Echo Therapeutics, Inc. - FORM 10-Q - XML - IDEA: XBRL DOCUMENT - May 10, 2012

In 1997, the Company adopted a Long-Term Incentive and Stock Option Plan (the “1997 Plan”). As of March 31, 2012, there were options to purchase an aggregate of 15,000 shares of Common Stock outstanding under the 1997 Plan. The Company may not grant any additional share under the 1997 Plan.

In connection with the Company’s strategic merger with ChoiceTel in 2002, the Company assumed options to purchase an aggregate of 86,567 shares of Common Stock under the 1999 Sontra Medical, Inc. Stock Option and Incentive Plan (the “1999 Plan”). As of March 31, 2012, there were options to purchase an aggregate of 3,853 shares of Common Stock outstanding under the 1999 Plan. The Company may not grant any additional shares under the 1999 Plan.

In March 2003, the Company’s shareholders approved its 2003 Stock Option and Incentive Plan (the “2003 Plan”). Pursuant to the 2003 Plan, the Company’s Board of Directors (or its committees and/or executive officers delegated by the Board of Directors) may grant incentive and nonqualified stock options, restricted stock, and other stock-based awards to the Company’s employees, officers, directors, consultants and advisors. As of March 31, 2012, the maximum aggregate number of shares that may be authorized for issuance under the 2003 Plan for all periods is 1,600,000 shares. As of March 31, 2012, there were 161,250 restricted shares of Common Stock issued and options to purchase an aggregate of 604,750 shares of Common Stock outstanding under the 2003 Plan and 560,000 shares available for future grants.

In May 2008, the Company’s shareholders approved the 2008 Equity Compensation Plan (the “2008 Plan”). The 2008 Plan provides for grants of incentive stock options to employees and nonqualified stock options and restricted stock to employees, consultants and non-employee directors of the Company. In July 2010, the Company’s shareholders approved an amendment to the 2008 Plan to increase the maximum number of shares of Common Stock available under the Plan by 2,000,000 shares to 4,700,000 shares. As of March 31, 2012, there were restricted shares of Common Stock issued and options to purchase an aggregate of 3,327,250 shares of Common Stock outstanding under the 2008 Plan and 1,242,750 shares available for future grants.

Share-Based Compensation – Options

For stock options issued and outstanding during the three months ended March 31, 2012 and 2011, the Company recorded additional paid-in capital and non-cash compensation expense of approximately $282,000 and $146,000, respectively, each net of estimated forfeitures.

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model with certain assumptions noted below. Expected volatilities are based on historical volatility of the Common Stock using historical periods consistent with the expected term of the options. The Company uses historical data, as well as subsequent events occurring prior to the issuance of the financial statements, to estimate option exercise and employee termination and forfeitures within the valuation model. The expected term of stock options granted under the Company’s stock plans is based on the average of the contractual term (generally 10 years) and the vesting period (generally 24 to 42 months). The risk-free rate is based on the yield of a U.S. Treasury security with a term consistent with the option.

The assumptions used principally for stock options granted to employees and members of the Company’s Board of Directors in the three months ended March 31, 2012 and 2011 were as follows:

A summary of stock option activity under the Company’s stock plans and stock options granted to officers of the Company outside any plan as of and for the three months ended March 31, 2012 is as follows:

The weighted-average grant-date fair value of stock options granted during the three months ended March 31, 2012 was $2.08 per share. Share-based compensation expense recognized in the three months ended March 31, 2012 and 2011 was approximately $282,000 and $146,000, respectively. As of March 31, 2012, there was approximately $2,305,000 of total unrecognized compensation expense related to non-vested share-based option compensation arrangements. With the exception of the unrecognized share-based compensation related to certain restricted stock grants to officers and employees that contain performance conditions related to United States Food and Drug Administration (“FDA”) approval for Symphony or the sale of substantially all of the stock or assets of the Company (see Restricted Stock section below), unrecognized compensation is expected to be recognized over the next four years.

Share-Based Compensation – Restricted Stock

During the three months ended March 31, 2012, the Company granted an aggregate of 237,500 restricted shares of Common Stock to certain employees, officers and directors of the Company. The grants were issued pursuant to the 2008 Plan. The grant date fair value of these restricted stock grants was approximately $484,125.

As of March 31, 2012, the Company had outstanding restricted stock grants amounting to 3,158,594 shares at a weighted-average grant-date fair value of $1.87 per share. Of the outstanding restricted stock grants, 2,177,094 shares have not vested. A summary of the Company’s nonvested restricted stock activity as of and for the three months ended March 31, 2012, is as follows:

Among the 2,177,094 shares of non-vested restricted stock, the various vesting criteria are as follows:

As of March 31, 2012, there was approximately $3,911,000 of total unrecognized compensation expense related to non-vested share-based restricted stock arrangements granted pursuant to the Company’s equity compensation plans. As of March 31, 2012, the Company cannot estimate the timing of completion of performance vesting requirements required by certain of these restricted stock grant arrangements. Compensation expense related to these restricted share grants will be recognized when the Company concludes that achievement of the performance vesting conditions is probable.