form 8-K dated August 14, 2006.10.8
    
    Common Stock and Warrant Purchase Agreement dated as of January 2, 2007 by and among the
Registrant, Sherbrooke Partners, LLC and the purchasers named therein is incorporated herein
by reference to Exhibit 10.1 of the Registrants Current Report on Form 8-K dated January 1,
2007.10.9
    
    Form of Warrant to Purchase Shares of Common Stock is incorporated herein by reference to
Exhibit 10.2 of the Registrants Current Report on Form 8-K dated January 1, 2007.10.10
    
    Form of Subscription Agreement is incorporated herein by reference to Exhibit 10.1 of the
Registrants Current Report on Form 8-K dated June 15, 2007.10.11
    
    Form of Warrant to Purchase Shares of Common Stock is incorporated herein by reference to
Exhibit 10.2 of the Registrants Current Report on Form 8-K dated June 15, 2007.10.12*
    
    Employment Agreement by and between the Registrant and Patrick T. Mooney dated as of
September 14, 2007 is incorporated herein by reference to Exhibit 10.4 to the Registrants
Current Report on Form 8-K dated September 14, 2007 (including Nonqualified Stock Option
Agreement).10.13*
    
    Employment Agreement by and between the Registrant and Shawn K. Singh dated as of
September 14, 2007 is incorporated herein by reference to Exhibit 10.5 to the Registrants
Current Report on Form 8-K dated September 14, 2007 (including Nonqualified Stock Option
Agreement).10.14*
    
    Employment Agreement by and between the Registrant and Harry G. Mitchell dated as of
September 14, 2007 is incorporated herein by reference to Exhibit 10.6 to the Registrants
Current Report on Form 8-K dated September 14, 2007 (including Nonqualified Stock Option
Agreement).10.15
    
    Form of Warrant to Purchase Shares of Common Stock is incorporated herein by reference to
Exhibit 10.1 to the Registrants Quarterly Report on Form 10-QSB for the period ended
September 30, 2007.10.16*
    
    Form of Nonqualified Stock Option Agreement is incorporated herein by reference to
Exhibit 10.1 to the Registrants Current Report on Form 8-K dated December 22, 2007.10.17
    
    First Amendment to Lease dated February 11, 2008 by and between the Registrant and CRP-2
Forge, LLC, as successor in interest to Forge Park Investors LLC, is incorporated herein by
reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K dated March 13,
2008.10.18
    
    Note and Warrant Purchase Agreement by and among the Registrant and the Purchasers named
therein dated as of February 11, 2008 is incorporated herein by reference to Exhibit 10.1 to
the Registrants Current Report on Form 8-K dated February 11, 2008.10.19
    
    Guaranty dated as of February 11, 2008 executed by Sontra Medical, Inc. is incorporated
herein by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K dated
February 11, 2008.10.20
    
    Guaranty dated as of February 11, 2008 executed by Echo Therapeutics, Inc. is incorporated
herein by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K dated
February 11, 2008.
 70




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##### Table of Contents



ExhibitNumber
    
    Description of Document10.21
    
    Form of Senior Convertible Promissory Note is incorporated herein by reference to
Exhibit 10.4 to the Registrants Current Report on Form 8-K dated February 11, 2008.10.22
    
    Form of Warrant is incorporated herein by reference to Exhibit 10.5 to the Registrants
Current Report on Form 8-K dated February 11, 2008.10.23
    
    Securities Purchase and Loan Agreement by and among the Registrant and the Purchaser named
therein dated as of March 24, 2008 is incorporated herein by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K dated March 24, 2008.10.24
    
    Form of Original Issue Discount Senior Secured Note is incorporated herein by reference to
Exhibit 10.2 to the Registrants Current Report on Form 8-K dated March 24, 2008.10.25
    
    Form of Warrant is incorporated herein by reference to Exhibit 10.3 to the Registrants
Current Report on Form 8-K dated March 24, 2008.10.26
    
    Guaranty dated as of March 24, 2008 executed by Echo Therapeutics, Inc., Sontra Medical,
Inc., Imperium Advisers, LLC, and Imperium Master Fund, Ltd. is incorporated herein by
reference to Exhibit 10.4 to the Registrants Current Report on Form 8-K dated March 24,
2008.10.27
    
    Security Agreement by and among the Registrant, Imperium Advisers, LLC, Imperium Master Fund,
Ltd., Echo Therapeutics, Inc. and Sontra Medical, Inc. dated as of March 24, 2008 is
incorporated herein by reference to Exhibit 10.5 to the Registrants Current Report on
Form 8-K dated March 24, 2008.10.28
    
    Registration Rights Agreement by and among the Registrant and the Purchaser dated as of
March 24, 2008 is incorporated herein by reference to Exhibit 10.6 to the Registrants
Current Report on Form 8-K dated March 24, 2008.10.29*
    
    Nonqualified Stock Option Agreement by and between the Registrant and Vincent D. Enright
dated as of March 25, 2008 is incorporated herein by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K dated March 25, 2008.10.30
    
    Amendment No. 1 to Registration Rights Agreement by and among the Registrant and Imperium
Master Fund, Ltd. dated as of May 14, 2008 is incorporated herein by reference to
Exhibit 10.1 to the Registrants Current Report on Form 8-K dated May 14, 2008.10.31*
    
    2008 Equity Incentive Plan is incorporated herein by reference to Appendix B to the
Registrants Definitive Proxy Statement on Schedule 14A filed on April 30, 2009.10.32
    
    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, 2008.10.33
    
    Exchange Agreement between the Registrant and the Investors named therein dated as of
September 30, 2008 is incorporated herein by reference to Exhibit 10.1 to the Registrants
Current Report on Form 8-K dated September 30, 2008.10.34
    
    Form of Warrant to Purchase Common Stock is incorporated herein by reference to Exhibit 4.1
to the Registrants Current Report on Form 8-K dated September 30, 2008.10.35
    
    Stock and Warrant Purchase Agreement between the Registrant and the Purchasers named therein
dated as of October 28, 2008 is incorporated herein by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K dated October 28, 2008.10.36
    
    Form of Warrant to Purchase Common Stock is incorporated herein by reference to Exhibit 4.1
to the Registrants Current Report on Form 8-K dated October 28, 2008.10.37
    
    Letter agreement between the Registrant and Burnham Hill Partners LLC dated January 30, 2009
is incorporated herein by reference to Exhibit 10.1 to the Registrants Current Report on
Form 8-K dated January 30, 2009.10.38
    
    Letter agreement between the Registrant and Imperium Master Fund, Ltd. dated March 23, 2009
is incorporated herein by reference to Exhibit 10.1 to the Registrants Current Report on
Form 8-K dated March 23, 2009.10.39
    
    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, 2009.10.40
    
    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, 2009.10.41
    
    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, 2009.10.42
    
    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.
 71




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##### Table of Contents



ExhibitNumber
    
    Description of Document10.43
    
    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, 2009.10.44
    
    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, 2009.10.45
    
    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, 2009.10.46
    
    Form of Exchange Agreement between the Company and Series A Holders, Series A-1 Holders and
Series A-2 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, 2009.10.47
    
    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, 2009.10.48
    
    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 17, 2009.10.49
    
    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 17, 2009.10.50
    
    Common Stock and Warrant Purchase Agreement by and among the Company and the Investors named
therein, dated as of November 30, 2009 is incorporated herein by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K dated November 30, 2009.10.51
    
    Form of Warrant to Purchase Common Stock incorporated herein by reference to Exhibit 4.1 of
the Companys Current Report on Form 8-K dated November 30, 2009.10.52
    
    Common Stock and Warrant Purchase Agreement by and among the Company and the Investors named
therein, dated as of February 4, 2010 is incorporated herein by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K dated February 4, 2010.10.53
    
    Form of Warrant to Purchase Common Stock incorporated herein by reference to Exhibit 4.1 of
the Companys Current Report on Form 8-K dated February 4, 2010.21
    
    Subsidiaries of the Registrant.23
    
    Consent of Wolf & Company, P.C.31.1
    
    Certification of the Chief Executive Officer and Chairman of the Board pursuant to
Rule 13a-14(a) or Rule 15d-14(a) of the Securities and Exchange Act of 1934 as adopted under
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of the Chief Operating Officer, Chief Financial Officer and Treasurer pursuant
to Rule 13a-14(a) or Rule 15d-14(a) of the Securities and Exchange Act of 1934 as adopted
under Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of the Chief Executive Officer and Chairman of the Board 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.
 
 *
    
    Management contract or compensatory plan or arrangement filed in
response to Item 13 of Form 10-K. 72