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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2008
| 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
Irvington, New York 10533
(Address, including zip code, of registrant’s principal executive offices)
Irvington, New York 10533
(Address, including zip code, of registrant’s principal executive offices)
(914) 591-3783
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Name of Each Exchange on Which Registered | |
| Common stock, $0.001 par value | The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act:
None
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Security Act.
Yes o No þ
Yes o No þ
Indicate by check mark whether the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes o No þ
Yes o No þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See
the definition of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
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
The aggregate market value of the 14,624,528 shares of common stock held by non-affiliates of
the registrant as of June 30, 2008 was $112,023,884 based on the last reported sale price of $7.66
per share on the Nasdaq Capital Market on June 30, 2008. (For this computation, the registrant
excluded the market value of all the shares of its common stock held by Directors and Officers of
the registrant holding approximately 5.1% of the registrant’s outstanding shares; such exclusion
shall not be deemed to constitute an admission that any such person is an “affiliate” of the
registrant. There were no shareholders holding at least 10% of the Company’s common stock). The
number of shares outstanding of the registrant’s common stock as of February 27, 2009 was
17,634,498 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for the 2009 Annual Meeting of Stockholders,
which is to be filed subsequent to the date hereof, are incorporated by reference into Part III of
this Form 10-K.
ELECTRO-OPTICAL SCIENCES, INC.
2008 FORM 10-K ANNUAL REPORT
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This Annual Report on Form 10-K, including the sections labeled Management’s 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 industry’s 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. We generally identify these statements by words or phrases such as
“believe,” “anticipate,” “assuming,” “expect,” “intend,” “plan,” “will,” “may,” “should,”
“estimate,” “predict,” “potential,” “continue,” or the negative of such terms or other similar
expressions. 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
section “Risk Factors,” as well as those discussed elsewhere in this Annual Report on Form 10-K. 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.
Item 1. Business
Overview
We are a medical device company focused on the design, development and commercialization 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 light of multiple
wavelengths to capture images of suspicious pigmented skin lesions and extract data. The data are
then analyzed utilizing image processing classification algorithms, ‘trained’ on our proprietary
database of melanomas and benign lesions, to provide information to assist in the management of the
patient, including information useful in the decision of whether to biopsy the lesion.
The components of the MelaFind® system include:
| • | a hand-held imaging device, which employs high precision optics and multi-spectral illumination (multiple colors of light including near infra-red); | ||
| • | our proprietary database of pigmented skin lesions, which we believe to be the largest in the US; and | ||
| • | our lesion classifiers, which are sophisticated mathematical algorithms that extract lesion feature information and classify lesions. |
We have entered into a binding Protocol Agreement with the US Food and Drug Administration
(“FDA”), which is an agreement for the conduct of the pivotal trial in order to establish the
safety and effectiveness of MelaFind®. We believe the presence of the Protocol Agreement
significantly enhances our ability to expedite the FDA approval process. On October 12, 2006, we
announced that the FDA had informed us that when submitted, the MelaFind® premarket
approval, or PMA, application would receive expedited review. Expedited review means that upon
filing our PMA, the FDA will conduct a team review, prioritize the application, and allocate
sufficient resources toward a 180 day review period. While the expedited review could shorten the
MelaFind® FDA approval process, we can give no assurances that this will be the case.
The data accrual phase of the MelaFind® pivotal trial was completed in the third quarter
of 2008 and the image processing classification algorithms were finalized in the fourth quarter.
At year end 2008, the databases were undergoing third-party statistical validation and the
classification algorithms were undergoing software verification and validation.
On February 13, 2009, the Company announced that a third party, independent bio-statistician
had provided positive top line results from the MelaFind® pivotal clinical trial. This
blinded study was conducted at seven clinical sites and included 1,831 pigmented skin lesions from
1,383 patients. We are working to complete our PMA application, which includes the final study
reports, and expect to file it with the FDA during the second quarter of 2009. Upon obtaining
approval from the FDA, we plan to launch MelaFind® commercially in the United States.
To date, we have not generated any revenues from MelaFind®.
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Cancers of the skin have a higher incidence than all other cancers combined, and the rates are
rising dramatically. It is estimated that there were over 120,000 new cases of melanoma in 2008,
and a similar number of new cases is projected for 2009. This equates to Melanoma being the cause
of one death every hour of every day of the year in the U.S. Melanoma is responsible for
approximately 75% of skin cancer fatalities and is the deadliest of all skin cancers as there is
currently no cure for advanced stage melanoma. However, early detection of skin cancers, like
melanoma, can lead to virtually a 100% cure rate. Advanced stage melanoma is costly to treat and is
responsible for approximately 90% of the total spending on melanoma treatment in the US, costing up
to $170,000 per patient. If diagnosed early, however, melanoma is almost always cured by simple
resection at a cost of approximately $1,800 per patient.
Because early detection is critical to survival, the American Cancer Society recommends that
individuals age 40 years and older have complete skin examinations on an annual basis. According to
US Census data, over 130 million Americans in the US are over age 40. Furthermore, there are more
than 20 million individuals in the US who have dysplastic nevi, a type of pigmented skin lesion
that when present is associated with an increased risk of melanoma. These individuals warrant more
frequent observation.
Melanomas are mainly diagnosed by dermatologists and/or primary care physicians using visual
clinical evaluation. Physicians assess pigmented skin lesions using the “ABCDE” criteria,
Asymmetry, Border irregularity, Color variation, Diameter greater
than 6 mm, and Evolving — change in “ABCD” over time. This assessment is subjective and
results in missed melanomas, as well as a ratio of benign lesions biopsied to melanomas confirmed
that is highly variable and as high as 40 to 1 for dermatologists and as high as 50 to 1 for
primary care physicians.
To date, MelaFind® has been developed, trained and tested on over 9,000 skin
lesions from over 7,000 patients at over 30 clinics. Our clinical studies have demonstrated that
MelaFind® is highly sensitive for melanoma in situ and minimally invasive melanomas, and
results in fewer false positive biopsies than skin cancer experts. Furthermore, reader studies have
demonstrated that MelaFind® detected more melanomas than dermatologists, including skin
cancer experts.
We believe that with the assistance provided by MelaFind®, physicians could
diagnose more melanomas at the earliest, most curable stages with fewer false positive biopsies,
which would reduce both treatment costs and the number of unnecessary biopsies, and improve quality
of life.
Our objective is for MelaFind® to become an integral part of the standard of care
in melanoma detection.
All of our 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. We decided to discontinue all operations associated with our
DIFOTI® product, effective as of April 5, 2005, in order to focus our resources on the
development and commercialization of MelaFind®. On December 11, 2006 we announced that
we had signed an exclusive sale and licensing agreement with KaVo Dental GmbH (“KaVo”), a leading
dental equipment manufacturer and subsidiary of Danaher Corporation, to further develop and
commercialize DIFOTI®. In accordance with the terms of the agreement, KaVo paid us an
up-front sum and made a second payment to us in July 2007. KaVo will pay us an annual royalty based
on the number of DIFOTI® related systems sold per calendar year following commercial
re-launch. The Company began earning the contractual minimum royalty in the second half of 2008, as
KaVo had not re-launched the product as of year end.
The Market Opportunity
Cancer of the skin (non-melanoma and melanoma skin cancers combined) is the most common of all
cancers, with over 1.3 million projected cases annually, and is estimated to account for more than
50% of all cancers. It is estimated that there were over 120,000 new cases of melanoma in 2008, and
a similar number of new cases is projected for 2009. There are three significant forms of skin
cancer: basal cell, accounting for approximately 75% of skin cancer cases; squamous cell, totaling
approximately 20% of skin cancer cases; and melanoma, which accounts for an estimated 4% of skin
cancer cases, but is responsible for approximately 75% of all deaths from skin cancer. The American
Cancer Society projects over 10,000 deaths annually from skin cancer. Since 1973, the mortality
rate for melanoma has increased by 50%. Since approximately 62% of melanomas and 45% of melanoma
deaths occur prior to age 65, melanoma places significant burdens on the healthcare system well
beyond Medicare.
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Melanoma, if left untreated, can be fatal. If diagnosed and removed early in its evolution,
when confined to the outermost skin layer and deemed to be “in situ,” it is virtually 100% curable.
Invasive melanomas that are thin and extend into the uppermost regions of the second skin layer
still have excellent cure rates (greater than 90%). However, once the cancer advances into the
deeper layers of skin, the risk of metastasis (spreading to other parts of the body) increases.
Metastases can occur when the tumor enters into lymphatic channels and newly formed blood vessels,
potentially resulting in significant morbidity (illness) and mortality (death). Once the cancer has
advanced and metastasized to other parts of the body, it is difficult to treat. At this advanced
stage, the five year survival rate is reported to be only 10%. Moreover, survival prospects for
those with advanced melanoma have not improved over the past three decades.
Melanoma is currently the subject of significant attention in the medical community. In part,
this attention is due to the fact that it is the fastest growing cancer. It is also the most common
cancer in young adults ages 20-30, and currently there are more new cases of melanoma than
HIV/AIDS. In women ages 25-30, melanoma is the primary cause of cancer death. In women ages 30-35,
melanoma is the second leading cause of death after breast cancer. There has been a 50% increase
in the incidents of Melanoma in women between the ages of 15 and 39, over the last twenty-five
years. Recently published papers identify a strong correlation between breast cancer and melanoma.
Our Strategy
Our objective is for MelaFind® to become an integral part of the standard of care
in melanoma detection. To achieve this objective, we are pursuing the following strategy:
| • | Establish MelaFind® as the leading technology for assisting in the detection of melanoma. We have invested considerable capital and expertise into developing our core technology platform, which is protected by eight US patents. We will continue to refine and optimize this technology in order to position MelaFind® as the leading system for assisting in the detection of melanoma. | ||
| • | Pursue the timely FDA approval of MelaFind®. We have entered into a binding Protocol Agreement with the FDA for the conduct of the pivotal trial of MelaFind®. On October 12, 2006, we announced that the FDA had informed us that when submitted, the MelaFind® premarket approval, or PMA, application would receive expedited review. Expedited review means that upon filing our PMA, the FDA will conduct a team review, prioritize the application, and allocate sufficient resources toward a 180 day review period. While the expedited review could shorten the MelaFind® FDA approval process, we can give no assurances that this will be the case. The data accrual phase of the MelaFind® pivotal trial was completed in the third quarter of 2008 and the image processing classification algorithms were finalized in the fourth quarter. At year end 2008, the databases were undergoing third-party statistical validation and the classification algorithms were undergoing software verification and validation. On February 13, 2009, the Company announced that a third party, independent bio-statistician had provided positive top line results from the MelaFind® pivotal trial. We are working to complete our PMA application, which includes the final study reports, and expect to file it with the FDA during the second quarter of 2009. Upon obtaining PMA approval from the FDA, we plan to commercially launch MelaFind® in the United States. | ||
| • | Commercialize MelaFind® using multiple sales and marketing strategies. Our internal sales and marketing effort will commence following PMA approval and it will focus initially on “high volume and key opinion leader” dermatologists, including skin cancer specialists, in key regions of the US. We intend to offer MelaFind® on a per patient basis, creating a recurring revenue stream. To enter the larger US markets of general dermatologists and primary care physicians, and for international markets, we may establish partnerships with pharmaceutical and/or diagnostic/device companies with an established presence in these markets. We intend to commence sales of MelaFind® in the US immediately upon receiving PMA approval for physicians to offer MelaFind® to their patients on a self-pay basis. Once sufficient evidence to support favorable coding and coverage decisions and to obtain appropriate payment levels, we may pursue national coverage decisions from the Centers for Medicare and Medicaid Services (“CMS”) and private payers for third-party reimbursement. |
Additionally, our strategy may include the potential acquisition of complementary products and
technologies in the dermatological arena.
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Limitations of Current Melanoma Diagnosis
Melanomas are mainly diagnosed by dermatologists and/or primary care physicians using visual
clinical evaluation. This subjective interpretation relies on physician experience and skill. In
contrast, MelaFind® delivers an objective assessment based on numerical scores assigned
to the suspicious skin lesion under evaluation. Further, clinical examination is limited to the
surface appearance of the suspicious pigmented skin lesion, whereas MelaFind® utilizes
information derived from up to 2.5 mm deep into the skin. Dermatologists who specialize in the
management of pigmented skin lesions may also use dermoscopy, a method of viewing lesions under
magnification. Although dermoscopy provides more information than unaided visual examination,
mastery of the technique necessitates many years of training and experience. Proper use of
dermoscopy can reduce the number of unnecessary biopsies of benign lesions, but even dermoscopy
experts biopsy 3-10 benign lesions for every melanoma detected.
Most dermatologists generally use only visual clinical evaluation for melanoma detection.
Consequently they biopsy up to 40 benign lesions for every melanoma detected. While many primary
care physicians immediately refer patients with suspicious pigmented skin lesions to a specialist,
an increasing number perform biopsies on skin lesions themselves. Their lack of specialist training
in identifying suspect lesions makes their diagnostic accuracy much lower in terms of both
sensitivity (the ability to detect disease when present) and specificity (the ability to exclude
disease when not present) . This results in 40% misdiagnosed melanomas and a ratio of benign
lesions biopsied to melanomas confirmed of up to 50 to 1.
MelaFind® Product Description
MelaFind® is a non-invasive system for assisting in the early detection of
melanoma. The MelaFind® system that, in commercial use will perform all diagnosis at the
point of care, is comprised of a hand-held imaging device, our proprietary database of pigmented
skin lesions and our lesion classifiers. MelaFind® employs multiple wavelengths of light
to obtain data from images of suspicious lesions; and then the data are analyzed against our
proprietary database of melanomas and benign lesions using our sophisticated algorithms. A
diagnostic report will be generated in the physician’s office containing considerable objective
information about the lesion that is currently not available, including information useful in the
decision of whether to biopsy the lesion. The key components of the MelaFind® system are
listed below:
A hand-held imaging device, which is comprised of several components:
| • | an illuminator that shines 10 different specific wavelengths of light, including near infra-red bands; | ||
| • | a lens system composed of nine elements that creates images of the light reflected from the lesions; | ||
| • | a photon (light) sensor; and | ||
| • | an image processor employing proprietary algorithms to extract many discrete characteristics or features from the images. |
Our proprietary database of pigmented skin lesions, which includes in vivo
MelaFind® images and corresponding histological results of over 9,000 biopsied skin
lesions from over 7,000 patients, which we believe to be the largest such database in the US and a
substantial barrier to competition.
Our lesion classifiers, which are sophisticated mathematical algorithms. The “brain” of the
MelaFind® system, the Lesion Classifier, distinguishes melanoma from non-melanoma using
the lesion features extracted and measured by the hand-held imaging device. The Lesion Classifiers
are developed from our proprietary database of pigmented skin lesions and employ sophisticated
mathematical algorithms. The mathematical formulas and algorithms used by the Lesion Classifiers
are devised and optimized through the process of “classifier training” using lesions from our
proprietary database. Lesion Classifier development and training is an iterative process involving:
(1) selection of the lesion features that provide for optimal lesion discrimination; (2)
optimization of the mathematical formulas to differentiate benign lesions from melanoma; and (3)
expansion of the size and diversity of our proprietary lesion database. The performance of the
Lesion Classifiers is directly related to the size of the database used in classifier development,
as well as the degree to which the training database is representative of the lesions that will be
evaluated by MelaFind® in commercial use.
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As with many diagnostic systems, the diagnostic performance of MelaFind® is
characterized using two measures: (1) sensitivity — the ability to detect disease when it is
present; and (2) specificity — the ability to exclude disease when it is not present. Since
sensitivity and specificity are typically trade-offs, meaning that as one parameter increases the
other decreases, the MelaFind® Lesion Classifier is developed and trained with the
intention that MelaFind® will detect all melanomas in the training data set with the
highest possible specificity.
Reliable functioning of the MelaFind® system is critical to its utility and success
in the marketplace. Automated self-calibration tests are performed by the hand-held device to
ensure proper functionality.
MelaFind® Regulatory Status
In late 2004, we entered into a binding Protocol Agreement with the FDA for our pivotal
clinical study. A pivotal clinical trial is a blinded clinical study that is used by the FDA as the
basis for determining the effectiveness of a device in a PMA application. The Protocol Agreement
specified the inclusion criteria (description of patients and lesions eligible for the trial),
sample size, endpoints, and performance criteria necessary to establish the safety and
effectiveness of MelaFind®. The Protocol Agreement requires that the study include at
least 1,200 pigmented skin lesions and at least 93 eligible melanomas for analysis. The data
accrual phase of the MelaFind® pivotal trial was completed in the third quarter of 2008.
In October 2006, the FDA informed us that when submitted, the MelaFind® PMA
application would receive expedited review. Expedited review means that upon filing a PMA, the FDA
will conduct a team review, prioritize the application, and allocate sufficient resources toward a
180 day review period. While the expedited review could shorten the MelaFind® FDA
approval process, we can give no assurances that this will be the case.
On February 13, 2009, the Company announced that a third party, independent bio-statistician
had provided positive top line results from the MelaFind® pivotal clinical trial. This
blinded study was conducted at seven centers across the US and included 1,831 pigmented skin
lesions from 1,383 patients. Prior to the start of the study, the Company and the FDA entered into
a binding Protocol Agreement to stipulate the sensitivity and specificity endpoints that should be
used to determine the safety and effectiveness of MelaFind®. MelaFind®
detected 112 of 114 (98% sensitivity; lower confidence bound of 95%) melanomas that were eligible
and evaluable for primary sensitivity endpoint analysis, and 125 of 127 (98% sensitivity; lower
confidence bound greater than 95%) melanomas overall. The Protocol Agreement calls for sensitivity
endpoints of greater than 95% lower confidence bound (a lower confidence bound of greater than 95%
indicates that if the study were repeated, there would be less than a 5% chance that the
sensitivity would be below 95%). MelaFind®‘s specificity, the ability to accurately rule
out disease, was significantly superior (9.5%) to that of the study dermatologists (3.7%), who are
skin cancer experts (p-value less than 0.02). The Protocol Agreement calls for MelaFind®
to be more specific than the study physicians at a p-value of less than 0.05 (a p-value of less
than 0.05 indicates a less than 5% probability that the observed difference was due to chance).
In order to generate a comparison with dermatologists’ ability to accurately detect melanoma,
the Company conducted a parallel pilot readers’ study with a different group of 39 dermatologists.
Using images and clinical histories of 23 randomly-selected melanomas from the pivotal study, this
group of dermatologists, on average, would have decided to biopsy only approximately 18 (80%) of
the melanomas, whereas the MelaFind® result would have led to a biopsy of 22 of the
melanomas (biopsy sensitivity of 96%).
We are working to complete our PMA application, which includes the final study reports, and
expect to file it with the FDA during the second quarter of 2009.
Upon obtaining PMA approval from the FDA, we plan to launch MelaFind® commercially
in the United States. For commercialization outside the US, approvals from appropriate regulatory
bodies within other countries will be required. The Company has obtained Underwriters’ Laboratories
(“UL”) certification and Certification Bodies’ Scheme (“CB”) test certification for
MelaFind®. The CB test certification is an international system of acceptance for test
reports and facilitates the process of obtaining product certification in many other countries We
intend to seek Conformite Europeenne (“CE”) mark approval following further interaction with the
FDA in the review and approval of MelaFind®.
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History of MelaFind®
MelaFind®
Development History
MelaFind® has been developed, trained and tested on over 9,000 skin lesions from
over 7,000 patients at over 30 clinical sites. On February 13, 2009, the Company announced that a
third party, independent bio-statistician had provided positive top line results from the
MelaFind® pivotal trial. This blinded study was conducted at seven clinical sites and
included 1,831 pigmented skin lesions from 1,383 patients.
Having recently concluded the MelaFind® pivotal trial, we are currently preparing
the MelaFind® PMA application and look forward to filing it with the FDA during the
second quarter of 2009. The FDA has previously notified us that MelaFind® has received
expedited review designation. Expedited review means that upon filing a PMA, the FDA will conduct
a team review, prioritize the application, and allocate sufficient resources toward a 180 day
review period. The FDA has also indicated to us that MelaFind® will be the subject of a
Panel Meeting, which we anticipate will occur approximately midway through the review cycle. Upon
FDA approval of MelaFind®, we will commence US commercialization efforts.
Hardware and Software History
ASKION GmbH (“Askion”), located in Gera Germany, which specializes in precision optics, has
become an integral member of our MelaFind® development team and we expect to continue to
work with Askion for the foreseeable future. Askion produced the MelaFind® hand-held
imaging devices used in our pivotal clinical trials and is currently building additional units and
performing other additional developmental activities on our behalf.
Through Askion, the Company uses Carl Zeiss Jena GmbH (“Zeiss”) to build the lenses and lens
assemblies that are being used in MelaFind® system. In addition, Zeiss provides the
Company with certain technical consulting expertise for production scale-up of the
MelaFind® systems. We expect to continue to work with ASKION and Zeiss throughout 2009.
In developing the MelaFind® system, we have developed and tested several
generations of hand-held imaging devices. Commercial-grade systems were used in our pivotal
clinical trial.
Along with hardware development efforts, we have also developed, trained, tested, and continue
to refine the software components of the system, including lesion quality control filters,
calibration algorithms, lesion classification algorithms, and hardware normalization software. In
the fourth quarter of 2008, we finalized the image processing classification algorithms for use in
the analysis of the data obtained from the pivotal clinical trial.
Sales and Marketing
We plan to offer MelaFind® as a point-of-care service. This approach is intended to
provide us with the advantage of recurring revenues corresponding to the number of patients
examined and to provide the physician with access to our technology without having to make a
significant capital investment. Our sales and marketing strategy is to initially establish,
directly or indirectly, a regionally focused sales, marketing, and distribution effort in North
America. We plan to concentrate our commercialization efforts initially on “high volume and key
opinion leader” dermatologists, including skin cancer experts, in key regions of the US. For the
expansion to the larger US markets of general dermatologists and primary care physicians, and for
international markets, we may establish development and commercialization partnerships with
pharmaceutical and/or diagnostic/device companies with an established competency in the market to
accelerate the product introduction and to maximize the breadth of the commercial opportunity.
While we are exploring potential partnership opportunities for the purpose of marketing and
commercializing MelaFind®, at this time we have not yet established any such partnership
arrangements.
Ultimately, we believe that MelaFind® is well suited for use by primary care
physicians, who are at the front line of early detection, but lack specialist training in
identifying suspect lesions. We believe that MelaFind® can significantly assist primary
care physicians in improving their diagnostic acumen.
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The MelaFind® Value Proposition for the Healthcare System
Upon FDA approval, we plan to offer MelaFind®, on a self-pay basis. Based on market
research with physicians and patients, we believe that a self-pay model could support significant
utilization of MelaFind®, especially in the dermatologists’ offices.
Following the introduction of MelaFind® on a self-pay basis, we look to build a
sufficient body of medical evidence to support favorable coding and coverage decisions at
appropriate payment levels by third-party payers. This strategy is consistent with the approach
that has been used to support positive coverage decisions by CMS and private payers for other
products. The value drivers include: (1) the diagnosis of melanoma at the early curable stages, as
opposed to advanced stages, allowing for both a greater opportunity to cure and a reduction in
treatment costs, and (2) reduced number of referrals for evaluation and biopsy of benign pigmented
skin lesions. We believe that the use of MelaFind® could result in substantial savings
to the US healthcare system.
Our Reimbursement Strategy
We may pursue Current Procedural Terminology (“CPT”) code and private insurance coverage, as
appropriate, following initial commercialization efforts, which will be undertaken on a self-pay
basis. We are aware of no CPT code that is specifically applicable to the use of
MelaFind®. We have engaged the services of expert consultants with extensive experience
in the CPT and coverage and payment decision processes to assist us in our strategy.
The following is a description of the process that may be undertaken in pursuit of favorable
coding and coverage decisions and appropriate payment levels by third-party payers:
In advance of obtaining a CPT code, we intend to extend our efforts to secure coverage by
private payers and Medicare administrative contractors. Securing coverage first through private
payers and Medicare administrative contractors is a common strategy for facilitating national
Medicare coverage. Our efforts to secure reimbursement for services using MelaFind® will
focus first on private payers and Medicare administrative contractors, particularly in sunbelt
locations and in areas that have been shown to be underserved by dermatologists.
In the US, healthcare providers that utilize medical systems such as MelaFind®,
generally rely on third-party payers, including Medicare, Medicaid, private health insurance
carriers, and managed care organizations, to reimburse part, but not necessarily all, of the costs
and fees associated with the procedures performed using these devices. Public and professional
concern about the cost of medical care and new technologies has evoked a variety of remedies.
Third-party payers are increasingly challenging the pricing of medical products and procedures.
Guidelines have been established that recognize the need for clinical strategies to assess the
cost-effectiveness of new diagnostic tools or procedures (Evidence-Based Medicine), in the hope of
reducing the variations in diagnostic and treatment protocols and reducing healthcare expenditures.
Insurers are also attempting to curb overutilization by applying a rational analysis of the
costs versus benefits of new technologies.
It is critical to build a sufficient body of clinical evidence to support favorable coding and
coverage decisions and to secure appropriate levels of payment from third-party payers. The
importance of Evidence-Based Medicine is underscored by recent actions by CMS, including its
proposed Covered with Evidence Development initiative designed to provide quicker access to new
technologies for beneficiaries while assuring that appropriate evidence for final coverage
decisions will be obtained.
Assuming FDA approval of MelaFind®, we are considering submitting an application
for a new CPT code to the American Medical Association (“AMA”) CPT Editorial Panel pursuant to the
establishment of significant clinical evidence to support favorable coding and coverage decisions.
If the CPT Editorial Panel concurs that a new CPT code is needed and appropriate, and we are able
to demonstrate that MelaFind® is reasonable and necessary for the Medicare population,
we anticipate that the new code would be referred to the AMA’s Relative Value Scale Update
Committee (“RUC”) to determine the appropriate level of Medicare Part B reimbursement for the
procedure, relative to other physician services. This analysis would include a survey of physicians
utilizing MelaFind® in the commercial setting. In setting Medicare reimbursement rates,
CMS is generally guided, though not bound, by the recommendation of the RUC.
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Medicare coverage and payment policies significantly influence the practices and policies
of private payers, managed care organizations, and state Medicaid agencies. We expect to commence
efforts to obtain positive coverage decisions from private payers, managed care organizations,
Medicaid agencies, and state Medicare administrative contractors pursuant to the establishment of
significant clinical evidence to support favorable coding and coverage decisions and secure
appropriate payment levels. We believe it is likely that the private payers, managed care
organizations, and state Medicare administrative contractors will desire to establish pilot
programs of MelaFind® to determine the impact of the product in their systems,
initially.
One of the keys to securing reimbursement is the desire of physicians to use a new technology
in order to enhance their diagnostic acumen and improve the standard of care. Likewise, we believe
that once patients become aware of the availability of MelaFind®, they may request that
their physicians utilize MelaFind®. We believe that MelaFind® will represent
an improvement in the standard of care for the detection of melanoma. As such, we anticipate that
its adoption by physicians and reimbursement by payers will be facilitated by medical and
scientific evidence published in peer-reviewed journals and presentations at scientific and medical
meetings including the American Academy of Dermatology annual and regional meetings. We plan to
execute a publication strategy and to provide information for continuing medical education efforts
in order to communicate the potential of MelaFind® to improve patient care. We also plan
to sponsor clinical trials following PMA approval in order to evaluate MelaFind® in
additional settings. We anticipate that the results of these studies will also be published in
peer-reviewed journals and presented at scientific and medical meetings. We anticipate that these
studies will help to demonstrate the potential of MelaFind® to improve patient care.
We recognize that a favorable reimbursement environment will have a significant impact on
MelaFind®‘s adoption and commercial success. Even if a procedure is eligible for
reimbursement, the level of reimbursement may not be adequate. In addition, third-party payers may
deny reimbursement if they determine that the device used in the treatment was not cost-effective
or was used for a non-approved indication. We have anticipated this need and we plan to employ an
active strategy to obtain medical coverage, identify appropriate coding and establish adequate
payment.
Upon FDA approval, we plan to offer MelaFind® on a self-pay basis. Based on market
research with physicians and patients, we believe that a self-pay model could support significant
utilization of MelaFind®, especially in the dermatologists’ offices.
Competition
We are not aware of any direct competitors to MelaFind®. A number of systems for
visualization and assessment of pigmented skin lesions are in use or in development. These include
clinical (naked eye) examination, whole body mole mapping systems, dermoscopes (also known as
“dermatoscopes”), digital dermoscopes, spectrophotometric intercutaneous analysis (analysis of skin
structures through measurement of how they absorb light of different wavelengths), confocal
microscopy, and spectrophotometric (color) analysis. These systems rely on physician experience and
expertise in recognizing patterns that are associated with melanoma and non-melanoma in order to
render an interpretation and diagnosis.
The current primary method for detecting melanoma relies on physicians to interpret whether a
pigmented skin lesion is suspicious for melanoma (thereby requiring biopsy) based on their ability
to recognize patterns using clinical examination. Physicians use the “ABCDE” criteria: Asymmetry,
Border irregularity, Color variation, Diameter greater than 6 mm, and Evolving- change in “ABCD”,
in their assessment. Whole body mole mapping consists of periodic photography of patients,
typically those at high risk for developing melanoma. The pictures are reviewed clinically. This
service is provided at some diagnostic imaging centers and dermatology offices. DigitalDerm, Inc.
offers a computerized system for acquisition, storage, and review of the pictures.
Dermoscopy, or epiluminescence microscopy, allows for non-invasive visualization of colors and
microstructures of the epidermis, the dermal-epidermal junction, and the papillary dermis not
visible to the naked eye. Manufacturers of dermoscopes include (but are not limited to) Welch
Allyn, Inc. (US), Heine Optotechnik (Germany), and 3Gen, LLC (US). Digital dermoscopes allow for
dermoscopic images to be visualized on a computer screen at larger magnification. In addition,
images may be stored and compared to images taken previously. Manufacturers of digital dermoscopes
include (but are not limited to) Derma Medical Systems, Inc. (Austria), ZN, High Medical Systems
S.P.A., Vision Technologies AG (Germany), Polartechnics, Ltd. (Australia), Biomips Engineering
(Italy). and Sci Base AB (Stockholm Sweden).
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Dermoscopy is a tool used by approximately 25% of dermatologists in the US and is associated
with a long learning curve. Physicians experienced in the use of dermoscopy have been shown to have
an increased diagnostic accuracy of 10 to 20% over clinical examination. Although some digital
dermoscopes provide information regarding the probability that a lesion may be melanoma compared to
a database of lesions, no system, to our knowledge, is under PMA development for objective
interpretation. In addition, Sci Base AB is developing electrical impedance technology for
melanoma detection.
An article published in 2005 describes the results of a study utilizing the DB-Mips system
from Biomips Engineering. The database of lesions used in this study differs significantly from our
proprietary database. For example, our database includes a substantial number of lesions such as
seborrheic keratoses (benign lesions derived from skin cells called Keratinocytes) and pigmented
basal cell carcinomas, which can be difficult to differentiate from melanoma. The DB-Mips database
included none of these lesions. Further, our database includes many more melanomas that are
minimally invasive as well as a much higher percentage of dysplastic nevi compared to the DB-Mips
database. Minimally invasive melanomas are more difficult to diagnose than melanomas that have
significantly invaded the skin, and dysplastic nevi can be very difficult to differentiate from
melanoma. Thus, we believe that the DB-Mips database does not include as many pigmented lesions
that are difficult to differentiate from melanoma as our database. This is further confirmed by the
fact that the specificity of dermatologists in other DB-Mips studies was reported to be over 80%
while the specificity of dermatologists in MelaFind® studies is typically under 30%. The
DB-Mips system has a reported specificity of up to 79%, which is roughly equivalent to the
specificity of the dermatologists in DB-Mips studies. The DB-Mips system has a reported sensitivity
to melanoma of about 95%. We believe that because the DB-Mips database includes relatively few
early melanomas, direct comparison with MelaFind®‘s sensitivity is not meaningful.
Another article published in November 2005 describes the results of a study conducted using
the SolarScan system developed by PolarTechnics, Ltd. The sensitivity and specificity of SolarScan
on a training set of 1,644 melanocytic lesions (skin lesions derived from skin cells called
melanocytes), including 260 melanomas was 90% and 61%, respectively. In a blinded study of 786
melanoncytic lesions including 122 melanomas, the sensitivity and specificity of SolarScan was 91%
and 65%, respectively. In a reader study of 78 melanocytic lesions including 13 melanomas, the
sensitivity and specificity of SolarScan was 85% and 65%, respectively, compared to the sensitivity
and specificity of skin cancer experts (90% and 59%, respectively) and dermatologists (81% and 60%,
respectively). SolarScan did not perform well on non-melanocytic lesions; for example, only 13% of
seborrheic keratoses were successfully classified. We believe that since SolarScan is intended for
melanocytic lesions only, its use is limited to expert dermatologists. Further, we believe that a
sensitivity in the range of 90% would not gain market approval.
Spectrophotometric intercutaneous analysis is a technique of visualizing collagen, blood, and
pigment. Astron Clinica (UK) manufactures a device utilizing this technique. Confocal microscopy is
an experimental approach for non-invasive visualization of skin structures at the cellular level;
such a device utilizing this technique is in development by Lucid (US). Other imaging modalities,
including molecular imaging in which tagged antibodies search for cancer cell antigens, and
molecular and genetic screening tests. Molecular-based approaches are being investigated; Dermtech
is exploring Messenger RNA analysis of surface cells for example.
A spectrophotometer (an instrument for measuring absorption of light of different wavelengths)
is offered by Medical High Technologies S.p.A. (Switzerland). In contrast to MelaFind®,
the product does not perform automatic quality control of images and has an external light source.
We believe that the reported sensitivity of 80.4% would not gain market approval. Further, we are
not aware of comparative data on physicians’ performance in corresponding data sets. The system
does not have PMA approval, nor are we aware of efforts directed to obtain PMA approval of the
product.
Several additional approaches to detecting Melanoma have been identified. Balter Medical
(Norway) uses ‘Optical Transfer Diagnosis’ to identify Melanomas. The technology measures how much
light is absorbed in healthy versus diseased tissue to determine whether cancer is present.
Raytheon Corporation, partnered with Arizona Cancer Center, utilizes satellite-based remote imaging
technology in detecting skin changes that could indicate the presence of cancer. Vanderbilt
University has introduced technology called ‘Confocal Raman Micro-Spectroscopy’ which uses a
reflective laser to produce a molecular fingerprint of the underlying tissue to indicate the
presence or absence of disease. All of these technologies are at very early stages of development.
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The broad 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 Raytheon
Corporation, General Electric Co., Siemens AG, Bayer AG, 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®.
Manufacturing
We are currently focusing our manufacturing efforts on building the MelaFind®
hand-held imaging devices and in initiating methods to facilitate larger-scale manufacturing of
commercialization devices. For this crucial phase leading up to MelaFind® launch, we
have contracted with ASKION in Germany, which specializes in precision optics. We have also
contracted with Zeiss, an international optics house, to supply lenses and lens assemblies to be
used in the hand-held imaging devices.
In addition, we are utilizing Nexcore Technology Inc., an FDA GMP compliant and certified
ISO13485 and ISO9001 original equipment manufacturer of medical devices in New Jersey, to provide
the assembled MelaFind® carts and tested MelaFind® systems incorporating the
hand-held devices along with the processing computer, software and operator controls.
Research and Development Efforts
Our research and development (“R&D”) efforts in 2008 resulted in the completion of the accrual
phase of the pivotal trial, and finalization of the MelaFind® Lesion Classifier that was
used on our pivotal clinical trial data. Following PMA approval and commercial launch of
MelaFind®, we plan to develop refinements and improvements to the hardware and software,
including lesion classification algorithms, some of which are likely to require approval of a PMA
supplement.
Our R&D plan also includes further improvements such as faster and easier software downloads
for future versions.
We have performed feasibility studies of a MelaFind® software add-on feature called
MelaMetertm, an enhancement to MelaFind® that provides information
regarding the depth of penetration of a pigmented skin lesion. This information may be useful to
physicians in determining the necessary depth and breadth of a biopsy of a pigmented skin lesion.
Initial clinical studies of MelaMetertm demonstrate the ability of
MelaMetertm to non-invasively estimate the Breslow thickness (the thickness of
a cutaneous malignant melanoma measured from the epidermis to the deepest malignant cells present)
comparably to histological examination of excised lesions. We plan to continue the development of
MelaMetertm and seek its FDA approval after receiving PMA approval of
MelaFind®.
We further intend to explore and evaluate the potential use of our light based computer vision
platform in other applications, including the non-invasive detection of basal cell carcinoma, the
most common skin cancer, as well as squamous cell carcinoma of the skin. New hardware systems for
the imaging of blood and blood vessel patterns are needed since the majority of these cancers are
not pigmented and, accordingly, the MelaFind® system as currently developed is not
appropriate for these uses. However, we believe many software programs and algorithms used in the
MelaFind® system will be applicable with some modification. The Company spent
approximately $7,575,000, $7,678,000 and $12,508,000 in each of 2006, 2007 and 2008, respectively,
on research and development.
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Intellectual Property
Our policy is to protect our intellectual property by obtaining US and foreign patents to
protect technology, inventions and improvements important to the development of our business. To
date we have been awarded 15 US patents with numerous foreign counterparts, of which eight US
patents and two Australian patents relate to various aspects of melanoma detection. In addition, we
have applied for six additional US patents, of which five relate to MelaFind®, and have
filed seven foreign patent applications, of which six relate to MelaFind®, and one of
the latter is currently in the European regional phase. Also, we have obtained non-exclusive
licenses from several of our suppliers for critical components of MelaFind®. We have not
granted any significant licenses with respect to our intellectual property other than licenses
granted in connection with the discontinuation of DIFOTI® operations (see ‘Discontinued
Business’ and Note 10 to our Financial Statements.)
We cannot be certain that our patents will not be challenged or circumvented by competitors.
Whether a patent is infringed and is valid, or whether a patent application should be granted, are
all complex matters 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 or other intellectual property rights are invalidated,
rejected or found unenforceable, that could reduce or eliminate any competitive advantage.
We also rely on trade secrets and technical know-how in the manufacture and marketing of
MelaFind®. We require our employees, consultants and contractors to execute
confidentiality agreements with respect to our proprietary information.
We have obtained US trademark registrations for the following marks: “MelaFind®”
and “DIFOTI®,” as well as the corporate logo for “eos-electro-optical sciences,
inc.®” The goods covered by these registrations are in International Class 010 and US
Classes 26, 39 and 44. For MelaFind®, the description of goods and services covered by
the trademark is: “medical devices, namely, electro-optical devices incorporating hardware for
obtaining images in different spectral bands and software for analyzing the images for use in
analyzing skin lesions and determining the existence of melanoma.” For DIFOTI®, the
description of goods and services covered by the trademark is: “electro-optical apparatus to
diagnose dental conditions.” For “eos-electro-optical sciences, inc.®,” the description
of goods and services covered by the trademark is: “instrumentation comprising computer assisted
optical imagers and image analyzers for use in the detection of dental cavities, cutaneous
melanoma, and other pathologies of the teeth, skin and other tissues.” We also have registered the
internet domain names: www.eo-sciences.com, www.eosciences.com, www.melafind.com, www.difoti.com
and www.skinsurf.com.
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The following table lists our US patents and patent applications relating to melanoma
detection:
US Patents Relating to Melanoma Detection
Patent
# |
Title |
Issued
|
Expiration |
|||
6,081,612
|
Systems and Methods for the
Multispectral Imaging and
Characterization of Skin Tissue |
06/27/00 | 02/27/18 | |||
6,208,749
|
Systems and Methods for the
Multispectral Imaging and
Characterization of Skin Tissue |
03/27/01 | 02/27/18 | |||
6,307,957
|
Multispectral Imaging and Characterization of Biological Tissue | 10/23/01 | 02/27/20 | |||
6,626,558
|
Apparatus for Uniform Illumination of an Object | 09/30/03 | 08/31/21 | |||
6,657,798
|
Method for Optimizing the Number of Good Assemblies Manufacturable From a Number of Parts | 12/02/03 | 02/10/23 | |||
6,710,947
|
Method for Assembling Lens Elements | 03/23/04 | 02/27/23 | |||
7,102,672
|
Integrated CMOS Imaging Array & Dark Current Monitor |
09/05/06 | 01/10/24 | |||
7,127,094
|
Method of Controlling Data Gathered at Remote Locations | 10/24/06 | 03/11/25 |
Filed US Patent Relating to Melanoma Detection
Patent # |
Title |
Filed |
||
n/a
|
Reducing noise in Digital Images | 08/9/06 | ||
n/a
|
Quantitative Analysis of Skin Characteristics | 03/2/07 | ||
n/a
|
Regulating use of a device to perform a procedure on a subject | 06/12/07 | ||
n/a
|
Dermatology information | 09/04/07 | ||
n/a
|
Characterizing a texture of an image | 12/14/07 |
Patent No. 6,081,612 relates to the MelaFind® system and methods employed in
building MelaFind® classification algorithms involving the use of novel multi-spectral
lesion features by means of wavelet maxima representations. Wavelet maxima representations use
specific types of mathematical transformations called wavelets to represent a signal, such as an
image of a lesion taken by the MelaFind® system, at different detail levels. The wavelet
maxima representation retains information of potential diagnostic value. This information is
quantified in the form of statistical features used for automatic classification. Patent No.
6,208,749 relates to methods employed in building MelaFind® classification algorithms
involving the use of novel features of multispectral lesion images that do not involve the use of
wavelet transformations to determine whether the lesion is or is not a melanoma. We believe the
inclusion of the described wavelets and non-wavelets features improves significantly the
sensitivity and specificity of the melanoma classifiers. Patent No. 6,307,957 extends the use of
the novel features of the MelaFind® system to endoscopy (examination of
gastro-intestinal tissues using fiber-optic probes). We have no present plans to develop endoscopy
applications of our technology.
Patent No. 6,626,558 covers the array of numerous light-emitting diodes (“LED’s”) that are
used in the MelaFind® hand-held device to provide uniform illumination of lesions in
multiple spectral bands of illumination. Patent No. 6,657,798 involves the use of a computer
algorithm to optimize the number of lens assemblies possible from a given number of sets of lens
elements. Patent No. 6,710,947 describes a method for the economical assembly of the nine elements
of the MelaFind® hand-held device’s optical lens apparatus.
Patent No. 7,102,672 is a process that we may employ to compensate for the effect of
temperature-dependent dark current on the images acquired by the MelaFind® hand-held
probe, and Patent No. 7,127,094 is a series of methods for central control of the acquisition and
processing of the image data acquired by MelaFind® probes located at remotes sites.
Our patent filed August 9, 2006 seeks to protect a novel method for reducing noise in digital
images, which was invented and has been implemented as part of the calibration of all
MelaFind® images.
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The March 2, 2007 filing protects a device for quantitative analysis of skin characteristics to
identify lesions that require further evaluation by physicians to rule out melanoma. Our June 12,
2007 patent filing relates to ways we control our MelaFind® system and our September 4,
2007 patent filing surrounds certain dermatology information derived from MelaFind®.
Finally our December 14, 2007 filing relates to characterizing the texture of an image.
We also have developed trade secret calibration methods, classifier programs, and search
engines. These programs have been developed over many years and incorporate decades of experience
in optical computer vision. In addition, our proprietary MelaFind® database of over
9,000 lesions has been compiled over a number of years and would be difficult to replicate.
We believe that our patented methods and apparatus, together with unpatented related
trade-secret technology, give us a competitive advantage; however, we cannot be certain that, if
challenged, our patented methods and apparatus and/or trade-secret technology would be upheld. If
one or more of our patented methods, patented apparatus or trade-secret technology rights are
invalidated, rejected or found unenforceable, that could reduce or eliminate any competitive
advantage we might otherwise have had.
FDA Regulation
Our product, MelaFind®, is regulated as a medical device and is subject to
extensive regulation by the FDA and other regulatory authorities in the US. The Food, Drug, and
Cosmetic Act (“FD&C Act”) and other federal and state statutes and regulations govern the research,
design, development, preclinical and clinical testing, manufacturing, safety, approval or
clearance, labeling, packaging, storage, record keeping, servicing, promotion, import and export,
and distribution of medical devices.
Unless an exemption applies, each medical device we wish to commercially distribute in the US
will require either prior premarket notification, or 510(k) clearance, or PMA approval from the
FDA. The FDA classifies medical devices into one of three classes. Devices requiring fewer controls
because they are deemed to pose lower risk are placed in Class I or II. Class I devices are subject
to general controls such as labeling, premarket notification, and adherence to the FDA’s Quality
System Regulation (a set of current good manufacturing practice requirements put forth by the FDA
which govern the methods used in, and the facilities and controls used for, the design,
manufacture, packaging, labeling, storage, installation and servicing of finished devices) (“QSR”).
Class II devices are subject to special controls such as performance standards, postmarket
surveillance, FDA guidelines, as well as general controls. Some Class I and Class II devices are
exempted by regulation from the premarket notification, or 510(k), clearance requirement or the
requirement of compliance with certain provisions of the QSR. Devices are placed in Class III,
which requires approval of a PMA application, if insufficient information exists to determine that
the application of general controls or special controls are sufficient to provide reasonable
assurance of safety and effectiveness, or they are life-sustaining, life-supporting or implantable
devices, or the FDA deems these devices to be “not substantially equivalent” either to a previously
510(k) cleared device or to a “pre-amendment” Class III device in commercial distribution before
May 28, 1976, for which PMA applications have not been required. The FDA classifies
MelaFind® as a Class III device, requiring PMA approval.
A PMA application must be supported by valid scientific evidence, which typically requires
extensive data, including technical, pre-clinical, clinical, manufacturing and labeling data, to
demonstrate to the FDA’s satisfaction the safety and effectiveness of the device. A PMA application
must include, among other things, a complete description of the device and its components, a
detailed description of the methods, facilities and controls used to manufacture the device, and
proposed labeling. A PMA application also must be accompanied by a user fee, unless exempt. For
example, the FDA does not require the submission of a user fee for a small business’ first PMA.
After a PMA application is submitted and found to be sufficiently complete, the FDA begins an
in-depth review of the submitted information. During this review period, the FDA may request
additional information, or clarification of information already provided. Also during the review
period, the FDA has informed us that an advisory panel of experts from outside the FDA will be
convened to review and evaluate the application and provide recommendations to the FDA as to the
approvability of the device. In addition, the FDA generally will conduct a pre-approval inspection
of the manufacturing facility to ensure compliance with the QSR, which requires manufacturers to
follow design, testing, control, documentation and other quality assurance procedures. In October
of 2004, we entered into a binding Protocol Agreement with the US Food and Drug Administration
(“FDA”), which is an agreement for the conduct of the pivotal trial in order to establish the
safety and effectiveness of MelaFind®. On October 12, 2006, we announced that the FDA
had informed us that when submitted, the MelaFind® PMA application would receive
expedited review. Expedited review means that upon filing our PMA ,
the FDA will conduct a team review, prioritize the application,
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and allocate sufficient resources
toward a 180 day review period. While the expedited review could shorten the MelaFind®
FDA approval process, we can give no assurances that this will be the case. Upon obtaining
premarket approval from the FDA, we plan to commercially launch MelaFind® in the United
States. In late 2008, during pre-PMA meeting discussions with the FDA, it was agreed that a
complete PMA (as opposed to a modular PMA) for MelaFind® will be submitted.
On February 13, 2009, the Company announced that a third party, independent bio-statistician
had provided positive top line results from the MelaFind® pivotal clinical trial. We
are working to complete our PMA application, which includes the final study reports, and expect to
file it with the FDA during the second quarter of 2009. We do not expect that there are any
significant additional steps to be taken in our completing the PMA application and in its
submission.
Notwithstanding the Protocol Agreement, the FDA can delay, limit or deny approval of a PMA
application for many reasons, including:
| • | MelaFind® may not be safe or effective to the FDA’s 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. |
If the FDA evaluations of both the PMA application and the manufacturing facilities are
favorable, the FDA will either issue an approval letter, or approvable letter, which usually
contains a number of conditions which must be met in order to secure final approval of the PMA.
When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will
issue a PMA approval letter authorizing commercial marketing of the device for certain indications.
If the FDA’s evaluation of the PMA or manufacturing facilities is not favorable, the FDA will deny
approval of the PMA or issue a not approvable letter. The FDA may also determine that additional
clinical trials are necessary, in which case the PMA approval may be delayed while the trials are
conducted and the data acquired is submitted in an amendment to the PMA. Even with additional
trials, the FDA may not approve the PMA application. The PMA process can be expensive, uncertain
and lengthy and a number of devices for which FDA approval has been sought by other companies have
never been approved for marketing.
New PMA applications or PMA supplements may be required for modifications to the manufacturing
process, labeling and device specifications, materials or design of a device that is approved
through the PMA process. PMA supplements often require submission of the same type of information
as an initial PMA application, except that the supplement is limited to information needed to
support any changes from the device covered by the original PMA application, and may not require as
extensive clinical data or the convening of an advisory panel.
Clinical trials are almost always required to support a PMA application, and are sometimes
required for a 510(k) clearance. These trials generally require submission of an application for an
Investigational Device Exemption (“IDE”) to the FDA. We have not been required to file an IDE
application for the MelaFind® clinical studies because FDA has considered the trials
“Non-Significant Risk” (“NSR”) studies subject to abbreviated IDE regulations, which do not require
formal IDE submission. An IDE application must be supported by appropriate data, such as animal and
laboratory testing results, showing that it is safe to test the device in humans and that the
testing protocol is scientifically sound. The IDE application must be approved in advance by the
FDA for a specified number of patients, unless the product is deemed a non-significant risk device
and eligible for more abbreviated IDE requirements. Generally, clinical trials for a significant
risk device may begin once the IDE application is approved by the FDA and the study protocol and
informed consent form are approved by appropriate institutional review boards (“IRBs”) at the
clinical trial sites. The FDA’s approval of an IDE allows clinical testing to go forward, but does
not bind the FDA to accept the results of the trial as sufficient to prove the product’s safety and
effectiveness, even if the trial meets its intended success criteria. All clinical trials must be
conducted in accordance with the FDA’s IDE regulations that govern investigational device labeling,
prohibit promotion of the investigational device, and specify an array of recordkeeping, reporting
and monitoring responsibilities of study sponsors and study investigators.
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The clinical studies of MelaFind® are considered by the FDA as NSR studies.
Consequently, the trials were conducted under the auspices of an abbreviated IDE. Clinical trials
must further comply with the FDA’s regulations for IRB approval and for informed consent. Required
records and reports are subject to inspection by the FDA. The results of clinical testing may be
unfavorable or, even if the intended safety and effectiveness success criteria are achieved, may
not be considered sufficient for the FDA to grant approval or clearance of a product. Although we
believe our clinical trial satisfies the FDA Protocol Agreement, they may ultimately be determined
to be inadequate to support approval of a PMA application, or 510(k) clearance.
Although we believe our clinical trial provides favorable data to support our PMA application,
upon evaluation the FDA may conclude differently . Delays in receipt of or failure to receive FDA
approval, the withdrawal of previously received approvals, or failure to comply with existing or
future regulatory requirements would have a material adverse effect on our business, financial
condition and results of operations. Even if granted, the approvals may include significant
limitations on the intended use and indications for use for which our products may be marketed.
After a device is approved or cleared and placed in commercial distribution, numerous
regulatory requirements apply. These include:
| • | establishment registration and device listing; | ||
| • | QSR, which requires manufacturers to follow design, testing, control, documentation and other quality assurance procedures; | ||
| • | labeling regulations, which prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on labeling; | ||
| • | medical device reporting regulations, which require that manufacturers report to the FDA if a device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur; and | ||
| • | corrections and removal reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FD&C Act that may present a risk to health. |
Also, the FDA may require us to conduct postmarket studies or order us to establish and
maintain a system for tracking our products through the chain of distribution to the patient level.
The FDA enforces regulatory requirements by conducting periodic, unannounced inspections and market
surveillance. Inspections may include the manufacturing facilities of our subcontractors. Thus, we
must continue to spend time, money, and effort to maintain compliance.
Failure to comply with applicable regulatory requirements, including those applicable to the
conduct of our clinical trials, can result in enforcement action by the FDA, which may lead to any
of the following sanctions:
| • | warning letters; | ||
| • | fines and civil penalties; | ||
| • | unanticipated expenditures; | ||
| • | delays in approving or refusal to approve our applications, including supplements; | ||
| • | withdrawal of FDA approval; | ||
| • | product recall or seizure; | ||
| • | interruption of production; | ||
| • | operating restrictions; |
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| • | injunctions; and | ||
| • | criminal prosecution. |
Our contract manufacturers, specification developers, and some suppliers of components are
also required to manufacture our products in compliance with current Good Manufacturing Practices
(“cGMP”) requirements set forth in the QSR. The QSR requires a quality system for the design,
manufacture, packaging, labeling, storage, installation and servicing of marketed devices, and
includes extensive requirements with respect to quality management and organization, device design,
equipment, purchase and handling of components, production and process controls, packaging and
labeling controls, device evaluation, distribution, installation, complaint handling, servicing,
and record keeping. The FDA enforces the QSR through periodic unannounced inspections that may
include the manufacturing facilities of our subcontractors. We expect that our subcontractors’
manufacturing facilities will be subject to domestic and international regulatory inspection and
review. If the FDA believes any of our contract manufacturers or regulated suppliers are not in
compliance with these requirements, it can shut down the manufacturing operations of our contract
manufacturers, require recall of our products, refuse to approve new marketing applications,
institute legal proceedings to detain or seize products, enjoin future violations, or assess civil
and criminal penalties against us or our officers or other employees. Any such action by the FDA
would have a material adverse effect on our business. We cannot assure you that we will be able to
comply with all applicable FDA regulations.
Non-FDA Government Regulation
The advertising of our MelaFind® product will be subject to both FDA and Federal
Trade Commission regulations. In addition, the sale and marketing of MelaFind® will be
subject to a complex system of federal and state laws and regulations intended to deter, detect,
and respond to fraud and abuse in the healthcare system. These laws and regulations restrict and
may prohibit pricing, discounting, commissions and other commercial practices that may be typical
outside of the healthcare business. In particular, anti-kickback and self-referral laws and
regulations will limit our flexibility in crafting promotional programs and other financial
arrangements in connection with the sale of our products and related services, especially with
respect to physicians seeking reimbursement through Medicare or Medicaid. These federal laws
include, by way of example, the following:
| • | the anti-kickback statute prohibits certain business practices and relationships that might affect the provision and cost of healthcare services reimbursable under Medicare, Medicaid and other federal healthcare programs, 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, which prohibits referrals by physicians of Medicare or Medicaid patients to providers of a broad range of designated healthcare services in which the physicians or their immediate family members have ownership interests or with which they have certain other financial arrangements; | ||
| • | 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 the US Department of Health and Human Services (“HHS”) to impose civil penalties administratively for fraudulent or abusive acts. |
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. These laws also
impose an affirmative duty on those receiving Medicare or Medicaid funding to ensure that they do
not employ or contract with persons excluded from the Medicare and other government programs.
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Many states have adopted or are considering legislative proposals similar to the federal fraud
and abuse laws, some of which extend beyond the Medicare and Medicaid programs to prohibit the
payment or receipt of remuneration for the referral of patients and physician self-referrals
regardless of whether the service was reimbursed by Medicare or Medicaid. Many states have also
adopted or are considering legislative proposals to increase patient protections, such as limiting
the use and disclosure of patient-specific health information. These state laws typically impose
criminal and civil penalties similar to the federal laws.
In the ordinary course of their business, medical device manufacturers and suppliers have been
and are subject regularly to inquiries, investigations and audits by federal and state agencies
that oversee these laws and regulations. Recent federal and state legislation has greatly increased
funding for investigations and enforcement actions, which have increased dramatically over the past
several years. This trend is expected to continue. Private enforcement of healthcare fraud also has
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. These whistleblower suits by
private persons, known as qui tam relaters, may be filed by almost anyone, including physicians and
their employees and patients, our employees, and even competitors. The Health Insurance Portability
and Accountability Act of 1996 (“HIPAA”), in addition to its privacy provisions, created a series
of new healthcare-related crimes.
Environmental Regulation
Our research and development and clinical processes involve the handling of potentially
harmful biological materials as well as hazardous materials. We and our investigators and vendors
are subject to federal, state and local laws and regulations governing the use, handling, storage
and disposal of hazardous and biological materials and we incur expenses relating to compliance
with these laws and regulations. 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 financial condition. 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 are 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.
International Regulation
International sales of medical devices are subject to foreign government regulations, which
may vary substantially from country to country from having no regulations to having a premarket
notice or premarket acceptance. The time required to obtain approval in a foreign country may be
longer or shorter than that required for FDA approval, and the requirements may differ. There is a
trend towards harmonization of quality system standards among the European Union, US, Canada and
certain other industrialized countries.
The European Union, which includes most of the major countries in Europe, has adopted numerous
directives and standards regulating the design, manufacture, clinical trials, labeling and adverse
event reporting for medical devices. Devices that comply with the requirements of a relevant
directive will be entitled to bear the CE conformity marking, indicating that the device conforms
to the essential requirements of the applicable directives and, accordingly, can be commercially
distributed throughout Europe. The method of assessing conformity varies depending on the class of
the product, but normally involves a combination of self-assessment by the manufacturer and a third
party assessment by a “Notified Body.” This third party assessment may consist of an audit of the
manufacturer’s quality system and specific testing of the manufacturer’s product. An assessment by
a Notified Body of one country within the European Union is required in order for a manufacturer to
commercially distribute the product throughout the European Union. As part of the CE compliance,
manufacturers are required to comply with the ISO 9000 series of standards for quality operations
(an international standard for quality management requirements maintained by the International
Organization for Standardization (“ISO”)). Other countries, such as Switzerland, have voluntarily
adopted laws and regulations that mirror those of the European Union with respect to medical
devices. Outside of the European Union, regulatory approval needs to be sought on a
country-by-country basis in order for us to market our products.
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Product Liability and 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. Claims may be
made by patients, healthcare providers or others involved with MelaFind®.
MelaFind® will require FDA 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 only maintain limited domestic
clinical trial liability insurance, as required by certain clinical sites. We have placed 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.
Employees
As of December 31, 2008, we had 37 full-time and 4 part-time employees, of whom 23 were
engaged in research and development (including clinical and regulatory affairs), 7 in production
(including document control and quality assurance) and 11 in marketing, sales and administrative
activities. We believe that our relationship with our employees is good.
Discontinued Business
As of April 5, 2005, we decided to discontinue all operations associated with our
DIFOTI® product, a non-invasive imaging device for the detection of dental cavities, in
order to focus our resources on the development and commercialization of MelaFind®. On
December 11, 2006 we announced that we had signed an exclusive sale and licensing agreement with
KaVo, a leading dental equipment manufacturer and subsidiary of Danaher Corporation, to further
develop and commercialize DIFOTI®. In accordance with the terms of the agreement, KaVo
paid us an up-front sum, and made a second payment to us in July 2007. KaVo will pay us an annual
royalty based on the number of systems sold per calendar year following commercial re-launch of
DIFOTI® or a set minimum royalty payment, whichever is greater. As a result of this
disposition, we do not expect to have any significant continuing responsibility for the
DIFOTI® business. The Company began earning the minimum royalty payment in the second
half of 2008 as KaVo did not re-launch DIFOTI® as of year end.
Other
Our
Internet address is www.eosciences.com. Our annual report on Form 10-K, quarterly reports
on Forms 10-Q, current reports on Forms 8-K, and amendments to those reports are available, without
charge, on our website, www.eosciences.com, as soon as reasonably practical after they are filed
electronically with the Securities and Exchange Commission (“SEC”). Copies are also available,
without charge, from Electro-Optical Sciences, Inc., 3 West Main Street, Suite 201, Irvington New
York, 10533, Attention: Secretary.
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Item 1A. Risk Factors
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.
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 seven years in developing
MelaFind®. MelaFind® may require additional development and clinical
evaluation and it will require regulatory approval, significant marketing efforts and substantial
additional investment before it can provide us with any revenue. On February 13, 2009, we announced
the top-line results of our pivotal clinical trial relating to MelaFind®. While we
believe that the top-line results support submission of the PMA, commercialization of
MelaFind® remains subject to certain risks. 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 to the FDA’s satisfaction; | ||
| • | physicians may not receive any reimbursement from third-party payers, or the level of reimbursement may be insufficient to support widespread adoption of MelaFind®; | ||
| • | we may experience delays in our continuing 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 continued 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. |
If we are unable to 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 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. The PMA process
requires us to prove the safety and effectiveness of MelaFind® to the FDA’s
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:
| • | MelaFind® may not be safe or effective to the FDA’s 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. |
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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. While
the Company believes that top-line results from the MelaFind® pivotal trial, which was
recently concluded, would support a favorable PMA review, the FDA may not consider the data
gathered in the trial sufficient to support approval of a PMA The FDA may 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 . The occurrence of unexpected findings in connection with any subsequent
clinical trial that may be required by the FDA may prevent or delay obtaining PMA approval, and may
adversely affect coverage or reimbursement determinations. If we are unable to complete subsequent
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. While the FDA had informed us that the MelaFind® PMA would receive
expedited review when submitted, there is no assurances that the expedited review will shorten the
MelaFind® FDA approval process.
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 not 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.
MelaFind® may not be commercially viable if we fail to obtain an adequate level of
reimbursement by Medicare and other third party payers. 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 payers.
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 payers 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 payers
decide to cover procedures involving our product, we cannot be certain that the
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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 payers 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.
The FDA may require additional clinical trials and any adverse results in such clinical trials, or
difficulties in conducting such clinical trials, could have a material adverse effect on our
business.
While the Company has completed its pivotal clinical trials on which it intends to base the
MelaFind® PMA, upon evaluation of the MelaFind® PMA, the FDA may require us
to conduct additional clinical studies. The occurrence of unexpected findings in connection with
any subsequent clinical trial required by the FDA may prevent or delay obtaining PMA approval. In
addition subsequent clinical studies would require the expenditure of additional Company resources
and could be a long and expensive process subject to unexpected delays. Any adverse results in such
clinical trials, or difficulties in conducting such clinical trials, could have a material adverse
effect on our business.
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 year ended December
31, 2008 was approximately $17.6 million, and as of December 31, 2008, we had an accumulated
deficit of approximately $60.8 million. Our research and development expenses may continue 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, marketing expenses and manufacturing expenses which will require
additional funding. 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.
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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.; Biomips
Engineering and SciBase 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: Raytheon Corporation, 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 payers; | ||
| • | 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. Molecular-based approaches are being
investigated; Dermtech is exploring Messenger RNA analysis of surface cells, for example. Several
additional approaches to detecting Melanoma have been identified. Balter Medical (Norway) uses
‘Optical Transfer Diagnosis’ to identify Melanomas. The technology measures how much light is
absorbed in healthy versus diseased tissue to determine whether cancer is present. Raytheon
Corporation, partnered with Arizona Cancer Center, utilizes satellite-based remote imaging
technology in detecting skin changes that could indicate the presence of cancer. Vanderbilt
University has introduced technology called ‘Confocal Raman Micro-Spectroscopy’. The technology
uses a reflective laser to produce a molecular fingerprint of the underlying tissue to indicate the
presence or absence of disease. 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®. Any of the above
competitive developments could have a material adverse effect on our business, financial condition, and results of operations.
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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.
For any additional clinical trials required for MelaFind® by the FDA or with respect to
clinical trials relating to the development of our core technology for other applications, we
depend on clinical investigators and clinical sites 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.
With respect to any additional clinical studies for MelaFind® which are required by
the FDA or with respect to clinical trials relating to the development of the Company’s core
technology for other applications, 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® or other products
developed from our core technology. 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® or other products developed from
our core technology.
In addition to the foregoing, any additional clinical studies for MelaFind® which
are required by the FDA and any clinical trials relating to the development of the Company’s core
technology for other applications may be delayed or halted, or be inadequate to support PMA
approval , 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. |
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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 payers 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. Private payers, including
managed care payers, 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 payers are
expected to continue. Payers 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®. By limiting the capital cost of MelaFind® to the
physician, we believe we will accelerate its adoption and usage. However, by charging on a per
patient basis we will increase the initial capital burden on the Company. If MelaFind®
receives the appropriate regulatory approvals but does not achieve an adequate level of acceptance
by patients, physicians and healthcare payers, 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®; | ||
| • | convenience of use; | ||
| • | cost of 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 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.
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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®; however, there can
be no assurance that any such recommendations will be obtained. 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.
As of December 31, 2008 we had $15.5 million in cash, cash equivalents and marketable
securities. Our operations have consumed substantial amounts of cash for each of the last seven
years. We currently believe that our available cash and cash equivalents will be sufficient to fund
our anticipated levels of operations through early 2010. 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. 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, and achieve significant commercialization of MelaFind®. Any
additional equity 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 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 payers, or the amount of direct payments we are able to obtain from patients and/or physicians utilizing MelaFind®; | ||
| • | the cost of commercialization activities, including products, 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.
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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 regionally 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 fully 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 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 outsource production 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. 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
have developed or are developing relationships will have or sustain
the ability to produce the quantities of MelaFind® needed
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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 several vendors for critical materials:
FillFactory, a subsidiary of Cypress Semiconductor Corp., to manufacture and supply the
complementary metal oxide semiconductor sensor in MelaFind®, on Carl Zeiss Jena GmbH
(“Zeiss”) for lens and lens objective assemblies, CompServ, AAEON, AmeriCad, Applied Image, EpiGap,
Lamothermic Precision, Richardson Electronics, SL Power Electronics and others to provide services
or components of our devices. We are working with ASKION in Germany, which specializes in
precision optics for the provision of the hand-held imaging devices. In addition, we are utilizing
Nexcore Technology Inc., an FDA good manufacturing practices (“GMP”) compliant and certified
ISO13485 and ISO9001 original equipment manufacturer of medical devices in New Jersey, to provide
the assembled MelaFind® carts and tested MelaFind® systems.
There can be no assurance that these third parties will meet their obligations. 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 impact 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; | ||
| • | 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. |
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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.
We intend to enter into a contract for commercial production of the hand-held imaging devices once
commercial 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 Zeiss for lenses and lens objective assemblies, and we have entered into a contract for the
commercial production of lenses. The manufacturing agreement with ASKION will include integration
of the Zeiss 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 Zeiss, 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
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®. Later discovery of previously unknown
problems with MelaFind®, including manufacturing problems, or failure to comply with
regulatory requirements such as the FDA 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 could be materially and adversely affected.
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 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. These
deficiencies were ultimately corrected by December 2006.
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Our full-time director of quality assurance and regulatory affairs continues to address the
inspectional findings, particularly as they relate to current MelaFind® design
development and ultimately MelaFind® commercial manufacturing. If we are not successful
in convincing the FDA that we are capable of addressing any concerns it might have relative to
MelaFind®, or in our efforts to address any MelaFind® deficiencies that might
develop, we could 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:
| • | warning letters; | ||
| • | 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; | ||
| • | injunctions; and | ||
| • | criminal prosecution. |
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.
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 Food, Drug, and Cosmetic 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 the Health Insurance Portability and Accountability Act of 1996 (“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
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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:
| • | billing for services; | ||
| • | quality of medical equipment and services; | ||
| • | confidentiality, maintenance and security issues associated with medical records and individually identifiable health information; | ||
| • | false claims; and | ||
| • | labeling products. |
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
management’s 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. 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.
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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, could
place significant strain on our financial resources, divert management’s 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. 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
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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 “Non-Significant Risk”. Consequently, the trials are conducted under the
auspices of an abbreviated Investigational Device Exemption. We therefore only maintain limited
domestic clinical trial liability insurance, as required by certain clinical sites. 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.
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 could adversely impact our business, financial condition and results of operations.
While the Company does provide off-site back-up for its critical data which we believe to be
sufficient to meet our needs, there can be no assurance that the our current plan can anticipate
every possible eventuality.
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
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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.
If there is a connection between the MelaFind® hand-held imaging device and the
central server in our offices, it will be dependent on the internet. We may use the internet as a
medium to provide quality control calibration 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.
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 may be 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, 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 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,
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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. 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 and Dina Gutkowicz-Krusin, Ph.D., our Director of Clinical
Research. Our success will depend on our ability to retain our current senior 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 will be affected by the attainment of milestones.
We have granted to certain employees stock options that vest with the attainment of various
performance 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. We have also
granted options that vest upon attainment of development milestones. Upon the attainment of each of
the relevant development milestones which include submission of the PMA application for
MelaFind® and FDA approval of such PMA, there will be a significant compensation charge
based on the then fair value of such options.
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 could have
an adverse effect on our stock price.
The Sarbanes-Oxley Act of 2002 (“SOX”), as well as rules subsequently implemented by the SEC,
the Public Company Accounting Oversight Board and the NASDAQ Capital Market, have required changes
in the corporate governance practices of public companies. Monitoring compliance with the existing
rules and implementing changes required by new rules may increase our legal and financial
compliance costs, divert management attention from operations and strategic opportunities, and make
legal, accounting and administrative activities more time-consuming and costly. On each of June 30,
2007 and 2008, our market capitalization exceeded $75 million. As a result we had our independent
registered public accounting firm attest to our compliance with Section 404 of SOX as of December
31, 2007 and 2008. In both 2007 and 2008, we retained a consultant experienced in SOX that
assisted us in the process of instituting changes to our internal procedures to satisfy the
requirements of the SOX. We have evaluated our internal control systems in order to allow us to
report on, and our independent registered public accounting firm to
attest to, our internal controls, as required by Section 404 of
the SOX. As a small company
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with
limited capital and human resources, going forward we may need to divert management’s time and attention
away from our business in order to ensure continued compliance with these regulatory requirements.
We may require new information technologies systems, the auditing of our internal controls, and
compliance training for our directors, officers and personnel. Such efforts may entail a
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 ensure that we can
conclude on an ongoing basis that we have effective internal control over financial reporting in
accordance with Section 404 of the SOX. Any failure to maintain the adequacy of our internal
controls could have an adverse effect on timely and accurate financial reporting and the trading
price of our common stock.
Risks Relating to our Common Stock
An active trading market for our common stock may not be sustained.
An active public market for our common stock may not be sustained. Further, we cannot be
certain that the market price of our common stock will not decline 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 may be volatile, meaning purchasers of our common stock could incur substantial
losses.
Our stock price has been and is likely to continue to be volatile. Between October 28, 2005
(the date of our initial public offering) and December 31, 2008, our stock price has ranged from
$2.29 to $9.99 per share. 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; | ||
| • | 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; |
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| • | 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.
Our directors, executive officers, holders of more than 5% of our common stock, and their
affiliates in the aggregate, beneficially owned approximately 16.7% of our outstanding common
stock. As a result, these stockholders, subject to any fiduciary duties owed to our other
stockholders under Delaware law, could 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.
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.
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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.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties
We lease approximately 2,800 square feet of office space at 3 West Main Street, Suite 201,
Irvington, New York 10533, and an additional 7,450 square feet of office, laboratory, and assembly
space in an adjacent building with the street address of 1 Bridge Street, Suites 11 and 15,
Irvington, New York 10533. The lease on the 2,800 square feet of space expires in January 2011. On
the 1 Bridge Street property, the lease on 4,950 square feet of space expires in June 2009 and the
lease on 2,500 square feet acquired in August 2007 expires in January 2011. We believe that these
facilities are adequate to meet our current and reasonably foreseeable requirements. We believe
that we will be able to obtain additional space, if required, on commercially reasonable terms.
Item 3. 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. While the outcome of these
legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will
have a material effect upon our financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company’s security holders during the fourth
quarter of fiscal year 2008.
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PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information
Our common stock has been traded on the NASDAQ Capital Market since October 28, 2005 under the
symbol MELA. Prior to such time, there was no public market for our common stock. The following
table sets forth the range of the high and low intraday prices for the period of January 1, 2007
through December 31, 2008 as reported by the NASDAQ Capital Market:
High |
Low |
|||||||
Year Ended December 31, 2008 |
||||||||
October 1 — December 31, 2008 |
$ | 5.37 | $ | 2.29 | ||||
July 1 — September 30, 2008 |
$ | 7.98 | $ | 4.50 | ||||
April 1 — June 30, 2008 |
$ | 9.99 | $ | 5.71 | ||||
January 1, 2008 — March 31, 2008 |
$ | 6.50 | $ | 3.84 | ||||
Year Ended December 31, 2007 |
||||||||
October 1 — December 31, 2007 |
$ | 5.96 | $ | 4.05 | ||||
July 1 — September 30, 2007 |
$ | 6.79 | $ | 5.25 | ||||
April 1 — June 30, 2007 |
$ | 7.46 | $ | 4.29 | ||||
January 1, 2007 — March 31, 2007 |
$ | 7.10 | $ | 4.50 | ||||
As of January 31, 2009, there were approximately 172 holders of record of our common stock.
This number does not include the number of persons whose shares are in nominee or in “street name”
accounts through brokers.
Dividend Policy
We have never declared or paid cash dividends on our common stock. We currently intend to
retain our cash for the development of our business. We do not intend to pay cash dividends to our
stockholders in the foreseeable future.
Any future determination relating to our dividend policy will be made at the discretion of our
board of directors and will depend on then existing conditions, including our earnings, financial
condition, results of operations, level of indebtedness, contractual restrictions, capital
requirements, business prospects and other factors our board of directors may deem relevant. Our
board of directors’ ability to declare a dividend is also subject to limits imposed by Delaware
law.
Securities Authorized For Issuance Under Equity Compensation Plans
The information required by this Item concerning the Company’s equity compensation plans is
discussed in Note 8- Stock-Based Compensation and Warrants to the financial statements contained in
Part II Item 8 of this annual report.
Use of Proceeds from the Sale of Registered Securities
On June 26, 2008, the Company filed a Form S-3 shelf registration statement for an
indeterminate number of shares of common stock, warrants to purchase shares of common stock and
units consisting of a combination thereof having an aggregate initial offering price not to exceed
$40 million. The SEC declared the registration statement effective on July 7, 2008 (File#
333-151935). Management utilized this shelf registration statement to raise additional equity
capital by completing a registered direct offering of 2,088,451 shares of the Company’s common
stock for aggregate gross proceeds $11.9 million ($11 million approximate net proceeds to the
Company) at a per share offering price of $5.68. The offering closed on August 8, 2008.
The net proceeds have been invested in investment grade securities and money market accounts.
We are using, and intend to continue to use, these proceeds for research and development activities
including clinical trials, development of our sales and marketing capabilities and general
corporate purposes including general and administrative expenses, as described in the use of
proceeds section of our final prospectus filed with the SEC pursuant to Rule 424(b)(5) on July 31,
2008.
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Item 6. Selected Financial Data
The following table sets forth selected financial data. The financial information for the
years ended December 31, 2006, 2007, and 2008 and as of December 31, 2007 and 2008 has been derived
from our audited financial statements and related notes appearing in Part II Item 8 of this report
and should be read together with such financial statements and the “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” section appearing in Part II Item 7 of
this report. The financial information for the years ended December 31, 2004 and 2005 and as of
December 31, 2004, 2005, and 2006 have been derived from our audited financial statements not
included in this report. The historical results are not necessarily indicative of results of any
future periods.
| Year Ended December 31, | ||||||||||||||||||||
| 2004 | 2005 | 2006 | 2007 | 2008 | ||||||||||||||||
| (In thousands, except share and per share data) | ||||||||||||||||||||
Statements of Operations Data: |
||||||||||||||||||||
Research and development
expenses |
$ | 1,892 | $ | 3,822 | $ | 7,574 | $ | 7,678 | $ | 12,508 | ||||||||||
General and administrative
expenses |
1,234 | 2,636 | 4,526 | 5,400 | 5,766 | |||||||||||||||
Operating loss from continuing
operations |
(3,126 | ) | (6,458 | ) | (12,100 | ) | (13,078 | ) | (18,274 | ) | ||||||||||
Interest expense/(income) |
67 | (174 | ) | (728 | ) | (1,054 | ) | (468 | ) | |||||||||||
Other income |
— | — | — | (59 | ) | (201 | ) | |||||||||||||
Loss from continuing operations |
(3,193 | ) | (6,284 | ) | (11,372 | ) | (11,965 | ) | (17,605 | ) | ||||||||||
(Loss) gain from discontinued
operations |
(426 | ) | (442 | ) | 781 | 28 | — | |||||||||||||
Net loss |
(3,619 | ) | (6,726 | ) | (10,591 | ) | (11,937 | ) | (17,605 | ) | ||||||||||
Preferred stock deemed dividends |
(676 | ) | (1,199 | ) | — | — | — | |||||||||||||
Preferred stock accretion |
(258 | ) | (1,077 | ) | — | — | — | |||||||||||||
Net loss attributable to common
stockholders |
$ | (4,553 | ) | $ | (9,002 | ) | $ | (10,591 | ) | $ | (11,937 | ) | $ | (17,605 | ) | |||||
Net loss per share, basic and
diluted: |
||||||||||||||||||||
Continuing operations |
$ | (2.34 | ) | $ | (2.44 | ) | $ | (1.01 | ) | $ | (0.84 | ) | $ | (1.08 | ) | |||||
Discontinued operations |
(0.24 | ) | (0.13 | ) | .07 | — | — | |||||||||||||
Basic and diluted net loss per
common share |
$ | (2.58 | ) | $ | (2.57 | ) | $ | (.94 | ) | $ | (0.84 | ) | $ | (1.08 | ) | |||||
Basic and diluted weighted
average number of common shares outstanding |
1,766,608 | 3,508,835 | 11,293,783 | 14,220,466 | 16,282,176 | |||||||||||||||
| As of December 31, | ||||||||||||||||||||
| 2004 | 2005 | 2006 | 2007 | 2008 | ||||||||||||||||
| (In thousands, except share and per share data) | ||||||||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Total current assets |
$ | 6,813 | $ | 18,873 | $ | 21,771 | $ | 21,328 | $ | 15,836 | ||||||||||
Total assets |
7,096 | 19,166 | 22,476 | 22,108 | 16,620 | |||||||||||||||
Total liabilities |
691 | 916 | 1,162 | 1,336 | 1,530 | |||||||||||||||
Redeemable convertible preferred stock |
9,955 | — | — | — | — | |||||||||||||||
Accumulated deficit |
(13,907 | ) | (20,633 | ) | (31,225 | ) | (43,162 | ) | (60,767 | ) | ||||||||||
Total stockholders’ (deficiency)/equity |
(3,550 | ) | 18,249 | 21,314 | 20,772 | 15,089 | ||||||||||||||
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion contains forward looking statements, which involve risks and
uncertainties. Our actual results could differ from those anticipated in these forward-looking
statements as a result of various factors, including those set forth above under the caption
“Business-Risk Factors”. You should read the following discussion and analysis of our financial
condition and results of operations together with our financial statements for the year ended
December 31, 2008 and the related notes appearing in Part II Item 8 of this report.
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 principal 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®. On December 11, 2006 we
announced that we had signed an exclusive sale/licensing agreement with KaVo, a leading dental
equipment manufacturer, to further develop and commercialize DIFOTI®. In accordance with
the terms of our DIFOTI® sale/licensing agreement with KaVo, they will pay us an annual
royalty based on the number of DIFOTI® related systems sold per calendar year following
commercial re-launch. The Company began earning the contractual minimum royalty in the second half
of 2008, as KaVo did not re-launch as of year end.
We do not expect to have any significant continuing responsibility for the DIFOTI®
business.
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 upon
the results of our pivotal clinical trial. On February 13, 2009, the Company announced that a third
party, independent bio-statistician had provided positive top line results from the
MelaFind® pivotal clinical trial. This blinded study was conducted at seven clinical
sites and included 1,831 pigmented skin lesions from 1,383 patients. We are working to complete
our PMA application, which includes the final study reports, and expect to file it with the FDA
during the second quarter of 2009. We believe that period-to-period comparisons of our results of
operations may not be 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 December 31, 2008, we had an accumulated deficit of $60.8 million. We expect to continue to
spend significant amounts on the PMA submission, FDA approval process and commercialization costs
when we begin to introduce MelaFind® into the US market.
On October 28, 2005, we completed an initial public offering. We 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 $17.7 million. On October 31, 2006 we entered into securities purchase agreements and
a registration rights agreement with certain accredited investors for the private placement of
2,312,384 shares of the Company’s common stock and warrants to purchase up to 346,857 shares of the
Company’s common stock for aggregate gross proceeds of approximately $13.2 million and net proceeds
of approximately $12.5 million. The transaction closed November 3, 2006. On July 31, 2007, the
Company entered into a securities purchase agreement and registration rights agreement with certain
accredited investors for the private placement of 2,000,178 shares of the Company’s common stock
and warrants to purchase up to 500,041 shares of the Company’s common stock for aggregate gross
proceeds of approximately $11.5 million and net proceeds of approximately $10.7 million. This
transaction closed on August 3, 2007.
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In a
transaction which closed August 8, 2008, the Company completed a registered direct offering of 2,088,451
shares of common stock for aggregate gross proceeds of $11.9 million ($11 million net proceeds to
the Company).
We believe that the proceeds from these four transactions will be sufficient to fund our
anticipated level of operations into early 2010. We will however need to raise additional funds in
order to achieve significant commercialization of MelaFind® and generate significant
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 year ended December 31, 2008 were
expenses related primarily to the development of MelaFind®. We expect to continue to
incur additional research and development expenses relating to MelaFind® prior to its
commercial launch in the US and selected markets outside the US. These additional 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, especially if the FDA requires additional clinical trials to support
approval of MelaFind®.
General and administrative expenses consist primarily of salaries and related expenses and
general corporate activities and costs associated with our efforts 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. We expect selling,
general and administrative expenses to increase as we build our sales force and marketing
capabilities to support placing MelaFind® in selected markets.
At December 31, 2008, we had available net operating loss carryforwards for federal income tax
reporting purposes of approximately $23.6 million. The net operating loss carryforwards may be
available to offset future taxable income expiring at various dates through the year 2028. The
Company’s ability to utilize its net operating losses may be significantly limited due to changes
in the Company’s ownership as defined by federal income tax regulations.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s 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.
While our significant accounting policies are more fully described in Note 1 to our financial
statements included in this report, 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
The Company has not received FDA approval for the sale of MelaFind® and has had no
revenues from products since the 2005 discontinuance of DIFOTI® operations.
Stock-Based Compensation
We account for non-employee stock-based awards in which goods or services are the
consideration received for the equity instruments issued based on the fair value of the equity
instruments issued in accordance with the Emerging Issues Task Force Issue No. 96-18,
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“Accounting for Equity
Instruments that Are Issued to Other Than Employees for Acquiring, or in Conjunction With Selling,
Goods or Services.”
We record 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 Bulletins No. 107 and No.
110. A compensation charge is recorded when it is probable that performance 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.
We have also granted to certain employees stock options that vest with the attainment of
development milestones. Upon the attainment of the relevant development milestones, there will be a
significant compensation charge based on the fair value of such options on the date granted.
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
under or over estimate 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 and
accrue for such costs in accordance with accounting principles generally accepted in the US. This
is done as of each balance sheet date in our financial statements.
Results of Operations (in thousands)
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Research and Development Expense
Research and development expense increased by $4,830 to $12,508 for the year ended December
31, 2008 from $7,678 for the year ended December 31, 2007. The increase was substantially
attributable to an increase in our clinical trial costs which increased by $1,984, product design
and consulting costs which increased by $1,543, regulatory and quality costs which increased by
$790 and manufacturing costs which increased by $559.
During 2008, the Company intensified its pivotal clinical trial activities completing the data
accrual phase of the MelaFind® pivotal trial in the third quarter of 2008 and built the
databases necessary to finalize the image processing classification algorithms (the classifier) in
the fourth quarter of the year. To accomplish this, clinical studies costs increased by $1,430 and
related pathology by $265. Steps undertaken during 2008 towards preparation for commercialization
included increases of $635 for functional and cosmetic design of the cart to house
MelaFind® and other product improvements of $673. In-house capabilities increased $231,
and use of consultants increased $525 in the quality and regulatory areas to address the FDA’s
Quality System Regulation including documentation and software validation.
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The increase in costs at Askion, our European contract manufacturer, were for additional labor
for the processes and production capability of commercial quantities of MelaFind® units.
General and Administrative Expense
General and administrative expense increased by $366 to $5,766 for the year ended December 31,
2008 from $5,400 for the year ending December 31, 2007. This was principally attributable to an
increase in share based compensation costs of $473 reflecting a non-cash charge in connection with
the option cancellation and new option grant to the Company’s President and Chief Executive
Officer. All other general and administrative costs decreased by a total of $107 from the 2007
level.
Interest (Income)/Expense
Interest income for the year ended December 31, 2008 was $468 compared to $1,054 for the year
ended December 31, 2007. The decrease for the year ended December 31, 2008 reflected an average of
over $3,000 less available to invest and significantly lower interest rates available in 2008.
Other Income, net
Other income for the year ended December 31, 2008 exceeded the same period in 2007 by $143.
Income earned under our joint research contract with L’Oreal was $83 above the 2007 level. In
accordance with the terms of our
DIFOTI®
sale/licensing agreement with KaVo, $48 was earned
through the provision of DIFOTI® transitional services, and the Company earned $10 as
the contractual minimum royalty in the second half of 2008. There was no income earned from KaVo in
2007. Included in other income, net is the loss of $4 on the sale of marketable securities in 2008.
In accordance with the terms of our DIFOTI® sale/licensing agreement with KaVo,
they will pay us an annual royalty based on the number of DIFOTI® related systems sold
per calendar year following commercial re-launch. The Company began earning the contractual minimum
royalty of $10 in the second half of 2008, as KaVo did not re-launch DIFOTI® as of
year end, which amount will be creditable against future royalty amounts payable by KaVo
thereunder.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Research and Development Expense
Research and development expense increased by $103 to $7,678 for the year ended December 31,
2007 from $7,575 for the year ended December 31, 2006. As we have noted throughout 2007, our total
research and development spending trend remained consistent with 2006. However, there was a shift
in the components of this spending. Our clinical trial costs increased by $653 and the technical
support necessary to support the clinical trails increased by $208. In addition, spending on our
quality systems increased $126 as we continue to work towards developing and documenting processes
and procedures for FDA review. Offsetting these increases, production costs decreased $328,
regulatory spending decreased $150, software development and other research decreased $137 and
share based compensation costs decreased $269.
General and Administrative Expense
General and administrative expense increased by $874 to $5,400 for the year ended December 31,
2007 from $4,526 for the year ending December 31, 2006. The increase was attributable to an
increase in marketing costs of $714, the majority of which was incurred in connection with market
research designed to allow us to properly position the Melafind® system following FDA
approval. As we grow and mature our costs have increased in several areas including; travel
expenses $174, recruiting costs $142, legal costs for patent work $140, depreciation $76, rent and
utilities $69, and salaries $41. These increases were offset by declines in several spending areas
including corporate legal work which decreased $218, and temporary help costs which were $94 lower.
In addition, share based compensation costs decreased $190.
Interest (Income)/Expense
Interest income for the year ended December 31, 2007 was $1,054 compared to $728 for the year
ended December 31, 2006. The increase for the year ended December 31, 2007 was directly
attributable to an increase in cash and cash equivalents generated as a result of our financings in November
2006 and August 2007 along with the 2007 proceeds from the sale and licensing of our
DIFOTI® assets.
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Other Income
Other income for the year ended December 31, 2007 totaling $59 consisted of amounts earned
under our contract with L’Oreal.
Gain (Loss) from Discontinued Operations
There was a gain of $28 on the sale of discontinued operations in the year ended December 31,
2007. Costs associated with the transaction with KaVo were lower than expected and the December
31, 2006 accrual to capture these expenses was partially reversed in 2007.
Liquidity and Capital Resources (in thousands)
From inception, we have financed our operations primarily through the use of working capital
from the sale of equity securities. 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 December 31, 2008, we had
$15,460 in cash, cash equivalents and marketable securities as compared to $20,916 at December 31,
2007. The $5,456 decrease in 2008 from 2007 reflects the $16,205 cash used in operating activities
and $313 cash used for purchase of fixed assets less $11,057 cash provided by the 2008 financing
activities.
Our
cash and cash equivalents at December 31, 2008 are liquid investments in cash with a
commercial bank, investment grade securities, and money market
accounts, which are held with financial institutions in amounts
that substantially exceed FDIC limits.
Cash Flows from Operating Activities
Net cash used in operations was $16,205 for the year ended December 31, 2008. For the year
ended December 31, 2007, the net cash used in operations was $11,049. For all periods, cash used in
operations was attributable primarily to net losses after adjustment for non-cash charges related
to non-cash compensation, depreciation and other changes in operating assets and liabilities.
Cash Flows from Investing Activities
Net cash provided by our investing activities was $1,021 for the year ended December 31, 2008
principally relating to the sale of marketable securities less the purchase of fixed assets. For
the year ended December 31, 2007, net cash used in investing activities was $1,524 principally
relating to the purchase of marketable securities, fixed assets and patent costs offset by the
proceeds received from the sale and licensing of our DIFOTI® assets.
Cash Flows from Financing Activities
Net cash provided by financing activities was $11,057 for the year ended December 31, 2008 and
reflects the net proceeds received from our August 8, 2008 registered direct offering of common
stock together with proceeds from the exercise of common stock options and warrants. For the year
ended December 31, 2007, the net cash flows provided by financing activities was $10,830, which
included net proceeds from a private placement of $10,716 in 2007.
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Operating Capital and Capital Expenditure Requirements
We face certain risks and uncertainties, which are present in many emerging medical device
companies. At December 31, 2008, we had an accumulated deficit of $60.8 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 proceed with the MelaFind® system
approval process, expand our 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 initial public offering, our November 2006 private
placement, our August, 2007 private placement, our August 2008 registered direct offering, our
current cash, cash equivalents and marketable securities and the interest we earn on these balances
will be sufficient to meet our anticipated cash needs for working capital and capital expenditures
into early 2010. If our existing cash is 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, which will be even more difficult due to the lack of available capital as a
result of current global economic crisis. If additional funds are raised through the issuance of
debt securities, these securities would 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 payers, 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; | ||
| • | our ability to establish and maintain any collaborative, licensing or other arrangements, and the terms and timing of any such arrangements; and | ||
| • | our sales model, which limits the capital cost of MelaFind® to the physician, thereby increasing the initial capital burden on us. |
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Contractual Obligations
The following table summarizes our outstanding contractual obligations as of December 31, 2008
and the effect those obligations are expected to have on our liquidity and cash flows in future
periods:
Payments Due by Period
| Less Than | More Than | |||||||||||||||||||
Contractual Obligations
|
Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | |||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
Operating Leases |
$ | 458 | $ | 256 | $ | 202 | $ | — | $ | — | ||||||||||
Total |
$ | 458 | $ | 256 | $ | 202 | $ | — | $ | — | ||||||||||
Our long-term obligations are two non-cancelable operating leases for space. The lease on
2,800 square feet of office space expires in January 2011. The lease on our laboratory, assembly,
and office space, originally 4,950 square feet (expiring in June 2009) was amended in August 2007
to include an additional 2,500 square feet of office space (expiring in January 2011).
Related Party Transactions (see Note 9 of Notes to Financial Statements)
For a description of our related party transactions, see our financial statements and the
related notes to our financial statements included in this report.
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.
Recently Adopted Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets
and Financial Liabilities, including an amendment to SFAS No. 115” (SFAS 159). This statement
permits entities to choose to measure many financial instruments and certain other items at fair
value. The objective is to improve financial reporting by providing entities with the opportunity
to mitigate volatility in reporting earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting provisions. This statement is expected
to expand the use of fair value measurements, which is consistent with FASB’s long-term measurement
objectives for accounting for financial instruments. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. The adoption of SFAS 159 did not have a material impact on our
financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). This
statement defines fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. This statement relating to financial assets is effective
for financial statements issued for fiscal years beginning after November 15, 2007. The adoption
of SFAS 157 did not have a material impact on our financial statements. The provisions of SFAS
157 related to other non-financial assets and liabilities will be effective for us on January, 1,
2009, and will be applied prospectively. We are currently evaluating the impact that these
additional SFAS 157 provisions will have on our financial statements.
Recent Accounting Pronouncements
In June 2008, the FASB issued Staff Position EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1”), which
is effective for financial statements issued for fiscal years beginning after December 15, 2008.
FSP EITF 03-6-1 clarifies that share-based payment awards that entitle holders to receive
nonforfeitable dividends before they vest will be considered participating securities and included
in the basic earning per share calculation. We do not expect that the adoption of FSP EITF 03-6-1
will have a material effect on our financial statements.
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In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible
Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors an entity should consider in developing
renewal or extension assumptions used in determining the useful life of recognized intangible
assets under SFAS No. 142, “Goodwill and Other Intangible Assets”. This guidance for determining
the useful life of a recognized intangible asset applies prospectively to intangible assets
acquired individually or with a group of other assets in either an asset acquisition or business
combination. FSP FAS 142-3 is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2008, earlier adoption is prohibited. We do not expect that the
adoption of FSP FAS 142-3 will have a material effect on our financial statements.
In March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and
Hedging Activities” (“SFAS 161”). This new standard enhances disclosure requirements for derivative
instruments in order to provide users of financial statements with an enhanced understanding of (i)
how and why an entity uses derivative instruments, (ii) how derivative instruments and related
hedged items are accounted for under SFAS No. 133 “Accounting for Derivative Instruments and
Hedging Activities” and its related interpretations, and (iii) how derivative instruments and
related hedged items affect an entity’s financial position, financial performance, and cash flows.
SFAS 161 is to be applied prospectively for the first annual reporting period beginning on or after
November 15, 2008. We believe that the adoption of SFAS 161 will not have a material impact on our
financial statement disclosures since we do not currently have any derivative instruments.
In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141R,
Business Combinations. This Statement replaces FASB SFAS No. 141. SFAS 141R establishes principles
and requirements for how the acquirer of a business recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. SFAS 141R also provides guidance for recognizing and measuring the
goodwill acquired in the business combination and determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial effects of the business
combination. This Statement applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. The effect of these changes will be applicable to acquisitions on or after
January 1, 2009.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements—an amendment of ARB No. 51. This Statement amends ARB 51 to establish
accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity in the consolidated
financial statements. In addition to the amendments to ARB 51, this Statement amends FASB Statement
No. 128, Earnings per Share; so that earnings-per-share data will continue to be calculated the
same way those data were calculated before this Statement was issued. This Statement is effective
for fiscal years, and interim periods within those fiscal years, beginning on or after December 15,
2008. We do not expect the adoption of this pronouncement to have a material impact on our
financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Our exposure to market risk at December 31, 2008 is confined to our cash, cash equivalents and
marketable securities. We invest in cash and certificates of deposit with a commercial bank,
investment grade securities, and money market accounts. We currently do not hedge interest rate
exposure. While declines in interest rates do impact the amount of interest income that our cash,
cash equivalents and marketable securities will earn, we do not believe that we have any material
exposure to interest rate risk arising from our investments, due to the short-term nature of our
investments.
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Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
| Page | ||
| 49 | ||
| 50 | ||
| 51 | ||
| 52 | ||
| 53 | ||
| 54 |
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Electro-Optical Sciences, Inc.
Electro-Optical Sciences, Inc.
We have audited the accompanying balance sheets of Electro-Optical Sciences, Inc. as of
December 31, 2007 and 2008, and the related statements of operations, stockholders’ equity, and
cash flows for each of the years in the three-year period ended December 31, 2008. These financial
statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Electro-Optical Sciences, Inc., as of December 31, 2007 and
2008, and the results of its operations and its cash flows for each of the years in the three-year
period ended December 31, 2008, in conformity with accounting principles generally accepted in the
United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Electro-Optical Sciences, Inc.’s internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our
report dated February 26, 2009 expressed an unqualified opinion thereon.
/s/ Eisner LLP
New York, New York
February 26, 2009
February 26, 2009
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ELECTRO-OPTICAL SCIENCES, INC.
BALANCE SHEETS
| December 31, | December 31, | |||||||
| 2007 | 2008 | |||||||
| ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 19,196,589 | $ | 15,069,939 | ||||
Marketable securities |
1,719,905 | 390,512 | ||||||
Prepaid expenses and other current assets |
411,554 | 375,612 | ||||||
Total Current Assets |
21,328,048 | 15,836,063 | ||||||
Property and equipment, net |
616,110 | 643,383 | ||||||
Patents and trademarks, net |
118,138 | 94,908 | ||||||
Other assets |
45,876 | 45,276 | ||||||
Total Assets |
$ | 22,108,172 | $ | 16,619,630 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current Liabilities: |
||||||||
Accounts payable (includes related parties of $17,500 as of
December 31, 2008) |
$ | 567,987 | $ | 634,394 | ||||
Accrued expenses (includes related parties of $10,000 as of
December 31, 2007 |
674,711 | 832,228 | ||||||
Deferred income |
74,946 | 36,085 | ||||||
Other current liabilities |
18,804 | 27,466 | ||||||
Total Current Liabilities |
1,336,448 | 1,530,173 | ||||||
COMMITMENTS AND CONTINGENCIES (Note 5) |
||||||||
Stockholders’ Equity: |
||||||||
Preferred stock — $0.10 par value; authorized 10,000,000 shares: |
||||||||
Issued and outstanding: none |
— | — | ||||||
Common stock — $0.001 par value; authorized 30,000,000 shares: |
||||||||
Issued and outstanding 15,401,882 and 17,634,498 shares at
December 31, 2007 and 2008, respectively. |
15,402 | 17,634 | ||||||
Additional paid-in capital |
63,930,689 | 75,845,953 | ||||||
Accumulated other comprehensive loss |
(12,136 | ) | (6,868 | ) | ||||
Accumulated deficit |
(43,162,231 | ) | (60,767,262 | ) | ||||
Total Stockholders’ Equity |
20,771,724 | 15,089,457 | ||||||
Total Liabilities and Stockholders’ Equity |
$ | 22,108,172 | $ | 16,619,630 | ||||
The accompanying notes are an integral part of these financial statements
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ELECTRO-OPTICAL SCIENCES, INC.
STATEMENTS OF OPERATIONS
| Year Ended | ||||||||||||
| December 31, | December 31, | December 31, | ||||||||||
| 2006 | 2007 | 2008 | ||||||||||
Operating expenses: |
||||||||||||
Research and development |
$ | 7,574,744 | $ | 7,677,578 | $ | 12,507,959 | ||||||
General and administrative |
4,525,789 | 5,400,371 | 5,766,238 | |||||||||
Operating loss from continuing operations |
(12,100,533 | ) | (13,077,949 | ) | (18,274,197 | ) | ||||||
Interest income |
(728,053 | ) | (1,054,130 | ) | (467,587 | ) | ||||||
Other income, net |
— | (58,567 | ) | (201,579 | ) | |||||||
| (728,053 | ) | (1,112,697 | ) | (669,166 | ) | |||||||
Loss from continuing operations |
(11,372,480 | ) | (11,965,252 | ) | (17,605,031 | ) | ||||||
Gain on sale and licensing of discontinued operations |
781,003 | 27,808 | — | |||||||||
Net loss |
$ | (10,591,477 | ) | $ | (11,937,444 | ) | $ | (17,605,031 | ) | |||
Net income (loss) per common share, basic and
diluted: |
||||||||||||
Continuing operations |
$ | (1.01 | ) | $ | (0.84 | ) | $ | (1.08 | ) | |||
Discontinued operations |
.07 | — | — | |||||||||
Basic and diluted net loss per common share |
$ | (0.94 | ) | $ | (0.84 | ) | $ | (1.08 | ) | |||
Basic and diluted weighted average number of common
shares outstanding |
11,293,783 | 14,220,466 | 16,282,176 | |||||||||
The accompanying notes are an integral part of these financial statements
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ELECTRO-OPTICAL SCIENCES, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended December 31, 2006, 2007 and 2008
Years Ended December 31, 2006, 2007 and 2008
| Accumulated | Total | |||||||||||||||||||||||||||
| Additional | Other | Stockholders’ | ||||||||||||||||||||||||||
| Common Stock | Paid-in | Deferred | Comprehensive | Accumulated | Equity | |||||||||||||||||||||||
| Shares | Amount | Capital | Compensation | Loss | Deficit | (Deficiency) | ||||||||||||||||||||||
Balance at January 1, 2006 |
10,837,833 | $ | 10,838 | $ | 38,934,420 | $ | (62,610 | ) | $ | (20,633,310 | ) | $ | 18,249,338 | |||||||||||||||
Exercise of options |
135,450 | 136 | 87,929 | 88,065 | ||||||||||||||||||||||||
Exercise of warrants |
10,781 | 10 | 26,418 | 26,428 | ||||||||||||||||||||||||
Amortization of deferred compensation |
62,610 | 62,610 | ||||||||||||||||||||||||||
Issuance of shares of common stock
and warrants in connection with
private placement (net of expenses) |
2,312,384 | 2,312 | 12,503,075 | 12,505,387 | ||||||||||||||||||||||||
Issuance of options to consultant |
161,934 | 161,934 | ||||||||||||||||||||||||||
Share-based compensation expense |
811,632 | 811,632 | ||||||||||||||||||||||||||
Net loss |
(10,591,477 | ) | (10,591,477 | ) | ||||||||||||||||||||||||
Balance at December 31, 2006 |
13,296,448 | $ | 13,296 | $ | 52,525,408 | $ | (31,224,787 | ) | $ | 21,313,917 | ||||||||||||||||||
Exercise of options |
105,256 | 106 | 114,421 | 114,527 | ||||||||||||||||||||||||
Issuance of shares of common stock
and warrants in connection with
private placement (net of expenses) |
2,000,178 | 2,000 | 10,713,847 | 10,715,847 | ||||||||||||||||||||||||
Issuance of options to consultant |
139,703 | 139,703 | ||||||||||||||||||||||||||
Share-based compensation expense |
437,310 | 437,310 | ||||||||||||||||||||||||||
Other comprehensive income/(loss) |
(12,136 | ) | (12,136 | ) | ||||||||||||||||||||||||
Net loss |
(11,937,444 | ) | (11,937,444 | ) | ||||||||||||||||||||||||
Comprehensive loss (sub-total) |
(11,949,580 | ) | ||||||||||||||||||||||||||
Balance at December 31, 2007 |
15,401,882 | $ | 15,402 | $ | 63,930,689 | $ | (12,136 | ) | $ | (43,162,231 | ) | $ | 20,771,724 | |||||||||||||||
Exercise of options |
141,823 | 141 | 73,234 | 73,375 | ||||||||||||||||||||||||
Exercise of warrants |
2,342 | 2 | 10,584 | 10,586 | ||||||||||||||||||||||||
Issuance of shares of common stock
in connection with a public
offering(net of expenses) |
2,088,451 | 2,089 | 10,970,695 | 10,972,784 | ||||||||||||||||||||||||
Share-based compensation expense |
860,751 | 860,751 | ||||||||||||||||||||||||||
Other comprehensive income |
5,268 | 5,268 | ||||||||||||||||||||||||||
Net loss |
(17,605,031 | ) | (17,605,031 | ) | ||||||||||||||||||||||||
Comprehensive loss (sub-total) |
(17,599,763 | ) | ||||||||||||||||||||||||||
Balance at December 31, 2008 |
17,634,498 | $ | 17,634 | $ | 75,845,953 | $ | (6,868 | ) | $ | (60,767,262 | ) | $ | 15,089,457 | |||||||||||||||
The accompanying notes are an integral part of these financial statements
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ELECTRO-OPTICAL SCIENCES, INC.
STATEMENTS OF CASH FLOWS
| Year Ended | ||||||||||||
| December 31, | December 31, | December 31, | ||||||||||
| 2006 | 2007 | 2008 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Loss from continuing operations |
$ | (11,372,480 | ) | $ | (11,965,252 | ) | $ | (17,605,031 | ) | |||
Gain on sale and licensing of discontinued operations |
781,003 | 27,808 | — | |||||||||
Net loss |
(10,591,477 | ) | (11,937,444 | ) | (17,605,031 | ) | ||||||
Adjustments to reconcile net loss to net cash used in operating
activities: |
||||||||||||
Gain on sale of discontinued operations |
(781,003 | ) | (27,808 | ) | — | |||||||
Depreciation and amortization |
138,358 | 223,706 | 308,977 | |||||||||
Noncash compensation and amortization of deferred compensation |
874,241 | 437,310 | 860,751 | |||||||||
Amortization of unearned interest income-discontinued operations |
— | (12,320 | ) | — | ||||||||
Common stock options and warrants issued for consulting fees |
161,934 | 139,703 | — | |||||||||
Amortization of discount on marketable securities |
— | (519 | ) | 519 | ||||||||
Changes in operating assets and liabilities: |
||||||||||||
(Increase) decrease in prepaid expenses and other current assets |
(132,694 | ) | (67,920 | ) | 35,942 | |||||||
Increase in accounts payable and accrued expenses |
196,193 | 124,800 | 223,924 | |||||||||
(Decrease) increase in other current liabilities |
(751 | ) | 2,727 | 8,662 | ||||||||
(Increase) decrease in other assets |
(6,146 | ) | (6,118 | ) | 600 | |||||||
Increase (decrease) in deferred income |
— | 74,946 | (38,861 | ) | ||||||||
Net cash used in operating activities |
(10,141,345 | ) | (11,048,937 | ) | (16,204,517 | ) | ||||||
Cash flows from investing activities: |
||||||||||||
Patent costs |
(35,491 | ) | (40,006 | ) | — | |||||||
Purchases of property and equipment |
(508,547 | ) | (252,847 | ) | (313,020 | ) | ||||||
(Purchase) sale of marketable securities |
— | (1,731,522 | ) | 1,334,142 | ||||||||
Proceeds from sale and licensing of discontinued operations |
500,000 | 500,000 | — | |||||||||
Net cash (used in) provided by investing activities |
(44,038 | ) | (1,524,375 | ) | 1,021,122 | |||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from private placements/public offering |
13,180,598 | 11,501,023 | 11,909,057 | |||||||||
Expenses related to private placement financing |
(675,211 | ) | (785,176 | ) | (936,273 | ) | ||||||
Proceeds from exercise of stock options |
88,065 | 114,527 | 73,375 | |||||||||
Proceeds from exercise of stock warrants |
26,428 | — | 10,586 | |||||||||
Net cash provided by financing activities |
12,619,880 | 10,830,374 | 11,056,745 | |||||||||
Net increase (decrease) in cash and cash equivalents |
2,434,497 | (1,742,938 | ) | (4,126,650 | ) | |||||||
Cash and cash equivalents at beginning of year |
18,505,030 | 20,939,527 | 19,196,589 | |||||||||
Cash and cash equivalents at end of year |
$ | 20,939,527 | $ | 19,196,589 | $ | 15,069,939 | ||||||
Supplemental Schedule of Noncash Investing and Financing
Activities: |
||||||||||||
Receivable from sale and licensing of discontinued operations |
$ | 487,680 | $ | — | $ | — | ||||||
Unrealized loss (gain) on marketable securities |
— | 12,136 | (5,268 | ) | ||||||||
The accompanying notes are an integral part of these financial statements
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ELECTRO-OPTICAL SCIENCES, INC.
Notes to Financial Statements
(In thousands, except for share and per share data)
(In thousands, except for share and per share data)
1. Principal Business Activities and Summary of Significant Accounting Policies:
Organization and Business
Electro-Optical Sciences, Inc., a Delaware corporation (the Company), is focused on the
development of 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 clinical trial and establishment of the
safety and effectiveness of the MelaFind® device. On October 12, 2006, the Company
announced that the FDA informed the Company that when submitted, the MelaFind® premarket
approval, or PMA, application would receive expedited review. Expedited review means that upon
filing our PMA, the FDA will conduct a team review, prioritize the application, and allocate
sufficient resources toward a 180 day review period. While the expedited review could shorten the
MelaFind® FDA approval process, there can be no assurance that this will be the case.
The data accrual phase of the MelaFind® pivotal trial was completed in the third quarter of 2008
and the image processing classification algorithms were finalized during the fourth quarter. At
year end 2008, the databases were undergoing third-party statistical validation and the
classification algorithms were undergoing software verification and validation. We are currently
working to complete our pre-market approval application.
To date, the Company has not generated any revenues from MelaFind®. All of the
Company’s historical revenues have come from activities and products that have since been
discontinued, including the 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®. As more fully described in Note 10, in
December 2006, the Company sold and licensed its rights to the DIFOTI® assets and does
not expect to have any significant continuing responsibility for the DIFOTI® business or
products.
At December 31, 2008, the Company has an accumulated deficit of $60.8 million and anticipates
that it will continue to incur net losses for the foreseeable future in the development and
commercialization of the Melafind® device. From inception, the Company has financed
operations primarily through the sale of convertible preferred stock and subsequently sold common
stock as part of an initial public offering on October 28, 2005, private placements in November
2006 and August 2007, and a registered direct offering which closed August 8, 2008 (refer to Note
7, “Stockholders’ Equity,” for further details). With the exception of the additional funds that
will be needed in order to achieve significant commercialization of MelaFind®, the
Company believes that the proceeds from these transactions will permit the Company to fund its
anticipated levels of operations through early 2010. The Company faces certain risks and
uncertainties which are present in many emerging medical device companies regarding future
profitability, ability to obtain future capital, protection of patents and property rights,
competition, rapid technological change, government regulations, changing health care marketplace,
recruiting and retaining key personnel, and third party manufacturing organizations.
Business Segments
The Company’s operations are confined to one business segment: the design and development of
MelaFind®.
Cash and Cash Equivalents
The Company’s cash is held in a nationally-chartered bank and the amount the Company
currently maintains with this bank exceeds the current federal insurance limits provided by the
Federal Deposit Insurance Company. The Company has not experienced any loss of its cash or interest
income. Cash equivalents are highly liquid debt instruments with an original maturity of three
months or less at the date of acquisition. The carrying value of these instruments approximates
fair value.
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Marketable Securities
Marketable securities are classified in accordance with SFAS No. 115, “Accounting for Certain
Investments in Debt and Equity Securities.” Held-to-maturity marketable securities are reported at
amortized cost. Available for sale marketable securities are reported at fair value, with
unrealized gains and losses excluded from earnings, and reported in other comprehensive income.
Trading securities are reported at fair value, with unrealized gains and losses included in
earnings. The Company evaluates declines in fair value of its 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.
The Company adopted SFAS No. 157, “Fair Value Measurements,” on January 1, 2008. SFAS No. 157,
among other things, defines fair value, establishes a consistent framework for measuring fair value
and expands disclosure for each major asset and liability category measured at fair value on either
a recurring or nonrecurring basis. SFAS No. 157 clarifies that fair value is an exit price,
representing the amount that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants. As such, fair value is a market-based
measurement that should be determined based on assumptions that market participants would use in
pricing an asset or liability. As a basis for considering such assumptions, SFAS No. 157
establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair
value as follows:
| Level 1: | Observable inputs such as quoted prices in active markets; |
| Level 2: | Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and |
| Level 3: | Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
Property and Equipment
Depreciation of property and equipment is provided for by the straight-line method over the
estimated useful lives of the related assets. Leasehold improvements are amortized over the lesser
of the assets’ useful lives or the remaining term of the lease.
Patents
Patents are carried at cost less accumulated amortization which is calculated on a
straight-line basis over a period of 15 years.
Revenue Recognition
The Company has not received FDA approval for the sale of MelaFind® and has had no
revenues from products other than from the sale of DIFOTI® products.
Income Taxes
The Company accounts for income taxes under the provisions of SFAS No. 109, “Accounting for
Income Taxes,” which requires the use of the asset and liability method of accounting for deferred
income taxes (see Note 11).
The provision for income taxes includes federal, state and local income taxes currently
payable and deferred taxes resulting from temporary differences between the financial statement and
tax bases of assets and liabilities. Valuation allowances are recorded to reduce deferred tax
assets when it is more likely than not that a tax benefit will not be realized.
In accordance with Accounting Standards Board (“FASB”) Interpretation No. 48 “Accounting for
Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”), which became
effective for the Company as of January 1, 2007, the Company would recognize the tax benefit from
an uncertain tax position only if it is more-likely-than-not that the tax position will be
sustained upon examination by the taxing authorities, based on the technical merits of the
position. The tax benefits to be recognized in the financial statements from such a position would
be measured based on the largest benefit that has a greater than fifty percent likelihood of being
realized upon ultimate resolution.
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The
Company’s reassessment of its tax positions in accordance with FIN 48 did not have a material impact on
its results of operations and financial position.
Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the US 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. The most significant estimates relate to stock-based compensation arrangements and accrued
expenses. Actual results could differ from these estimates.
Long-lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. An asset is
considered to be impaired when the sum of the undiscounted future net cash flows expected to result
from the use of the asset and its eventual disposition exceeds its carrying amount. The amount of
impairment loss, if any, is measured as the difference between the net book value of the asset and
its estimated fair value.
Research and Development
Research and development costs are expensed as incurred.
Stock-Based Compensation
The Company records 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 Bulletins No. 107
and No. 110. A compensation charge is recorded when it is probable that performance 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.
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, the Company estimates the total amount of
deferred compensation when the grant is issued for the entire option value based on the
Black-Scholes valuation model. Subsequently, the deferred compensation is adjusted each reporting
period until vesting occurs and the charge is taken. Compensation attributable to non-vested
options is not recorded until vesting occurs (see Note 8).
Financial Instruments
The Company’s financial instruments consist principally of cash and cash equivalents,
marketable securities and accounts payable. The Company believes the financial instruments’
recorded values approximate current values because of their nature and respective durations.
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 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 and warrants which are summarized as follows:
| Year Ended December 31, | ||||||||||||
| 2006 | 2007 | 2008 | ||||||||||
Common stock options |
1,689,412 | 1,812,084 | 2,069,080 | |||||||||
Warrants |
626,845 | 1,126,886 | 1,124,544 | |||||||||
Total |
2,316,257 | 2,938,970 | 3,193,624 | |||||||||
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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, if any, are reflected as accumulated other comprehensive loss in stockholders’ equity
on the Company’s balance sheet. For the year ended December 31, 2006, net loss was equal to
comprehensive loss as there were no unrealized gains or losses on available-for-sale marketable
securities at year end. For the year ended December 31, 2007, comprehensive loss was $11,949 which
includes a net loss of $11,937 and an unrealized loss on available-for-sale marketable securities
of $12. For the year ended December 31, 2008, comprehensive loss was $17,600 which includes a net
loss of $17,605 and an unrealized gain on available-for-sale marketable securities of $5.
Recently
Adopted Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities, including an amendment to SFAS
No. 115” (“SFAS No. 159”). This statement permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve financial reporting
by providing entities with the opportunity to mitigate volatility in reporting earnings caused by
measuring related assets and liabilities differently without having to apply complex hedge
accounting provisions. This statement is expected to expand the use of fair value measurements,
which is consistent with the FASB’s long-term measurement objectives for accounting for financial
instruments. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The
adoption of SFAS No. 159 did not have a material impact on the Company’s financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). This
statement defines fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. This statement relating to financial assets is effective
for financial statements issued for fiscal years beginning after November 15, 2007. The adoption
of SFAS 157 did not have a material impact on the Company’s financial statements. The provisions
of SFAS 157 related to other non-financial assets and liabilities will be effective for the Company
on January, 1, 2009, and will be applied prospectively. The Company is currently evaluating the
impact that these additional SFAS 157 provisions will have on the Company’s financial statements.
Recent
Accounting Pronouncements
In June 2008, the FASB issued Staff Position EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1”), which
is effective for financial statements issued for fiscal years beginning after December 15, 2008.
FSP EITF 03-6-1 clarifies that share-based payment awards that entitle holders to receive
nonforfeitable dividends before they vest will be considered participating securities and included
in the basic earning per share calculation. The Company does not expect that the adoption of FSP
EITF 03-6-1 will have a material effect on the financial statements.
In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible
Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors an entity should consider in developing
renewal or extension assumptions used in determining the useful life of recognized intangible
assets under SFAS No. 142, “Goodwill and Other Intangible Assets”. This guidance for determining
the useful life of a recognized intangible asset applies prospectively to intangible assets
acquired individually or with a group of other assets in either an asset acquisition or business
combination. FSP FAS 142-3 is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2008, earlier adoption is prohibited. The Company does not
expect that the adoption of FSP FAS 142-3 will have a material effect on the financial statements.
In March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and
Hedging Activities” (“SFAS 161”). This new standard
enhances disclosure requirements for derivative instruments in order to provide users of financial statements with an enhanced understanding of (i)
how and why an entity uses derivative instruments, (ii) how derivative instruments and related
hedged items are accounted for under SFAS No. 133 “Accounting for Derivative Instruments and
Hedging Activities” and its related interpretations, and (iii) how derivative instruments and
related hedged items affect an entity’s financial position, financial performance, and cash flows.
SFAS 161 is to be applied prospectively for the first annual reporting period beginning on or after
November 15, 2008. The Company believes that the adoption of SFAS 161 will not have a material
impact on the Company’s financial statement disclosures since the Company does not currently have
any derivative instruments.
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In December 2007, the FASB issued SFAS No. 141R, Business Combinations (“SFAS 141R”). SFAS
141R replaces FASB SFAS No. 141, and establishes principles and requirements for how the acquirer
of a business recognizes and measures in its financial statements the identifiable assets acquired,
the liabilities assumed, and any noncontrolling interest in the acquired company. SFAS 141R also
provides guidance for recognizing and measuring the goodwill acquired in the business combination
and determines what information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS 141R applies prospectively to
business combinations for which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2008. The effect of the changes will be
applicable to acquisitions on or after January 1, 2009.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements—an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 amends ARB 51 to establish
accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity in the consolidated
financial statements. In addition to the amendments to ARB 51, SFAS 160 amends FASB Statement No.
128, Earnings per Share, so that earnings-per-share data will continue to be calculated the same
way those data were calculated before SFAS 160 was issued. SFAS 160 is effective for fiscal years,
and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company
believes the adoption of this pronouncement will not have a material impact on the Company’s
financial statements.
2. Marketable Securities:
The Company’s marketable securities consist of corporate debt securities with a weighted
average maturity not in excess of twelve months. The Company classifies its 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 loss. Interest income, realized gains and
losses, and declines in value of securities judged to be other-than-temporary are included in the
Company’s statement of operations. As of December 31, 2008, marketable securities consisted of:
| December 31, 2008 | ||||||||
| Unrealized | ||||||||
| Fair Value | Gain (Loss) | |||||||
Corporate debt securities |
$ | 391 | $ | (7 | ) | |||
As described in Note 1, the Company adopted SFAS No. 157 on January 1, 2008. SFAS No. 157,
among other things, defines fair value, establishes a consistent framework for measuring fair value
and expands disclosure for each major asset and liability category measured at fair value on either
a recurring or nonrecurring basis. SFAS No. 157 clarifies that fair value is an exit price,
representing the amount that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants. As such, fair value is a market-based
measurement that should be determined based on assumptions that market participants would use in
pricing an asset or liability.
The fair values of the Company’s marketable securities on hand at December 31, 2008 were
measured using quoted prices in active markets for identical assets (Level 1).
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3. Property and Equipment:
Property and equipment, at cost, consists of the following:
| December 31, | ||||||||||||
| Estimated | ||||||||||||
| 2007 | 2008 | Useful Life | ||||||||||
Leasehold improvements |
$ | 184 | $ | 186 | Lease Term | |||||||
Laboratory and research equipment |
672 | 821 | 5 years | |||||||||
Office furniture and equipment |
313 | 475 | 3-5 years | |||||||||
| 1169 | 1482 | |||||||||||
Accumulated depreciation and amortization |
553 | 839 | ||||||||||
| $ | 616 | $ | 643 | |||||||||
Depreciation expense amounted to approximately $120, $201and $286 for the years ended
December 31, 2006, 2007 and 2008, respectively.
4. Patents:
Patents as shown in the accompanying balance sheets are net of accumulated amortization of
$156 and $179 at December 31, 2007 and 2008, respectively. In connection with the discontinuance of
DIFOTI® operations in April 2005, patents with a net book value of $71 had been
reclassified as assets held for sale, and were subsequently written off in connection with the
December 2006 sale and licensing agreement with KaVo. Amortization expense related to all
non-DIFOTI® patents was approximately $18, $22 and $23 for the years ended December 31,
2006, 2007 and 2008, respectively. Amortization expense of currently held non-DIFOTI®
patents is expected to amount to $15, $15, $15, $13 and $7 for the years ending December 31,
2009, 2010, 2011, 2012 and 2013, respectively.
5. Commitments and Contingencies:
The Company is obligated under two non cancelable operating leases for office space expiring
June 2009 and January 2011. The leases are subject to escalations for increases in operating
expenses. The approximate aggregate minimum future payments due under these leases are as follows:
Year ended December 31, |
||||
2009 |
$ | 256 | ||
2010 |
186 | |||
2011 |
16 | |||
| $ | 458 | |||
Rent expense charged to operations amounted to approximately $255, $305 and $320 for the
years ended December 31, 2006, 2007, and 2008, respectively.
ASKION GmbH (“Askion”), located in Gera Germany, which specializes in precision optics, has
become an integral member of our MelaFind® development team and we expect to continue to
work with ASKION for the foreseeable future. ASKION produced the MelaFind® hand-held
imaging devices used in our pivotal clinical trials and is currently building additional units and
performing other additional developmental activities.
Beginning in August 2006, the Company, primarily through ASKION, engaged Carl Zeiss Jena GmbH
(“Zeiss”) to build the lenses and assemblies, as well as provide certain technical consulting, for
the MelaFind® units which have been used in the Company’s pivotal clinical trials. This
work was performed during 2007 and 2008 and is expected to continue on commercial
MelaFind® units throughout 2009.
The Company has an employment agreement with its President and Chief Executive Officer (Dr.
Joseph Gulfo), which provides for a base salary, stock options, and discretionary performance
bonuses. The agreement, which provides for automatic one year renewal terms, currently runs
through the end of 2009. Effective March 1, 2008, the Company’s Board of Directors increased Dr.
Gulfo’s annual base salary to $280 and awarded him a bonus of $65 (see also Note 8).
The Company is not currently subject to any material legal proceedings, nor to management’s
knowledge is any material legal proceeding threatened against the Company.
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6. Employee Benefit Plan:
The Company has a SIMPLE IRA defined contribution plan covering all qualified employees. An
officer of the Company serves as trustee of the plan. The Company provides a matching contribution
of up to 3% of each employee’s salary. Company contributions to this plan amounted to approximately
$42, $38 and $72 for the years ended December 31, 2006, 2007 and 2008, respectively.
7. Stockholders’ Equity
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 Company’s stock on the date of grant, and compensation
expense in the amount of $63 for this award was recognized on a straight line basis over the
nontransferable period. For the year ended December 31, 2006, $63 was charged to compensation
expense.
On October 31, 2006, the Company entered into securities purchase agreements and a
registration rights agreement with certain accredited investors for the private placement of
2,312,384 shares of the Company’s common stock and warrants to purchase up to 346,857 shares of the
Company’s common stock for aggregate gross proceeds of approximately $13.2 million and net proceeds
of approximately $12.5 million. Pursuant to the securities purchase agreements, for a purchase
price of $5.70 each investor received one share of the Company’s common stock and a warrant to
purchase 0.15 of a share of the Company’s common stock. The warrants are five-year warrants with an
exercise price of $6.70 per share.
On July 31, 2007, the Company entered into a securities purchase agreement and a registration
rights agreement with certain accredited investors for the private placement of 2,000,178 shares of
the Company’s common stock and warrants to purchase up to 500,041 shares of the Company’s common
stock for aggregate gross proceeds of approximately $11.5 million and net proceeds of approximately
$10.7 million. The private placement closed August 3, 2007. Pursuant to the securities purchase
agreement, for a purchase price of $5.75 each investor received one share of the Company’s common
stock and a warrant to purchase 0.25 of a share of common stock. The warrants are five-year
warrants with an exercise price of $8.00 per share.
Both of the private placements were completed pursuant to an exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended, and/or Regulation D promulgated
thereunder.
Pursuant to the terms of the registration rights agreements, the Company filed resale
registration statements covering the shares in both private placements, including the shares
issuable upon exercise of the warrants, with the SEC. In the unlikely event that the Company fails
to meet certain obligations, as described in the registration rights agreements, the holders would
be entitled to certain monetary damages.
However, in no event is the Company obligated to make payments in excess of 10% of the
aggregate purchase price of the common shares. The Company has concluded that it is unlikely that
the Company would be required to remit any payments to its investors for failing to maintain its
effectiveness. The Company’s resale registration statements on Form S-3 were declared effective by
the Securities and Exchange Commission (Registration No. 333-139056 and Registration No.333-145740)
on February 12, 2007 and September 11, 2007, respectively.
On June 26, 2008, the Company filed a Form S-3 shelf registration statement for an
indeterminate number of shares of common stock, warrants to purchase shares of common stock and
units consisting of a combination thereof having an aggregate initial offering price not to exceed
$40 million. The SEC declared the registration statement effective on July 7, 2008 (file#
333-151935). Management utilized this shelf registration statement to raise additional equity
capital by completing a registered direct offering of 2,088,451 shares of the Company’s common
stock for aggregate gross proceeds of $11.9 million ($11 million approximate net proceeds to the
Company) at a per share offering price of $5.68. The offering closed on August 8, 2008. The Company
will require additional funds to achieve significant commercialization of MelaFind®.
As of December 31, 2008, the Company had 10,000,000 shares of $0.10 par value preferred stock
authorized and no shares issued and outstanding.
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8. Stock-Based Compensation and Warrants:
Stock Options
The Company has one stock option plan under which the board of directors may currently grant
incentives to employees, directors, consultants and collaborating scientists in the form of
incentive stock options, nonqualified stock options and restricted stock awards. The Company also
has two other stock-based compensation plans pursuant to which stock options are outstanding but no
new grants may be made.
Stock awards under the Company’s stock option plans have been granted at prices which are no
less than the market value of the stock on the date of the 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 up to a maximum of ten years from the date of
grant. Since the Company adopted the 2005 Plan, awards may not be granted under the Company’s
previous stock option plans.
On October 10, 2008, the formula based option, issued in 2004 to Dr. Gulfo, from the Company’s
2003 Stock Incentive Plan for 743,283 shares, at an exercise price of $0.46 a share, was cancelled.
On October 10, 2008, Dr. Gulfo was granted stock options for 900,000 shares of the Company’s common
stock at an exercise price of $3.75 (the closing price on the grant date); 380,000 shares from the
Company’s 2005 Plan previously approved for issuance by the Compensation Committee of the Board of
Directors and the stockholders of the Company, and 520,000 shares from the Company’s 2005 Plan
approved for issuance by the Compensation Committee of the Board of Directors subject to
stockholder approval. The exercise of these 520,000 stock options is subject to the receipt of
stockholder approval of the availability of these shares for issuance under the 2005 Plan, which is
anticipated to be solicited in the Company’s 2009 Proxy Statement, but are deemed to have been
granted outside the 2005 Plan until approved by the Company’s stockholders.
Of the 900,000 common shares underlying these stock options granted to D. Gulfo, 180,000
shares vested immediately, 540,000 shares vest upon the Company receiving FDA approval of its PMA
application for MelaFind®; and 180,000 shares vest in four equal annual installments
commencing on the date of grant, the first anniversary of which is October 10, 2009. These 900,000
options expire ten years from the date of grant.
The compensation expense recognized in the Statement of Operations during 2006, 2007 and 2008
for stock options and restricted stock awards amounted to $1,036, $577 and $861, respectively.
Cash received from options exercised under all share-based payment arrangements for the years ended
December 31, 2006, 2007,and 2008 was $88, $115 and $73, respectively.
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 Year Ended | ||||||||||||
| December 31, 2006 | December 31, 2007 | December 31, 2008 | ||||||||||
Expected life |
5 years | 5 years | 5-10 years | |||||||||
Expected volatility |
60 | % | 60 | % | 60 | % | ||||||
Risk-free interest rate |
4.92 - 5.04 | 3.41 - 5.02 | 1.67 - 3.86 | % | ||||||||
Dividend yield |
0 | 0 | 0 | |||||||||
The expected life of the options is based on the observed and expected time to full-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 expected dividend yield is zero as the Company has never paid dividends and does
not currently anticipate paying any in the foreseeable future.
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At December 31, 2008, stock options to purchase 2,069,080 shares of common stock at exercise
prices ranging from $.46 to $7.75 per share are outstanding and are exercisable at various dates
through 2018. The total number of options exercisable at December 31, 2006, 2007, and 2008 was
588,284, 609,901and 768,403 respectively, with weighted average exercise prices of $2.47, $3.54 and
$4.30 respectively.
The status of the Company’s stock option plans during the periods indicated 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 January 1, 2006 |
1,115,415 | $ | 0.95 | 4.4 | $ | 4,935 | ||||||||||
Granted |
748,822 | 5.56 | 4.1 | |||||||||||||
Exercised |
(135,450 | ) | 0.65 | N/A | ||||||||||||
Forfeited or expired |
(39,375 | ) | 6.76 | N/A | ||||||||||||
Outstanding at December 31, 2006 |
1,689,412 | 2.88 | 4.2 | 7,331 | ||||||||||||
Granted |
277,407 | 3.11 | 3.9 | |||||||||||||
Exercised |
(105,256 | ) | 1.09 | N/A | ||||||||||||
Forfeited or expired |
(49,479 | ) | 5.24 | N/A | ||||||||||||
Outstanding at December 31, 2007 |
1,812,084 | 2.96 | 3.5 | 4,167 | ||||||||||||
Granted |
1,165,539 | 3.61 | 8.2 | |||||||||||||
Exercised |
(141,823 | ) | 0.52 | N/A | ||||||||||||
Forfeited or expired |
(766,720 | ) | 0.52 | N/A | ||||||||||||
Outstanding at December 31,2008 |
2,069,080 | 4.39 | 5.8 | 621 | ||||||||||||
During the years ended December 31, 2006 , 2007 and 2008 the weighted average fair value of
options granted, estimated as of the grant date using the Black-Scholes option valuation model, was
$4.15, $4.11 and $ 2.89 respectively per share. The total intrinsic value of options exercised
during the years ended December 31, 2006, 2007and 2008 was $730, $558 and $664, respectively. The
requisite service periods for options granted during 2006, 2007and 2008 for employees and
consultants were four years.
The following table summarizes information about stock options outstanding at December 31,
2008:
| Options Outstanding | ||||||||||||||||||||
| Weighted- | Options Exercisable | |||||||||||||||||||
| Average | Weighted- | Weighted- | ||||||||||||||||||
| Remaining | Average | Average | ||||||||||||||||||
| Number | Contractual | Exercise | Number | Exercise | ||||||||||||||||
Range of Exercise Prices |
Outstanding | Life | Price | Exercisable | Price | |||||||||||||||
$ .46 |
130,000 | 0.9 years | $ | .46 | 70,000 | $ | .46 | |||||||||||||
$ .47-$1.00 |
104,578 | 3.0 years | 1.00 | 104,578 | 1.00 | |||||||||||||||
$1.01-$7.75 |
1,834,502 | 6.3 years | 4.86 | 593,825 | 5.34 | |||||||||||||||
$ .01-$7.75 |
2,069,080 | 5.8 years | $ | 4.39 | 768,403 | $ | 4.30 | |||||||||||||
As of December 31, 2008, of the total 2,069,080 options outstanding 1,300,677 have not vested.
Of this total unvested amount 980,152 will vest upon the attainment of certain milestones, and the
balance will vest over the requisite service period. There was $3,300 of total unrecognized
compensation cost related to unvested options, of which approximately $2,201 will be recognized
upon PMA approval, $473 upon achievement of other milestones and $626 upon completion of the
requisite service period over four years.
The Company will be seeking stockholder approval for increasing the shares of common stock
available for issuance pursuant to grants made under the 2005 Plan by 1,500,000 option shares,
which includes 520,000 shares of common stock to cover the October 10, 2008 stock option grant to
Dr. Gulfo. As of December 31, 2008 there were 402,651 shares available for future grants under the
Company’s 2005 Plan.
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On March 24, 2006, the Company issued to its then acting Chief Operating Officer and a member
of the Board, Dr. Gerald Wagner, stock option grants of 49,500 shares of the Company’s common stock
which vested immediately and 50,000 shares which vested upon commencement of the pivotal trial for
MelaFind®. Compensation expense of $162 was charged to operations in 2006. With the
start of the clinical trials in late January 2007, the Company recorded a $140 charge to operations
in the first quarter of 2007.
Warrants
Warrants outstanding at December 31, 2008 include a 5-year warrant to purchase 75,000 shares
of the Company’s common stock at an exercise price of $7.00 per share issued to one of the
Company’s consultants in 2004. Also outstanding at December 31, 2008 are 5-year warrants to
purchase 52,646 shares of the Company’s common stock at an exercise price of $4.52 per share, which
expire in 2009. These 52,646 warrants were converted from Series C preferred stock warrants upon
completion of the initial public offering.
In connection with the Company’s initial public offering in October 2005, the Company issued
150,000 warrants to the underwriters to purchase shares of the Company’s common stock at $6.25 per
share. These 5-year warrants became exercisable on October 28, 2006.
In addition, as previously discussed, in connection with the Company’s private placements in
November 2006 and August 2007, the Company issued warrants to purchase up to 346,857 and 500,041
shares, respectively, of the Company’s common stock. The warrants are exercisable for five years
at a price of $6.70 and $8.00 per share, respectively.
9. Related Party Agreements (see Note 5):
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 Company’s Board of Directors, for consulting services related to the FDA approval
of MelaFind® and the Company’s 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 $29 in 2006, $24 in 2007 and $99 in 2008. This consulting
agreement is terminable by either party on 30 days’ written notice.
Consulting Agreement with Marek Elbaum, Ph.D.
Effective May 31, 2005, the Company entered into a new consulting agreement with Marek Elbaum,
PhD, the Company’s former President and Chief Science and Technology Officer. In consideration of
the services as Chief Scientist to be provided, the Company agreed to pay Dr. Elbaum a monthly fee
of $15. The term of this agreement extended for a period of two years and was automatically
renewable for an additional one year period. Dr. Elbaum and the Company entered into an amended
agreement effective June 1, 2007. Under the terms of the amended agreement, Dr. Elbaum will be
paid a monthly fee of $9 through January 2009. Dr Elbaum’s contract was completed in January 2009.
Consulting Agreement with Robert Friedman, M.D.
During June 2005, the Company retained the services of Robert Friedman, M.D., for an initial
term of one year as a consultant and medical advisor to the Company’s Board of Directors. In
consideration for these services, Dr. Friedman will be paid at a rate of $5 per day. This
consulting agreement is automatically renewed for successive one-year terms unless either party
terminates the agreement at least 30 days prior to the expiration of the agreement. The amounts
paid to Dr. Friedman amounted to $42 in 2006, $58 in 2007 and $63 in 2008.
Consulting Agreement with Gerald Wagner, Ph.D. (see also Note 8)
Effective April 1, 2006, the Company entered into an amended and restated consulting agreement
with Gerald Wagner, Ph.D., a member of the Company’s Board of Directors and its former acting Chief Operating Officer.
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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. In addition, in
connection with his ongoing engagement as a consultant, Dr. Wagner received a stock option grant of
50,000 shares of the Company’s common stock which vested upon commencement of the pivotal trial for
Melafind® in January 2007. In addition, on March 24, 2006, Dr. Wagner received another
stock option grant of 49,500 shares of the Company’s common stock which vested immediately.
With the start of the pivotal clinical trial in January 2007, Dr. Wagner transitioned out of
his role as acting Chief Operating Officer and entered into an amended and restated consulting
contract with the Company. Under the terms of the amended contract, Dr. Wagner is paid a monthly
retainer of $2.5 and will be paid $2.5 for each additional consulting day. This amended agreement
will end at the option of Dr. Wagner or the Company at any time, by providing fifteen days prior
written notice, or immediately upon the mutual agreement of the Company and Dr. Wagner. The amounts
paid to Dr. Wagner amounted to $180 in 2006, $42.5 in 2007 and $70 in 2008.
10. Other Income (including gain on sale of discontinued operations):
During March 2007, the Company entered into an agreement with L’Oreal to study the
feasibility of using the Company’s novel multi-spectral imaging technology for the evaluation and
differentiation of pigmented skin lesions of cosmetic importance. EOS has granted L’Oreal an
option to acquire an exclusive license to use EOS technology in the field covered by the research,
on terms to be mutually agreed. The option was extended and now expires on June 30, 2009. The
laboratory and clinical research will be funded by L’Oreal. Pursuant to the agreement, L’Oreal is
responsible for all costs and expenses incurred in connection with the Feasibility Program, and
will reimburse EOS for expenses incurred by EOS with respect to the Feasibility Program. During
the years ended December 31, 2007 and 2008, the Company earned $59 and $141, respectively recorded
as other income, to offset expenses incurred by EOS under the Feasibility Program with L’Oreal.
Amounts received from L’Oreal in advance of being earned have been recorded as deferred income.
During April 2005, the Company discontinued all operations associated with its
DIFOTI® product, in order to focus its resources and attention on the development and
commercialization of MelaFind®. In accordance with the provisions of SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-lived Assets,” the results of operations of the
DIFOTI® business have been excluded from continuing operations and have been reported as
discontinued operations. During December 2006, the Company entered into a sale and exclusive
licensing agreement with KaVo, a leading dental equipment manufacturer, which provides for KaVo to
further develop and commercialize DIFOTI®. Upon execution of the agreement, KaVo paid
the Company $500, and made a second payment of $500 in July 2007. Beginning in 2008, KaVo is
required to pay to the Company a royalty stream based upon the worldwide aggregate net sales of the
licensed product, as defined in the license agreement, or a set minimum royalty payment, whichever
is greater. Royalties, if any, will be recorded when earned. For the year ended December 31,
2008, the Company recorded minimum royalty income of $10.
For the year ended December 31, 2006 the Company recorded a gain of $781 on the sale and
licensing of its remaining DIFOTI® assets based upon the cash proceeds and the
discounted value of the second payment.
For the year ended December 31, 2007, the Company recorded a gain of $28 on the sale of its
discontinued operations. Costs associated with the 2006 transaction with KaVo were lower than
expected and the December 31, 2006 accrual to capture these expenses was partially reversed in
2007.
11. Income Taxes:
Because the Company has incurred net losses, it has not provided for income taxes for the
years ended December 31, 2006, 2007 and 2008.
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The difference between the actual income tax benefit and that computed by applying the U.S.
federal income tax rate of 34% to pretax loss from continuing operations is summarized below:
| Year Ended December 31, | ||||||||||||
| 2006 | 2007 | 2008 | ||||||||||
Computed expected tax benefit |
$ | (3,866 | ) | $ | (4,068 | ) | $ | (5,986 | ) | |||
State tax benefit, net of federal effect |
(682 | ) | (718 | ) | (1,056 | ) | ||||||
Increase in the valuation allowance |
4,548 | 4,786 | 7,042 | |||||||||
Provision for income taxes |
$ | — | $ | — | $ | — | ||||||
The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets and liabilities as of December 31, 2007 and 2008 are as follows:
| December 31, | ||||||||
| 2007 | 2008 | |||||||
Deferred tax assets: |
||||||||
Net operating loss carryforwards |
$ | 8,409 | $ | 10,389 | ||||
Capitalized research and developmental costs |
7,094 | 11,868 | ||||||
Non-cash compensation |
1,064 | 1,352 | ||||||
Total deferred tax assets |
16,567 | 23,609 | ||||||
Less valuation allowance |
(16,567 | ) | (23,609 | ) | ||||
Net deferred tax assets |
$ | — | $ | — | ||||
In assessing the realizability of deferred tax assets, the Company considers whether it is
more likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. Based on the
Company’s historical net losses, management does not believe that it is more likely than not that
the Company will realize the benefits of these deferred tax assets and, accordingly, a full
valuation allowance has been recorded against the deferred tax assets as of December 31, 2007 and
2008. The Company’s valuation allowance against its deferred tax assets increased by $4,548, $4,786
and $7,042 for the years ended December 31, 2006, 2007 and 2008, respectively.
The Company has net operating loss carryforwards of approximately $23.6 million to offset
future taxable income. The Company has experienced certain ownership changes, which under the
provisions of Section 382 of the Internal Revenue Code of 1986, as amended, result in annual
limitations on the Company’s ability to utilize its net operating losses in the future. The Company
has conducted a study to determine the extent of the limitations. Based on the study, the Company
believes that these limitations will not materially impact the Company’s ability to utilize its net
operating losses in the future. However, any future equity raise by the Company may limit the use
of these net operating loss carryforwards.
In July 2006, the FASB issued Interpretation No. 48, “Uncertainty in Income Taxes” (“FIN 48”).
FIN 48 applies to all tax positions and clarifies the recognition of tax benefits in the financial
statements by providing for a two-step approach of recognition and measurement. The first step
involves assessing whether the tax position is more likely than not to be sustained upon
examination based upon its technical merits. The second step involves measurement of the amount to
recognize. Tax positions that meet the more likely than not threshold are measured at the largest
amount of tax benefit that is greater than 50% likely of being realized upon ultimate finalization
with the taxing authority.
The Company adopted FIN 48 on January 1, 2007. As a result of the implementation of FIN 48,
the Company recognized no material adjustment in the liability for unrecognized income tax
benefits. At the adoption date of January 1, 2007, the Company did not have any unrecognized tax
benefits which would favorably affect the effective tax rate if recognized in future periods, or
accrued penalties and interest. If such matters were to arise, the Company would recognize interest
and penalties related to income tax matters in income tax expense. The earliest open tax year
subject to examination is 2005.
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12. Quarterly Operating Results (Unaudited)
The following is a summary of operating results by quarter for the years ended December 31,
2008 and 2007:
| Quarter Ended | ||||||||||||||||
| March 31, | June 30, | September 30, | December 31, | |||||||||||||
2008 |
||||||||||||||||
Loss from continuing operations |
$ | (4,277 | ) | $ | (4,951 | ) | $ | (4,200 | ) | $ | (4,177 | ) | ||||
Net Loss |
$ | (4,277 | ) | $ | (4,951 | ) | $ | (4,200 | ) | $ | (4,177 | ) | ||||
Basic and diluted net loss per share of common
stock |
$ | (0.28 | ) | $ | (0.32 | ) | $ | (0.25 | ) | $ | (0.23 | ) | ||||
2007 |
||||||||||||||||
Loss from continuing operations |
$ | (2,994 | ) | $ | (3,096 | ) | $ | (2,709 | ) | $ | (3,166 | ) | ||||
Gain on sale of discontinued operations |
28 | |||||||||||||||
Net Loss |
$ | (2,994 | ) | $ | (3,096 | ) | $ | (2,709 | ) | $ | (3,138 | ) | ||||
Basic and diluted net loss per share of common stock |
$ | (0.22 | ) | $ | (0.23 | ) | $ | (0.18 | ) | $ | (0.20 | ) | ||||
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures.
Evaluation of disclosure controls and procedures
Our company’s management, with the participation of our chief executive officer and our chief
financial officer, has evaluated the effectiveness of our “disclosure controls and procedures” (as
defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934) as of December 31, 2008.
Based on such evaluation, our chief executive officer and our chief financial officer have
concluded that, as of December 31, 2008, our disclosure controls and procedures were effective to
ensure that the information we are required to disclose in reports that we file or submit to the
SEC is (1) recorded, processed, summarized and reported within the time periods specified under the
rules and forms of the SEC and (2) accumulated and communicated to our management, including our
chief executive officer and our chief financial officer, as appropriate to allow timely decisions
regarding required disclosures.
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Report of Management on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting and for the assessment of the effectiveness of internal control over financial reporting. Under the rules of the SEC, ''internal control over financial reporting procedures’’ is defined as a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
financial reporting and for the assessment of the effectiveness of internal control over financial reporting. Under the rules of the SEC, ''internal control over financial reporting procedures’’ is defined as a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Internal control over financial reporting includes maintaining records, that in reasonable detail,
accurately and fairly reflect our transactions and our dispositions of assets; provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America; provide reasonable assurance that receipts and expenditures of company assets are made only in accordance with management authorization; and provide reasonable assurance regarding the prevention or the timely detection of the unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
accurately and fairly reflect our transactions and our dispositions of assets; provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America; provide reasonable assurance that receipts and expenditures of company assets are made only in accordance with management authorization; and provide reasonable assurance regarding the prevention or the timely detection of the unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of our internal control over financial
reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control—Integrated Framework. Based on this evaluation, management concluded
that the company’s internal control over financial reporting was effective as of December 31, 2008.
Eisner LLP, the independent registered public accounting firm, have issued their report on our
internal control over financial reporting as of December 31, 2008. Their report is included in this
Item 9A.
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Electro-Optical Sciences, Inc.
Electro-Optical Sciences, Inc.
We have audited Electro-Optical Sciences, Inc.’s internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The Company’s
management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting, included in
the accompanying Report of Management on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions, and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of the effectiveness to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Electro-Optical Sciences, Inc., maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on the criteria
established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the balance sheets of Electro-Optical Sciences, Inc. as of December 31, 2007
and December 31, 2008, and the related statements of operations, stockholders’ equity and cash
flows for each of the years in the three-year period ended December 31, 2008, and our report dated
February 26, 2009 expressed an unqualified opinion on those financial statements.
/s/ Eisner LLP
New York, New York
February 26, 2009
February 26, 2009
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Change in internal control over financial reporting
There were no changes in our internal control over financial reporting during the quarter
ended December 31, 2008 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.
Item 9B. Other Information.
Not applicable.
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
The information required by this item will be contained in our definitive proxy statement to
be filed with the Securities and Exchange Commission in connection with the Annual Meeting of our
Stockholders (the “Proxy Statement”), which is expected to be filed no later than 120 days after
the end of our fiscal year ended December 31, 2008, and is incorporated in this report by
reference.
Item 11. Executive Compensation
The information required by this item will be set forth in the Proxy Statement and is
incorporated in this report by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters ,
The information required by this item will be set forth in the Proxy Statement and is
incorporated in this report by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be set forth in the Proxy Statement and is
incorporated in this report by reference.
Item 14. Principal Accountant Fees and Services
The information required by this item will be set forth in the Proxy Statement and is
incorporated in this report by reference.
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Table of Contents
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Exhibits and Financial Statement Schedules:
(1) Financial Statements
See the “Index to Financial Statements” in Part II Item 8 of this report.
(2) Financial Statement Schedules
Not applicable.
(3) Exhibits
A list of exhibits required by Item 601 of Regulation S-K filed or incorporated by reference
is found in the Exhibit Index immediately following Part IV of this report.
70
Table of Contents
EXHIBIT INDEX
| Exhibit | ||||
Number |
Exhibit Title |
|||
3
|
.1 | Fourth Amended and Restated Certificate of Incorporation of the Registrant.(1) | ||
3
|
.2 | Third Amended and Restated Bylaws of the Registrant.(2) | ||
4
|
.1 | Specimen Stock Certificate.(2) | ||
4
|
.2 | Second Amended and Restated Investor’s Rights Agreement dated as of October 26, 2004 by and among the Registrant and the parties listed therein.(3) | ||
4
|
.3 | Form of Warrant.(7) | ||
4
|
.4 | Form of Warrant.(13) | ||
10
|
.1* | Form of Indemnification Agreement for directors and executive officers.(2) | ||
10
|
.2* | 1996 Stock Option Plan.(3) | ||
10
|
.3* | 2003 Stock Incentive Plan, as amended.(3) | ||
10
|
.4* | 2005 Stock Incentive Plan.(2) | ||
10
|
.5* | Employment Agreement dated as of January 5, 2004 between the Registrant and Joseph V. Gulfo.(3) | ||
10
|
.6 | Consulting Agreement dated as of May 31, 2005 between the Registrant and Marek Elbaum.(3) | ||
| 10 | .7 | Lease Agreement dated as of December 16, 1998, by and between the Registrant and Bridge Street Properties LLC, for office space located at One Bridge Street, Irvington, New York.(3) | ||
10
|
.8 | First Amendment to the Lease Agreement dated as of May 17, 2001 by and between the Registrant and Bridge Street Properties LLC.(3) | ||
10
|
.9 | Second Amendment to the Lease Agreement dated as of June 19, 2003 by and between the Registrant and Bridge Street Properties LLC.(3) | ||
10
|
.10 | Lease Agreement dated as of November 23, 2004, by and between the Registrant and Bridge Street Properties LLC, for office space located at 3 West Main Street, Irvington, New York.(3) | ||
10
|
.11* | Consulting Agreement dated as of June 20, 2003 between the Registrant and Breaux Castleman, as amended.(1) | ||
10
|
.12 | Consulting Agreement dated as of June 1, 2005 between the Registrant and Robert Friedman, M.D.(1) | ||
10
|
.13 | Third Amendment dated as of June 6, 2005, by and between the Registrant and Bridge Street Properties LLC, for office space located at 1 Bridge Street, Irvington, New York.(1) | ||
10
|
.14 | Production Agreement between the Registrant and ASKION GmbH dated as of January 25, 2006.(4) | ||
10
|
.15* | Amended and Restated Consulting Agreement effective as of April 1, 2006 between the Registrant and Gerald Wagner Consulting LLC.(11) | ||
10
|
.16* | Employment Offer Letter, dated April 24, 2006, between the Registrant and Richard I. Steinhart.(5) | ||
10
|
.17* | Employment Offer Letter, dated May 30, 2006, between the Registrant and Christiano S. Butler.(6) | ||
10
|
.18 | Securities Purchase Agreement among the Registrant and the purchasers identified on the signature pages thereto, dated as of October 31, 2006.(8) | ||
10
|
.19 | Securities Purchase Agreement among the Registrant and the purchasers identified on the signature pages thereto, dated as of October 31, 2006.(8) | ||
10
|
.20 | Registration Rights Agreement among the Registrant and the purchasers identified on the signature pages thereto, dated as of October 31, 2006.(8) | ||
10
|
.21 | Licensing Agreement between the Registrant and KaVo Dental GmbH, dated as of December 5, 2006.(9) | ||
10
|
.22* | Amendment No. 1 to Amended and Restated Consulting Agreement dated as of January 30, 2007 by and among the Registrant, Gerald Wagner and Gerald Wagner Consulting LLC. (10) | ||
10
|
.23 | Research and Feasibility Agreement between Registrant and L’Oreal S.A. dated as of March 26, 2007.(12) | ||
10
|
.24 | Securities Purchase Agreement among the Registrant and the purchasers identified on the signature pages thereto, dated as of July 31, 2007.(13) | ||
10
|
.25 | Registration Rights Agreement among the Registrant and the purchasers identified on the signature pages thereto, dated as of July 31, 2007.(13) | ||
10
|
.26 | Fifth Amendment dated as of August 24, 2007, by and between the Registrant and Bridge Street Commercial, LLC, for office space located at 1 Bridge Street, Irvington, New York. (14) | ||
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Table of Contents
| Exhibit | ||||
Number |
Exhibit Title |
|||
10
|
.27 | Placement Agency Agreement by and between the Registrant and Needham & Company, LLC, dated as of July 31, 2008.(15) | ||
10
|
.28 | Form of Subscription Agreement between and Registrant and each investor.(15) | ||
21
|
.1# | Subsidiaries of Registrant. | ||
23
|
.1# | Consent of Eisner LLP | ||
31
|
.1# | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31
|
.2# | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32
|
.1# | Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| * | Indicates management compensatory plan, contract or arrangement | |
| (1) | Incorporated by reference to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-125517), as filed on July 15, 2005. | |
| (2) | Incorporated by reference to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-125517), as filed on August 8, 2005. | |
| (3) | Incorporated by reference to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-125517), as filed on June 3, 2005. | |
| (4) | Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on January 31, 2006. Portions of this agreement have been omitted pursuant to a request for confidential treatment. | |
| (5) | Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on April 27, 2006. | |
| (6) | Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on June 2, 2006. | |
| (7) | Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on November 1, 2006. | |
| (8) | Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on November 8, 2006. | |
| (9) | Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on December 11, 2006. | |
| (10) | Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on January 31, 2007. | |
| (11) | Incorporated by reference to the Registrant’s Annual Report on Form 10-K filed on March 29, 2006. | |
| (12) | Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on March 28, 2007. | |
| (13) | Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on August 1, 2007. | |
| (14) | Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on November 8, 2007. | |
| (15) | Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on July 31, 2008. | |
| # | Filed herewith. |
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Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities and 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/ Joseph V. Gulfo, M.D. | |||
| Joseph V. Gulfo, M.D. President and Chief Executive Officer (Principal Executive Officer) |
||||
Dated: March 2, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature |
Title |
Date |
||
/s/ Joseph V. Gulfo, M.D.
|
Director, President and
Chief Executive Officer (Principal Executive Officer) |
March 2, 2009 | ||
/s/ Richard I. Steinhart
|
Vice President, Finance and
Chief Financial Officer (Principal Financial and Accounting Officer) |
March 2, 2009 | ||
/s/ Breaux Castleman
|
Chairman of the Board of Directors | March 2, 2009 | ||
/s/ Sidney Braginsky
|
Director | March 2, 2009 | ||
/s/ George C. Chryssis
|
Director | March 2, 2009 | ||
/s/ Martin D. Cleary
|
Director | March 2, 2009 | ||
/s/ Dan W. Lufkin
|
Director | March 2, 2009 | ||
/s/ Gerald Wagner, PhD.
|
Director | March 2, 2009 |
73
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
The Registrant does not have any subsidiaries.
74
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements of Electro-Optical
Sciences, Inc. (“the Company”) on Forms S-3 (File No. 333-139056, File No. 333-145740 and File No.
333-151935) and on Form S-8 (File No. 333-136183) of our reports dated February 26, 2009 with
respect to our audits of the balance sheets of Electro-Optical Sciences, Inc. as of December 31,
2007 and 2008, and the related statements of operations, stockholders’ equity and cash flows for
each of the years in the three-year period ended December 31, 2008, and our audit of the Company’s
internal control over financial reporting as of December 31, 2008, included in the December 31,
2008 annual report on Form 10-K of Electro-Optical Sciences, Inc.
We also consent to the reference to our firm under the heading “Experts” in the Registration
Statements on Forms S-3 (File No. 333-139056, File No. 333-145740 and File No. 333-151935).
/s/ Eisner LLP
New York, New York
February 26, 2009
February 26, 2009
75
Exhibit 31.1
CERTIFICATION
I, Joseph V. Gulfo, certify that:
1. I have reviewed this report on Form 10-K 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 registrant’s 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
registrant’s 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;
d) disclosed in this report any change
in the registrant’s internal control
over financial reporting that
occurred during the registrant’s most
recent fiscal quarter that has
materially affected, or is reasonably
likely to materially affect, the
registrant’s internal control over
financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s 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 registrant’s 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 registrant’s internal control
over financial reporting.
| /s/ Joseph V. Gulfo, M.D. | ||||
| Joseph V. Gulfo, M.D. | ||||
| President and Chief Executive Officer (Principal Executive Officer) |
||||
Date: March 2, 2009
76
Exhibit 31.2
CERTIFICATION
I, Richard I. Steinhart, certify that:
1. I have reviewed this report on Form 10-K 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 registrant’s 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
registrant’s 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;
d) disclosed in this report any change
in the registrant’s internal control
over financial reporting that
occurred during the registrant’s most
recent fiscal quarter that has
materially affected, or is reasonably
likely to materially affect, the
registrant’s internal control over
financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s 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 registrant’s 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 registrant’s internal control
over financial reporting.
| /s/ Richard I. Steinhart | ||||
| Richard I. Steinhart | ||||
| Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) |
||||
Date: March 2, 2009
77
Exhibit 32.1
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
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 Company’s Annual Report on Form 10-K for the period ended
December 31, 2008 (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, M.D. | ||||
| Joseph V. Gulfo, M.D. | ||||
| President and Chief Executive Officer (Principal Executive Officer) |
||||
March 2, 2009
| /s/ Richard I. Steinhart | ||||
| Richard I. Steinhart | ||||
| Vice President & Chief Financial Officer (Principal Accounting and Financial Officer) |
||||
March 2, 2009
| * | 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-K 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. |
78