Echo Therapeutics (ECTE)

Echo (ECTE) Note 12-22-14

downloadreportThe Legacy Directors Become the “Resigning Directors”
Platinum and Other Investors Commit to $4M in Fresh Funding
Echo Shares Regain Compliance with NASDAQ for Continued Listing

Download Full 4-Page Note with Important Disclosures: Morning Note 12-22-14 ECTE

Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.
- Winston Churchill – November 10, 1942

The Tide Turns: Investors are now feeling like Winston Churchill, when after losing every battle for 3 years, the British finally had their first victory of WWII at the second battle of El Alamein. Friday’s 8-K filing brought news that a.) the Legacy Directors are now the “Resigning Directors”, b.) Platinum and others are providing $4M in financial support and c.) Echo has regained compliance with NASDAQ listing requirements.

Maintaining Avoid/Sell Rating for Now: We understand speculators may view Echo shares as a trading idea with the view that “things can only get better” and we might agree. However, we require a financial model with a reasonable basis to determine valuation. In the coming days, weeks and months we expect Echo to announce a new management team, a new product development plan, new timeframes, new market plans, cash requirements and audited year-end financial statements, which will allow for such a new model. We also suggest that when the Resigning Directors actually resign, that Echo change all the locks just in case “to protect the interests of all stockholders“.

It may almost be said, “Before Alamein we never had a victory. After Alamein we never had a defeat.
- Winston Churchill – History of the Second World War, vol. 4 (1951)

Guilty Conscience? Legacy Board members Vincent D. Enright, William F. Grieco and James F. Smith delivered an irrevocable resignation letter stating they will resign from the Board by the earlier of (i) the company obtaining an extended directors and officers insurance policy covering all actions taken by past and present officers and directors while they served in such capacities, which policy will be similar in all material respects to the current D&O policy and (ii) January 15, 2015. Any accrued and unpaid director fees earned by the directors prior to their resignations will be applied toward the cost of the D&O Policy.

$4M Financing Terms:
Cash: On December 18, 2014, Platinum and other investors agreed to purchase Series F Convertible Preferred Stock for $4M with $1M invested upon the execution (840,336 shares at $1.19) with the remaining in 3 consecutive monthly installments of $1M when the new director and officer insurance commences. The Preferred Stock will be equal to the dollar amount of each investment divided by the lesser of (i) the closing bid price of the Common Stock immediately preceding the execution of the respective installment or (ii) $1.50, provided that the Preferred Stock will not be convertible if the conversion would result in the holder beneficially owning more than 19.9% of the then outstanding shares, unless stockholder approval has been obtained for the issuance of the shares of Common Stock issuable upon conversion of the Preferred Stock in accordance with Nasdaq rules. There are customary provisions as well as an additional restriction on conversion such that the Preferred Stock will not be convertible if the conversion would result in the holder beneficially owning more than 9.9% of the then outstanding shares. Affiliates of Platinum agreed to exchange the number of shares of Common Stock owned by them for shares of Preferred Stock, such that the number of shares of Common Stock owned by each Investor following the exchange shall be less than 9.9% of the then outstanding shares of Common Stock.

Warrants: A 5-year Warrant for each share of Preferred Stock was issued with a $3.00 per share exercise price (840,336 Warrants issued upon execution). The Warrants will not be exercisable if the exercise would result in the holder beneficially owning more than 19.9% of the then outstanding shares, unless stockholder approval has been obtained for the issuance of the shares of Common Stock issuable upon exercise of the Warrants.

Regains Compliance with NASDAQ: On December 18, 2014, Echo was notified by NASDAQ that the Company had regained compliance with NASDAQ’s Marketplace Rule 5450(a)(2) because the bid price of the company’s common stock closed at or above the required minimum $1.00 per share for ten consecutive business days.

Download Full 4-Page Note with Important Disclosures: Morning Note 12-22-14 ECTE

Echo (ECTE) Note 10-03-14

downloadreportEcho Out of Ideas – Calls in PwC While Fighting Platinum’s Game Plan & Cash
Platinum Calls for Shareholder Vote to Remove Board Members “for Cause
Platinum Calls Echo Board “Worst in Class Corporate Governance

Download Full 11-Page Note with Important Disclosures: Morning Note 10-03-14 ECTE

Echo Therapeutics issued two announcements yesterday with the first stating that Board members Michael Goldberg M.D. and Shepard Goldberg, both nominees from Platinum Management (Echo’s largest shareholder owning 20% or 30% on a fully converted basis) were engaging in “numerous unauthorized public communications targeted at Echo stockholders, the trading markets and the media” specifically, the recent investor forum, investor conference calls and press releases. This announcement disclaiming the Goldberg’s actions due to “the potential to confuse and mislead our stockholders as well as the stock market” is unnecessary in our opinion as we have not encountered any confusion among investors outside of their bewilderment with the behavior of the legacy Board.

We also find this ironic considering two of the more “confusing” events from Echo were their press release of June 5, 2014 titled “Positive Clinical Trial Results of Echo Therapeutics Symphony CGM System to be Presented at the 74th Scientific Sessions of the American Diabetes Associationwhen in fact the trial results were not “positive” as it failed to achieve a CE Mark as they stated a month earlier on May 9, 2014. It was also “confusing” when Ms. Burke, Echo’s general counsel, was named interim CEO on June 30th for 60 days expiring August 30th but the company remained silent when August 30th passed and no CEO, interim or otherwise, was announced leading investors to believe Ms. Burke was still interim CEO. To this day we are unaware of anyone who is acting CEO and we must assume that there is an unannounced executive committee of some kind.

To further underscore the investor confusion with the legacy Board, Echo also announced that they have retained PricewaterhouseCoopers LLP’s Restructuring and Recovery Services Practice (PwC) as a financial and restructuring consultant to explore “financial and strategic alternatives that could sufficiently address its liquidity needs and allow it to resume operations. Such financial and strategic alternatives could include, but are not limited to, a sale of intellectual property and other assets, a merger, other business combination, a capital transaction and/or a voluntary petition for reorganization or liquidation pursuant to the U.S. Bankruptcy Code.In our opinion, this demonstrates to investors that after 50 board meetings, proxy battles and numerous lawyers, Echo’s legacy Board has finally admitted they do not know how to run the company or even what to do next. 

We are reiterating our Avoid/Sell rating as we believe the company remains uninvestable as it continues its death spiral as shown below:

[CLICK ON IMAGE TO ENLARGE] EchoChart100314

Download Full 11-Page Note with Important Disclosures: Morning Note 10-03-14 ECTE

Echo (ECTE) Note 09-30-14

downloadreportPlatinum Calls for Shareholder Vote to Remove Board Members “for Cause
Platinum Funds Prevent Board Shut Down of Echo – Maintains Control of Cash
Platinum Calls Echo Board “Worst in Class Corporate Governance

Download Full 10-Page Note with Important Disclosures: Morning Note 09-30-14 ECTE

Late yesterday, Platinum Management, Echo’s largest shareholder (owning 20% or 30% on a fully converted basis) announced that they have filed a proxy statement for shareholders to vote for the removal, for cause, of the legacy Board members Mr. William Grieco, Mr. Vincent Enright and Mr. James Smith. Platinum will be sending a “WHITE” proxy card asking shareholders to vote on the removal of the three Directors. Interested shareholders can call Morrow & Co. at 800-662-5200 or 203-658-9400 or by email at SaveEcho@morrowco.com We also encourage investors to review the preliminary proxy statement at http://1.usa.gov/1xwKRIQ 

Specifically, Platinum is calling for a “Removal Meeting” of Echo stockholders for the purpose of allowing stockholders by majority vote to remove William Grieco, Vincent Enright and/or James Smith from the Board for cause pursuant to Section 141(k) of the Delaware General Corporation Law. At the Removal Meeting, each of William Grieco, Vincent Enright and James Smith shall have the opportunity to present evidence in their defense following a presentation by PPVA in favor of removal.

Accordingly, Platinum is suspending work on its $5M rescission suit (announced September 17, 2014) against Echo’s Board in favor of this proxy contest, believing such action to be in the best interests of Echo stockholders in general.

Below are portions of Platinum’s letter and encourage investors to review the filing at http://1.usa.gov/1sLI51g 

Self-Dealing and Breach of Fiduciary Duty of Loyalty by the Lingering Directors
Following the Company’s 2014 Annual Meeting of stockholders and in the face of continuing public and private requests for their resignation and questions about their past and ongoing conduct, the Lingering Directors:

•changed the Company’s bylaws and took other actions to grant themselves a gold-plated indemnity package that furthered their personal interests at the expense of the Company and its stockholders, over the strenuous objections of the Stockholder Supported Directors.

•adopted a highly controversial bylaw of questionable enforceability to shift litigation costs to plaintiffs that effectively chills the exercise of stockholders’ lawful rights while insulating the entrenched Lingering Directors from checks and balances by those stockholders. This was done over the strenuous objections of the Stockholder Supported Directors and in spite of guidance from Delaware’s legislature seeking restraint by corporations while the legislature further considered such bylaws.

•amended the bylaws over strenuous objections of the Stockholder Supported Directors to deprive any two directors of their historic right to call a meeting of the Board, thus denying the Stockholder Supported Directors the use of the corporate machinery while further entrenching the Lingering Directors from the views of those equally and more recently chosen by stockholders to protect stockholder interests.

Additionally, according to public statements by one of the Stockholder Supported Directors, in 2013, the Lingering Directors twice manipulated a hand-picked compensation consulting firm, at considerable expense to the Company, to recommend an increased compensation package to the Lingering Directors despite their uniform lack of skills, experience, training or education germane to the technology the Company was trying to develop.

Breach of Fiduciary Duty of Care by the Lingering Directors
In just two examples of a breach of their fiduciary duty of Care, the Lingering Directors:

•Violated the charter of the Board’s Nominating and Corporate Governance Committee by failing to perform the annually mandated review of directors before adding Robert F. Doman to the Company’s slate of nominees for the 2014 Annual Meeting.

•Knowingly and intentionally filed in connection with the 2014 Annual Meeting a definitive proxy statement instead of a preliminary proxy statement subject to SEC review, all in violation of well-known SEC requirements and over the objections and concerns raised by Dr. Goldberg, who was a director at the time.

Abuse of the Company’s Corporate Machinery by the Lingering Directors for the Sole Purpose of Denying the New Directors Any Chance to Discharge Their Fiduciary Duties
The Lingering Directors (in what also may constitute a breach of their duty of loyalty) have engaged in a continuing, purposeful campaign to prevent the Stockholder Supported Directors—40% of the Board—from protecting stockholders by discharging their fiduciary duties by, among other things:

•Excluding the Stockholder Supported Directors from membership on any Board committee, and then conducting all Board action through rogue committee action.

•Systematically denying the Stockholder Supported Directors access to Company information to which they are entitled under Delaware law, leading one of the Stockholder Supported Directors recently to declare publicly that he does not know what the Lingering Directors are hiding.

•Systematically denying the Stockholder Supported Directors fair and customary access to Company employees while intimidating those employees with threats of retaliation and termination.

Repeated Violations by the Lingering Directors of the Disclosure Requirements of U.S. Securities Laws
During the last year, the Lingering Directors have caused the Company to engage in a series of serious disclosure violations to the detriment of stockholders and the market, including:

•Publicly announcing that the Company was conducting a search to replace ex-CEO Patrick F. Mooney, M.D., then hiding for over six months the fact that the search had secretly been suspended, leaving stockholders and the market with materially inaccurate information.

•The failure, ongoing to this day, to disclose properly, accurately and fully the facts, circumstances and legal risks surrounding and resulting from the profound breach of the Company’s various agreements with MTIA and the resulting damage the false and misleading picture the Company has painted with respect to the commercialization of its technology.

•The continuing failure to disclose the decision to file an improper definitive (rather than preliminary proxy statement) with the SEC, and the material costs and expenses flowing from that abusive filing, including the hiring of a second, duplicative (and expensive) large law firm in a glaring proxy defeat that a Stockholder Supported Director recently said cost the Company over $1 million.

Destruction of the MTIA Development and Financing Relationship by the Lingering Directors
In a display of incredible incompetence, the Lingering Directors have caused the Company to engage in a series of breaches of the terms of the December 2013 financing and licensing arrangements to the material detriment of the Company and its stockholders that has led directly to the destruction of the relationship with MTIA, including:

•Not giving MTIA the shares of Common Stock MTIA had paid for when they should have.

•Causing embarrassing cancellations of meetings with the Chinese medical regulatory authorities.

•Substantially not performing the Company’s cooperation obligations.

•Misusing the money MTIA did fund, spending it not on development but on lawyers in attempts to entrench the Lingering Directors still further.

Download Full 10-Page Note with Important Disclosures: Morning Note 09-30-14 ECTE

Echo (ECTE) Note 09-24-14

downloadreportPlatinum Funds Prevent Board Shut Down of Echo – Maintains Control of Cash
Platinum Attempting Removal of Legacy Board Members “for Cause
Platinum Calls Echo Board “Worst in Class Corporate Governance

Download Full 8-Page Note with Important Disclosures: Morning Note 09-24-14 ECTE

After the close, Echo’s legacy Board members, who have been battling Platinum Management on behalf of “all shareholders“, decided without actually asking all shareholders, that they would rather halt all product development, research, manufacturing and clinical programs and operations rather than accept Platinum’s funding offer (and presumably MTIA’s remaining $2.6M as well). We find it ironic that the reason stated for the shutdown was “to conserve its liquidity and capital resources“, which apparently is a new corporate objective for Echo considering their recent proxy battle expenses, legal fees and over 50 board meetings. However, as we have been noting with our Avoid/Sell rating, Echo Therapeutics has not really been an operating company since May as the lack of specific development progress in recent press releases and 10-Q along with a lack of a Q2 investor conference call indicates to us that little progress has been made on the GEN2 system needed for CE Mark and FDA approval. In our opinion, Echo has been an entity mostly focused on control rather than execution.

In response, Platinum announced this morning that they are committed to fund Echo Therapeutics with $3 million over the next 30 weeks (equivalent to $100,000 per week) to be used for the benefit of Echo and its shareholders. As stated in their press release: One of the key terms of this deal is that only Dr. and Mr. Goldberg, as opposed to the entire Echo board of directors, will have control over these funds. Platinum has proposed that in order to prevent the misuse of these funds, current directors Vincent Enright, James Smith, and William Greico will not have access to Platinum’s capital nor have any right to determine how the new funds are utilized. Concretely, these three “lingering directors” will not be able to use the funds invested by Platinum for legal defense of their past actions or any other self-serving purposes. Michael Goldberg stated “With access to capital, while we go through the trouble of removing the three lingering directors for cause, we hope to maintain as much of the key staff and technical capabilities as possible and we would appreciate it immensely if the lingering three would cease interfering with our good faith efforts to advance the Company.

Platinum Funding Terms: As stated in the press release: The funding, while beginning immediately, will not convert into Echo shares until the three lingering directors have been removed. At that time, the investment will convert to a direct investment into Echo Therapeutics, in the form of common stock equivalents and warrants. The investment will convert into common stock equivalents at the lower of $2.00 a share or the market price at that time. While $2.00 per share is greater than a 400% premium to the current price Platinum and Messrs Goldberg are highly confident that, given progress on the plan they have presented to shareholders, and the removal of the toxic governance situation, they can anticipate a rapid recovery in valuation reflecting a going concern and not the liquidation valuation that is currently being reflected. Platinum will also get 100% warrant coverage at an exercise price of $6.00 a share, a 2400% premium to the current stock price. The funding is set to begin next Monday, September 29, 2014. The conversion to equity will officially be consummated upon the removal or resignation of the three “lingering directors.” Once the “lingering directors” no longer sit on the board, Platinum plans to move all but 9% (of the total outstanding shares) of its common stock holdings into “toothless” preferred stock thereby significantly reducing its voting power. Additionally, Platinum will agree not to exercise its right to exceed 20% ownership for voting purposes until after the 2016 annual meeting. Further, Platinum will drop all litigation against Echo. Should the three “lingering directors” leave prior to their being removed for cause, Platinum will agree not to litigate against them or the Company for any action that had occurred prior to September 30, 2014.

We encourage interested parties to read the entire press release at: http://bit.ly/1ohIPnu 

Download Full 8-Page Note with Important Disclosures: Morning Note 09-24-14 ECTE

Echo (ECTE) Note 09-22-14

downloadreportToday’s Conference Call – Dissident Board Members Pull No Punches
Attempting Removal of Legacy Board Members “for Cause
Platinum Seeks Return of $5M Calling Echo “Worst in Class Governance
Reiterating Avoid/Sell as Echo Therapeutics Nears Financial Death Spiral

Listen to Complete Conference Call:

Transcript of Opening Remarks: ECTE Goldberg Board Call 09-22-14

Download Full 8-Page Note with Important Disclosures: Mid-Day Note 09-22-14 ECTE

This morning, Echo Board members Michael Goldberg M.D. and Shepard M. Goldberg, nominated by Platinum Management, held a shareholder conference call. They gave a detailed historical account of Echo’s management and Board actions outlining the reasons for demanding the removal, for cause, of Board members William Grieco, Vincent Enright and James Smith.

Michael Goldberg described their attempts at working out the issues but finally stated “After months of trying we have reached the conclusion that the directors have no interest in leaving and according to one lawyer we consulted, will only leave in handcuffs.

He went on to state “We have been specifically asked to investigate the claim made by platinum that the three lingering directors have used Morgan Lewis for personal advice and had the Company pay for the cost. This has been labeled by the accuser as potentially embezzlement of corporate funds and they go on to say that Morgan Lewis also should be investigated for aiding and abetting in the ongoing criminal acts. Neither Shepard, nor I are qualified to assess the merits of the allegations, nor were we a party to all the facts and circumstances that support these allegations. We asked the board to allow us to engage independent qualified counsel to investigate. Of course the three lingering directors should have recused themselves but of course they refused and therefore we have no choice but to refer these allegations to the relevant authorities, The SEC, the Bar and the relevant criminal authorities. This is further evidence of their need to be terminated for cause. If they are in fact innocent, the risk to the corporation of opening up multiple investigations that could take months to years to adjudicate, will have an expensive and potentially negative impact on the Company while ongoing. This could be avoided if the investigation could address these issues and determine that there is no basis for proceeding further. Of course if they are terminated for cause they will be liable for any costs or damages resulting from their decision not to recuse themselves.”

Mr. Goldberg described the immediate steps they would take should they gain control of Echo’s Board. Specifically, cut cash burn to $500K or less per month, eliminate the Philadelphia office, reduce or eliminate legal costs and target spending toward business development efforts. The immediate development efforts would focus on the wearable computer market, MTIA reducing manufacturing costs and developing for China market, application with lidocaine in the tattoo removal space and glucose monitoring for gestational diabetes (diabetes during pregnancy).

Download Full 8-Page Note with Important Disclosures: Mid-Day Note 09-22-14 ECTE 

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