10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2006
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000 51481
ELECTRO-OPTICAL SCIENCES, INC.
(Exact name of Registrant as specified in its charter)
|
|
|
Delaware
|
|
13-3986004 |
(State or Other Jurisdiction of
|
|
(I.R.S. Employer |
Incorporation or Organization)
|
|
Identification No.) |
|
|
|
3 West Main Street, Suite 201
|
|
10533 |
Irvington, New York
|
|
(Zip Code) |
(Address of Principal Executive offices) |
|
|
Registrants Telephone Number, including area code:
(914) 591-3783
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of August 9, 2006 10,944,602 shares of the Registrants common stock were outstanding.
Electro-Optical Sciences, Inc.
Table of Contents
ELECTRO-OPTICAL SCIENCES, INC.
CONDENSED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(unaudited) |
|
|
* |
|
ASSETS |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
6,536,710 |
|
|
$ |
18,505,030 |
|
Marketable securities |
|
|
6,478,998 |
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
209,733 |
|
|
|
210,940 |
|
Assets held for sale |
|
|
156,677 |
|
|
|
156,677 |
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
13,382,118 |
|
|
|
18,872,647 |
|
Property and equipment, net |
|
|
451,464 |
|
|
|
175,369 |
|
Patents and trademarks, net |
|
|
85,391 |
|
|
|
84,052 |
|
Other assets |
|
|
39,758 |
|
|
|
33,612 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
13,958,731 |
|
|
$ |
19,165,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable (includes related parties of $23,500 as of June 30, 2006
and $11,263 as of December 31, 2005) |
|
$ |
256,431 |
|
|
$ |
329,462 |
|
Accrued expenses (includes related parties of $6,417 as of June 30, 2006
and $15,000 as of December 31, 2005) |
|
|
650,610 |
|
|
|
570,052 |
|
Other current liabilities |
|
|
11,746 |
|
|
|
16,828 |
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
918,787 |
|
|
|
916,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
|
|
|
|
|
|
Common stock $.001 par value; authorized 30,000,000 shares;
issued and outstanding 10,879,668 shares at June 30, 2006 and 10,837,833
shares at December 31, 2005 |
|
|
10,880 |
|
|
|
10,838 |
|
Additional paid-in capital |
|
|
39,731,273 |
|
|
|
38,934,420 |
|
Deferred compensation |
|
|
(247,944 |
) |
|
|
(62,610 |
) |
Other comprehensive loss |
|
|
(4,337 |
) |
|
|
|
|
Accumulated deficit |
|
|
(26,449,928 |
) |
|
|
(20,633,310 |
) |
|
|
|
|
|
|
|
Stockholders Equity |
|
|
13,039,944 |
|
|
|
18,249,338 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
13,958,731 |
|
|
$ |
19,165,680 |
|
|
|
|
|
|
|
|
* Derived from the audited balance sheet as of December 31, 2005
See accompanying notes to the financial statements
2
ELECTRO-OPTICAL SCIENCES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
$ |
2,020,643 |
|
|
$ |
909,557 |
|
|
$ |
4,005,876 |
|
|
$ |
1,545,824 |
|
General and administrative |
|
|
1,080,596 |
|
|
|
491,720 |
|
|
|
2,164,283 |
|
|
|
995,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss from continuing operations |
|
|
(3,101,239 |
) |
|
|
(1,401,277 |
) |
|
|
(6,170,159 |
) |
|
|
(2,541,755 |
) |
Interest income |
|
|
173,489 |
|
|
|
36,509 |
|
|
|
353,541 |
|
|
|
62,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(2,927,750 |
) |
|
|
(1,364,768 |
) |
|
|
(5,816,618 |
) |
|
|
(2,478,986 |
) |
Loss from discontinued operations |
|
|
|
|
|
|
(201,568 |
) |
|
|
|
|
|
|
(330,111 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(2,927,750 |
) |
|
|
(1,566,336 |
) |
|
|
(5,816,618 |
) |
|
|
(2,809,097 |
) |
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock deemed dividends |
|
|
|
|
|
|
357,025 |
|
|
|
|
|
|
|
719,064 |
|
Preferred stock accretion |
|
|
|
|
|
|
323,248 |
|
|
|
|
|
|
|
646,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss Attributable to Common Stockholders |
|
$ |
(2,927,750 |
) |
|
$ |
(2,246,609 |
) |
|
$ |
(5,816,618 |
) |
|
$ |
(4,174,657 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.27 |
) |
|
$ |
(1.13 |
) |
|
$ |
(0.54 |
) |
|
$ |
(2.13 |
) |
Discontinued operations |
|
|
|
|
|
|
(0.11 |
) |
|
|
|
|
|
|
(0.18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share |
|
$ |
(0.27 |
) |
|
$ |
(1.24 |
) |
|
$ |
(0.54 |
) |
|
$ |
(2.31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average number of
common shares outstanding |
|
|
10,869,393 |
|
|
|
1,809,758 |
|
|
|
10,860,682 |
|
|
|
1,809,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the financial statements
3
ELECTRO-OPTICAL SCIENCES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(unaudited) |
|
|
(unaudited) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(5,816,618 |
) |
|
$ |
(2,478,986 |
) |
Loss from discontinued operations |
|
|
|
|
|
|
(330,111 |
) |
|
|
|
|
|
|
|
Net loss |
|
|
(5,816,618 |
) |
|
|
(2,809,097 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
|
|
|
|
|
(1,000 |
) |
Depreciation and amortization |
|
|
48,872 |
|
|
|
25,098 |
|
Noncash compensation and amortization of deferred compensation |
|
|
573,911 |
|
|
|
121,230 |
|
Amortization of discount on marketable securities |
|
|
|
|
|
|
(30,072 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Decrease in receivables |
|
|
|
|
|
|
8,128 |
|
Increase in inventories |
|
|
|
|
|
|
(16,122 |
) |
Decrease in prepaid expenses and other current assets |
|
|
1,208 |
|
|
|
9,293 |
|
Deferred registration costs |
|
|
|
|
|
|
(79,169 |
) |
Increase in other assets |
|
|
(6,146 |
) |
|
|
|
|
Increase in accounts payable and accrued expenses |
|
|
7,527 |
|
|
|
5,382 |
|
Decrease in deferred revenues |
|
|
|
|
|
|
(106,335 |
) |
Decrease in other current liabilities |
|
|
(5,082 |
) |
|
|
(17,284 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(5,196,328 |
) |
|
|
(2,889,948 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Patent costs |
|
|
(10,377 |
) |
|
|
(2,822 |
) |
Purchases of property and equipment |
|
|
(315,930 |
) |
|
|
(81,337 |
) |
(Purchase) redemption of marketable securities |
|
|
(6,483,335 |
) |
|
|
3,007,110 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(6,809,642 |
) |
|
|
2,922,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Payment for stock subscription receivable |
|
|
|
|
|
|
34,500 |
|
Proceeds from exercise of stock options |
|
|
37,650 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
37,650 |
|
|
|
34,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(11,968,320 |
) |
|
|
67,503 |
|
Cash and cash equivalents at beginning of period |
|
|
18,505,030 |
|
|
|
108,705 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
6,536,710 |
|
|
$ |
176,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Schedule of Noncash Financing Activities: |
|
|
|
|
|
|
|
|
Preferred stock accretion |
|
|
|
|
|
$ |
646,496 |
|
Reclassification of inventories and patents to assets held for sale |
|
|
|
|
|
$ |
156,677 |
|
See accompanying notes to financial statements
4
ELECTRO-OPTICAL SCIENCES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(In thousands, except for share and per share data)
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Electro-Optical Sciences, Inc., a Delaware corporation (the Company), is focused on the
design and development of MelaFind ® , a non-invasive, point-of-care instrument
for assisting in the early diagnosis of melanoma. The Company has entered into a protocol agreement
with the Food and Drug Administration (FDA) which is an agreement for the conduct of the pivotal
trial and to establish the safety and effectiveness of the MelaFind ® device.
Upon obtaining premarket approval, or PMA, from the FDA, the Company plans to launch
MelaFind ® in the United States.
To date the Company has not generated any revenues from MelaFind ® . All of
the Companys historical revenues have come from activities and products that have since been
discontinued, including our DIFOTI ® product, a non-invasive imaging device for
the detection of dental cavities. The Company discontinued all operations associated with its
DIFOTI ® product effective as of April 5, 2005, in order to focus its
resources on the development and commercialization of MelaFind ® . The Company
is currently seeking a buyer for the DIFOTI ® assets, and does not expect to
have any significant continuing responsibility for the DIFOTI ® business after
the sale of the DIFOTI ® assets.
The unaudited financial statements included herein have been prepared from the books and
records of the Company pursuant to the rules and regulations of the Securities and Exchange
Commission for reporting on Form 10-Q. The information and note disclosures normally included in
complete financial statements prepared in accordance with accounting principles generally accepted
in the United States (GAAP) have been condensed or omitted pursuant to such rules and regulations.
The interim financial statements should be read in conjunction with the audited financial
statements and notes thereto included in the Companys Annual Report on Form 10-K for the year
ended December 31, 2005.
The Company is responsible for the financial statements included in this document. The
Companys interim financial statements are unaudited. Interim results may not be indicative of the
results that may be expected for the year. However, the Company believes all adjustments considered
necessary for a fair presentation of these interim statements have been included and are of a
normal and recurring nature.
2. MARKETABLE SECURITIES
The Companys marketable securities are debt securities primarily consisting of government
obligations and corporate debt securities with a weighted average maturity not in excess of six
months. We classify all of the Companys marketable securities as available-for-sale, as defined by
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in
Debt and Equity Securities. Available-for-sale securities are carried at fair value, with
unrealized gains and losses reported as a component of stockholders equity in accumulated other
comprehensive income (loss). Interest income, realized gains and losses, and declines in value of
securities judged to be other-than-temporary are included in the Companys statement of operations.
As of June 30, 2006, marketable securities consisted of:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
|
|
|
|
|
Unrealized |
|
|
|
Fair Value |
|
|
Gain (Loss) |
|
Corporate debt securities |
|
$ |
1,993 |
|
|
$ |
(3 |
) |
Obligations of US government agencies |
|
|
4,486 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
6,479 |
|
|
$ |
(4 |
) |
|
|
|
|
|
|
|
5
The Company evaluates declines in fair value of our investments in available-for-sale
marketable securities to determine if these declines are other-than-temporary. When a decline in
value is determined to be other-than-temporary, an impairment charge would be recorded and a new
cost basis in the investment would be established.
3. COMPREHENSIVE LOSS
Comprehensive loss includes net loss and unrealized gains and losses on available-for-sale
marketable securities. Cumulative unrealized gains and losses on available-for-sale marketable
securities are reflected as accumulated other comprehensive loss in stockholders equity on the
Companys balance sheet. For the six months ended June 30, 2006, comprehensive loss was $5,821,
which includes a net loss of $5,817, and an unrealized loss on available-for-sale marketable
securities of $4.
4. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires the use of estimates and assumptions by
management that affect reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from these estimates.
5. RECENT ACCOUNTING DEVELOPMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
(FIN 48), which prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. FIN 48 also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. We do not expect the adoption of FIN 48 to have a material
impact on our financial reporting, and we are currently evaluating the impact, if any, the adoption
of FIN 48 will have on our disclosure requirements.
Effective January 1, 2006, the Company began recording compensation expense associated with stock
options and other forms of equity compensation in accordance with Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R), as interpreted by SEC Staff
Accounting Bulletin No. 107. Prior to January 1, 2006, the Company accounted for stock options
according to the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25), and related interpretations, and therefore no related compensation
expense was recorded for awards granted with no intrinsic value. The Company adopted the modified
prospective transition method provided for under SFAS 123R, and consequently, has not retroactively
adjusted results from prior periods. Under this transition method, compensation cost associated
with stock options recognized in the three month and six month periods ended June 30, 2006
includes: 1) amortization related to the remaining unvested portion of all stock option awards
granted prior to January 1, 2006 over the requisite service period based on the grant-date fair
value estimated in accordance with the original provisions of SFAS 123, Accounting for Stock-Based
Compensation ; and 2) amortization related to all stock option awards granted on or subsequent to
January 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123R. A compensation charge is recorded when
it is probable that performance or service conditions will be satisfied. The probability of
vesting is updated at each reporting period and compensation is adjusted via a cumulative catch-up
adjustment or prospectively depending upon the nature of the change.
As a result of the adoption of SFAS 123R, incremental compensation expense for the three and
six month periods ended June 30, 2006 amounted to $263 and $358, respectively. At June 30, 2006
total unrecognized compensation cost amounted to approximately $2,006, representing 921,592
unvested options.
6
For stock options granted prior to the adoption of SFAS 123R, if compensation expense for the
Companys various stock option plans had been determined based upon estimated fair values at the
grant dates in accordance with SFAS No. 123, the Companys pro forma net loss attributable to
common stockholders and pro forma basic and diluted net loss per common share would have been as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, 2005 |
|
|
June 30, 2005 |
|
|
|
(In thousands except per share amounts) |
|
Net loss attributable to common stockholders, as reported |
|
$ |
(2,247 |
) |
|
$ |
(4,175 |
) |
Add: Stock-based employee compensation expense included
in reported net loss, net of related tax effect |
|
|
8 |
|
|
|
87 |
|
Deduct: Stock-based employee compensation expense determined
|
|
|
(9 |
) |
|
|
(91 |
) |
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(2,248 |
) |
|
$ |
(4,179 |
) |
|
|
|
|
|
|
|
Basic and diluted earnings per share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
(1.24 |
) |
|
$ |
(2.31 |
) |
|
|
|
|
|
|
|
Pro forma |
|
$ |
(1.24 |
) |
|
$ |
(2.31 |
) |
|
|
|
|
|
|
|
6. NET LOSS PER COMMON SHARE
Net loss per share is presented in accordance with the provisions of SFAS No. 128, Earnings Per
Share (EPS). Basic EPS excludes dilution for potentially dilutive securities and is computed by
dividing loss attributable to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted EPS gives effect to dilutive options, warrants and other
potential common shares outstanding during the period. Diluted net loss per common share is equal
to the basic net loss per common share since all potentially dilutive securities are anti-dilutive
for each of the periods presented. Potential common stock equivalents excluded consist of stock
options, warrants and redeemable convertible preferred stock which are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
Common stock options |
|
|
1,651,705 |
|
|
|
899,875 |
|
Warrants |
|
|
298,280 |
|
|
|
2,758,923 |
|
Redeemable convertible preferred stock |
|
|
|
|
|
|
3,398,105 |
|
|
|
|
|
|
|
|
Total |
|
|
1,949,985 |
|
|
|
7,056,903 |
|
|
|
|
|
|
|
|
7. STOCK-BASED COMPENSATION AND DEFERRED COMPENSATION
The Company has three stock-based compensation plans, (the Plans) which allow the Board of
Directors to grant incentives to employees, directors and collaborating scientists in the form of
incentive stock options, nonqualified stock options and restricted stock awards.
The compensation expense recognized in the Statement of Operations in the second quarter of
2006 for stock options and restricted stock awards amounted to $290, and for the six months ended
June 30, 2006 compensation expense amounted to $574. Cash received from options exercised under all
share-based payment arrangements for the three and six months ended June 30, 2006 was $10 and $38,
respectively.
7
Details regarding the valuation and accounting for stock options are as follows:
The fair value of each option award granted after the adoption of SFAS 123R is estimated on
the date of grant using the Black-Scholes option valuation model and assumptions as noted in the
following table:
|
|
|
|
|
For the Six Months |
|
|
Ended June 30, 2006 |
Expected life |
|
5 years |
Expected volatility |
|
60% |
Risk-free interest rate |
|
5.15% |
The expected life of the options is based on the observed and expected time to post-vesting,
forfeiture and exercise. Groups of employees that have similar historical exercise behavior are
considered separately for valuation purposes. The expected volatility is based on implied
volatility from other publicly-traded options and other factors. The risk-free interest rate is
based on the continuous rates provided by the U.S. Treasury with a term equal to the expected life
of the option.
The status of the Companys stock option plans at June 30, 2006 is summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Aggregate |
|
|
|
Number of |
|
|
Price per |
|
|
Term in |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Share |
|
|
Years |
|
|
Value |
|
Outstanding at December 31, 2005 |
|
|
1,115,415 |
|
|
$ |
0.95 |
|
|
|
4.4 |
|
|
$ |
4,935 |
|
Granted |
|
|
578,125 |
|
|
|
6.42 |
|
|
|
4.8 |
|
|
$ |
731 |
|
Exercised |
|
|
(41,835 |
) |
|
|
.90 |
|
|
|
N/A |
|
|
$ |
228 |
|
Forfeited or expired |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006 |
|
|
1,651,705 |
|
|
|
2.87 |
|
|
|
4.6 |
|
|
$ |
7,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at June 30, 2006 |
|
|
600,524 |
|
|
|
1.64 |
|
|
|
4.8 |
|
|
$ |
3,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the second quarter of 2006 the weighted average fair value of each option granted,
estimated as of the grant date using the Black-Scholes option valuation model, was $3.95 per share,
and for the six months ended June 30, 2006 the weighted average was $3.81 per share. The total
intrinsic value of options exercised during the three and six months ended June 30, 2006 was $100
and $228, respectively. The requisite service periods for options granted in the first three and
six months of 2006 for employees and consultants were five years.
Stock awards under the Companys current plan are granted at prices which are equal to the
market value of the stock on the date of grant. Options granted under the 2005 Stock Incentive Plan
(2005 Plan) are generally time-based or performance-based options, and vesting varies
accordingly. Options under this plan expire five years from the date of grant. Since the Company
has adopted the 2005 Plan, awards are not issued under the Companys previous stock option plans.
As of June 30, 2006, of the total 1,651,705 options outstanding (including 50,000 options awarded
to a consultant) 1,051,181 have not vested. Of this
total nonvested amount, 946,933 will vest upon the attainment of certain milestones and the balance
will vest over the requisite service period. As of June 30, 2006, there was $2,254 of total
unrecognized compensation cost related to nonvested options (including $248 of deferred
compensation). As of June 30, 2006 there were 690,135 shares available for future grant under the
Companys 2005 plan.
The employment agreement with the President and Chief Executive Officer (Dr. Gulfo) includes three
separate grants of common stock options. The first two stock option grants for a total of 81,753
shares of the Companys common stock have fully vested. The number of shares of the Companys
common stock subject to the third stock option can only be calculated at the time of PMA approval
of MelaFind ® .
8
The number of shares under this option is equal to that number
of shares of our common stock equal to four percent of the Companys fully diluted capital stock at
the time of PMA approval of MelaFind ® minus the 81,753 options granted to Dr.
Gulfo under the employment agreement. At June 30, 2006, total unvested options outstanding for Dr.
Gulfo amounted to 431,433.
On March 24, 2006, the Company issued to its Acting Chief Operating Officer and a member of the
Board, Dr. Gerald Wagner, a stock option grant of 49,500 shares of the Companys common stock which
vested immediately. The exercise price for this stock option grant was the closing price per share
of the Companys common stock on the option grant date which was $5.87 per share. The fair value of
this option grant was determined using the Black-Scholes option valuation model on the date of the
grant. Compensation expense of $162 was charged to operations during the first quarter 2006.
On April 24, 2006 the Company entered into an agreement with Richard I. Steinhart to serve as the
Companys Vice-President of Finance and Chief Financial Officer. In accordance with that agreement
Mr. Steinhart received a five year option under the Companys 2005 Plan to purchase up to 100,000
shares of common stock at $5.82 per share.
On May 29, 2006 the Company entered into an agreement with Christiano S. Butler to serve as the
Companys Vice-President of Technical Support. In accordance with that agreement, Mr. Butler
received a five year option under the Companys 2005 Plan to purchase up to 40,000 shares of common
stock at $7.60.
At the Companys May 22, 2006 Board of Directors meeting, the Board approved managements
recommendation to award incentive stock options to a group of 27 employees. A total of 315,500
shares (excluding Mr. Steinharts and Mr. Butlers options) were awarded to Company employees under
the Companys 2005 Plan.
Deferred Compensation
Options or warrants issued to non-employees for services are recorded at fair value and accounted
for in accordance with Emerging Issues Task Force (EITF) Issue No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services. For equity instruments that are not immediately vested, compensation cost is
measured on the date such instruments vest or a performance commitment is reached, as defined in
EITF 96-18. Under this method of accounting, we record deferred compensation during the quarter
the grant is issued for the entire option value based on the Black Scholes valuation model.
Subsequently the deferred compensation is adjusted each quarter until vesting occurs and the charge
is taken. Deferred compensation attributable to non-vested options or restricted stock is
reflected as a reduction of stockholders equity. The costs are classified in the accompanying
Statement of Operations based on the nature of the service performed.
On March 24, 2006, the Company issued to Dr. Wagner, in connection with his on-going engagement as
a consultant, a stock option grant of 50,000 shares of the Companys common stock which fully vests
immediately upon commencement of the pivotal trial for MelaFind ® . The
exercise price for this stock option grant is the closing price per share of the Companys common
stock on the option grant date which was $5.87 per share. The fair value of this option grant is
determined using the Black-Scholes options valuation model at each reporting date until vesting has
occurred. As of June 30, 2006, total deferred compensation for this grant amounted to $239.
In December 2005, the Company issued a restricted common stock award of 11,488 shares to an
employee at the closing market price of the Companys stock on the date of grant, and compensation
expense in the amount of $63 for this award will be recognized on a straight line basis over the
nontransferable period. For the three and six month periods ended June 30, 2006, $27 and $54
respectively was charged to compensation expense.
9
8. COMMITMENTS AND CONTINGENCIES
In connection with the planned start of our clinical trials, we have committed to several
clinical sites a total amount of approximately $63 in contracts that do not exceed one year. These
contracts are cancelable by us with up to 90 days prior notice.
On March 24, 2006, the Company entered into an amended and restated consulting agreement with
Gerald Wagner, Ph.D., Acting Chief Operating Officer and a member of the Companys Board of
Directors. The effective date of this amended and restated agreement is April 1, 2006. Under this
amended consulting agreement, the Company agrees to pay Dr. Wagner an annual amount of $180 payable
monthly over the term of the agreement. The agreement will end at the option of Dr. Wagner or the
Company, at any time by providing thirty days prior written notice or immediately upon the mutual
agreement of the Company and Dr. Wagner. (See Note 7)
In January 2006, the Company entered into an agreement with ASKION GmbH to produce and test
commercial grade MelaFind® hand-held imaging device systems. Under the agreement,
ASKION is to produce up to forty MelaFind® imaging devices for the Company to be
utilized in the Companys pivotal trial which will be conducted at up to twenty clinical study
sites in the United States. The Company is required to make payments to ASKION upon delivery of
the MelaFind® systems. This contract commenced in February 2006 and is expected to be
completed later this year. Total payments to ASKION during 2006 have totaled approximately $1,300
of which approximately $900 was paid in accordance with this agreement. In addition, pursuant to
the agreement, the Company has instituted additional test procedures at ASKION to ensure proper
operation of the MelaFind® systems. These test procedures will require additional
funding and the payments for this testing will take place over the next several months.
During January 2004, the Company entered into an employment agreement with its President and
Chief Executive Officer through December 31, 2005, which provided for a base salary of $175, stock
options and performance bonuses. The agreement provided for automatic one year renewal terms and
renewed automatically for 2006. Effective May 31, 2006 the base salary was increased to $235, and
he received a bonus in the amount of $50.
During January 2004, the Company amended its employment agreement with its former President
and Chief Science and Technology Officer. The agreement was originally entered into in May 2003
with a three-year term. The amended agreement included a salary of $175 and provided for stock
options and performance bonuses. As of May 31, 2005, a new consulting agreement was entered into
with this former employee, which superceded the amended employment
agreement. (See Note 11)
The Company is not currently subject to any material legal proceedings, nor to managements
knowledge is any material legal proceeding threatened against the Company.
9. INITIAL PUBLIC OFFERING
On October 28, 2005, the Company completed an initial public offering. The company
issued 4,000,000 shares of common stock on October 28, 2005 and 262,300 shares of common stock on
November 15, 2005, both issuances at $5.00 per share. After deducting underwriting discounts and
expenses and offering-related expenses, the initial public offering resulted in net proceeds to the
Company of approximately $17,687. In connection with the initial public offering, all of the
outstanding shares of the
Companys redeemable convertible preferred stock were automatically converted into 3,398,105 shares
of the Companys common stock, and all related deemed but unpaid dividends on the redeemable
convertible preferred stock were forfeited.
10. WARRANTS
During 2005, the Company issued 1,305,321 shares of common stock in exchange for 2,610,643
outstanding warrants (a conversion ratio of one share of common stock for two warrants).
10
The
Company recorded this transaction as an exchange of equity instruments at fair value which had no
net effect on stockholders equity. The fair value of the warrants was determined using the
Black-Scholes method and assumed the following: common stock value of $10.00 per share, remaining
warrant life of 6.25 years, risk-free interest rate of 3.2%, and an expected volatility of 60%.
The warrants outstanding at June 30, 2006 consist of a 5 year warrant to purchase 75,000
shares of common stock at an exercise price of $7.00 per share issued to one of the Companys
consultants in 2004, and a 7 year warrant to purchase 73,280 shares the Companys common stock at
an exercise price of $4.52 per share issued in connection with the sale of Series C redeemable
convertible preferred stock. Additionally, in connection with the Companys initial public offering
which closed on November 2, 2005, the Company issued 150,000 warrants to the underwriters to
purchase common stock at $6.25 per share. The warrants are exercisable commencing October 28, 2006
and have a five year term.
11. RELATED PARTY CONSULTING AGREEMENTS (see Note 7)
The Company has in place the following consulting agreements with related parties:
Consulting Agreement with Breaux Castleman
In June 2003, the Company entered into a consulting agreement with Breaux Castleman, the
Chairman of the Companys Board of Directors, for consulting services related to the FDA approval
of MelaFind ® , and the Companys business and financial strategy. Under this
agreement, Mr. Castleman receives compensation for each month of services rendered. The Company
made payments, pursuant to this consulting agreement, of $8 and $25, respectively, for the three
and six month period ending June 30, 2006. This consulting agreement is terminable by either party
by providing thirty days prior written notice.
Consulting Agreement with Marek Elbaum, Ph.D.
Pursuant to a consulting agreement effective as of May 31, 2005, the Company retained Marek
Elbaum, Ph.D., the Companys founder and former Chief Science and Technology Officer, as the
Companys Chief Scientist. In consideration of the services to be provided, the Company has agreed
to pay Dr. Elbaum a monthly fee of $15. The term of this agreement extends for a period of two
years and is automatically renewable for an additional one year period. In the event of a
non-renewal, or in the event that Dr. Elbaums services terminate as a result of his death or
disability, we will pay Dr. Elbaum a termination fee of $100.
Consulting Agreement with Robert Friedman, M.D.
Effective as of June 1, 2005, the Company retained the services of Robert Friedman, M.D., for
an initial term of one year as a consultant, medical advisor to our Board of Directors, and in
connection with the clinical testing of MelaFind ® . In consideration for these
services, Dr. Friedman will be paid at a rate of $5 per day. This consulting agreement
automatically renewed effective June 1, 2006 for an additional one-year term and is automatically
renewable for successive one-year terms unless either party terminates the agreement at least 30
days prior to the expiration of the agreement. The Company made payments to Dr. Friedman totaling
$10 and $22, respectively, for the three and six month period ending June 30, 2006.
Consulting Agreement with Gerald Wagner, Ph.D.
On March 24, 2006, the Company entered into an amended and restated consulting agreement with
Gerald Wagner, Ph.D., Acting Chief Operating Officer and a member of the Companys Board of
Directors. The
effective date of this amended and restated agreement is April 1, 2006. Under this amended
consulting agreement, the Company agreed to pay Dr. Wagner the annual amount of $180 payable
monthly over the term of the agreement. The agreement will end at the option of Dr. Wagner or the
Company, at any time by providing thirty days prior written notice or immediately upon the mutual
agreement of the Company and Dr. Wagner. In addition, in connection with his ongoing engagement as
a consultant, Dr. Wagner received a stock option grant of 50,000 shares of the Companys common
stock which vests in full immediately upon commencement of the pivotal trial for MelaFind
® . Also, on March 24, 2006, Dr. Wagner received another stock option grant of 49,500
shares of the Companys common stock which vested immediately. (See Note 7.)
11
12. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
On March 9 through March 21, 2005, the Company was inspected by the FDA in connection with its
DIFOTI® product, a non-invasive imaging device for the detection of dental cavities. On
March 21, 2005, the Company was cited for failure to comply fully with FDA Quality System
Regulation, or QSR, mandated procedures. These inspectional findings were discussed in a
subsequent meeting with the FDA on April 28, 2005. The Company is in the process of addressing the
deficiencies noted in accordance with the agreement reached with the FDA. On May 18, 2006, the FDA
visited the Companys facility for a follow-up inspection. No non-conformities or negative
observations were reported to the Company.
The Company decided to discontinue all operations associated with its
DIFOTI ® product effective as of April 5, 2005, in order to focus its resources
and attention on the development and commercialization of MelaFind ® . The
Company is currently seeking an acquirer for the DIFOTI ® assets and does not
expect to have any significant continuing responsibility for the DIFOTI ®
business after its disposition. Losses attributable to DIFOTI ® operations discontinued in April 2005
amounted to $202 for the quarter ended June 30, 2005 and $330 for the six months then ended.
SFAS No. 144 requires that long-lived assets to be disposed by sale be measured at the
lower of carrying amount or fair value less cost to sell. SFAS No. 144 also broadened the reporting
of discontinued operations to include all components of an entity with operations that will be
eliminated from ongoing operations of the entity in a disposal transaction. At June 30, 2006,
assets held for sale consisted of DIFOTI ® related inventories and patents.
12
ITEM 2
ELECTRO-OPTICAL SCIENCES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This managements discussion and analysis of financial condition and results of operations is
intended to provide information to help you better understand and evaluate our financial condition
and results of operations. We recommend that you read this section in conjunction with our
Financial Statements and Notes to Financial Statements and with our Annual Report on Form 10K for
the year ended December 31, 2005.
This quarterly report on Form 10-Q, including the following managements discussion and analysis of
financial condition and results of operations, contains forward-looking statements that you should
read in conjunction with the financial statements and notes to financial statements that we have
included elsewhere in this report. These statements are based on our current expectations,
assumptions, estimates and projections about our business and our industry, and involve known and
unknown risks, uncertainties, and other factors that may cause our or our industrys results,
levels of activity, performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied in, or contemplated by, the
forward-looking statements. Words such as believe, anticipate, expect, intend, plan,
will, may, should, estimate, predict, potential, continue, or the negative of such
terms or other similar expressions, identify forward-looking statements. Our actual results and the
timing of events may differ significantly from the results discussed in the forward-looking
statements, and you should not place undue reliance on these statements. Factors that might cause
such a difference include those discussed below under the heading Risk Factors, as well as those
discussed elsewhere in this quarterly report on Form 10-Q. We disclaim any intent or obligation to
update any forward-looking statements as a result of developments occurring after the period
covered by this report or otherwise.
Overview
We are a medical device company focused on the design and development of a non-invasive,
point-of-care instrument to assist in the early diagnosis of melanoma. Our flagship product,
MelaFind®, features a hand-held imaging device that emits multiple wavelengths of light
to capture images of suspicious pigmented skin lesions and extract data. We currently do not have
any commercialized products or any significant source of revenue; however, the financial results
for all periods discussed below account for the revenues and the related expenses associated with
our DIFOTI® product, a non-invasive imaging device for the detection of dental cavities,
as a discontinued operation. We decided to discontinue all operations associated with our
DIFOTI® product effective as of April 5, 2005, in order to focus our resources and
attention on the development and commercialization of MelaFind®. We are currently
seeking an acquirer for the DIFOTI® assets, and we do not expect to have any significant
continuing responsibility for the DIFOTI® business after its disposition. Unless
otherwise indicated, the following discussion relates to our continuing operations.
Our revenue for the foreseeable future will depend on the commercialization of MelaFind®
and may vary substantially from year to year and quarter to quarter. Our operating expenses may
also vary substantially from year to year and quarter to quarter based on the timing of the
clinical trial and patient enrollment. We believe that period-to-period comparisons of our results
of operations are not meaningful and should not be relied on as indicative of our future
performance.
We commenced operations in December 1989 as a New York corporation and re-incorporated as a
Delaware corporation in September 1997. Since our inception, we have generated significant losses.
As of June 30, 2006, we had an accumulated deficit of $26.4 million. We expect to continue to spend
significant amounts on the development of MelaFind®. We expect to incur significant
commercialization costs when we begin to introduce MelaFind® into the US market. On
October 28, 2005, the Company completed an initial public offering. The Company issued 4,000,000
shares of common stock on October 28, 2005 and 262,300 shares of common stock on November 15, 2005, both issuances at $5.00 per share.
13
After
deducting underwriting discounts and expenses and estimated offering related expenses, the initial
public offering resulted in net proceeds to the Company of approximately $17.7 million. We will
need to raise additional funds in order to achieve significant commercialization of
MelaFind® and generate revenues.
Most of our expenditures to date have been for research and development activities and general and
administrative expenses. Research and development expenses represent costs incurred for product
development, clinical trials and activities relating to regulatory filings and manufacturing
development efforts. We expense all of our research and development costs as they are incurred.
Our research and development expenses incurred for the three and six months ended June 30, 2006
were expenses related primarily to the development of MelaFind®. We expect to incur
additional research and development expenses relating to MelaFind® prior to its
commercial launch in the US and selected markets outside the US. Over the last six months we have
developed a relationship with a company named ASKION GmbH of Gera, Germany. ASKION has become an
integral member of our MelaFind® development team and we expect to continue to work
with ASKION for the foreseeable future. ASKION is currently preparing MelaFind® systems
for our pivotal clinical trials that we expect to begin later this year. These additional research
and development expenses are subject to the risks and uncertainties associated with clinical trials
and the FDA regulatory review and approval process. As a result, these additional expenses could
exceed our estimated amounts, possibly materially.
General and administrative expenses consist primarily of salaries and related expenses, general
corporate activities and costs associated with our efforts to obtain PMA approval for
MelaFind® and toward development of a commercial infrastructure to market and sell
MelaFind®. We anticipate that general and administrative expenses will increase as a
result of the expected expansion of our operations, facilities and other activities associated with
the planned expansion of our business, together with the additional costs associated with operating
as a public company. We expect selling, general and administrative expenses to increase as we
develop our sales and marketing capabilities to support placing MelaFind® in selected
markets.
Critical Accounting Policies and Significant Judgments and Estimates
Our managements discussion and analysis of our financial condition and results of operations are
based on our financial statements, which have been prepared in accordance with accounting
principles generally accepted in the US. The preparation of these financial statements requires us
to make estimates and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial statements as well
as the reported revenues and expenses during the reporting periods. On an ongoing basis, we
evaluate our judgments related to accounting estimates. We base our estimates on historical
experience and on various other factors that we believe are reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe that the following accounting policies and significant judgments and estimates relating
to revenue recognition, stock-based compensation charges, and accrued expenses are most critical to
aid you in fully understanding and evaluating our reported financial results.
Revenue Recognition
We decided to discontinue all operations associated with our DIFOTI® product effective
as of April 5, 2005 and account for the DIFOTI® revenue and expenses as a discontinued
operation. Revenue from the DIFOTI® product sales had been recognized at the time of
delivery and acceptance, after consideration of all the terms and conditions of the customer
contract.
We currently do not have any commercialized products or any significant source of revenue.
14
Stock-Based Compensation and Deferred Compensation
Effective January 1, 2006, the Company began recording compensation expense associated with stock
options and other forms of equity compensation in accordance with Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R), as interpreted by SEC Staff
Accounting Bulletin No. 107. Prior to January 1, 2006, the Company accounted for stock options
according to the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25), and related interpretations, and therefore no related compensation
expense was recorded for awards granted with no intrinsic value. The Company adopted the modified
prospective transition method provided for under SFAS 123R and, consequently, has not retroactively
adjusted results from prior periods. Under this transition method, compensation cost associated
with stock options in 2006 includes: 1) quarterly amortization related to the remaining unvested
portion of all stock option awards granted prior to January 1, 2006, over the requisite service
period based on the grant-date fair value estimated in accordance with the original provisions of
SFAS 123, Accounting for Stock-Based Compensation; and 2) quarterly amortization related to all
stock option awards granted on or subsequent to January 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123R.
We have also granted to certain employees stock options that vest with the attainment of
development milestones not under the Companys control. Upon the attainment of the relevant
development milestones, there could be a significant compensation charge based on the fair value of
such options.
Options or warrants issued to non-employees for services are recorded at fair value and accounted
for in accordance with Emerging Issues Task Force (EITF) Issue No.96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services. For equity instruments that are not immediately vested, compensation cost is
measured on the date such instruments vest or a performance commitment, as defined in EITF 96-18,
is reached. Under this method of accounting, we record a deferred charge during the quarter the
grant is issued for the entire option value based on the Black Scholes valuation model. We then
adjust the deferred charge each subsequent quarter until vesting occurs.
Accrued Expenses
As part of the process of preparing financial statements, we are required to estimate accrued
expenses. This process involves identifying services that have been performed on our behalf and
estimating the level of service performed and the associated cost incurred for such service where
we have not been invoiced or otherwise notified of the actual cost. Examples of estimated accrued
expenses include:
|
|
|
professional service fees; |
|
|
|
|
contract clinical service fees; |
|
|
|
|
fees paid to contract manufacturers in conjunction with the
production of clinical components or materials; and |
|
|
|
|
fees paid to third party data collection organizations and
investigators in conjunction with the clinical trials. |
In connection with such service fees, our estimates are most affected by our projections of the
timing of services provided relative to the actual level of services incurred by such service
providers. The majority of our service providers invoice us monthly in arrears for services
performed. In the event that we do not identify certain costs that have begun to be incurred or we
are under or over our estimate of the level of services performed or the costs of such services,
our actual expenses could differ from such estimates. The date on which certain services commence,
the level of services performed on or before a given date, and the cost of such services are often
subjective determinations. We make these judgments based upon the facts
and circumstances known to us in accordance with accounting principles generally accepted in the
US.
15
This is done as of each balance sheet date in our financial statements.
Results of Operations (in thousands)
As we work
on developing our non-invasive melanoma detection system,
MelaFind®,
we continue to spend a majority of our time and money in
research and development related activities.
Overall spending has remained relatively consistent throughout the first half of 2006. We expect
these trends to continue throughout the year. As we move to the
start, and during the pivotal clinical trials for
MelaFind®
we would expect an increase in costs associated with this work.
Our overall general and administrative costs have grown over the prior year but have also remained
relatively consistent during the first half of 2006.
Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005
Research and Development Expense.
Research and development expense for the three months ended June 30, 2006 was $2,021 as compared
with $910 for the three months ended June 30, 2005. This increase was primarily attributable to an
increase in product development activities including manufacturing, preparation for clinical
trials, regulatory filings and compliance totaling $804. We also had an increase in consulting
fees of $141 associated with our product development activities.
In addition, we recorded a share-based compensation charge of $129 for research and development
personnel for the three months ended June 30, 2006. This expense includes charges in accordance
with SFAS 123R, which we implemented beginning January 1, 2006.
General and Administrative Expense.
General and administrative expense for the three months ended June 30, 2006 was $1,081 as compared
with $492 for the three months ended June 30, 2005. The increase was due to a rise in personnel
and related costs totaling $161, an increase in professional and consulting fess in the amount of
$120, and an increase in rent, insurance and overhead totaling $157, of which $58 was attributable
to higher insurance premiums for Director and Officer insurance coverage.
In addition, our share based compensation expense increased by $153 during the three months ended
June 30, 2006 as a result of the implementation of SFAS 123R.
At the start of 2006 certain salaries, benefits and share based compensation costs were classified
into research and development expenses to reflect the nature of the services provided by selected
personnel. For the three months ended June 30, 2006 this charge was approximately $45. Based on
this allocation general and administrative costs were reduced by approximately $45 and research and
development costs were increased by a like amount.
Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005
Our six month 2006 trend is consistent with the three month spending noted above.
Research and Development Expense.
Research and development expense for the six months ended June 30, 2006 was $4,006 as compared with
$1,546 for the six months ended June 30, 2005. This increase was attributable to higher personnel
and
personnel related costs of $146 as we increased our research and development programs, and
increased product development activities of our MelaFind® product in the amount of
$1,941. Of this total we expended approximately $1,300 with our development partner, ASKION, GmbH
of Gera Germany.
16
In addition, we recorded a $385 share-based compensation charge for certain research and
development personnel for the six months ended June 30, 2006. This expense includes charges in
accordance with SFAS 123R, and the issuance of stock options.
General and Administrative Expense.
General and administrative expense for the six months ended June 30, 2006 was $2,164 as compared
with $996 for the six months ended June 30, 2005. Higher costs associated with our status as a
public company included increased legal and consulting fees of $537, and an increase of $116 in our
insurance costs primarily relating to increases in Director and Officer insurance coverage. As
noted above, beginning January 1, 2006 certain salaries, benefits and share based compensation
costs were classified into research and development expenses to reflect the services provided by
selected personnel. As a result approximately $90 in salaries and related expenses were and will
continue to be charged to research and development, thus reducing general and administrative costs
by a like amount.
In addition we had increased costs in our reimbursement and pre-marketing efforts of $198 and staff
expansion totaling $70. We also had an increase of $102 for recording a share-based compensation
charge in accordance with SFAS 123R.
Interest Income.
Interest income for three and the six months ended June 30, 2006 was $173 and $354 respectively, as
compared to $37 and $63 respectively, for the comparative periods in the previous year. This
increase was directly attributable to an increase in cash and marketable securities generated as a
result of our initial public offering on October 28, 2005.
Liquidity and Capital Resources (in thousands)
From inception, we have financed our operations primarily through the use of working capital from
private placements of equity securities and by applying for and obtaining a series of National
Institute of Health Small Business Innovative Research grants and similar grants. In October and
November of 2005 we sold a total of 4,262,300 shares of common stock in an initial public offering
that resulted in approximately $17.7 in net proceeds. To date, we have not borrowed (other than by
issuing convertible notes, all of which have been converted into equity) or financed our operations
through equipment leases, financing loans or other debt instruments. As of June 30, 2006, we had
$13,016 in cash, cash equivalents and marketable securities as compared to $18,505 at December 31,
2005. The decrease was a result of cash used in operating activities partially offset by interest
income produced by our cash and marketable securities.
Our cash and cash equivalents at June 30, 2006 are liquid investments in money market funds with a
commercial bank. Our marketable securities are debt securities with a maturity within six months
and consist of investments in corporate bonds, short-term US Treasury obligations and federal
agency notes.
Cash Flows from Operating Activities.
Net cash used in operations was $5,196 for the six months ended June 30, 2006. For the
corresponding periods in 2005 net cash used in operations was $2,890. Cash used in operations was
attributable to net losses after an adjustment for non-cash charges related to depreciation and
share-based compensation, and other changes in operating assets and liabilities.
Cash Flows from Investing Activities.
Net cash used in our investing activities was $6,810 for the six months ended June 30, 2006 and was
principally related to the purchase of investments of approximately of $6,483 and $316 for the
purchase of scientific equipment and leasehold improvements in support of our MelaFind®
development. For the corresponding period in 2005, net cash provided by our investing activities
was $2,923 and was principally related to the redemption of investments.
17
Cash Flows from Financing Activities.
Net cash provided by financing activities was $38 for the six months ended June 30, 2006 and
reflects proceeds from to the sale of common stock upon exercise of options. For the corresponding
period in 2005 net cash provided from financing activities was $35 which reflected proceeds from a
stock subscription receivable.
Operating Capital and Capital Expenditure Requirements
We face certain risks and uncertainties, which are present in many emerging medical device
companies. At June 30, 2006, we had an accumulated deficit of $26.4 million. To date, we have not
commercialized our principal product, MelaFind®. We anticipate that we will continue to
incur net losses for the foreseeable future as we continue to develop the MelaFind®
system, expand our clinical development team and corporate infrastructure, and prepare for the
potential commercial launch of MelaFind®. We do not expect to generate significant
product revenue until we successfully obtain PMA approval for and begin selling
MelaFind®. In order to achieve significant commercialization of MelaFind® we
will need to obtain additional funding. We believe that the net proceeds from our recently
completed initial public offering, including our current cash, cash equivalents, marketable equity
securities and interest we earn on these balances, will be sufficient to meet our anticipated cash
needs for working capital and capital expenditures through mid 2007. If existing cash and cash
generated from our recently completed initial public offering are insufficient to satisfy our
liquidity requirements, or if we develop additional products, we may seek to sell additional equity
or debt securities or obtain a credit facility. If additional funds are raised through the issuance
of debt securities, these securities could have rights senior to those associated with our common
stock, and could contain covenants that would restrict our operations. Any additional financing may
not be available in amounts or on terms acceptable to us, or at all. If we are unable to obtain
this additional financing, we may be required to reduce the scope of, delay or eliminate some or
all of planned product research development and commercialization activities, which could harm our
business.
Because of the numerous risks and uncertainties associated with the development of medical devices
such as MelaFind®, we are unable to estimate the exact amounts of capital outlays and
operating expenditures associated with our current and anticipated clinical trials. Our future
funding requirements will depend on many factors, including, but not limited to:
|
|
|
The schedule, costs, and results of our clinical trials; |
|
|
|
|
The success of our research and development efforts; |
|
|
|
|
The costs and timing of regulatory approval; |
|
|
|
|
Reimbursement amounts for the use of MelaFind® that we are
able to obtain from Medicare and third party payors, or the amount of
direct payments we are able to obtain from patients and/or physicians
utilizing MelaFind®; |
|
|
|
|
The cost of commercialization activities, including product marketing
and building a domestic direct sales force; |
|
|
|
|
The emergence of competing or complementary technological developments; |
|
|
|
|
The costs of filing, prosecuting, defending and enforcing any patent
claims and other rights, including litigation costs and the results of
such litigation; |
|
|
|
|
The costs involved in defending any patent infringement actions
brought against us by third parties; and |
18
|
|
|
Our ability to establish and maintain any collaborative, licensing or
other arrangements, and the terms and timing of any such arrangements. |
Contractual Obligations
The following table summarizes our outstanding contractual obligations as of June 30, 2006 and the
effect those obligations are expected to have on our liquidity and cash flows in future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
Total |
|
|
1 year |
|
|
1-3 years |
|
|
4-5 years |
|
|
5 years |
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
Operating
Leases |
|
$ |
916 |
|
|
$ |
244 |
|
|
$ |
509 |
|
|
$ |
163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
916 |
|
|
$ |
244 |
|
|
$ |
509 |
|
|
$ |
163 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our long-term obligations are two non-cancelable operating leases for space expiring June 2009 and
November 2010. The lease on 3,700 square feet of office and laboratory space expires in June 2009
and the lease on 2,800 square feet of office space expires November 2010. In May 2006, we leased
an additional 1,250 square feet at our laboratory facility for three years also expiring June 2009.
In connection with the planned start of our clinical trials, we have committed to several clinical
sites a total of approximately $63 in contracts that do not exceed one year. These contracts are
cancelable by us with up to 90 days prior notice.
Related Party Transactions
On March 24, 2006, the Company entered into an amended and restated consulting agreement with
Gerald Wagner, Ph.D. to be effective as of April 1, 2006. In connection with his ongoing engagement
as a consultant, Dr. Wagner received a stock option grant of 50,000 shares of the Companys common
stock which vests in full immediately upon commencement of the pivotal trial for
MelaFind®. As a consultant to the company we utilize EITF 96-18 to account for this
grant. Under this method, we record a charge based on the fair market value of the option at the
end of each quarter and adjust that charge each subsequent quarter until the option vests. For the
three months ended June 30, 2006 we recorded deferred compensation of $239 for this grant.
In addition, on March 24, 2006, Dr. Wagner received another stock option grant of 49,500 shares of
the Companys common stock which vests immediately. The Company recorded a $161 compensation
charge during the first quarter ended March 31, 2006. Refer to Notes 7 and 8 to our financial
statements for further details.
The exercise price for these two stock option grants is the closing price per share of the
Companys common stock on the option grant date.
For a more detailed description of our related party transactions, see our financial statements and
the related notes to our financial statements in Note 11.
Off-Balance Sheet Arrangements
We do not currently have, nor have we ever had, any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance or special purpose
entities, which would have been established for the purpose of facilitating off-balance sheet
arrangements or other contractually
narrow or limited purposes. In addition, we do not engage in trading activities involving
non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity,
market or credit risk that could arise if we had engaged in these relationships.
19
Recent Accounting Developments
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (FIN
48), which prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN
48 also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. We do not expect the adoption of FIN 48 to have a material impact on our
financial reporting, and we are currently evaluating the impact, if any, the adoption of FIN 48
will have on our disclosure requirements.
20
Risk factors
Investing in our common stock involves a high degree of risk. You should carefully consider the
following risk factors, as well as the other information contained in this report. If any of the
following risks actually occur, our business, financial condition and results of operations would
suffer. In that case, the trading price of our common stock would likely decline and you might lose
all or part of your investment in our common stock.
Risks Relating to Our Business
We currently do not have, and may never develop, any commercialized products.
We currently do not have any commercialized products or any significant source of revenue. We have
invested substantially all of our time and resources over the last five years in developing
MelaFind®. MelaFind® will require additional development, clinical
evaluation, regulatory approval, significant marketing efforts and substantial additional
investment before it can provide us with any revenue. Our efforts may not lead to commercially
successful products for a number of reasons, including:
|
|
we may not be able to obtain regulatory approvals for MelaFind®, or the approved indication may be narrower than
we seek; |
|
|
|
MelaFind® may not prove to be safe and effective in clinical trials; |
|
|
|
physicians may not receive any reimbursement from third-party payors, or the level of reimbursement may be insufficient to
support widespread adoption of MelaFind®; |
|
|
|
we may experience delays in our development program; |
|
|
|
any products that are approved may not be accepted in the marketplace by physicians or patients; |
|
|
|
we may not have adequate financial or other resources to complete the development or to commence the commercialization of
MelaFind® and we will not have adequate financial or other resources to achieve significant commercialization of
MelaFind®; |
|
|
|
we may not be able to manufacture our products in commercial quantities or at an acceptable cost; and |
|
|
|
rapid technological change may make our technology and products obsolete. |
We do not expect to be able to commercialize MelaFind® before the end of 2007. If we are
unable to develop, obtain regulatory approval for or successfully commercialize
MelaFind®, we will be unable to generate revenue.
We have not received, and may never receive, FDA approval to market MelaFind®.
We do not have the necessary regulatory approvals to market MelaFind® in the US or in
any foreign market. We have not filed, and currently do not have plans to file, for regulatory
approval in any foreign market. We plan initially to launch MelaFind®, once approved, in
the US. The regulatory approval process for MelaFind® in the US involves, among other
things, successfully completing clinical trials and obtaining PMA approval from the FDA. We
commenced the PMA application process for MelaFind® by filing a proposed outline for a
Modular PMA application (a compilation of well-delineated components submitted separately) on
September 30, 2002. The PMA process requires us to prove the safety and effectiveness of
MelaFind® to the FDAs satisfaction. This process is expensive and uncertain, and
requires detailed and comprehensive scientific and human clinical data. FDA review may take years
after a PMA application is filed. The FDA may never grant approval. The FDA can delay, limit or
deny approval of a PMA application for many reasons, including:
21
|
|
MelaFind® may not be safe or effective to the FDAs satisfaction; |
|
|
|
the data from our pre-clinical studies and clinical trials may be insufficient to support approval; |
|
|
|
the manufacturing process or facilities we use may not meet applicable requirements; and |
|
|
|
changes in FDA approval policies or adoption of new regulations may require additional data. |
No precedent has been established for FDA approval of a device such as MelaFind® to
assist in determining the appropriateness of biopsies of suspicious pigmented skin lesions. Before
submitting a PMA application (the final module), we must successfully complete a pivotal clinical
trial to demonstrate that MelaFind® is safe and effective. Product development,
including clinical trials, is a long, expensive and uncertain process and is subject to delays and
failure at any stage. Furthermore, the data obtained from the trial may be inadequate to support
approval of a PMA application. While we obtained a Protocol Agreement from the FDA, FDA approval of
a Protocol Agreement does not mean that the FDA will consider the data gathered in the trial
sufficient to support approval of a PMA application, even if the trials intended endpoints are
achieved. There may be unexpected findings, particularly those that may only become evident from
the larger scale of the pivotal clinical trial, as compared with the smaller scale tests done to
date. For example, we initiated a clinical trial at the end of 2004 and encountered several
technical problems which required us to refine the MelaFind® system. The data obtained
in the pivotal trial may not be sufficient to support the anticipated indication for use, and may
not support a more limited indication for use. The occurrence of unexpected findings in connection
with the pivotal trial or any subsequent clinical trial required by the FDA may prevent or delay
obtaining PMA approval and may adversely affect coverage or reimbursement determinations. The FDA
may also determine that additional clinical trials are necessary, in which case the PMA approval
may be delayed for several months or even years while the trials are conducted and the data
acquired are submitted in an amendment to the PMA. If we are unable to complete the clinical trials
necessary to successfully support the MelaFind® PMA application, our ability to
commercialize MelaFind®, and our business, financial condition, and results of
operations would be materially adversely affected, thereby threatening our ability to continue
operations.
If MelaFind® is approved by the FDA, it may be approved only for narrow indications.
Even if approved, MelaFind® may not be approved for the indications that are necessary
or desirable for successful commercialization. Our preference is to obtain a broad indication for
use in assisting in the diagnosis of almost all pigmented melanomas (other than those on palms,
soles of the feet, in or near the eye, and inaccessible areas such as the edge of the nose). The
final MelaFind® lesion classifier may be able to identify the maximum number of types of
melanoma possible. The indications for use must specify those lesion types for which the classifier
has not been trained. Approximately five percent of melanoma lesions may be amelanotic, meaning
they are not pigmented. These lesions cannot be differentiated by MelaFind®, which will
be restricted to pigmented lesions. Approximately ten percent of pigmented melanoma lesions are
nodular, a type of melanoma that is often missed by dermatologists in early stages. If nodular
melanoma lesions are not sufficiently well-represented in the MelaFind® training
database, the classifier may not differentiate nodular melanomas from non-melanomas with sufficient
sensitivity and specificity. If we restrict the indications for use of MelaFind® to
exclude certain melanoma lesion types, in addition to the other restrictions, then the size of the
market for MelaFind® and the rate of acceptance of MelaFind® by physicians
may be adversely affected.
If we wish to modify MelaFind® after receiving FDA approval, including changes in
indications or other modifications that could affect safety and effectiveness, additional approvals
could be required from the FDA. We may be required to submit extensive pre-clinical and clinical
data, depending on the nature of the changes. Any request by the FDA for additional data, or any
requirement by the FDA that we conduct additional clinical studies, could delay the
commercialization of MelaFind® and require us to make substantial additional research,
development and other expenditures. We may not obtain the necessary regulatory approvals to market
MelaFind® in the US or anywhere else. Any delay in, or failure to receive or maintain,
approval for MelaFind® could prevent us from generating revenue or achieving
profitability, and our business, financial condition, and results of operations would be materially adversely
affected.
22
MelaFind® may not be commercially viable if we fail to obtain an adequate level of
reimbursement by Medicare and other third party payors. The markets for MelaFind® may
also be limited by the indications for which its use may be reimbursed.
The availability of medical insurance coverage and reimbursement for newly approved medical devices
is uncertain. In the US, physicians and other healthcare providers performing biopsies for
suspicious skin lesions are generally reimbursed for all or part of the cost of the diagnosis and
biopsy by Medicare, Medicaid, or other third-party payors.
The commercial success of MelaFind® in both domestic and international markets will
significantly depend on whether third-party coverage and reimbursement are available for services
involving MelaFind®. Medicare, Medicaid, health maintenance organizations and other
third-party payors are increasingly attempting to contain healthcare costs by limiting both the
scope of coverage and the level of reimbursement of new medical devices, and as a result, they may
not cover or provide adequate payment for the use of MelaFind®. In order to obtain
satisfactory reimbursement arrangements, we may have to agree to a fee or sales price lower than
the fee or sales price we might otherwise charge. Even if Medicare and other third-party payors
decide to cover procedures involving our product, we cannot be certain that the reimbursement
levels will be adequate. Accordingly, even if MelaFind® or future products we develop
are approved for commercial sale, unless government and other third-party payors provide adequate
coverage and reimbursement for our products, some physicians may be discouraged from using them,
and our sales would suffer.
Medicare reimburses for medical devices in a variety of ways, depending on where and how the device
is used. However, Medicare only provides reimbursement if the Centers for Medicare and Medicaid
Services (CMS) determines that the device should be covered and that the use of the device is
consistent with the coverage criteria. A coverage determination can be made at the local level by
the Medicare administrative contractor (formerly called carriers and fiscal intermediaries), a
private contractor that processes and pays claims on behalf of CMS for the geographic area where
the services were rendered, or at the national level by CMS through a national coverage
determination. There are new statutory provisions intended to facilitate coverage determinations
for new technologies, but it is unclear how these new provisions will be implemented. Coverage
presupposes that the device has been cleared or approved by the FDA and further, that the coverage
will be no broader than the approved intended uses of the device as approved or cleared by the FDA,
but coverage can be narrower. A coverage determination may be so limited that relatively few
patients will qualify for a covered use of the device. Should a very narrow coverage determination
be made for MelaFind®, it may undermine the commercial viability of
MelaFind®.
Obtaining a coverage determination, whether local or national, is a time-consuming, expensive and
highly uncertain proposition, especially for a new technology, and inconsistent local
determinations are possible. On average, according to an industry report, Medicare coverage
determinations for medical devices lag 15 months to five years or more behind FDA approval for that
device. The Medicare statutory framework is also subject to administrative rulings, interpretations
and discretion that affect the amount and timing of reimbursement made under Medicare. Medicaid
coverage determinations and reimbursement levels are determined on a state by state basis, because
Medicaid, unlike Medicare, is administered by the states under a state plan filed with the
Secretary of the US Department of Health and Human Services (HHS). Medicaid generally reimburses at
lower levels than Medicare. Moreover, Medicaid programs and private insurers are frequently
influenced by Medicare coverage determinations.
Any adverse results in our clinical trials, or difficulties in conducting our clinical trials,
could have a material adverse effect on our business.
Clinical studies in the US have been ongoing for over five years, and we have a Protocol Agreement
with the FDA, but we have not conducted the pivotal clinical trial required for PMA approval. We
initiated a trial under the terms of the Protocol Agreement at the end of 2004. However, technical
operational issues with the systems were experienced, requiring further refinement.
23
We are
currently refining the hardware systems and expect to have new systems available in order to start the pivotal clinical trial in
2006. However, we cannot provide any assurances that we will have these systems available on a
timely basis. In addition, the pivotal clinical trial and supporting clinical studies will require
the involvement of larger numbers of clinical sites than we have previously engaged at any single
time and the recruitment of large numbers of patients. If the clinical sites, which enroll patients
on a best efforts basis, do not provide cases at rates anticipated for any reason (such as, for
example, lower than forecasted clinical site productivity), we may face delays or may be unable to
complete the development of MelaFind®.
Risk of delay in product development.
We could encounter delays in our pivotal trial or in obtaining PMA approval because of a number of
factors. We will require the receipt of all information specified in our Protocol Agreement on the
required number of melanomas before the pivotal clinical trial can be concluded. The
MelaFind® classifier will then be utilized to evaluate the lesions acquired during the
pivotal trial, and the results will be analyzed to determine if we have achieved the endpoints
specified in the Protocol Agreement.
The final training of the classifier, required to be completed before the classifier is utilized as
described above, is expected to take approximately two months. Accordingly, the classifier must be
ready for final training two months before the end of the pivotal trial. For the classifier to be
ready for final training, approximately 300 melanoma lesions are targeted to have been received.
Therefore, in addition to acquiring the melanoma lesions required to complete the pivotal trial
(approximately 100), we must have completed the acquisition of approximately 300 training melanoma
lesions on schedule. Currently, approximately 275 melanoma lesions are in the training database.
The current classifier has been trained on 221 of these melanoma lesions. Our schedule for the
acquisition of these lesions is based upon the projected numbers of imaging devices to be located
at participating sites, the projected productivity of those sites in terms of melanomas and other
lesions biopsied per month, and the projected efficiency of the study pathologists in classifying
the lesion slides presented for histological analysis (the microscopic examination of excised or
biopsied tissue specimens) and reporting their results. If we are unable to produce and maintain a
sufficient number of imaging devices at participating sites, if the clinicians do not maintain
sufficient productivity, or if the pathologists do not produce reports with sufficient efficiency,
then our ability to maintain our schedule will be adversely affected, the start or conclusion of
the pivotal trial may be delayed, and the submission of the completed PMA will be delayed.
To date, the lesion images in the training database have been acquired using first-generation
hand-held devices, which also extract data from the lesions that are used by the classifiers.
Pre-commercialization hand-held devices are being developed for use in the pivotal trial. If the
lesion data obtained with pre-commercialization devices are not consistent with data from the first
generation hand-held devices, the classifier will need to be trained solely on lesions imaged using
only one or the other generation of hand-held devices. Were this need to arise, significant delay
and expense could be incurred, which could jeopardize our ability to complete the development of
MelaFind®.
We have incurred losses for a number of years, and anticipate that we will incur continued losses
for the foreseeable future.
We began operations in December 1989. At that time we provided research services, mostly to US
government agencies, on classified projects. We have financed our operations since 1999 primarily
through the sale of our equity securities and have devoted substantially all of our resources to
research and development relating to MelaFind®. Our net loss for the six months ended
June 30, 2006 was $5.8 million, and as of June 30, 2006, we had an accumulated deficit of
approximately $26.4 million. We expect our research and development expenses to increase in
connection with our clinical trials and other development activities related to
MelaFind®. If we receive PMA approval for MelaFind® from the FDA, we expect
to incur significant sales and marketing expenses, which will require additional funding, and
manufacturing expenses. Additionally, our general and administrative expenses have increased due to
the additional operational and regulatory responsibilities applicable to public companies. As a
result, we expect to continue to incur significant and increasing operating losses for the
foreseeable future. These losses, among other things, have had and will continue to have an adverse
effect on our stockholders equity.
24
We expect to operate in a highly competitive market, we may face competition from large,
well-established medical device manufacturers with significant resources, and we may not be able to
compete effectively.
We do not know of any product possessing the diagnostic assistance capabilities of
MelaFind®. We believe that electro-optical products designed to enhance the
visualization and analysis of potential melanomas have been approved or are under development by:
Welch Allyn, Inc.; Heine Optotechnik; 3Gen, LLC; Derma Medical Systems, Inc.; Medical High
Technologies S.p.A.; ZN Vision Technologies AG; Polartechnics, Ltd.; Astron Clinica, Ltd.; LINOS
Photonics, Inc.; Biomips Engineering and Sci.Base, AB. The broader market for precision optical
imaging devices used for medical diagnosis is intensely competitive, subject to rapid change, and
significantly affected by new product introductions and other market activities of industry
participants. If our products are approved for marketing, we will potentially be subject to
competition from major optical imaging companies, such as: General Electric Co.; Siemens AG; Bayer
AG; Eastman Kodak Company; Welch Allyn, Inc.; Olympus Corporation; Carl Zeiss AG Deutschland; and
others, each of which manufactures and markets precision optical imaging products for the medical
market, and could decide to develop or acquire a product to compete with MelaFind®.
These companies enjoy numerous competitive advantages, including:
|
|
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, 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. |
As a result, we may not be able to compete effectively against these companies or their products.
Technological breakthroughs in the diagnosis or treatment of melanoma could render
MelaFind® obsolete.
The precision optical imaging field is subject to rapid technological change and product
innovation. MelaFind® is based on our proprietary technology, but a number of companies
and medical researchers are pursuing new technologies. Companies in the medical device industry
with significantly greater financial, technical, research, marketing, sales and distribution and
other resources have expertise and interest in the exploitation of computer-aided diagnosis,
medical imaging, and other technologies MelaFind® utilizes. Some of these companies are
working on potentially competing products or therapies, including confocal microscopy (a type of
scanning microscopy for 3-dimensional specimens, which produces blur-free images at various
depths), various forms of spectroscopy (a study of the way molecules absorb and emit light), other
imaging modalities, including molecular imaging in which tagged antibodies search for cancer cell
antigens, and molecular and genetic screening tests. In addition, the National Institutes of Health
and other supporters of cancer research are presumptively seeking ways to improve the diagnosis or
treatment of melanoma by sponsoring corporate and academic research. There can be no assurance that
one or more of these companies will not succeed in developing or marketing technologies and
products or services that demonstrate better safety or effectiveness, superior clinical results,
greater ease of use or lower cost than MelaFind®, or that such competitors will not
succeed in obtaining regulatory approval for introducing or commercializing any such products or
services prior to us. FDA approval of a commercially viable alternative to MelaFind®
produced by a competitor could significantly reduce market acceptance
of MelaFind®.
25
Any
of the above competitive developments could have a material adverse effect on our
business, financial condition, and results of operations. There is no assurance that products,
services, or technologies introduced prior to or subsequent to the commercialization of
MelaFind® will not render MelaFind® less marketable or obsolete.
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.
We rely on clinical investigators and clinical sites, some of which are private practices, and some
of which are research university or government-affiliated, to enroll patients in our clinical
trials. We rely on: pathologists and pathology laboratories; a contract research organization to
assist in monitoring, collection of data, and ensuring FDA Good Clinical Practices (GCP) are
observed at our sites; a consultant biostatistician; and other third parties to manage the trial
and to perform related data collection and analysis. However, we may not be able to control the
amount and timing of resources that clinical sites and other third parties may devote to our
clinical trials. If these clinical investigators and clinical sites fail to enroll a sufficient
number of patients in our clinical trials, or if the clinical sites fail to comply adequately with
the clinical protocols, we will be unable to complete these trials, which could prevent us from
obtaining regulatory approvals for MelaFind®. Our agreements with clinical investigators
and clinical sites for clinical testing place substantial responsibilities on these parties and, if
these parties fail to perform as expected, our trials could be delayed or terminated. If these
clinical investigators, clinical sites or other third parties do not carry out their contractual
duties or obligations or fail to meet expected deadlines, or if the quality or accuracy of the
clinical data they obtain are compromised due to their failure to adhere to our clinical protocols
or for other reasons, our clinical trials may be extended, delayed or terminated, and we may be
unable to obtain regulatory approval for, or successfully commercialize, MelaFind®.
In addition to the foregoing, our clinical trial may be delayed or halted, or be inadequate to
support approval of a PMA application, for numerous other reasons, including, but not limited to,
the following:
|
|
the FDA, an Institutional Review Board (IRB) or other regulatory authorities place our clinical trial on hold; |
|
|
patients do not enroll in clinical trials at the rate we expect; |
|
|
patient follow-up is not at the rate we expect; |
|
|
IRBs and third-party clinical investigators delay or reject our trial protocol; |
|
|
third-party organizations do not perform data collection and analysis in a timely or accurate manner; |
|
|
regulatory inspections of our clinical trials or manufacturing facilities, among other things, require us to undertake
corrective action or suspend or terminate our clinical trials, or invalidate our clinical trials; |
|
|
changes in governmental regulations or administrative actions; and |
|
|
the interim or final results of the clinical trial are inconclusive or unfavorable as to safety or effectiveness. |
If MelaFind® is approved for reimbursement, we anticipate experiencing significant
pressures on pricing.
Even if Medicare covers a device for certain uses, that does not mean that the level of
reimbursement will be sufficient for commercial success. We expect to experience pricing pressures
in connection with the commercialization of MelaFind® and our future products due to
efforts by private and government-funded payors to reduce or limit the growth of healthcare costs,
the increasing influence of health maintenance organizations, and additional legislative proposals
to reduce or limit increases in public funding for healthcare services.
26
Private payors, including
managed care payors, increasingly are demanding discounted
fee structures and the assumption by healthcare providers of all or a portion of the financial
risk. Efforts to impose greater discounts and more stringent cost controls upon healthcare
providers by private and public payors are expected to continue. Payors frequently review their
coverage policies for existing and new diagnostic tools and can, sometimes without advance notice,
deny or change their coverage policies. Significant limits on the scope of services covered or on
reimbursement rates and fees on those services that are covered could have a material adverse
effect on our ability to commercialize MelaFind® and therefore, on our liquidity and our
business, financial condition, and results of operations.
In some foreign markets, which we may seek to enter in the future, pricing and profitability of
medical devices are subject to government control. In the US, we expect that there will continue to
be federal and state proposals for similar controls. Also, the trends toward managed healthcare in
the US and proposed legislation intended to control the cost of publicly funded healthcare programs
could significantly influence the purchase of healthcare services and products and may force us to
reduce prices for MelaFind® or result in the exclusion of MelaFind® from
reimbursement programs.
MelaFind® may never achieve market acceptance even if we obtain regulatory approvals.
To date, only those patients who were treated by physicians involved in our clinical trials have
been evaluated using MelaFind®, and even if we obtain regulatory approval, patients with
suspicious lesions and physicians evaluating suspicious lesions may not endorse
MelaFind®. Physicians tend to be slow to change their diagnostic and medical treatment
practices because of perceived liability risks arising from the use of new products and the
uncertainty of third party reimbursement. Physicians may not utilize MelaFind® until
there is long-term clinical evidence to convince them to alter their existing methods of diagnosing
or evaluating suspicious lesions and there are recommendations from prominent physicians that
MelaFind® is effective. We cannot predict the speed at which physicians may adopt the
use of MelaFind®. If MelaFind® receives the appropriate regulatory approvals
but does not achieve an adequate level of acceptance by patients, physicians and healthcare payors,
we may not generate significant product revenue and we may not become profitable. The degree of
market acceptance of MelaFind® will depend on a number of factors, including:
|
|
perceived effectiveness of MelaFind®; |
|
|
cost of the use of MelaFind®; |
|
|
availability and adequacy of third-party coverage or reimbursement; |
|
|
approved indications and product labeling; |
|
|
publicity concerning MelaFind® or competitive products; |
|
|
potential advantages over alternative diagnostic methodologies; |
|
|
introduction and acceptance of competing products or technologies; and |
|
|
extent and success of our sales, marketing and distribution efforts. |
The identification and screening of melanomas is now dominated by visual clinical evaluation, with
a minority of dermatologists using dermoscopy. Even if MelaFind® proves to be as
effective as visual inspection by an expert dermatologist, and if all approvals are obtained, the
success of MelaFind® will depend upon the acceptance by dermatologists and other
physicians who perform skin examinations and treat skin disorders, including industry opinion
leaders, that the diagnostic information provided by MelaFind® is medically useful and
reliable. We will be subject to intense scrutiny before physicians will be comfortable
incorporating MelaFind® in their diagnostic approaches. We believe that recommendations
by respected physicians will be essential for the development and successful marketing of
MelaFind®, and
there can be no assurance that any such recommendations will be obtained.
27
To date, the medical
community outside the limited circle of certain dermatologists specializing in melanoma has had
little exposure to us and MelaFind®. Because the medical community is often skeptical of
new companies and new technologies, we may be unable to gain access to potential customers in order
to demonstrate the operation and effectiveness of MelaFind®. Even if we gain access to
potential customers, no assurance can be given that members of the dermatological, or later the
general practice, medical community will perceive a need for or accept MelaFind®. In
particular, given the potentially fatal consequences of failing to detect melanoma at the early,
curable stages, practitioners may remain reluctant to rely upon MelaFind® even after we
receive approval from the FDA for marketing the product. Any of the foregoing factors, or other
currently unforeseen factors, could limit or detract from market acceptance of
MelaFind®. Insufficient market acceptance of MelaFind® would have a material
adverse effect on our business, financial condition and results of operations.
We may be unable to complete the development and commence commercialization of MelaFind®
or other products without additional funding and we will not be able to achieve significant
commercialization without additional funding.
Our operations have consumed substantial amounts of cash for each of the last six years. We
currently believe that our available cash, cash equivalents and marketable securities, including
the proceeds from our initial public offering, will be sufficient to fund our anticipated levels of
operations through mid 2007. However, our business or operations may change in a manner that would
consume available resources more rapidly than we anticipate. We expect to continue to spend
substantial amounts on research and development, including conducting a clinical trial for
MelaFind®. We will need additional funds to fully commercialize the product, including
development of a direct sales force and expansion of manufacturing capacity. We expect that our
cash used by operations will increase significantly in each of the next several years, and should
we encounter any material delays or impediments, we may need additional funds to complete the
development of MelaFind® and commence commercialization of MelaFind®, and we
will need additional funds to achieve significant commercialization of MelaFind®. Any
additional financing may be dilutive to stockholders, or may require us to grant a lender a
security interest in our assets. The amount of funding we will need will depend on many factors,
including:
|
|
the schedule, costs, and results of our clinical trials; |
|
|
the success of our research and development efforts; |
|
|
the costs and timing of regulatory approval; |
|
|
reimbursement amounts for the use of MelaFind® that we are able to obtain from Medicare and third party payors,
or the amount of direct payments we are able to obtain from patients and/or physicians utilizing MelaFind®; |
|
|
the cost of commercialization activities, including product marketing and building a domestic direct sales force; |
|
|
the emergence of competing or complementary technological developments; |
|
|
the costs of filing, prosecuting, defending and enforcing any patent claims and other rights, including litigation costs
and the results of such litigation; |
|
|
the costs involved in defending any patent infringement actions brought against us by third parties; and |
|
|
our ability to establish and maintain any collaborative, licensing or other arrangements, and the terms and timing of any
such arrangements. |
Additional financing may not be available to us when we need it, or it may not be available on
favorable terms.
28
If we are unable to obtain adequate financing on a timely basis, we may be
required to significantly
curtail or cease one or more of our development and marketing programs. We could be required to
seek funds through arrangements with collaborators or others that may require us to relinquish
rights to some of our technologies, product candidates or products that we would otherwise pursue
on our own. We also may have to reduce marketing, customer support and other resources devoted to
our products. If we raise additional funds by issuing equity securities, our then-existing
stockholders will experience ownership dilution, could experience declines in our share price and
the terms of any new equity securities may have preferences over our common stock.
If we are unable to establish sales, marketing and distribution capabilities or enter into and
maintain arrangements with third parties to sell, market and distribute MelaFind®, our
business may be harmed.
We do not have a sales organization and have no experience as a company in the marketing and
distribution of devices such as MelaFind®. To achieve commercial success for
MelaFind®, we must develop a sales and marketing force and enter into arrangements with
others to market and sell our products. Following product approval, we currently plan to establish
a small direct sales force to market MelaFind® in the US, focused on introducing it at
high volume dermatologists offices and training their staff in its use, but we have not made any
final determinations regarding the use of a particular marketing channel. We anticipate that we
will need additional funds in order to implement this marketing plan. In addition to being
expensive, developing such a sales force is time consuming and could delay or limit the success of
any product launch. We may not be able to develop this capacity on a timely basis or at all.
Qualified direct sales personnel with experience in the medical device market are in high demand,
and there is no assurance that we will be able to hire or retain an effective direct sales team.
Similarly, qualified, independent medical device representatives both within and outside the US are
in high demand, and we may not be able to build an effective network for the distribution of our
product through such representatives. We have no assurance that we will be able to enter into
contracts with representatives on terms acceptable or reasonable to us. Similarly, there is no
assurance that we will be able to build an alternate distribution framework, should we attempt to
do so.
We will need to contract with third parties in order to sell and install our products in larger
markets, including non-specialist dermatologists and primary care physicians. To the extent that we
enter into arrangements with third parties to perform marketing and distribution services in the
US, our product revenue could be lower and our costs higher than if we directly marketed
MelaFind®. Furthermore, to the extent that we enter into co-promotion or other marketing
and sales arrangements with other companies, any revenue received will depend on the skills and
efforts of others, and we do not know whether these efforts will be successful. If we are unable to
establish and maintain adequate sales, marketing and distribution capabilities, independently or
with others, we will not be able to generate product revenue and may not become profitable.
We have limited manufacturing capabilities and manufacturing personnel, and if our manufacturing
capabilities are insufficient to produce an adequate supply of MelaFind®, our growth
could be limited and our business could be harmed.
We have not yet completed the development and testing of MelaFind® and as a result have
no experience in manufacturing MelaFind® for commercial distribution. We currently have
limited resources, facilities and experience to commercially manufacture MelaFind®. In
order to produce MelaFind® in the quantities we anticipate to meet market demand, we
will need to increase our third-party manufacturing capacity. There are technical challenges to
increasing manufacturing capacity, including equipment design and automation, material procurement,
problems with production yields, and quality control and assurance. Developing commercial-scale
manufacturing facilities that meet FDA requirements would require the investment of substantial
additional funds and the hiring and retaining of additional management and technical personnel who
have the necessary manufacturing experience.
We currently plan to outsource certain production aspects to contract manufacturers. Any
difficulties in the ability of third-party manufacturers to supply devices of the quality, at the
times, and in the quantities we need, could have a material adverse effect on our business,
financial condition, and results of operations.
29
Similarly, when we enter into contracts for the
third-party manufacture of our devices, any revenue
received will depend on the skills and efforts of others, and we do not know whether these efforts
will be successful. Manufacturers often encounter difficulties in scaling up production of new
products, including problems involving product yields, controlling and anticipating product costs,
quality control and assurance, component supply, and shortages of qualified personnel. We cannot
assure you that the third-party contract manufacturers with whom we are developing relationships
will have or sustain the ability to produce the quantities of MelaFind® needed for
development or commercial sales or will be willing to do so at prices that allow
MelaFind® to compete successfully in the market.
Assuming that MelaFind® receives regulatory approval, if we are unable to manufacture or
obtain a sufficient supply of product, maintain control over expenses, or otherwise adapt to
anticipated growth, or if we underestimate growth, we may not have the capability to satisfy market
demand, and our business will suffer. Additionally, if MelaFind® receives regulatory
approval and we then need to make manufacturing changes, we may need to obtain additional approval
for these changes.
MelaFind® is complex and may contain undetected design defects and errors when first
introduced, or errors that may be introduced when enhancements are released. Such defects and
errors may occur despite our testing and may not be discovered until after our devices have been
shipped to and used by our customers. The existence of these defects and errors could result in
costly repairs, returns of devices, diversion of development resources and damage to our reputation
in the marketplace. Any of these conditions could have a material adverse impact on our business,
financial condition and results of operations. In addition, when we contract with third-party
manufacturers for the production of our products, these manufacturers may inadvertently produce
devices that vary from devices we have produced in unpredictable ways that cause adverse
consequences.
Our manufacturing operations are dependent upon third-party suppliers, making us vulnerable to
supply problems and price fluctuations, which could harm our business. We anticipate contracting
for final device assembly and integration, but no contract for such services on a commercial basis
has yet been procured.
Our manufacturing efforts currently rely on FillFactory, a subsidiary of Cypress Semiconductor
Corp., to manufacture and supply the complementary metal oxide semiconductor sensor in
MelaFind®, on Pracownia Optyki Instrumentalnej (Optyka) for lens elements, on Carl Zeiss
Jena GmbH (Zeiss) for lens objective assemblies, on ASKION GmbH (ASKION) for the main subassembly
and on Fairchild Semiconductor Corp., Panasonic Corp., Roithner-Laser Vienna, CompServ and others
for light-emitting diodes, or LEDs, printed circuit boards, and other elements or components of our
devices. We have written agreements with several of these vendors, under which the vendor is
obligated to perform services or produce components for us. There can be no assurance that these
third parties will meet their obligations under the agreements. Each of these suppliers is a
sole-source supplier. Our contract manufacturers also rely on sole-source suppliers to manufacture
some of the components used in our products. Our manufacturers and suppliers may encounter problems
during manufacturing due to a variety of reasons, including failure to procure their raw material
on time, failure to follow specific protocols and procedures, failure to comply with applicable
regulations, equipment malfunction and environmental factors, any of which could delay or impede
their ability to meet our demand. Our reliance on these outside manufacturers and suppliers also
subjects us to other risks that could harm our business, including:
|
|
suppliers may make errors in manufacturing components that could negatively affect the effectiveness or safety of our
products, or cause delays in shipment of our products; |
|
|
we may not be able to obtain adequate supply in a timely manner or on commercially reasonable terms; |
|
|
we may have difficulty locating and qualifying alternative suppliers for our sole-source suppliers; |
|
|
switching components may require product redesign and submission to the FDA of a PMA supplement or possibly a separate PMA,
either of which could significantly delay production; |
30
|
|
our suppliers manufacture products for a range of customers, and fluctuations in demand for the
products these suppliers manufacture for others may affect their ability to deliver components
to us in a timely manner; and |
|
|
our suppliers may encounter financial hardships unrelated to our demand for components, which
could inhibit their ability to fulfill our orders and meet our requirements. |
Any interruption or delay in the supply of components or materials, or our inability to obtain
components or materials from alternate sources at acceptable prices in a timely manner, could
impair our ability to meet the demand of our customers and cause them to cancel orders.
We have entered into a development agreement with ASKION to complete developmental engineering and
testing of our hand-held imaging device, and have also entered into a production agreement with
ASKION to assemble the components and produce initial quantities of our hand-held imaging devices
for clinical trials. We intend to enter into a contract for commercial production of the hand-held
imaging devices once specifications for MelaFind® have been finalized, but we may not be
able to enter such an agreement on mutually acceptable terms. Failure to enter into such an
agreement with ASKION would require us to expand our own manufacturing facilities or obtain such
services elsewhere. Similarly, we have entered into a confidentiality agreement and a development
agreement with Carl Zeiss Jena GmbH for lens objective assemblies, and we intend to enter into a
contract for the commercial production of lenses. These lenses are currently assembled by ASKION
utilizing the lens elements produced by Optyka. The manufacturing agreement with ASKION will
include integration of these lenses in the hand-held imaging devices. Our planned reliance upon an
outside provider for assembly and production services subjects us to the risk of adverse
consequences from delays and defects caused by the failure of such outside supplier to meet its
contractual obligations, including confidentiality obligations in the case of Carl Zeiss Jena GmbH,
which is an affiliate of Carl Zeiss AG, a potential competitor. The failure by us or our supplier
to produce a sufficient number of hand-held imaging devices that can operate according to our
specifications could delay the pivotal clinical trial and/or the commercial sale of
MelaFind® and would adversely affect both our ability to successfully commercialize
MelaFind® and our business, financial condition and results of operations.
We will not be able to sell MelaFind® unless and until its design is verified and
validated in accordance with current good manufacturing practices as set forth in the US medical
device Quality System Regulation.
We are in the process, but have not yet successfully completed, all the steps necessary to verify
and validate the design of the MelaFind® system that are required to be performed prior
to commercialization. If we are delayed or unable to complete verification and validation
successfully, we will not be able to sell MelaFind®, and we will not be able to meet our
plans for the commercialization of MelaFind® in late 2007. Assuming that regulatory
approval of MelaFind® is granted, the approval may be subject to limitations on the
indicated uses for which the product may be marketed or may contain requirements for costly
post-marketing testing and surveillance to monitor the safety or effectiveness of the device. Later
discovery of previously unknown problems with MelaFind®, including manufacturing
problems, or failure to comply with regulatory requirements such as the QSR, may result in
restrictions on MelaFind® or its manufacturing processes, withdrawal of
MelaFind® from the market, patient or physician notification, voluntary or mandatory
recalls, fines, withdrawal of regulatory approvals, refusal to approve pending applications or
supplements to approved applications, refusal to permit the import or export of our products,
product seizures, injunctions or the imposition of civil or criminal penalties. Should any of these
enforcement actions occur, our business, financial condition and results of operations would be
materially and adversely affected.
31
Assuming that MelaFind® is approved by regulatory authorities, if we or our suppliers
fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems
with MelaFind®, it could be subject to restrictions or withdrawal from the market.
Any product for which we obtain marketing approval, along with the manufacturing processes,
post-approval clinical data and promotional activities for such product, will be subject to
continuous review and
periodic inspections by the FDA and other regulatory bodies. In particular, we and our suppliers
are required to comply with the QSR and other regulations which cover the methods and documentation
of the design, testing, production, control, quality assurance, labeling, packaging, storage,
promotion, distribution, and shipping of MelaFind®, and with record keeping practices.
We also will be subject to ongoing FDA requirements, including required submissions of safety and
other post-market information and reports and registration and listing requirements. To the extent
that we contract with third parties to manufacture some of our products, our manufacturers will be
required to adhere to current Good Manufacturing Practices (cGMP) requirements enforced by the FDA
as part of QSR, or similar regulations required by regulatory agencies in other countries. The
manufacturing facilities of our contract manufacturers must be inspected or must have been
inspected, and must be in full compliance with cGMP requirements before approval for marketing. The
FDA enforces the QSR and other regulatory requirements through unannounced inspections. We have not
yet been inspected by the FDA for MelaFind® and will have to complete such an inspection
successfully before we ship any commercial MelaFind® devices. However, we were
previously inspected in connection with DIFOTI®, which we have discontinued for business
reasons, and were cited for failures to comply fully with QSR mandated procedures. The FDA
inspectors observed deficiencies that were documented on FDA Form 483 that was issued to us
following the inspection. We have discussed the findings in a subsequent meeting with the FDA and
are in the process of addressing the deficiencies. We are working with consultants to address the
inspectional findings, particularly as they relate to current MelaFind® design
development and ultimate MelaFind® commercial manufacturing. If we are not successful in
convincing the FDA that we are capable of addressing its concerns, or if our efforts to address the
deficiencies should prove unsuccessful, we might be subject to additional FDA action of a type
described below, which could negatively affect our ability to commercialize MelaFind®.
There can be no assurance that the future interpretations of legal requirements made by the FDA or
other regulatory bodies with possible retroactive effect, or the adoption of new requirements or
policies, will not adversely affect us. We may be slow to adapt, or may not be able to adapt to
these changes or new requirements. Failure by us or one of our suppliers to comply with statutes
and regulations administered by the FDA and other regulatory bodies, or failure to take adequate
response to any observations, could result in, among other things, any of the following actions:
|
|
fines and civil penalties; |
|
|
unanticipated expenditures; |
|
|
delays in approving or refusal to approve MelaFind®; |
|
|
withdrawal of approval by the FDA or other regulatory bodies; |
|
|
product recall or seizure; |
|
|
interruption of production; |
|
|
operating restrictions; |
If any of these actions were to occur, it would harm our reputation and cause our product sales and
profitability to suffer.
We are involved in a heavily regulated sector, and our ability to remain viable will depend on
favorable government decisions at various points by various agencies.
32
From time to time, legislation is introduced in the US Congress that could significantly change the
statutory
provisions governing the approval, manufacture and marketing of a medical device. Additionally,
healthcare is heavily regulated by the federal government, and by state and local governments. The
federal laws and regulations affecting healthcare change constantly, thereby increasing the
uncertainty and risk associated with any healthcare related venture, including our business and
MelaFind®. In addition, FDA regulations and guidance are often revised or reinterpreted
by the agency in ways that may significantly affect our business and our products. It is impossible
to predict whether legislative changes will be enacted or FDA regulations, guidance, or
interpretations changed, and what the impact of such changes, if any, may be.
The federal government regulates healthcare through various agencies, including but not limited to
the following: (i) the FDA, which administers the FD&C Act, as well as other relevant laws; (ii)
CMS, which administers the Medicare and Medicaid programs; (iii) the Office of Inspector General
(OIG) which enforces various laws aimed at curtailing fraudulent or abusive practices, including by
way of example, the Anti-Kickback Law, the Anti-Physician Referral Law, commonly referred to as
Stark, the Anti-Inducement Law, the Civil Money Penalty Law, and the laws that authorize the OIG to
exclude healthcare providers and others from participating in federal healthcare programs; and (iv)
the Office of Civil Rights, which administers the privacy aspects of HIPAA. All of the
aforementioned are agencies within HHS. Healthcare is also provided or regulated, as the case may
be, by the Department of Defense through its TriCare program, the Public Health Service within HHS
under the Public Health Service Act, the Department of Justice through the Federal False Claims Act
and various criminal statutes, and state governments under Medicaid and other state sponsored or
funded programs and their internal laws regulating all healthcare activities.
In addition to regulation by the FDA as a medical device manufacturer, we are subject to general
healthcare industry regulations. The healthcare industry is subject to extensive federal, state and
local laws and regulations relating to:
|
|
quality of medical equipment and services; |
|
|
confidentiality, maintenance and security issues associated with
medical records and individually identifiable health information; |
These laws and regulations are extremely complex and, in some cases, still evolving. In many
instances, the industry does not have the benefit of significant regulatory or judicial
interpretation of these laws and regulations. If our operations are found to be in violation of any
of the federal, state or local laws and regulations that govern our activities, we may be subject
to the applicable penalty associated with the violation, including civil and criminal penalties,
damages, fines or curtailment of our operations. The risk of being found in violation of these laws
and regulations is increased by the fact that many of them have not been fully interpreted by the
regulatory authorities or the courts, and their provisions are open to a variety of
interpretations. Any action against us for violation of these laws or regulations, even if we
successfully defend against it, could cause us to incur significant legal expenses and divert our
managements time and attention from the operation of our business.
We must comply with complex statutes prohibiting fraud and abuse, and both we and physicians
utilizing MelaFind® could be subject to significant penalties for noncompliance.
There are extensive federal and state laws and regulations prohibiting fraud and abuse in the
healthcare industry that can result in significant criminal and civil penalties. These federal laws
include: the anti-kickback statute which prohibits certain business practices and relationships,
including the payment or receipt of remuneration for the referral of patients whose care will be
paid by Medicare or other federal
healthcare programs; the physician self-referral prohibition, commonly referred to as the Stark
Law; the anti-inducement law, which prohibits providers from offering anything to a Medicare or
Medicaid beneficiary to induce that beneficiary to use items or services covered by either program;
the Civil False Claims Act, which prohibits any person from knowingly presenting or causing to be
presented false or fraudulent claims for payment by the federal government, including the Medicare
and Medicaid programs; and the Civil Monetary Penalties Law, which authorizes HHS to impose civil
penalties administratively for fraudulent or abusive acts.
33
Sanctions for violating these federal laws include criminal and civil penalties that range from
punitive sanctions, damage assessments, money penalties, imprisonment, denial of Medicare and
Medicaid payments, or exclusion from the Medicare and Medicaid programs, or both. As federal and
state budget pressures continue, federal and state administrative agencies may also continue to
escalate investigation and enforcement efforts to root out waste and to control fraud and abuse in
governmental healthcare programs. Private enforcement of healthcare fraud has also increased, due
in large part to amendments to the Civil False Claims Act in 1986 that were designed to encourage
private persons to sue on behalf of the government. A violation of any of these federal and state
fraud and abuse laws and regulations could have a material adverse effect on our liquidity and
financial condition. An investigation into the use of MelaFind® by physicians may
dissuade physicians from either purchasing or using MelaFind® and could have a material
adverse effect on our ability to commercialize MelaFind®.
The application of the privacy provisions of HIPAA is uncertain.
HIPAA, among other things, protects the privacy and security of individually identifiable health
information by limiting its use and disclosure. HIPAA directly regulates covered entities
(insurers, clearinghouses, and most healthcare providers) and indirectly regulates business
associates with respect to the privacy of patients medical information. Certain entities that
receive and process protected health information are required to adopt certain procedures to
safeguard the security of that information. It is uncertain whether we would be deemed to be a
covered entity under HIPAA, and it is unlikely that based on our current business model, we would
be a business associate. Nevertheless, we will likely be contractually required to physically
safeguard the integrity and security of the patient information that we or our physician customers
receive, store, create or transmit. If we fail to adhere to our contractual commitments, then our
physician customers may be subject to civil monetary penalties, and this could adversely affect our
ability to market MelaFind®. We also may be liable under state laws governing the
privacy of health information.
We may become subject to claims of infringement or misappropriation of the intellectual property
rights of others, which could prohibit us from shipping affected products, require us to obtain
licenses from third parties or to develop non-infringing alternatives, and subject us to
substantial monetary damages and injunctive relief. Our patents may also be subject to challenge on
validity grounds, and our patent applications may be rejected.
Third parties could, in the future, assert infringement or misappropriation claims against us with
respect to our current or future products. Whether a product infringes a patent involves complex
legal and factual issues, the determination of which is often uncertain. Therefore, we cannot be
certain that we have not infringed the intellectual property rights of such third parties. Our
potential competitors may assert that some aspect of MelaFind® infringes their patents.
Because patent applications may take years to issue, there also may be applications now pending of
which we are unaware that may later result in issued patents that MelaFind® infringes.
There also may be existing patents of which we are unaware that one or more components of our
MelaFind® system may inadvertently infringe.
Any infringement or misappropriation claim could cause us to incur significant costs, place
significant strain on our financial resources, divert managements attention from our business and
harm our reputation. If the relevant patents were upheld as valid and enforceable and we were found
to infringe, we could be prohibited from selling our product that is found to infringe unless we
could obtain licenses to use the technology covered by the patent or are able to design around the
patent. We may be unable to obtain a license on terms acceptable to us, if at all, and we may not
be able to redesign MelaFind® to avoid
infringement. A court could also order us to pay compensatory damages for such infringement, plus
prejudgment interest and could, in addition, treble the compensatory damages and award attorney
fees.
34
These damages could be substantial and could harm our reputation, business, financial condition and
operating results. A court also could enter orders that temporarily, preliminarily or permanently
enjoin us and our customers from making, using, selling, offering to sell or importing
MelaFind®, and/or could enter an order mandating that we undertake certain remedial
activities. Depending on the nature of the relief ordered by the court, we could become liable for
additional damages to third parties.
We also may rely on our patents, patent applications and other intellectual property rights to give
us a competitive advantage. Whether a patent is valid, or whether a patent application should be
granted, is a complex matter of science and law, and therefore we cannot be certain that, if
challenged, our patents, patent applications and/or other intellectual property rights would be
upheld. If one or more of those patents, patent applications and other intellectual property rights
are invalidated, rejected or found unenforceable, that could reduce or eliminate any competitive
advantage we might otherwise have had.
New product development in the medical device industry is both costly and labor intensive with very
low success rates for successful commercialization; if we cannot successfully develop or obtain
future products, our growth would be delayed.
Our long-term success is dependent, in large part, on the design, development and commercialization
of MelaFind® and other new products and services in the medical device industry. The
product development process is time-consuming, unpredictable and costly. There can be no assurance
that we will be able to develop or acquire new products, successfully complete clinical trials,
obtain the necessary regulatory clearances or approvals required from the FDA on a timely basis, or
at all, manufacture our potential products in compliance with regulatory requirements or in
commercial volumes, or that MelaFind® or other potential products will achieve market
acceptance. In addition, changes in regulatory policy for product approval during the period of
product development, and regulatory agency review of each submitted new application, may cause
delays or rejections. It may be necessary for us to enter into licensing arrangements in order to
market effectively any new products or new indications for existing products. There can be no
assurance that we will be successful in entering into such licensing arrangements on terms
favorable to us or at all. Failure to develop, obtain necessary regulatory clearances or approvals
for, or successfully market potential new products could have a material adverse effect on our
business, financial condition and results of operations.
We face the risk of product liability claims and may not be able to obtain or maintain adequate
insurance.
Our business exposes us to the risk of product liability claims that is inherent in the testing,
manufacturing and marketing of medical devices, including those which may arise from the misuse or
malfunction of, or design flaws in, our products. We may be subject to product liability claims if
MelaFind® causes, or merely appears to have caused, an injury or if a patient alleges
that MelaFind® failed to provide appropriate diagnostic information on a lesion where
melanoma was subsequently found to be present. Claims may be made by patients, healthcare providers
or others involved with MelaFind®. MelaFind® will require PMA approval prior
to commercialization in the US. The clinical studies of MelaFind® are considered by the
FDA as NSR. Consequently, the trials are conducted under the auspices of an abbreviated IDE. We
therefore do not maintain domestic clinical trial liability insurance. We have obtained clinical
trial liability insurance in certain European countries where required by statute or clinical site
policy. Although we have general liability insurance that we believe is appropriate, and anticipate
obtaining adequate product liability insurance before commercialization of MelaFind®,
this insurance is and will be subject to deductibles and coverage limitations. Our anticipated
product liability insurance may not be available to us in amounts and on acceptable terms, if at
all, and if available, the coverages may not be adequate to protect us against any future product
liability claims. If we are unable to obtain insurance at an acceptable cost or on acceptable terms
with adequate coverage, or otherwise protect against potential product liability claims, we will be
exposed to significant liabilities, which may harm our business. A product liability claim, recall
or other claim with respect to uninsured liabilities or for amounts in excess of insured
liabilities could result in
significant costs and significant harm to our business.
35
We may be subject to claims against us even if the apparent injury is due to the actions of others.
For example, we rely on the expertise of physicians, nurses and other associated medical personnel
to operate MelaFind®. If these medical personnel are not properly trained or are
negligent, we may be subjected to liability. These liabilities could prevent or interfere with our
product commercialization efforts. Defending a suit, regardless of merit, could be costly, could
divert management attention and might result in adverse publicity, which could result in the
withdrawal of, or inability to recruit, clinical trial volunteers, or result in reduced acceptance
of MelaFind® in the market.
Insurance and surety companies have reassessed many aspects of their business and, as a result, may
take actions that could negatively affect our business. These actions could include increasing
insurance premiums, requiring higher self-insured retentions and deductibles, reducing limits,
restricting coverages, imposing exclusions, and refusing to underwrite certain risks and classes of
business. Any of these actions may adversely affect our ability to obtain appropriate insurance
coverage at reasonable costs, which could have a material adverse effect on our business, financial
condition and results of operations.
We may be adversely affected by a data center failure.
The success of MelaFind® is dependent upon our ability to protect our data center
against damage from fire, power loss, telecommunications failure, natural disaster, sabotage or a
similar catastrophic event. Substantially all of our computer equipment and data operations are
located in a single facility. Our prospective failure to maintain off-site copies of information
contained in our MelaFind® database, or our inability to use alternative sites in the
event we experience a natural disaster, hardware or software malfunction or other interruption of
our data center, or any interruption in the ability of physicians to obtain access to our
MelaFind® server and its database could adversely impact our business, financial
condition and results of operations.
We may be adversely affected by breaches of online security.
Our MelaFind® lesion database does not contain any information that allows us to
identify specific patients. However, we must identify certain data as belonging to or as derived
from specific patients for regulatory, quality assurance and billing purposes. To the extent that
our activities involve the storage and transmission of confidential information, security breaches
could damage our reputation and expose us to a risk of loss, or to litigation and possible
liability. Our business may be materially adversely affected if our security measures do not
prevent security breaches. In addition, such information may be subject to HIPAA privacy and
security regulations, the potential violation of which may trigger concerns by healthcare
providers, which may adversely impact our business, financial condition and results of operations.
We are dependent upon telecommunications and the internet.
The connection between the MelaFind® hand-held imaging device and the central server in
our offices will be dependent on the internet. Our success will depend in large part on the
continued availability of electronic means for storing and transmitting encoded compressed
diagnostic information, and storing and transmitting the results of the comparison of such
information with our electronically-maintained database through the internet. If the domestic and
international telecommunications infrastructure required for these transmissions fails, our
business could be materially adversely affected.
We plan to use the internet as a medium to provide diagnostic assistance services to physicians. We
also plan to use the internet to inform the public about the availability of our products and to
market to and communicate with physicians who are potential or actual customers. Our success will
therefore depend in part on the continued growth and use of the internet. If our ability to use the
internet fails, it may materially adversely affect our business.
36
We
will be obligated to comply with Federal Communications Commission regulations for radio transmissions used by our products.
Versions of MelaFind® may rely on radio transmissions from the hand-held imaging device
to a base station that is connected to the internet. Applicable requirements will restrict us to a
particular band of frequencies allocated to low power radio service for transmitting data in
support of specific diagnostic or therapeutic functions. Failure to comply with all applicable
restrictions on the use of such frequencies, or unforeseeable difficulties with the use of such
frequencies, could impede our ability to commercialize MelaFind®.
All of our operations are conducted at a single location. Any disruption at our facility could
increase our expenses.
All of our operations are conducted at two adjacent buildings in Irvington, New York. We take
precautions to safeguard our facility, including insurance, health and safety protocols, contracted
off-site engineering services, provision for off-site manufacturing, and storage of computer data.
However, a natural disaster, such as a fire, flood or earthquake, could cause substantial delays in
our operations, damage or destroy our manufacturing equipment or inventory, and cause us to incur
additional expenses. The insurance we maintain against fires, floods, earthquakes and other natural
disasters may not be adequate to cover our losses in any particular case.
We may be liable for contamination or other harm caused by materials that we handle, and changes in
environmental regulations could cause us to incur additional expense.
Our manufacturing, research and development and clinical processes do not generally involve the
handling of potentially harmful biological materials or hazardous materials, but they may
occasionally do so. We are subject to federal, state and local laws and regulations governing the
use, handling, storage and disposal of hazardous and biological materials. If violations of
environmental, health and safety laws occur, we could be held liable for damages, penalties and
costs of remedial actions. These expenses or this liability could have a significant negative
impact on our business, financial condition and results of operations. We may violate
environmental, health and safety laws in the future as a result of human error, equipment failure
or other causes. Environmental laws could become more stringent over time, imposing greater
compliance costs and increasing risks and penalties associated with violations. We may be subject
to potentially conflicting and changing regulatory agendas of political, business and environmental
groups. Changes to or restrictions on permitting requirements or processes, hazardous or biological
material storage or handling might require an unplanned capital investment or relocation. Failure
to comply with new or existing laws or regulations could harm our business, financial condition and
results of operations.
Failure to obtain and maintain regulatory approval in foreign jurisdictions will prevent us from
marketing abroad.
Following commercialization of MelaFind® in the US, we may market MelaFind®
internationally. Outside the US, we can market a product only if we receive a marketing
authorization and, in some cases, pricing approval, from the appropriate regulatory authorities.
The approval procedure varies among countries and can involve additional testing, and the time
required to obtain approval may differ from that required to obtain FDA approval.
The foreign regulatory approval process may include all of the risks associated with obtaining FDA
approval, in addition to other risks. Foreign regulatory bodies have established varying
regulations governing product standards, packaging requirements, labeling requirements, import
restrictions, tariff regulations, duties and tax requirements. We may not obtain foreign regulatory
approvals on a timely basis, if at all. Foreign regulatory agencies, as well as the FDA,
periodically inspect manufacturing facilities both in the US and abroad. Approval by the FDA does
not ensure approval by regulatory authorities in other countries, and approval by one foreign
regulatory authority does not ensure approval by regulatory authorities in other foreign countries
or by the FDA. We have not taken any significant actions to obtain foreign regulatory approvals. We
may not be able to file for regulatory approvals and may not receive necessary approvals to
commercialize MelaFind®
in any market on a timely basis, or at all.
37
Our
inability or failure to comply with varying foreign regulation, or the imposition of new regulations, could
restrict our
sale of products internationally.
Our success will depend on our ability to attract and retain our personnel.
We are highly dependent on our senior management, especially Joseph V. Gulfo, M.D., our President
and Chief Executive Officer, Gerald Wagner, Ph.D., our Acting Chief Operating Officer and Dina
Gutkowicz-Krusin, Ph.D., our Director of Clinical Studies. Our success will depend on our ability
to retain our current management and to attract and retain qualified personnel in the future,
including scientists, clinicians, engineers and other highly skilled personnel. Competition for
senior management personnel, as well as scientists, clinicians, engineers, and experienced sales
and marketing individuals, is intense, and we may not be able to retain our personnel. The loss of
the services of members of our senior management, scientists, clinicians or engineers could prevent
the implementation and completion of our objectives, including the development and introduction of
MelaFind®. The loss of a member of our senior management or our professional staff would
require the remaining executive officers to divert immediate and substantial attention to seeking a
replacement. Each of our officers may terminate their employment at any time without notice and
without cause or good reason.
We expect to expand our operations and grow our research and development, product development and
administrative operations. This expansion is expected to place a significant strain on our
management, and will require hiring a significant number of qualified personnel. Accordingly,
recruiting and retaining such personnel in the future will be critical to our success. There is
competition from other companies and research and academic institutions for qualified personnel in
the areas of our activities. If we fail to identify, attract, retain and motivate these highly
skilled personnel, we may be unable to continue our development and commercialization activities.
Our financial results for future periods may be adversely affected by changes required by financial
and accounting regulatory agencies.
Our reported financial results may be adversely affected by changes in accounting principles
generally accepted in the US. Generally accepted accounting principles in the US are subject to
interpretation by the Financial Accounting Standards Board (FASB), the American Institute of
Certified Public Accountants, the Securities and Exchange Commission (SEC), and various bodies
formed to promulgate and interpret appropriate accounting principles. A change in these principles
or interpretations could have a significant effect on our reported financial results and could
affect the reporting of transactions completed before the announcement of a change.
Our financial results for future periods will be affected by the attainment of milestones.
We have granted to certain employees stock options that vest with the attainment of various
performance and development milestones. Upon the attainment of these milestones we will be
required to recognize a stock based compensation expense in an amount based on the fair value of
the options. This could be a significant charge.
If we fail to maintain the adequacy of our internal controls, our ability to provide accurate
financial statements could be impaired and any failure to maintain our internal controls and
provide accurate financial statements could cause our stock price to decrease substantially.
We will face increased legal, accounting, administrative and other costs and expenses as a public
company that we did not incur as a private company. The Sarbanes-Oxley Act of 2002 (SOX), as well
as new rules subsequently implemented by the SEC, the Public Company Accounting Oversight Board and
the NASDAQ Capital Market, require changes in the corporate governance practices of public
companies. We expect these new rules and regulations to increase our legal and financial compliance
costs, to divert management attention from operations and strategic opportunities, and to make
legal, accounting and administrative activities more time-consuming and costly. We have incurred
substantially higher costs to maintain directors and officers insurance since becoming a public
company.
38
We are in
the process of instituting changes to our internal procedures to satisfy the
requirements of the SOX. We have retained a
consultant to assist us and are currently evaluating our internal controls systems in order to
allow us to report on, and our independent registered public accounting firm to attest to, our
assessment of our internal controls as they relate to financial reporting, as required by Section
404 of the SOX. While we anticipate being able to fully implement the requirements relating to
internal controls and all other aspects of Section 404 of the SOX in a timely fashion, we cannot be
certain as to the timing of completion of our evaluation, testing and remediation actions or the
impact of the same on our operations, since there is no precedent available by which to measure
compliance adequacy. As a small company with limited capital and human resources, we will need to
divert managements time and attention away from our business in order to ensure compliance with
these regulatory requirements. As a public company, we require greater financial resources than we
required as a private company. Implementing these changes may require new information technologies
systems, the auditing of our internal controls, and compliance training for our directors, officers
and personnel. Such efforts would require a potentially significant expense. If we fail to maintain
the adequacy of our internal controls as such standards are modified, supplemented or amended from
time to time, we may not be able to provide accurate financial statements and comply with the SOX.
Any failure to maintain the adequacy of our internal controls and provide accurate financial
statements could cause the trading price of our common stock to decrease substantially.
Risks Relating to our Common Stock
An active trading market for our common stock may not develop.
Prior to our initial public offering, there was no public market for our common stock. An active
public market for our common stock may not continue to develop or be sustained. Further, we cannot
be certain that the market price of our common stock will not decline below the initial public
offering price or below the amount required by NASDAQ to maintain a listing on its Capital Market.
Should we fail to meet the minimum standards established by NASDAQ for its Capital Market, we could
be de-listed, meaning shareholders might be subject to limited liquidity.
Our stock price will be volatile, meaning purchasers of our common stock could incur substantial
losses.
Our stock price is likely to be volatile. The stock market in general and the market for medical
technology companies in particular have experienced extreme volatility that has often been
unrelated to the operating performance of particular companies. The following factors, in addition
to other risk factors described in this section and general market and economic conditions, may
have a significant impact on the market price of our common stock:
|
|
results of our research and development efforts and our clinical trials; |
|
|
the timing of regulatory approval for our products; |
|
|
failure of any of our products, if approved, to achieve commercial success; |
|
|
the announcement of new products or product enhancements by us or our competitors; |
|
|
regulatory developments in the US and foreign countries; |
|
|
ability to manufacture our products to commercial standards; |
|
|
developments concerning our clinical collaborators, suppliers or marketing partners; |
|
|
changes in financial estimates or recommendations by securities analysts; |
|
|
public concern over our products; |
|
|
developments or disputes concerning patents or other intellectual property rights; |
39
|
|
product liability claims and litigation against us or our competitors; |
|
|
the departure of key personnel; |
|
|
the strength of our balance sheet; |
|
|
variations in our financial results or those of companies that are perceived to be similar to us; |
|
|
changes in the structure of and third-party reimbursement in the US and other countries; |
|
|
changes in accounting principles or practices; |
|
|
general economic, industry and market conditions; and |
|
|
future sales of our common stock. |
A decline in the market price of our common stock could cause you to lose some or all of your
investment and may adversely impact our ability to attract and retain employees and raise capital.
In addition, stockholders may initiate securities class action lawsuits if the market price of our
stock drops significantly. Whether or not meritorious, litigation brought against us could result
in substantial costs and could divert the time and attention of our management. Our insurance to
cover claims of this sort may not be adequate.
If our directors, executive officers, and principal stockholders choose to act together, they may
have the ability to influence all matters submitted to stockholders for approval.
As of June 30, 2006, our directors, executive officers, holders of more than 5% of our common
stock, and their affiliates in the aggregate beneficially owned approximately 44% of our
outstanding common stock. As a result, these stockholders, subject to any fiduciary duties owed to
our other stockholders under Delaware law, will be able to exercise a controlling influence over
matters requiring stockholder approval, including the election of directors and approval of
significant corporate transactions, and will have significant control over our management and
policies. Some of these persons or entities may have interests that are different from yours. For
example, these stockholders may support proposals and actions with which you may disagree or which
are not in your interests. The concentration of ownership could delay or prevent a change in
control of our company or otherwise discourage a potential acquirer from attempting to obtain
control of our company, which in turn could reduce the price of our common stock. In addition,
these stockholders, some of whom have representatives sitting on our board of directors, could use
their voting influence to maintain our existing management and directors in office, delay or
prevent changes of control of our company, or support or reject other management and board
proposals that are subject to stockholder approval, such as amendments to our employee stock plans
and approvals of significant financing transactions.
If there are substantial sales of our common stock, our stock price could decline.
If our existing stockholders sell a large number of shares of our common stock or the public market
perceives that these sales may occur, the market price of our common stock could decline
significantly. At June 30, 2006, we had 10,879,668 shares of common stock outstanding. All of the
shares offered in our initial public offering completed on November 2, 2005 are freely tradeable
without restriction or further registration under the federal securities laws, unless purchased by
our affiliates or subject to a lock-up agreement. As of June 30, 2006, 4,191,671 shares of our
common stock were subject to lock-up agreements that have been entered into by certain of our
stockholders that expired on July 24, 2006. We estimate that all of the 6,523,164 shares of our
common stock outstanding prior to our initial public offering not previously eligible for sale
pursuant to Rule 144(k) will become available for sale under Rule 144(k) beginning October 27,
2006, except for approximately 525,534 shares held by our affiliates which will be eligible for
sale subject to the volume, manner of sale and other limitations under Rule 144.
40
On July 31, 2006, we registered 1,899,875 shares of common stock on form S-8 that are authorized
for
issuance under our stock option plans. We intend to register up to 325,135 shares of our common
stock available for issuance pursuant to our 2005 stock option plan on Form S-8 in the third
quarter of 2006 or thereafter. We intend to register additional shares of our common stock on Form
S-8 to the extent necessary to cover any additional shares that may be authorized for issuance
under our stock option plans by our board of directors (or compensation committee) in accordance
with the terms of our stock option plans. As of June 30, 2006, 1,651,705 shares were subject to
outstanding options, of which 600,524 shares were vested.
Our charter documents and Delaware law may inhibit a takeover that stockholders consider favorable
and could also limit the market price of our stock.
Provisions of our restated certificate of incorporation and bylaws and applicable provisions of
Delaware law may make it more difficult for or prevent a third party from acquiring control of us
without the approval of our board of directors. These provisions:
|
|
set limitations on the removal of directors; |
|
|
limit who may call a special meeting of stockholders; |
|
|
establish advance notice requirements for nominations for election to
our board of directors or for proposing matters that can be acted upon
at stockholder meetings; |
|
|
do not permit cumulative voting in the election of our directors,
which would otherwise permit less than a majority of stockholders to
elect directors; |
|
|
prohibit stockholder action by written consent, thereby requiring all
stockholder actions to be taken at a meeting of our stockholders; and |
|
|
provide our board of directors the ability to designate the terms of
and issue a new series of preferred stock without stockholder
approval. |
In addition, Section 203 of the Delaware General Corporation Law generally limits our ability to
engage in any business combination with certain persons who own 15% or more of our outstanding
voting stock or any of our associates or affiliates who at any time in the past three years have
owned 15% or more of our outstanding voting stock.
These provisions may have the effect of entrenching our management team and may deprive you of the
opportunity to sell your shares to potential acquirers at a premium over prevailing prices. This
potential inability to obtain a control premium could reduce the price of our common stock.
41
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk
Our exposure to market risk is confined to our cash equivalents and short-term investments. We
invest in high-quality financial instruments; primarily money market funds, federal agency
notes, and US Treasury obligations, with the effective duration of the portfolio within one year
which we believe are subject to limited credit risk. We currently do not hedge interest rate
exposure. Due to the short-term nature of our investments, we do not believe that we have any
material exposure to interest rate risk arising from our investments.
ITEM 4.
Controls and Procedures
Evaluation of disclosure controls and procedures
Based on their evaluation as of June 30, 2006, our Chief Executive Officer and Principal Financial
Officer have concluded that our disclosure controls and procedures as defined in Rules 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934, as amended, were sufficiently effective to
ensure that the information required to be disclosed by us in this Quarterly Report on Form 10-Q
was recorded, processed, summarized and reported within the time periods specified in the SECs
rules and Form lO-Q.
Change in internal control over financial reporting
There were no changes in our internal control over financial reporting during the quarter ended
June 30, 2006 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Limitations on the effectiveness of controls
Our disclosure controls and procedures are designed to provide reasonable, not absolute,
assurance that the objectives of our disclosure control system are met. Because of inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues, if any, within a company have been detected.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are not currently subject to any material legal proceedings, nor, to our knowledge, is any
material legal proceeding threatened against us. From time to time, we may be a party to certain
legal proceedings, incidental to the normal course of our business.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds.
During the three months ended June 30, 2006 two consultants exercised options and purchased 13,750
shares of our common stock. We received $9,565 in proceeds. We intend to use these proceeds for
general corporate purposes.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The 2006 Annual Meeting of Stockholders of the Company was held on May 22, 2006.
Our stockholders voted on proposals to elect directors and ratify the selection by the audit
committee of our board of directors of Eisner LLP as the Companys independent registered public
accounting firm for the fiscal year ending December 31, 2006.
42
All nominees for election to the board as directors were elected to serve until the 2007 Annual
Meeting of Stockholders and until their respective successors are elected and qualified, or until
such directors earlier death, resignation or removal. The stockholders also ratified the
selection of the independent registered public accounting firm by the audit committee of our board
of directors. The number of votes cast for, against or withheld and the number of abstentions with
respect to each proposal is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proposal |
|
Shares For |
|
Shares Withheld |
|
Shares Abstaining |
Election of Directors |
|
|
|
|
|
|
|
|
|
|
|
|
Joseph V. Gulfo, MD |
|
|
8,689,521 |
|
|
|
222,389 |
|
|
|
|
|
Breaux Castleman |
|
|
7,689,521 |
|
|
|
1,222,389 |
|
|
|
|
|
Sidney Braginsky |
|
|
8,889,521 |
|
|
|
22,389 |
|
|
|
|
|
George C. Chryssis |
|
|
8,889,521 |
|
|
|
22,389 |
|
|
|
|
|
Martin D. Cleary |
|
|
8,889,521 |
|
|
|
22,389 |
|
|
|
|
|
Dan W. Lufkin |
|
|
8,889,521 |
|
|
|
22,389 |
|
|
|
|
|
Gerald Wagner, Ph.D. |
|
|
8,889,521 |
|
|
|
22,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratification of Eisner LLP |
|
|
8,440,952 |
|
|
|
3,789 |
|
|
|
467,169 |
|
Item 5. Other Information.
(a) Not applicable.
(b) Not applicable.
43
ITEM 6. Exhibits
|
3.1 |
|
Fourth Amended and Restated Certificate of Incorporation. (1) |
|
|
3.2 |
|
By-laws. (2) |
|
|
4.1 |
|
Specimen Common Stock Certificate. (2) |
|
|
4.2 |
|
Specimen Warrant Certificate (incorporated by reference from Exhibit 4.3). (3) |
|
|
4.3 |
|
Form of Warrant Agreement entered into by and between the Registrant, ThinkEquity Partners
LLC and Stanford Group Company. (3) |
|
|
10.1 |
|
Production Agreement between the Registrant and Askion GmbH dated as of January 25, 2006.
(4) |
|
|
10.2 |
|
Amended and Restated Consulting Agreement effective as of April 1, 2006 between the
Registrant and Gerald Wagner. (5) |
|
|
10.3 |
|
Resignation Agreement, dated April 24, 2006, between the Registrant and Karen Krumeich.
(6) |
|
|
10.4 |
|
Employment Offer Letter, dated April 24, 2006, between the Registrant and Richard I.
Steinhart. (6) |
|
|
10.5 |
|
Employment Offer Letter, dated May 30, 2006, between the Registrant and Christiano S.
Butler. (7) |
|
|
31.2 |
|
Certification by the Principal Financial Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934. |
|
|
32.1 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
(1) |
|
Previously filed in connection with Amendment No. 1 to Electro-Optical Sciences, Inc.
Registration Statement on Form S-1 (file No. 333-125517) filed on July 15, 2005. |
|
(2) |
|
Previously filed in connection with Amendment No. 2 to Electro-Optical Sciences, Inc.
Registration Statement on Form S-1 (file No. 333-125517) filed on August 8, 2005. |
|
(3) |
|
Previously filed in connection with Amendment No. 4 to Electro-Optical Sciences, Inc.
Registration Statement on Form S-1 (file 333-125517) filed on September 27, 2005, as an
exhibit to the Form of Underwriting Agreement. |
|
(4) |
|
Previously filed in connection with Registrants Form 8-K filed in January 31, 2006. |
|
(5) |
|
Previously filed in connection with the Registrants Annual Report on Form 10-K filed on
March 29, 2006 as Exhibit 10.17 thereto. |
|
(6) |
|
Previously filed in connection with the Registrants Form 8-K filed on April 27, 2006. |
|
(7) |
|
Previously filed in connection with the Registrants Form 8-K filed on June 2, 2006. |
44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
ELECTRO-OPTICAL SCIENCES, INC.
|
|
|
By: |
/s/ Richard I. Steinhart
|
|
|
|
Richard I. Steinhart |
|
|
|
Vice President & Chief Financial Officer
(Principal Financial and Accounting
Officer) |
|
|
Date:
August 10, 2006
45
EXHIBIT INDEX
|
|
|
|
|
Exhibit Number |
|
Description |
|
31.1 |
|
|
Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934 |
|
|
|
|
|
|
31.2 |
|
|
Certification by the Principal Financial Officer pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934 |
|
|
|
|
|
|
32.1 |
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 |
46
EX-31.1
Exhibit 31.1
CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER PURSUANT TO
RULE 13A-14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Joseph V. Gulfo, certify that:
1. |
|
I have reviewed this report on Form 10-Q of Electro-Optical Sciences, Inc.; |
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report; |
|
3. |
|
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for,
the periods presented in this report; |
|
4. |
|
The registrants other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e) )and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have: |
|
a) |
|
designed such disclosure controls and
procedures, or caused such disclosure
controls and procedures to be
designed under our supervision, to
ensure that material information
relating to the registrant, including
its consolidated subsidiaries, is
made known to us by others within
those entities, particularly during
the period in which this report is
being prepared; |
|
|
b) |
|
designed such internal control over
financial reporting, or caused such
internal control over financial
reporting to be designed under our
supervision, to provide reasonable
assurance regarding the reliability
of financial reporting and the
preparation of the financial
statements for external purposes in
accordance with generally accepted
accounting principles; |
|
|
c) |
|
evaluated the effectiveness of the
registrants disclosure controls and
procedures and presented in this
report our conclusions about the
effectiveness of the disclosure
controls and procedures, as of the
end of the period covered by this
report based on such evaluation; and |
|
|
d) |
|
disclosed in this report any change
in the registrants internal control
over financial reporting that
occurred during the registrants most
recent fiscal quarter that has
materially affected, or is reasonably
likely to materially affect, the
registrants internal control over
financial reporting; and |
5. |
|
The registrants other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrants auditors and the audit committee of the registrants board of
directors (or persons performing the equivalent functions): |
|
a) |
|
all significant deficiencies and
material weaknesses in the design or
operations of internal control over
financial reporting which are
reasonably likely to adversely affect
the registrants ability to record,
process, summarize and report
financial information; and |
|
|
b) |
|
any fraud whether or not material,
that involves management or other
employees who have a significant role
in the registrants internal control
over financial reporting. |
Date:
August 10, 2006
|
|
|
/s/ Joseph V. Gulfo, M.D. |
|
|
|
|
|
Joseph V. Gulfo, M.D. |
|
|
President and Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
EX-31.2
Exhibit 31.2
CERTIFICATION BY THE CHIEF FINANCIAL OFFICER PURSUANT TO
RULE 13A-14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Richard I. Steinhart, certify that:
1. |
|
I have reviewed this report on Form 10-Q of Electro-Optical Sciences, Inc.; |
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report; |
|
3. |
|
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for,
the periods presented in this report; |
|
4. |
|
The registrants other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e) )and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have: |
|
a) |
|
designed such disclosure controls and
procedures, or caused such disclosure
controls and procedures to be
designed under our supervision, to
ensure that material information
relating to the registrant, including
its consolidated subsidiaries, is
made known to us by others within
those entities, particularly during
the period in which this report is
being prepared; |
|
|
b) |
|
designed such internal control over
financial reporting, or caused such
internal control over financial
reporting to be designed under our
supervision, to provide reasonable
assurance regarding the reliability
of financial reporting and the
preparation of the financial
statements for external purposes in
accordance with generally accepted
accounting principles; |
|
|
c) |
|
evaluated the effectiveness of the
registrants disclosure controls and
procedures and presented in this
report our conclusions about the
effectiveness of the disclosure
controls and procedures, as of the
end of the period covered by this
report based on such evaluation; and |
|
|
d) |
|
disclosed in this report any change
in the registrants internal control
over financial reporting that
occurred during the registrants most
recent fiscal quarter that has
materially affected, or is reasonably
likely to materially affect, the
registrants internal control over
financial reporting; and |
5. |
|
The registrants other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrants auditors and the audit committee of the registrants board of
directors (or persons performing the equivalent functions): |
|
a) |
|
all significant deficiencies and
material weaknesses in the design or
operations of internal control over
financial reporting which are
reasonably likely to adversely affect
the registrants ability to record,
process, summarize and report
financial information; and |
|
|
b) |
|
any fraud whether or not material,
that involves management or other
employees who have a significant role
in the registrants internal control
over financial reporting. |
Date:
August 10, 2006
|
|
|
/s/ Richard I. Steinhart |
|
|
|
|
|
Richard I. Steinhart |
|
|
Vice President and Chief Financial Officer |
|
|
(Principal Accounting and Financial Officer) |
|
|
EX-32.1
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
ELECTRO-OPTICAL SCIENCES, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Each of the undersigned officers of Electro-Optical Sciences, Inc.(the Company) hereby
certifies to his knowledge that the Companys quarterly report on Form 10-Q for the period ended
June 30, 2006 (the Report), as filed with the Securities and Exchange Commission on the date
hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934, as amended, and that the information contained in the Report
fairly presents, in all material respects, the financial condition and results of operations of the
Company.
|
|
|
/s/ Joseph V. Gulfo |
|
|
|
|
|
President and Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
August 10,
2006 |
|
|
|
|
|
/s/ Richard I. Steinhart |
|
|
|
|
|
Vice President & Chief Financial Officer |
|
|
(Principal Accounting and Financial Officer) |
|
|
August 10,
2006 |
|
|
|
|
|
* |
|
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of
2002 has been provided to Electro-Optical Sciences, Inc. and will be retained by Electro-Optical
Sciences, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
This written statement accompanies the Form 10-Q to which it relates, is not deemed filed with the
Securities and Exchange Commission, and will not be incorporated by reference into any filing of
Electro-Optical Sciences, Inc. under the Securities Act of 1933 or the Securities Exchange Act of
1934, irrespective of any general incorporation language contained in such filing. |