10-K
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
000-51481
ELECTRO-OPTICAL SCIENCES,
INC
(Exact name of registrant as
specified in its charter)
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Delaware
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13-3986004
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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3 West Main Street, Suite 201
Irvington, New York 10533
(Address, including zip code, of
registrants principal executive offices)
(914) 591-3783
Registrants telephone number, including area code:
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common stock, $0.001 par value
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark whether the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Security
Act. 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
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 registrants 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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act.
Large accelerated
filer o Accelerated
filer o Non-accelerated
filer þ
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the 9,119,534 shares of
common stock held by non-affiliates of the registrant as of
June 30, 2006 was $70,129,216 based on the last reported
sale price of $7.69 per share on the Nasdaq Capital Market
on June 30, 2006. (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 and a certain
shareholder holding approximately 10.1% of the registrants
shares outstanding; such exclusion shall not be deemed to
constitute an admission that any such person is an
affiliate of the registrant). The number of shares
outstanding of the registrants common stock as of
February 28, 2007 was 13,372,483 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement for the 2007
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.
2006
FORM 10-K
ANNUAL REPORT
TABLE OF
CONTENTS
This Annual Report on
Form 10-K,
including the sections labeled Managements Discussion and
Analysis of Financial Condition and Results of Operations,
contains forward-looking statements that you should read in
conjunction with the financial statements and notes to financial
statements that we have included elsewhere in this report. These
statements are based on our current expectations, assumptions,
estimates and projections about our business and our industry,
and involve known and unknown risks, uncertainties, and other
factors that may cause our or our industrys results,
levels of activity, performance or achievements to be materially
different from any future results, levels of activity,
performance or achievements expressed or implied in, or
contemplated by, the forward-looking statements. 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.
Overview
We are a medical device company focused on the design and
development of a non-invasive,
point-of-care
instrument to assist in the early diagnosis of melanoma. Our
flagship product,
MelaFind®,
features a hand-held imaging device that emits light of multiple
wavelengths to capture images of suspicious pigmented skin
lesions and extract data. The data are then analyzed against our
proprietary database of melanomas and benign lesions using our
sophisticated algorithms in order to provide information to the
physician and produce a recommendation of whether the lesion
should be biopsied.
The components of the
MelaFind®
system include:
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a hand-held imaging device, which employs high precision
optics and multi-spectral illumination (multiple colors of light
including near infra-red);
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our proprietary database of pigmented skin lesions, which
we believe to be the largest in the US;
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our lesion classifiers, which are sophisticated
mathematical algorithms that extract lesion feature information
and classify lesions; and
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a central server in our offices that is intended to
perform quality control functions and, in commercial use, will
be connected to physicians offices via the internet.
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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. We
stopped a study that was initiated in late 2004 under the
Protocol Agreement due to technical difficulties with some of
the
MelaFind®
clinical trial instruments. The FDA has provided confirmation
that our plan to correct the technical issues and start a new
pivotal trial to satisfy the Protocol Agreement is acceptable.
The pivotal trial commenced in January 2007. 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 a PMA with the
FDA, it is placed at the beginning of the FDAs queue and
receives additional review resources. 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 launch
MelaFind®
in the United States. If the pivotal trial and FDA approval
process proceeds as anticipated, management believes that PMA
approval could come as early as mid-2008.
To date, we have not generated any revenues from
MelaFind®.
1
Cancers of the skin have a higher incidence than all other
cancers combined, and the rates are rising dramatically. In
2007, over 120,000 new cases of melanoma are projected. 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 the 2000 US Census data, over
100 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 studied on over 5,000 skin lesions from over
3,500 patients at over 20 clinics. Our clinical studies
have demonstrated that
MelaFind®
missed fewer melanomas and produced fewer false positives than
experienced by study dermatologists, who are skin cancer
specialists. The performance of a diagnostic is measured in
terms of sensitivity (the ability to detect
disease when disease is present) and specificity
(the ability to exclude disease when disease is not
present). In the largest blinded trial that we have performed to
date on 562 suspicious pigmented skin lesions, using our most
advanced system,
MelaFind®
missed a single melanoma in situ, and study
dermatologists, who are skin cancer experts, missed an invasive
melanoma. Further, the specificity of
MelaFind®
was 45.1%, compared to study dermatologists 20.0% (p<0.0001).
We believe that with the assistance provided by
MelaFind®,
physicians could diagnose more melanomas at the earliest,
curable stage, 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 will make a second payment to us later in 2007.
If KaVo is successful in commercializing
DIFOTI®,
KaVo will pay us an annual royalty based on the number of
systems sold per calendar year following commercial
re-launch of
DIFOTI®.
The
Market Opportunity
Cancer of the skin (non-melanoma and melanoma skin cancers
combined) is the most common of all cancers, projected to be
over 1.3 million cases in 2007 and estimated to account for
more than 50% of all cancers. In 2007, over 120,000 new cases of
melanoma are projected. There are three significant forms of
skin cancer: basal cell, accounting for approximately 75% of
skin cancer; squamous cell, totaling approximately 20%; and
melanoma, which accounts for an estimated 4% of skin cancer
cases, but is responsible for
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approximately 75% of all deaths from skin cancer. The American
Cancer Society projects 10,850 deaths from skin cancer in
2007 8,110 from melanoma and 2,740 from other skin
cancers. 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.
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. Recent 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:
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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®.
The study commenced in January 2007. 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 a PMA with the
FDA, it is placed at the beginning of the FDAs queue and
receives additional review resources. 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 launch
MelaFind®
in the United States. If the pivotal trial and FDA approval
process proceeds as anticipated, management believes that PMA
approval could come as early as mid-2008.
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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 to ensure that
MelaFind®
is the leading system for assisting in the detection of melanoma.
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Obtain third party payer reimbursement to support our
recurring revenue pricing model. We intend to
offer
MelaFind®
on a per patient basis, creating a recurring revenue stream. To
do so, we will seek to obtain third party reimbursement as well
as private pay alternatives. We are working with experts to
create an evidence-based medicine evaluation model consistent
with those used to support positive coverage decisions by the
federal Centers for Medicare and Medicaid Services (CMS) and
private payers for similar products. The value drivers in the
model include the cost savings associated with early detection
and fewer biopsies. We believe that the use of
MelaFind®
could result in substantial savings to the US healthcare system.
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Commercialize
MelaFind®
using multiple sales and marketing
strategies. Our internal sales and marketing
effort will focus initially on high volume/key opinion
leader dermatologists with specialties in the diagnosis
and treatment of melanoma. To enter the larger US markets of
general dermatologists,
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plastic surgeons, and primary care physicians, and for
international markets, we intend to establish partnerships with
pharmaceutical
and/or
diagnostic device companies with an established presence in
these markets. While we believe obtaining a positive national
coverage decision from CMS may take an additional 18 to
36 months following PMA approval, and obtaining a positive
coverage decision from private payers, managed care
organizations and state Medicare administrative contractors may
take at least 6 to 12 months following PMA approval, we
intend to commence sales of
MelaFind®
immediately upon receiving PMA approval for physicians to offer
MelaFind®
to their patients on a self-pay basis and through negotiated
payment arrangements with several third-party payers.
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Additionally, our strategy includes the potential acquisition of
complimentary products and technologies in the dermatological
diagnostic arena.
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 and specificity. 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 is comprised of a
point-of-care,
hand-held imaging device that, in commercial use, is intended to
be connected via the internet to a central server in our offices
that will be used for quality control purposes. All diagnosis
will be performed at the point of care.
MelaFind®
employs multiple wavelengths of light to obtain data from images
of suspicious lesions; the data are analyzed against our
proprietary database of melanomas and benign lesions using our
sophisticated algorithms. When marketed, a report will be
generated in the physicians office containing considerable
objective information about the lesion that is currently not
available to doctors including
MelaFind®s
recommendation of whether the lesion should be biopsied. The key
components of the
MelaFind®
system are listed below:
A hand-held imaging device, which is comprised of several
components:
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an illuminator that shines 10 different specific wavelengths of
light, including near infra-red bands;
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a lens system composed of nine elements that creates images of
the light reflected from the lesions;
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a photon (light) sensor; and
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an image processor employing proprietary algorithms to extract
many discrete characteristics or features from the images.
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Our proprietary database of pigmented skin lesions, which
includes in vivo
MelaFind®
images and corresponding histological results of over 5,000
biopsied lesions from over 3,500 patients, which we believe
to be the largest such database in the US and a substantial
barrier to competition.
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Our lesion classifiers 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 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 training, as well as the degree to
which the training database is representative of the lesions
that will be evaluated by
MelaFind®
in commercial use.
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.
A central server located in our offices, is intended to
perform quality control functions on the point of care system.
When
MelaFind®
is marketed, the central server will perform tests on the
hand-held device to determine whether its functioning is within
appropriate limits, that is, that the quantitative data on
lesion and calibration image features provided by
MelaFind®
are within a pre-determined expected range of values. The server
will not permit
MelaFind®
to provide diagnostic information unless the hand-held device is
functioning properly.
MelaFind®
Regulatory Status
In late 2004, we entered into a binding Protocol Agreement with
the FDA for our pivotal clinical study. A pivotal trial is a
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 primary endpoints of the study include: (1) greater
than 95% lower confidence bound (a statistically derived lower
limit of a measured or observed value based on the number of
observations used to derive the measured or observed value)
sensitivity for detection of melanoma (99% observed
sensitivity); and (2) statistically significant greater
specificity in ruling out melanoma when compared to study
dermatologists. The lower confidence bound of 95% sensitivity is
a statistically-derived lower limit of sensitivity based on an
observed sensitivity of 99%. This means that in order to satisfy
the sensitivity requirement,
MelaFind®
must correctly identify at least 92 of the 93 melanomas, that
is, miss either none or one melanoma in the pivotal trial. In
order to satisfy the specificity requirement,
MelaFind®
must demonstrate a higher specificity than study dermatologists
at a level where the probability of obtaining such a result by
chance is less than 5%. For illustrative purposes, assuming a
specificity of 25% for study dermatologists, the specificity of
MelaFind®
would need to be at least 32% in order for the difference to be
statistically significant at the 95% confidence level.
We initiated a clinical trial under the terms of the Protocol
Agreement at the end of 2004. However, technical operational
issues with the systems were experienced, requiring further
refinement of the system. We are continuing this study as a
supportive pilot study. A pilot study is one that provides
information regarding the operation of a device in the clinical
setting as well as the feasibility of various clinical trial
evaluations. Pilot studies are often used to help refine certain
elements of a planned pivotal trial and serve to train study
personnel in advance of a pivotal trial.
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In 2005, we initiated an effort to refine the
MelaFind®
hardware with ASKION GmbH (Gera, Germany), which specializes in
precision optics. ASKION has become an integral member of our
MelaFind®
development team and we expect to continue to work with ASKION
for the foreseeable future. ASKION has produced several
MelaFind®
systems for our pivotal clinical trials that began in January
2007 and is currently building additional units that will be
used for new clinical sites that will be added over the next
several months.
In August of 2006, the Company engaged Carl Zeiss Jena GmbH
(Zeiss) on usual commercial terms to build the
lenses and assemblies that are being used in
MelaFind®.
In addition, Zeiss will provide certain technical consulting for
production
scale-up and
second generation
MelaFind®
system. We expect to expand this technical relationship with
Zeiss throughout 2007.
We reviewed our strategy with the FDA and obtained confirmation
from the FDA that our plan to correct the technical issues by
refining the hardware systems and to start the new pivotal trial
to satisfy the Protocol Agreement was acceptable. In addition,
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 with the FDA, it is placed at the
beginning of the FDAs queue and receives additional review
resources. 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 launch
MelaFind®
in the United States. If the pivotal trial and FDA approval
process proceeds as anticipated, management believes that PMA
approval could come as early as mid-2008. For commercialization
outside the US, approvals from appropriate regulatory bodies
within other countries will be required. Once PMA approval is
obtained, we may proceed with applications to commercialize in
various countries pending further assessment of market
opportunities and the possible identification of strategic
partners.
Clinical
Studies of
MelaFind®
Goals
and Objectives
MelaFind®
has been studied on over 5,000 skin lesions from over
3,500 patients during the past five years at over 20
clinical sites in the US, as well as two sites in Europe and one
in Australia. We aim to develop a system with a sensitivity of
at least 95% in detecting melanoma. Our goals are to complete
pre-commercialization design and testing of the hand-held
imaging device and its associated software, as well as to
establish a database of approximately 300 melanomas, including
in vivo
MelaFind®
images and biopsy results, for
MelaFind®
Lesion Classifier algorithm development and training.
Statistically, in order to have a high level of confidence of
success, we set the lower confidence bound at 99%, which
requires approximately 300 melanomas in the classifier training
database. To date, the
MelaFind®
lesion database includes over 300 melanomas.
We are developing in parallel several
MelaFind®
Lesion Classifiers, which differ in the algorithms, as
well as in the specific lesion features and relative weights
used in the mathematical formulas. Prior to conducting the
analysis of the data from the pivotal trial under the Protocol
Agreement, the optimal Lesion Classifier will be
selected. The primary means by which the performance of the
MelaFind®
Lesion Classifiers are evaluated is through measures of
sensitivity (the ability to detect disease when
present) and specificity (the ability to exclude
disease when not present). The reference standard used for
comparison of the results of
MelaFind®
and the study dermatologists is histological analysis of the
biopsied lesions by a group of expert pathologists.
MelaFind®
images of pigmented skin lesions (melanomas and non-melanomas)
and the histological results of the corresponding biopsied
lesions comprise our training database of lesions. When the
Lesion Classifiers are tested on the database used in
training, this is called a training study. When the
Lesion Classifiers are tested on a set of lesions not
used in training, this is called a blinded test,
which is a simulation of anticipated real-life prospective
classifier performance.
Our ultimate goal for
MelaFind®
is to demonstrate sensitivity of at least 95%, and superior
specificity as compared to study dermatologists in the pivotal
blinded test for PMA approval.
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MelaFind®
Development History Hardware and
Software
In developing the
MelaFind®
system we have tested both a first and second generation
hand-held imaging device, and have now developed a
pre-commercialization version for use in our pivotal clinical
trial that began in January 2007. Our research, development and
clinical testing efforts have been designed to improve our
MelaFind®
technology platform, including the imaging device and lesion
classifiers, and to enhance our lesion database.
We began using first generation hand-held imaging devices in
clinical studies in 2001. In 2002, we expanded the clinical
research program to additional study sites equipped with second
generation hand-held imaging devices. The aim of the study,
which is ongoing, is to build the
MelaFind®
proprietary lesion database for use in Lesion Classifier
training. The study calls for the
MelaFind®
hand-held imaging device to acquire images of pigmented skin
lesions scheduled for biopsy. After biopsy, the histological
slides are collected and sent for central histological review by
a panel of experts.
The results of initial training studies and blinded tests were
not to the expected level of performance. We determined the
cause to be a flaw in the second generation hand-held imaging
devices, which were subsequently shown to exhibit highly
variable levels of stray light, an optical artifact. Therefore,
we ceased producing this generation of hand-held imaging devices
and purged the training database of lesion images acquired with
several of them. We also incorporated a manufacturing
specification for stray light which, prior to this time, was not
included. Subsequent training studies and blinded tests
performed using only first generation hand-held imaging devices
confirmed our earlier favorable results:
MelaFind®
missed none or very few melanomas, and was shown to have higher
specificity than study dermatologists.
We initiated a clinical study under the terms of the Protocol
Agreement with the FDA in late 2004 using first generation
hand-held imaging devices. However, several technical operating
issues with these older systems were experienced, requiring
further refinement. Third generation hand-held imaging devices
were produced in 2004 and early 2005. These serve as the basis
of the design used to generate final, pre-commercialization
hand-held imaging devices, which are being utilized in the
pivotal study for PMA approval under the terms of the Protocol
Agreement. We delivered
MelaFind®
systems to the field for beta testing, in late 2006. Following
beta testing and additional refinements in late 2006, we began
our pivotal clinical trial in January 2007.
Along with hardware development efforts, we have also developed,
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. We plan to finalize these key elements
of the software prior to the analysis of the data obtained from
the pivotal trial for PMA approval.
Current
Results of Training Studies and Blinded Tests
The following data were presented at the American Academy of
Dermatology meeting in March 2006 and February 2007. These
represent the most current results of the
MelaFind®
system. The current version of the
MelaFind®
classifier was trained on a set of 2,265 lesions including 221
melanomas, 87 high grade dysplastic nevi, and 1,957 other
pigmented skin lesions. Following testing on the training set,
it was then tested on the largest blinded series that we have
performed to date 562 lesions including 54
melanomas, 22 high grade dysplastic nevi, and 486 other
pigmented skin lesions. The following table summarizes the
results of the tests on the training and blinded data sets.
February
2006 Training Study and Blinded Test
Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Training
|
|
|
Blinded test
|
|
|
|
MelaFind®
|
|
|
MelaFind®
|
|
|
Study Dermatologists
|
|
|
Sensitivity
|
|
|
100
|
%
|
|
|
Missed 1 in situ Melanoma
|
|
|
|
Missed 1 invasive Melanoma
|
|
Specificity
|
|
|
50.7
|
%
|
|
|
45.1
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%
|
|
|
20.0
|
%
|
|
|
|
|
|
|
(p < 0.0001)
|
Over-Biopsy Ratio
|
|
|
4.4:1
|
|
|
|
5:1
|
|
|
|
7.3:1
|
|
7
The study dermatologists, who are experts in the detection of
skin cancer, missed an invasive melanoma, indicating that the
lesion was not suspicious for melanoma; the lesion was biopsied
due to patient concern.
MelaFind®
missed one melanoma in situ. The specificity of
MelaFind®
was statistically significantly superior to that of study
dermatologists (p < 0.0001). The over biopsy ratio, that is,
the ratio of false positive interpretations to true positive
interpretations, is higher for study dermatologists than for
MelaFind®.
In a separate reader study of small lesions derived from the
training and blinded data sets, above, the diagnostic
performance of MelaFind was compared with that of nine
independent expert dermoscopists. This study was performed on 99
small lesions (49 melanomas and 50 non-melanomas), defined as
lesions ranging from 2mm to 6mm in diameter. The following table
demonstrates the performance (sensitivity and specificity) of
the nine readers and
MelaFind®.
The doctors impression of whether a lesion is a melanoma
or not a melanoma on dermoscopic grounds is assessed by asking
the question, Is this a melanoma? Whether a lesion
is sufficiently suspicious to warrant biopsy is assessed by
asking the question, Would you biopsy this lesion to
rule-out melanoma?
MelaFind®
answers both questions the same. The
MelaFind®
results compare quite favorably to the dermoscopists on these
small, difficult to differentiate lesions.
|
|
|
|
|
|
|
|
|
Would you Biopsy this Lesion to
|
|
|
Is this a Melanoma?
|
|
Rule-Out Melanoma?
|
|
|
Sensitivity / Specificity
|
|
Sensitivity/Specificity
|
|
Expert Dermatologists
|
|
38.78% / 82.32%
|
|
70.61% / 48.89%
|
MelaFind®
|
|
Sensitivity - 98% / Specificity -
44%
|
In another study of 68 lesions derived from the training and
blinded data sets, above, the ABCD (asymmetry, border
irregularity, color variation, and diameter) criteria were
assessed by two expert readers who pioneered the use of the ABCD
criteria, and
MelaFind®.
The 68 lesions included 14 melanomas, 4 high grade dysplastic
nevi, and 50 other lesions. The concordance of the ABCD criteria
between
MelaFind®
and Reader 1 was 51.5% (A), 61.8% (B), 79.4% (C), and 83.8% (D);
for Reader 2 and
MelaFind®,
the concordance was 57.4% (A), 57.4% (B), 80.9% (C), and 81.3%
(D). There is appreciable but not complete overlap between the
sets of lesions identified as being at risk for melanoma by
clinical ABCD by expert dermatologists compared with
quantitative ABCD using
MelaFind®.
The study further demonstrated that quantitative ABCD
characteristics have very high sensitivity to melanoma.
The studies performed to date have been executed with prototype
hardware systems as well as
MelaFind®
classifiers and software that were under development. We believe
that results derived from blinded tests utilizing
pre-commercialization hardware systems with the most advanced
software and
MelaFind®
classifiers will be equivalent or superior to the results
obtained to date using the prototype systems and developmental
software. We believe that the results of the pivotal study,
which will utilize the optimized hardware and software, will
satisfy the requirements of the Protocol Agreement.
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 focused sales, marketing,
and distribution effort in North America. We plan to concentrate
our commercialization efforts initially on high volume/key
opinion leader dermatologists who are strongly focused on
the diagnosis and treatment of melanoma. For the expansion to
the larger US markets of general dermatologists, plastic
surgeons, and primary care physicians, and for international
markets, we intend to 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.
We believe that the ultimate market for
MelaFind®
is in the primary care setting. When used by primary care
physicians,
MelaFind®
could have a significant public health benefit and a favorable
impact on healthcare
8
costs. Primary care physicians are at the front line of early
detection, but their lack of specialist training in identifying
suspect lesions makes the achievement of a high level of
diagnostic accuracy challenging. We believe that
MelaFind®
can significantly assist primary care physicians in improving
their diagnostic acumen.
The
MelaFind®
Value Proposition for the Healthcare System
We are currently working with experts on a quantitative analysis
of the value proposition of the use of
MelaFind®
by both dermatologists and primary care physicians using
Evidence-Based Medicine evaluation techniques. 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 are aware of no Current Procedural Terminology (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 decision processes
to assist us in the submission of appropriate applications to
obtain a CPT code(s) and positive coverage decisions from CMS
and private 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 over utilization by
applying a rational analysis of the costs versus benefits of new
technologies.
The Evidence-Based Medicine evaluation that we are undertaking
is central to our efforts to obtain positive coverage decisions
from CMS and private insurers. 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®
in the first half of 2008, we are considering submitting an
application for a new CPT code to the American Medical
Association (AMA) CPT Editorial Panel in late 2009, anticipating
possible issuance of a new CPT code and positive national or
regional Medicare coverage determinations in the first or second
quarter of 2011. The Evidence-Based Medicine evaluation will be
included in the application. 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 AMAs
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
9
setting. In setting Medicare reimbursement rates, CMS is
generally guided, though not bound, by the recommendation of the
RUC. 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 following the
completion of the pivotal clinical trial or PMA submission.
Presentations to the various committees that evaluate new
technologies will be made. These will include the Evidence-Based
Medicine evaluation and value proposition. 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
following PMA approval. In the case of private payers, managed
care organizations and state Medicare administrative
contractors, we anticipate that obtaining a positive coverage
decision for
MelaFind®
may take at least 6 to 12 months following PMA approval.
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 have employed an active strategy
to obtain medical coverage, identify appropriate coding and
establish adequate payment.
Pending approval of a CPT code and the availability of third
party reimbursement, we plan to offer
MelaFind®
to physicians, who would pay for using
MelaFind®,
and may or may not charge patients directly for its use. For
example, in capitated systems such as certain managed care plans
(where physicians cannot pass costs on to patients, but rather
are paid a fixed amount per patient managed under the plan,
whether or not treated) physicians may conclude that it is
cost-effective to use
MelaFind®
in order to reduce utilization of other services such as
biopsies, for example, when the
MelaFind®
result indicates biopsy is not recommended. In addition, we
believe that roughly ten percent of all dermatological practices
are focused on cosmetic dermatology. Most procedures performed
in cosmetic dermatological practices and Medi-Spas are provided
on a patient self-pay basis. Medi-Spas are health and beauty
clubs and spas in which medical care and supervision by licensed
medical practitioners such as doctors, nurses and physicians
assistants is provided; they specialize in aesthetic medicine.
We believe that healthcare consumers that seek these services
are likely to pay for
MelaFind®,
as well.
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.
10
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
(Sweden). 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.
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-
11
invasive visualization of skin structures at the cellular level;
such a device utilizing this technique is in development by
Lucid (US).
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.
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 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 for our pivotal trial and in designing
methods to facilitate larger-scale manufacturing of both the
pre-commercialization and commercial devices. For this crucial
phase in development, we have contracted with ASKION, which
specializes in precision optics. We have also contracted with
Zeiss, an international optics house, to supply lenses to ASKION
to be used in the hand-held clinical units.
In March 2005, we were inspected by the FDA for the
manufacturing and commercialization of
DIFOTI®,
our dental cavities detection product that has been discontinued
for business reasons. The FDA inspectors observed deficiencies
that were documented on FDA Form 483 that was issued to us
following the inspection. The
DIFOTI®
inspectional findings were discussed in a subsequent meeting
with the FDA on April 28, 2005. An onsite consultant was
hired to address these deficiencies and structure a compliant
Quality System for
MelaFind®.
During 2006 we worked to address the deficiencies noted in
accordance with the agreement reached with the FDA. On
May 18, 2006, the FDA re-audited the Companys
facility for a
follow-up
inspection and audited our revised Quality System. No
non-conformities or negative observations were reported to the
Company. On December 5, 2006 we received correspondence
from the FDA that reported that all previous observations
reported on the FDA-483 were corrected, and this firm no longer
manufactures or distributes the
DIFOTI®
2.0 dental imaging system. The Quality System implemented
at EOS for
MelaFind®
Design and Development corrected the deficiencies observed by
FDA inspection (March 2005), eliminated processes that were
no longer in use ( manufacturing at EOS) and implemented a
streamlined FDA regulation compliant Design Control process
for
MelaFind®.
Research
and Development Efforts
Our research and development efforts are currently focused on
the execution of the pivotal trial, and completion of the
development of the
MelaFind®
Lesion Classifiers. To date, we have developed and tested
four-step classifiers and we are currently working on five-step
and six-step versions. The classifiers have been trained on 221
melanomas to date, and our goal is to use 300 melanomas (and
over 4,000 non-melanoma pigmented lesions) for training. To date
we have collected over 300 melanomas, which are available for
classifier training.
We have engaged a consultant to perform specific technical
services supporting our algorithm and software development and
other efforts.
Our R&D plan also includes further improvements such as
incorporating an internet connection for quality monitoring of
our hand-held imaging device, as well as faster and easier
software downloads for future software versions. The internet
based monitoring of the performance of our hand-held imaging
device, known
12
as Intelligent Device Management, is intended to enable us to
monitor our hand-held imaging device, advise the user of errors
in handling, and thus enhance customer satisfaction and loyalty.
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. New hardware systems for the
imaging of blood and blood vessel patterns are needed since the
majority of basal cell carcinomas are not pigmented and,
accordingly, the
MelaFind®
system as currently developed is not appropriate for this use.
However, we believe
MelaFind®s
software programs and algorithms will be applicable.
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 two additional US patents and have
filed certain foreign patent applications relating to melanoma
detection, of which two foreign patent applications are
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
MelaFind®
intellectual property; having granted licenses only for the
discontinued
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, www.smartlightsensors.com, and
www.skinsurf.com.
13
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
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09/30/03
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08/31/21
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6,657,798
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Method for Optimizing the Number
of Good Assemblies Manufacturable From a Number of Parts
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12/02/03
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02/10/23
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6,710,947
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Method for Assembling Lens Elements
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03/23/04
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02/27/23
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7,102,672
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Integrated CMOS Imaging
Array & Dark Current Monitor
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09/05/06
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01/10/24
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7,127,094
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Method of Controlling Data
Gathered at Remote Locations
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10/24/06
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03/11/25
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Filed
US Patent Relating to Melanoma Detection
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Patent #
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Title
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Filed
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n/a
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Reducing noise in Digital Images
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08/9/06
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n/a
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Quantitative Analysis of Skin
Characteristics
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03/2/07
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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 (LEDs) 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 devices 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. 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.
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
14
vision. In addition, our proprietary
MelaFind®
database of over 5,000 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
FDAs 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
preamendment 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 FDAs 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. We commenced the PMA application process
for
MelaFind®
by filing a proposed Shell (an outline of a PMA) for a three
module PMA on September 30, 2002. We filed as a Small
Business Entity exempt from the user fee requirement. The Shell
was accepted and two Modules have been filed and reviewed. The
third Module will include the results of the pivotal clinical
study and cannot be filed until after that study is complete and
its results have been evaluated. 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®.
October 12, 2006,
15
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 a PMA with the FDA, it is placed at the
beginning of the FDAs queue and receives additional review
resources. 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 launch
MelaFind®
in the United States.
However, the FDA can delay, limit or deny approval of a PMA
application for many reasons, including:
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MelaFind®
may not be safe or effective to the FDAs satisfaction;
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the data from our pre-clinical studies and clinical trials may
be insufficient to support approval;
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the manufacturing process or facilities we use may not meet
applicable requirements; and
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changes in FDA approval policies or adoption of new regulations
may require additional data.
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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
FDAs 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 FDAs 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
products safety and effectiveness, even if the trial meets
its intended success criteria. All clinical trials must be
conducted in accordance with the FDAs 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. As stated above, the
clinical studies of
MelaFind®
are considered by the FDA as NSR. Consequently, the trials are
conducted under the auspices of an abbreviated IDE. Clinical
trials must further comply with the FDAs 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. The commencement or completion of any of
our clinical trials may be delayed or halted, or be inadequate
to
16
support approval of a PMA application, or 510(k) clearance, for
numerous reasons, including, but not limited to, the following:
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the FDA, other regulatory authorities, or an IRB do not approve
a clinical trial protocol or a clinical trial, or place a
clinical trial on hold;
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patients do not enroll in clinical trials at the rate we expect;
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physicians do not comply with trial protocols;
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patient
follow-up is
not at the rate we expect;
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patients experience adverse events;
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IRBs and third-party clinical investigators may delay or reject
our trial protocol;
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third-party clinical investigators decline to participate in a
trial or do not perform a trial on our anticipated schedule or
consistent with the clinical trial protocol, GCPs or other FDA
requirements;
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third-party organizations do not perform data collection and
analysis in a timely or accurate manner;
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regulatory inspections of our clinical trials or manufacturing
facilities may, among other things, require us to undertake
corrective action or suspend or terminate our clinical trials,
or invalidate our clinical trials;
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changes in governmental regulations or administrative
actions; and
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the interim or final results of the clinical trial are
inconclusive or unfavorable as to safety or effectiveness.
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Our clinical trials may not generate favorable data to support
any PMA applications, and we may not be able to obtain such
approvals on a timely basis, or at all. Delays in receipt of or
failure to receive such approvals, 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:
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establishment registration and device listing;
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QSR, which requires manufacturers to follow design, testing,
control, documentation and other quality assurance procedures;
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labeling regulations, which prohibit the promotion of products
for unapproved or off-label uses and impose other
restrictions on labeling;
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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
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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.
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Also, the FDA may require us to conduct postmarket surveillance
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.
17
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:
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warning letters;
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fines and civil penalties;
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unanticipated expenditures;
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delays in approving or refusal to approve our applications,
including supplements;
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withdrawal of FDA approval;
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product recall or seizure;
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interruption of production;
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operating restrictions;
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injunctions; and
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criminal prosecution.
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We and 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 manufacturing facility and those of our subcontractors will
be subject to domestic and international regulatory inspection
and review. If the FDA believes we or any of our contract
manufacturers or regulated suppliers are not in compliance with
these requirements, it can shut down our manufacturing
operations, 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.
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:
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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;
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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
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services in which the physicians or their immediate family
members have ownership interests or with which they have certain
other financial arrangements;
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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;
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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.
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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.
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
19
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 various 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
manufacturers quality system and specific testing of the
manufacturers 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.
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 from the 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
do not maintain domestic clinical trial liability insurance. 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, 2006, we had 28 full-time and
1 part-time employee, of whom 13 were engaged in research
and development (including clinical and regulatory affairs), 7
in production (including document control and quality assurance)
and 9 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 will make a second payment to us later in
2007. If KaVo is successful in commercializing
DIFOTI®,
KaVo will pay us an annual royalty based on the number of
systems sold per calendar year following commercial re-launch of
DIFOTI®.
As a result of this disposition we do not expect to have any
significant continuing responsibility for the
DIFOTI®
business.
20
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 five years in
developing
MelaFind®.
MelaFind®
will require additional development, clinical evaluation,
regulatory approval, significant marketing efforts and
substantial additional investment before it can provide us with
any revenue. Our efforts may not lead to commercially successful
products for a number of reasons, including:
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we may not be able to obtain regulatory approvals for
MelaFind®,
or the approved indication may be narrower than we seek;
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MelaFind®
may not prove to be safe and effective in clinical trials;
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physicians may not receive any reimbursement from third-party
payers, or the level of reimbursement may be insufficient to
support widespread adoption of
MelaFind®;
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we may experience delays in our development program;
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any products that are approved may not be accepted in the
marketplace by physicians or patients;
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we may not have adequate financial or other resources to
complete the development or to commence the commercialization of
MelaFind®
and we will not have adequate financial or other resources to
achieve significant commercialization of
MelaFind®;
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we may not be able to manufacture our products in commercial
quantities or at an acceptable cost; and
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rapid technological change may make our technology and products
obsolete.
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We do not expect to be able to commercialize
MelaFind®
before the second half of 2008. If we are unable to develop,
obtain regulatory approval for or successfully commercialize
MelaFind®,
we will be unable to generate revenue.
We
have not received, and may never receive, FDA approval to market
MelaFind®.
We do not have the necessary regulatory approvals to market
MelaFind®
in the US or in any foreign market. We have not filed, and
currently do not have plans to file, for regulatory approval in
any foreign market. We plan to initially launch
MelaFind®,
once approved, in the US. The regulatory approval process for
MelaFind®
in the US involves, among other things, successfully completing
clinical trials and obtaining PMA approval from the FDA. We
commenced the PMA application process for
MelaFind®
by filing a proposed outline for a Modular PMA application (a
compilation of well-delineated components submitted separately)
on September 30, 2002. The PMA process requires us to prove
the safety and effectiveness of
MelaFind®
to the FDAs satisfaction. This process is expensive and
uncertain, and requires detailed and comprehensive scientific
and human clinical data. FDA review may take years after a PMA
application is filed. The FDA may never grant approval. The FDA
can delay, limit or deny approval of a PMA application for many
reasons, including:
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MelaFind®
may not be safe or effective to the FDAs satisfaction;
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the data from our pre-clinical studies and clinical trials may
be insufficient to support approval;
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the manufacturing process or facilities we use may not meet
applicable requirements; and
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changes in FDA approval policies or adoption of new regulations
may require additional data.
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21
No precedent has been established for FDA approval of a device
such as
MelaFind®
to assist in determining the appropriateness of biopsies of
suspicious pigmented skin lesions. Before submitting a PMA
application (the final module), we must successfully complete a
pivotal clinical trial to demonstrate that
MelaFind®
is safe and effective. Product development, including clinical
trials, is a long, expensive and uncertain process, and is
subject to delays and failure at any stage. Furthermore, the
data obtained from a clinical trial may be inadequate to support
approval of a PMA application. While we obtained a Protocol
Agreement from the FDA, FDA approval of a Protocol Agreement
does not mean that the FDA will consider the data gathered in
the trial sufficient to support approval of a PMA application,
even if the trials intended endpoints are achieved. There
may be unexpected findings, particularly those that may only
become evident from the larger scale of the pivotal clinical
trial, as compared with the smaller scale tests done to date.
For example, we initiated a clinical trial in 2004 and
encountered several technical problems which required us to
refine the
MelaFind®
system. The data obtained in the pivotal trial may not be
sufficient to support the anticipated indication for use, and
may not support a more limited indication for use. The
occurrence of unexpected findings in connection with the pivotal
trial or any subsequent clinical trial required by the FDA may
prevent or delay obtaining PMA approval and may adversely affect
coverage or reimbursement determinations. The FDA may also
determine that additional clinical trials are necessary, in
which case the PMA approval may be delayed for several months or
even years while the trials are conducted and the data acquired
are submitted in an amendment to the PMA. If we are unable to
complete the clinical trials necessary to successfully support
the
MelaFind®
PMA application, our ability to commercialize
MelaFind®,
and our business, financial condition, and results of operations
would be materially adversely affected, thereby threatening our
ability to continue operations. On October 12, 2006 we
announced that the FDA had informed the Company that when
submitted, the
MelaFind®
PMA application would receive expedited review. Expedited review
means that upon filing a PMA with the FDA, it is placed at the
beginning of the FDAs review queue and receives additional
review resources. While the expedited review could shorten the
MelaFind®
FDA approval process, we can give no assurances that this will
be the case.
If
MelaFind®
is approved by the FDA, it may be approved only for narrow
indications.
Even if approved,
MelaFind®
may not be approved for the indications that are necessary or
desirable for successful commercialization. Our preference is to
obtain a broad indication for use in assisting in the diagnosis
of almost all pigmented melanomas (other than those on palms,
soles of the feet, in or near the eye, and inaccessible areas
such as the edge of the nose). The final
MelaFind®
lesion classifier may be able to identify the maximum number of
types of melanoma possible. The indications for use must specify
those lesion types for which the classifier has not been
trained. Approximately five percent of melanoma lesions may be
amelanotic, meaning they are not pigmented. These lesions cannot
be differentiated by
MelaFind®,
which will be restricted to pigmented lesions. Approximately ten
percent of pigmented melanoma lesions are nodular, a type of
melanoma that is often missed by dermatologists in early stages.
If nodular melanoma lesions are not sufficiently
well-represented in the
MelaFind®
training database, the classifier may not differentiate nodular
melanomas from non-melanomas with sufficient sensitivity and
specificity. If we restrict the indications for use of
MelaFind®
to exclude certain melanoma lesion types, in addition to the
other restrictions, then the size of the market for
MelaFind®
and the rate of acceptance of
MelaFind®
by physicians may be adversely affected.
If we wish to modify
MelaFind®
after receiving FDA approval, including changes in indications
or other modifications that could affect safety and
effectiveness, additional approvals could be required from the
FDA. We may be required to submit extensive pre-clinical and
clinical data, depending on the nature of the changes. Any
request by the FDA for additional data, or any requirement by
the FDA that we conduct additional clinical studies, could delay
the commercialization of
MelaFind®
and require us to make substantial additional research,
development and other expenditures. We may not obtain the
necessary regulatory approvals to market
MelaFind®
in the US or anywhere else. Any delay in, or failure to receive
or maintain, approval for
MelaFind®
could prevent us from generating revenue or achieving
profitability, and our business, financial condition, and
results of operations would be materially adversely affected.
22
MelaFind®
may not be commercially viable if we fail to obtain an adequate
level of reimbursement by Medicare and other third party 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 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 CMS determines that the device
should be covered and that the use of the device is consistent
with the coverage criteria. A coverage determination can be made
at the local level by the Medicare administrative contractor
(formerly called carriers and fiscal intermediaries), a private
contractor that processes and pays claims on behalf of CMS for
the geographic area where the services were rendered, or at the
national level by CMS through a national coverage determination.
There are new statutory provisions intended to facilitate
coverage determinations for new technologies, but it is unclear
how these new provisions will be implemented. Coverage
presupposes that the device has been cleared or approved by the
FDA and further, that the coverage will be no broader than the
approved intended uses of the device as approved or cleared by
the FDA, but coverage can be narrower. A coverage determination
may be so limited that relatively few patients will qualify for
a covered use of the device. Should a very narrow coverage
determination be made for
MelaFind®,
it may undermine the commercial viability of
MelaFind®.
Obtaining a coverage determination, whether local or national,
is a time-consuming, expensive and highly uncertain proposition,
especially for a new technology, and inconsistent local
determinations are possible. On average, according to an
industry report, Medicare coverage determinations for medical
devices lag 15 months to five years or more behind FDA
approval for that device. The Medicare statutory framework is
also subject to administrative rulings, interpretations and
discretion that affect the amount and timing of reimbursement
made under Medicare. Medicaid coverage determinations and
reimbursement levels are determined on a state by state basis,
because Medicaid, unlike Medicare, is administered by the states
under a state plan filed with the Secretary of the US Department
of Health and Human Services (HHS). Medicaid generally
reimburses at lower levels than Medicare. Moreover, Medicaid
programs and private insurers are frequently influenced by
Medicare coverage determinations.
Any
adverse results in our clinical trials, or difficulties in
conducting our clinical trials, could have a material adverse
effect on our business.
Clinical studies in the US have been ongoing for over five
years, and we have a Protocol Agreement with the FDA, but we
have not completed the pivotal clinical trial required for PMA
approval. We initiated a trial under the terms of the Protocol
Agreement at the end of 2004. However, technical operational
issues with the systems were experienced, requiring further
refinement. We are currently building the hardware systems
necessary to fully implement our pivotal clinical trial that
started in January 2007. However, we cannot provide any
assurances that we will have additional, necessary systems
available on a timely basis. In addition, the pivotal clinical
trial and supporting clinical studies will require the
involvement of larger numbers of
23
clinical sites than we have previously engaged at any single
time, and the recruitment of large numbers of patients. If the
clinical sites, which enroll patients on a best efforts basis,
do not provide cases at rates anticipated for any reason (such
as, for example, lower than forecasted clinical site
productivity), we may face delays or may be unable to complete
the development of
MelaFind®.
Risk
of delay in product development.
We could encounter delays in our pivotal trial or in obtaining
PMA approval because of a number of factors. We will require the
receipt of all information specified in our Protocol Agreement
on the required number of melanomas before the pivotal clinical
trial can be concluded. The
MelaFind®
classifier will then be utilized to evaluate the lesions
acquired during the pivotal trial, and the results will be
analyzed to determine if we have achieved the endpoints
specified in the Protocol Agreement.
The final training of the classifier, required to be completed
before the classifier is utilized as described above, is
expected to take approximately two months. Accordingly, the
classifier must be ready for final training two months before
the end of the pivotal trial. To date, there are over 300
melanoma lesions in the training database. The current
classifier has been trained on 221 of these melanoma lesions.
Our schedule for the acquisition of these lesions is based upon
the projected numbers of imaging devices to be located at
participating sites, the projected productivity of those sites
in terms of melanomas and other lesions biopsied per month, and
the projected efficiency of the study pathologists in
classifying the lesion slides presented for histological
analysis (the microscopic examination of excised or biopsied
tissue specimens) and reporting their results. If we are unable
to produce and maintain a sufficient number of imaging devices
at participating sites, if the clinicians do not maintain
sufficient productivity, or if the pathologists do not produce
reports with sufficient efficiency, then our ability to maintain
our schedule will be adversely affected, the start or conclusion
of the pivotal trial may be delayed, and the submission of the
completed PMA will be delayed.
To date, the lesion images in the training database have been
acquired using first-generation hand-held devices, which also
extract data from the lesions that are used by the classifiers.
Pre-commercialization hand-held devices are being developed for
use in the pivotal trial. If the lesion data obtained with
pre-commercialization devices are not consistent with data from
the first generation hand-held devices, the classifier will need
to be trained solely on lesions imaged using only one or the
other generation of hand-held devices. Were this need to arise,
significant delay and expense could be incurred, which could
jeopardize our ability to complete the development of
MelaFind®.
We
have incurred losses for a number of years, and anticipate that
we will incur continued losses for the foreseeable
future.
We began operations in December 1989. At that time we provided
research services, mostly to US government agencies, on
classified projects. We have financed our operations since 1999
primarily through the sale of our equity securities, and have
devoted substantially all of our resources to research and
development relating to
MelaFind®.
Our net loss for the twelve months ended December 31, 2006
was $10.6 million, and as of December 31, 2006, we had
an accumulated deficit of approximately $31.2 million. Our
research and development expenses have increased in connection
with our clinical trials and other development activities
related to
MelaFind®.
If we receive PMA approval for
MelaFind®
from the FDA, we expect to incur significant sales and marketing
expenses, which will require additional funding, and
manufacturing expenses. Additionally, our general and
administrative expenses have also increased due to the
additional operational and regulatory responsibilities
applicable to public companies. As a result, we expect to
continue to incur significant and increasing operating losses
for the foreseeable future. These losses, among other things,
have had and will continue to have an adverse effect on our
stockholders equity.
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
24
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: 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:
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significantly greater name recognition;
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established relations with healthcare professionals, customers
and third-party payers;
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established distribution networks;
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additional lines of products, and the ability to offer rebates,
higher discounts or incentives to gain a competitive advantage;
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greater experience in conducting research and development,
manufacturing, clinical trials, obtaining regulatory approval
for products, and marketing approved products; and
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greater financial and human resources for product development,
sales and marketing, and patent litigation.
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As a result, we may not be able to compete effectively against
these companies or their products.
Technological
breakthroughs in the diagnosis or treatment of melanoma could
render
MelaFind®
obsolete.
The precision optical imaging field is subject to rapid
technological change and product innovation.
MelaFind®
is based on our proprietary technology, but a number of
companies and medical researchers are pursuing new technologies.
Companies in the medical device industry with significantly
greater financial, technical, research, marketing, sales and
distribution and other resources have expertise and interest in
the exploitation of computer-aided diagnosis, medical imaging,
and other technologies
MelaFind®
utilizes. Some of these companies are working on potentially
competing products or therapies, including confocal microscopy
(a type of scanning microscopy for
3-dimensional
specimens, which produces blur-free images at various depths),
various forms of spectroscopy (a study of the way molecules
absorb and emit light), other imaging modalities, including
molecular imaging in which tagged antibodies search for cancer
cell antigens, and molecular and genetic screening tests. In
addition, the National Institutes of Health and other supporters
of cancer research are presumptively seeking ways to improve the
diagnosis or treatment of melanoma by sponsoring corporate and
academic research. There can be no assurance that one or more of
these companies will not succeed in developing or marketing
technologies and products or services that demonstrate better
safety or effectiveness, superior clinical results, greater ease
of use or lower cost than
MelaFind®,
or that such competitors will not succeed in obtaining
regulatory approval for introducing or commercializing any such
products or services prior to us. FDA approval of a commercially
viable alternative to
MelaFind®
produced by a competitor could significantly reduce market
acceptance of
MelaFind®.
Any of the above competitive developments could have a material
adverse effect on our business, financial condition, and results
of operations. There is no assurance that products, services, or
technologies introduced prior to or subsequent to the
commercialization of
MelaFind®
will not render
MelaFind®
less marketable or obsolete.
25
We
depend on clinical investigators and clinical sites to enroll
patients in our clinical trials and other third parties to
manage the trials and to perform related data collection and
analysis, and, as a result, we may face costs and delays that
are outside of our control.
We rely on clinical investigators and clinical sites, some of
which are private practices, and some of which are research
university or government-affiliated, to enroll patients in our
clinical trials. We rely on: pathologists and pathology
laboratories; a contract research organization to assist in
monitoring, collection of data, and ensuring FDA Good Clinical
Practices (GCP) are observed at our sites; a consultant
biostatistician; and other third parties to manage the trial and
to perform related data collection and analysis. However, we may
not be able to control the amount and timing of resources that
clinical sites and other third parties may devote to our
clinical trials. If these clinical investigators and clinical
sites fail to enroll a sufficient number of patients in our
clinical trials, or if the clinical sites fail to comply
adequately with the clinical protocols, we will be unable to
complete these trials, which could prevent us from obtaining
regulatory approvals for
MelaFind®.
Our agreements with clinical investigators and clinical sites
for clinical testing place substantial responsibilities on these
parties and, if these parties fail to perform as expected, our
trials could be delayed or terminated. If these clinical
investigators, clinical sites or other third parties do not
carry out their contractual duties or obligations or fail to
meet expected deadlines, or if the quality or accuracy of the
clinical data they obtain are compromised due to their failure
to adhere to our clinical protocols or for other reasons, our
clinical trials may be extended, delayed or terminated, and we
may be unable to obtain regulatory approval for, or successfully
commercialize,
MelaFind®.
In addition to the foregoing, our clinical trial may be delayed
or halted, or be inadequate to support approval of a PMA
application, for numerous other reasons, including, but not
limited to, the following:
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the FDA, an IRB, or other regulatory authorities place our
clinical trial on hold;
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patients do not enroll in clinical trials at the rate we expect;
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patient
follow-up is
not at the rate we expect;
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IRBs and third-party clinical investigators delay or reject our
trial protocol;
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third-party organizations do not perform data collection and
analysis in a timely or accurate manner;
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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;
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changes in governmental regulations or administrative
actions; and
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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.
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In some foreign markets, which we may seek to enter in the
future, pricing and profitability of medical devices are subject
to government control. In the US, we expect that there will
continue to be federal and state proposals for similar controls.
Also, the trends toward managed healthcare in the US and
proposed legislation intended to control the cost of publicly
funded healthcare programs could significantly influence the
purchase of healthcare services and products, and may force us
to reduce prices for
MelaFind®
or result in the exclusion of
MelaFind®
from reimbursement programs.
MelaFind®
may never achieve market acceptance even if we obtain regulatory
approvals.
To date, only those patients who were treated by physicians
involved in our clinical trials have been evaluated using
MelaFind®
and even if we obtain regulatory approval, patients with
suspicious lesions and physicians evaluating suspicious lesions
may not endorse
MelaFind®.
Physicians tend to be slow to change their diagnostic and
medical treatment practices because of perceived liability risks
arising from the use of new products and the uncertainty of
third party reimbursement. Physicians may not utilize
MelaFind®
until there is long-term clinical evidence to convince them to
alter their existing methods of diagnosing or evaluating
suspicious lesions and there are recommendations from prominent
physicians that
MelaFind®
is effective. We cannot predict the speed at which physicians
may adopt the use of
MelaFind®.
If
MelaFind®
receives the appropriate regulatory approvals but does not
achieve an adequate level of acceptance by patients, physicians
and healthcare 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:
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perceived effectiveness of
MelaFind®;
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convenience of use;
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cost of the use of
MelaFind®;
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availability and adequacy of third-party coverage or
reimbursement;
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approved indications and product labeling;
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publicity concerning
MelaFind®
or competitive products;
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potential advantages over alternative diagnostic methodologies;
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introduction and acceptance of competing products or
technologies; and
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extent and success of our sales, marketing and distribution
efforts.
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The identification and screening of melanomas is now dominated
by visual clinical evaluation, with a minority of dermatologists
using dermoscopy. Even if
MelaFind®
proves to be as effective as visual inspection by an expert
dermatologist, and if all approvals are obtained, the success of
MelaFind®
will depend upon the acceptance by dermatologists and other
physicians who perform skin examinations and treat skin
disorders, including industry opinion leaders, that the
diagnostic information provided by
MelaFind®
is medically useful and reliable. We will be subject to intense
scrutiny before physicians will be comfortable incorporating
MelaFind®
in their diagnostic approaches. We believe that recommendations
by respected physicians will be essential for the development
and successful marketing of
MelaFind®,
and there can be no assurance that any such recommendations will
be obtained. 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.
27
We may
be unable to complete the development and commence
commercialization of
MelaFind®
or other products without additional funding and we will not be
able to achieve significant commercialization without additional
funding.
Our operations have consumed substantial amounts of cash for
each of the last seven years. We currently believe that our
available cash, cash equivalents and marketable securities,
including the proceeds from our recently completed (November
2006) financing and our 2005 initial public offering, will
be sufficient to fund our anticipated levels of operations
through mid-2008. However, our business or operations may change
in a manner that would consume available resources more rapidly
than we anticipate. We expect to continue to spend substantial
amounts on research and development, including conducting the
clinical trial for
MelaFind®.
We will need additional funds to fully commercialize the
product, including development of a direct sales force and
expansion of manufacturing capacity. We expect that our cash
used by operations will increase significantly in each of the
next several years, and should we encounter any material delays
or impediments, we may need additional funds to complete the
development of
MelaFind®
and commence commercialization of
MelaFind®
and we will need additional funds to achieve significant
commercialization of
MelaFind®.
Any additional financing may be dilutive to stockholders, or may
require us to grant a lender a security interest in our assets.
The amount of funding we will need will depend on many factors,
including:
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the schedule, costs, and results of our clinical trials;
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the success of our research and development efforts;
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the costs and timing of regulatory approval;
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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®;
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the cost of commercialization activities, including product
marketing and building a domestic direct sales force;
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the emergence of competing or complementary technological
developments;
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the costs of filing, prosecuting, defending and enforcing any
patent claims and other rights, including litigation costs and
the results of such litigation;
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the costs involved in defending any patent infringement actions
brought against us by third parties; and
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our ability to establish and maintain any collaborative,
licensing or other arrangements, and the terms and timing of any
such arrangements.
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Additional financing may not be available to us when we need it,
or it may not be available on favorable terms.
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
28
product approval, we currently plan to establish a small direct
sales force to market
MelaFind®
in the US, focused on introducing it at high volume
dermatologists offices and training their staff in its
use, but we have not made any final determinations regarding the
use of a particular marketing channel. We anticipate that we
will need additional funds in order to implement this marketing
plan. In addition to being expensive, developing such a sales
force is time consuming and could delay or limit the success of
any product launch. We may not be able to develop this capacity
on a timely basis or at all. Qualified direct sales personnel
with experience in the medical device market are in high demand,
and there is no assurance that we will be able to hire or retain
an effective direct sales team. Similarly, qualified,
independent medical device representatives both within and
outside the US are in high demand, and we may not be able to
build an effective network for the distribution of our product
through such representatives. We have no assurance that we will
be able to enter into contracts with representatives on terms
acceptable or reasonable to us. Similarly, there is no assurance
that we will be able to build an alternate distribution
framework, should we attempt to do so.
We will need to contract with third parties in order to sell and
install our products in larger markets, including non-specialist
dermatologists and primary care physicians. To the extent that
we enter into arrangements with third parties to perform
marketing and distribution services in the US, our product
revenue could be lower and our costs higher than if we directly
marketed
MelaFind®.
Furthermore, to the extent that we enter into co-promotion or
other marketing and sales arrangements with other companies, any
revenue received will depend on the skills and efforts of
others, and we do not know whether these efforts will be
successful. If we are unable to establish and maintain adequate
sales, marketing and distribution capabilities, independently or
with others, we will not be able to generate product revenue,
and may not become profitable.
We
have limited manufacturing capabilities and manufacturing
personnel, and if our manufacturing capabilities are
insufficient to produce an adequate supply of
MelaFind®,
our growth could be limited and our business could be
harmed.
We have not yet completed the development and testing of
MelaFind®,
and as a result have no experience in manufacturing
MelaFind®
for commercial distribution. We currently have limited
resources, facilities and experience to commercially manufacture
MelaFind®.
In order to produce
MelaFind®
in the quantities we anticipate to meet market demand, we will
need to increase our third-party manufacturing capacity. There
are technical challenges to increasing manufacturing capacity,
including equipment design and automation, material procurement,
problems with production yields, and quality control and
assurance. Developing commercial-scale manufacturing facilities
that meet FDA requirements would require the investment of
substantial additional funds and the hiring and retaining of
additional management and technical personnel who have the
necessary manufacturing experience.
We currently plan to outsource certain production aspects to
contract manufacturers. Any difficulties in the ability of
third-party manufacturers to supply devices of the quality, at
the times, and in the quantities we need, could have a material
adverse effect on our business, financial condition, and results
of operations. Similarly, when we enter into contracts for the
third-party manufacture of our devices, any revenue received
will depend on the skills and efforts of others, and we do not
know whether these efforts will be successful. Manufacturers
often encounter difficulties in scaling up production of new
products, including problems involving product yields,
controlling and anticipating product costs, quality control and
assurance, component supply, and shortages of qualified
personnel. We cannot assure you that the third-party contract
manufacturers with whom we are developing relationships will
have or sustain the ability to produce the quantities of
MelaFind®
needed for development or commercial sales, or will be willing
to do so at prices that allow
MelaFind®
to compete successfully in the market.
Assuming that
MelaFind®
receives regulatory approval, if we are unable to manufacture or
obtain a sufficient supply of product, maintain control over
expenses, or otherwise adapt to anticipated growth, or if we
underestimate growth, we may not have the capability to satisfy
market demand, and our business will suffer. Additionally, if
MelaFind®
receives regulatory approval and we then need to make
manufacturing changes, we may need to obtain additional approval
for these changes.
29
MelaFind®
is complex and may contain undetected design defects and errors
when first introduced, or errors that may be introduced when
enhancements are released. Such defects and errors may occur
despite our testing, and may not be discovered until after our
devices have been shipped to and used by our customers. The
existence of these defects and errors could result in costly
repairs, returns of devices, diversion of development resources
and damage to our reputation in the marketplace. Any of these
conditions could have a material adverse impact on our business,
financial condition and results of operations. In addition, when
we contract with third-party manufacturers for the production of
our products, these manufacturers may inadvertently produce
devices that vary from devices we have produced in unpredictable
ways that cause adverse consequences.
Our
manufacturing operations are dependent upon third-party
suppliers, making us vulnerable to supply problems and price
fluctuations, which could harm our business. We anticipate
contracting for final device assembly and integration, but no
contract for such services on a commercial basis has yet been
procured.
Our manufacturing efforts currently rely on FillFactory, a
subsidiary of Cypress Semiconductor Corp., to manufacture and
supply the complementary metal oxide semiconductor sensor in
MelaFind®,
on Zeiss for lens and lens objective assemblies, on ASKION for
the main subassembly and on Fairchild Semiconductor Corp.,
Panasonic Corp., Roithner-Laser Vienna, CompServ and others for
light-emitting diodes, or LEDs, printed circuit boards, and
other elements or components of our devices. We have written
agreements with several of these vendors, under which the vendor
is obligated to perform services or produce components for us.
There can be no assurance that these third parties will meet
their obligations under the agreements. Each of these suppliers
is a sole-source supplier. Our contract manufacturers also rely
on sole-source suppliers to manufacture some of the components
used in our products. Our manufacturers and suppliers may
encounter problems during manufacturing due to a variety of
reasons, including failure to procure their raw material on
time, failure to follow specific protocols and procedures,
failure to comply with applicable regulations, equipment
malfunction and environmental factors, any of which could delay
or impede their ability to meet our demand. Our reliance on
these outside manufacturers and suppliers also subjects us to
other risks that could harm our business, including:
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suppliers may make errors in manufacturing components that could
negatively affect the effectiveness or safety of our products,
or cause delays in shipment of our products;
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we may not be able to obtain adequate supply in a timely manner
or on commercially reasonable terms;
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we may have difficulty locating and qualifying alternative
suppliers for our sole-source suppliers;
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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;
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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
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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 for clinical
trials. 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
30
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 pivotal clinical trial
and/or the
commercial sale of
MelaFind®,
and would adversely affect both our ability to successfully
commercialize
MelaFind®
and our business, financial condition and results of operations.
We
will not be able to sell
MelaFind®
unless and until its design is verified and validated in
accordance with current good manufacturing practices as set
forth in the US medical device Quality System
Regulation.
We are in the process, but have not yet successfully completed,
all the steps necessary to verify and validate the design of the
MelaFind®
system that are required to be performed prior to
commercialization. If we are delayed or unable to complete
verification and validation successfully, we will not be able to
sell
MelaFind®,
and we will not be able to meet our plans for the
commercialization of
MelaFind®
in 2008. Assuming that regulatory approval of
MelaFind®
is granted, the approval may be subject to limitations on the
indicated uses for which the product may be marketed, or may
contain requirements for costly post-marketing testing and
surveillance to monitor the safety or effectiveness of the
device. Later discovery of previously unknown problems with
MelaFind®,
including manufacturing problems, or failure to comply with
regulatory requirements such as the QSR, may result in
restrictions on
MelaFind®
or its manufacturing processes, withdrawal of
MelaFind®
from the market, patient or physician notification, voluntary or
mandatory recalls, fines, withdrawal of regulatory approvals,
refusal to approve pending applications or supplements to
approved applications, refusal to permit the import or export of
our products, product seizures, injunctions or the imposition of
civil or criminal penalties. Should any of these enforcement
actions occur, our business, financial condition and results of
operations 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. The
FDA inspectors observed deficiencies that were documented on FDA
Form 483 that was issued to us following the inspection.
The
DIFOTI®
inspectional findings were discussed in a subsequent meeting
with the FDA on April 28, 2005. An onsite consultant was
hired to address these deficiencies and structure a compliant
Quality System for
31
MelaFind®.
Throughout 2006 we worked to address the deficiencies noted in
accordance with the agreement reached with the FDA. On
May 18, 2006, the FDA re-audited the Companys
facility for a
follow-up
inspection and audited our revised Quality System. No
non-conformities or negative observations were reported to the
Company. On December 5, 2006 we received correspondence
from the FDA that reported that all previous observations
reported on the FDA-483 were corrected, and this firm no longer
manufactures or distributes the
DIFOTI®
2.0 dental imaging system.
We continue to work with our in-house consultant 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:
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warning letters;
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fines and civil penalties;
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unanticipated expenditures;
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delays in approving or refusal to approve
MelaFind®;
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withdrawal of approval by the FDA or other regulatory bodies;
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product recall or seizure;
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interruption of production;
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operating restrictions;
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injunctions; and
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criminal prosecution.
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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 FD&C Act, as well as
other relevant laws; (ii) CMS, which administers the
Medicare and Medicaid programs; (iii) the Office of
Inspector General (OIG) which enforces various laws aimed at
curtailing fraudulent or abusive practices, including by way of
example, the Anti-Kickback Law, the Anti-Physician Referral Law,
commonly referred to as Stark, the Anti-Inducement Law, the
Civil Money Penalty Law, and the laws that authorize the OIG to
exclude healthcare providers and others
32
from participating in federal healthcare programs; and
(iv) the Office of Civil Rights, which administers the
privacy aspects of HIPAA. All of the aforementioned are agencies
within HHS. Healthcare is also provided or regulated, as the
case may be, by the Department of Defense through its TriCare
program, the Public Health Service within HHS under the Public
Health Service Act, the Department of Justice through the
Federal False Claims Act and various criminal statutes, and
state governments under Medicaid and other state sponsored or
funded programs and their internal laws regulating all
healthcare activities.
In addition to regulation by the FDA as a medical device
manufacturer, we are subject to general healthcare industry
regulations. The healthcare industry is subject to extensive
federal, state and local laws and regulations relating to:
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billing for services;
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quality of medical equipment and services;
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confidentiality, maintenance and security issues associated with
medical records and individually identifiable health information;
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false claims; and
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labeling products.
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These laws and regulations are extremely complex and, in some
cases, still evolving. In many instances, the industry does not
have the benefit of significant regulatory or judicial
interpretation of these laws and regulations. If our operations
are found to be in violation of any of the federal, state or
local laws and regulations that govern our activities, we may be
subject to the applicable penalty associated with the violation,
including civil and criminal penalties, damages, fines or
curtailment of our operations. The risk of being found in
violation of these laws and regulations is increased by the fact
that many of them have not been fully interpreted by the
regulatory authorities or the courts, and their provisions are
open to a variety of interpretations. Any action against us for
violation of these laws or regulations, even if we successfully
defend against it, could cause us to incur significant legal
expenses and divert our managements time and attention
from the operation of our business.
We
must comply with complex statutes prohibiting fraud and abuse,
and both we and physicians utilizing
MelaFind®
could be subject to significant penalties for
noncompliance.
There are extensive federal and state laws and regulations
prohibiting fraud and abuse in the healthcare industry that can
result in significant criminal and civil penalties. These
federal laws include: the anti-kickback statute which prohibits
certain business practices and relationships, including the
payment or receipt of remuneration for the referral of patients
whose care will be paid by Medicare or other federal healthcare
programs; the physician self-referral prohibition, commonly
referred to as the Stark Law; the anti-inducement law, which
prohibits providers from offering anything to a Medicare or
Medicaid beneficiary to induce that beneficiary to use items or
services covered by either program; the Civil False Claims Act,
which prohibits any person from knowingly presenting or causing
to be presented false or fraudulent claims for payment by the
federal government, including the Medicare and Medicaid programs
and; the Civil Monetary Penalties Law, which authorizes HHS to
impose civil penalties administratively for fraudulent or
abusive acts.
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
33
physicians from either purchasing or using
MelaFind®,
and could have a material adverse effect on our ability to
commercialize
MelaFind®.
The
application of the privacy provisions of HIPAA is
uncertain.
HIPAA, among other things, protects the privacy and security of
individually identifiable health information by limiting its use
and disclosure. HIPAA directly regulates covered
entities (insurers, clearinghouses, and most healthcare
providers) and indirectly regulates business
associates with respect to the privacy of patients
medical information. Certain entities that receive and process
protected health information are required to adopt certain
procedures to safeguard the security of that information. It is
uncertain whether we would be deemed to be a covered entity
under HIPAA, and it is unlikely that based on our current
business model, we would be a business associate. Nevertheless,
we will likely be contractually required to physically safeguard
the integrity and security of the patient information that we or
our physician customers receive, store, create or transmit. If
we fail to adhere to our contractual commitments, then our
physician customers may be subject to civil monetary penalties,
and this could adversely affect our ability to market
MelaFind®.
We also may be liable under state laws governing the privacy of
health information.
We may
become subject to claims of infringement or misappropriation of
the intellectual property rights of others, which could prohibit
us from shipping affected products, require us to obtain
licenses from third parties or to develop non-infringing
alternatives, and subject us to substantial monetary damages and
injunctive relief. Our patents may also be subject to challenge
on validity grounds, and our patent applications may be
rejected.
Third parties could, in the future, assert infringement or
misappropriation claims against us with respect to our current
or future products. Whether a product infringes a patent
involves complex legal and factual issues, the determination of
which is often uncertain. Therefore, we cannot be certain that
we have not infringed the intellectual property rights of such
third parties. Our potential competitors may assert that some
aspect of
MelaFind®
infringes their patents. Because patent applications may take
years to issue, there also may be applications now pending of
which we are unaware that may later result in issued patents
that
MelaFind®
infringes. There also may be existing patents of which we are
unaware that one or more components of our
MelaFind®
system may inadvertently infringe.
Any infringement or misappropriation claim could cause us to
incur significant costs, could place significant strain on our
financial resources, divert managements attention from our
business and harm our reputation. If the relevant patents were
upheld as valid and enforceable and we were found to infringe,
we could be prohibited from selling our product that is found to
infringe unless we could obtain licenses to use the technology
covered by the patent or are able to design around the patent.
We may be unable to obtain a license on terms acceptable to us,
if at all, and we may not be able to redesign
MelaFind®
to avoid infringement. A court could also order us to pay
compensatory damages for such infringement, plus prejudgment
interest and could, in addition, treble the compensatory damages
and award attorney fees. 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.
34
New
product development in the medical device industry is both
costly and labor intensive with very low success rates for
successful commercialization; if we cannot successfully develop
or obtain future products, our growth would be
delayed.
Our long-term success is dependent, in large part, on the
design, development and commercialization of
MelaFind®
and other new products and services in the medical device
industry. The product development process is time-consuming,
unpredictable and costly. There can be no assurance that we will
be able to develop or acquire new products, successfully
complete clinical trials, obtain the necessary regulatory
clearances or approvals required from the FDA on a timely basis,
or at all, manufacture our potential products in compliance with
regulatory requirements or in commercial volumes, or that
MelaFind®
or other potential products will achieve market acceptance. In
addition, changes in regulatory policy for product approval
during the period of product development, and regulatory agency
review of each submitted new application, may cause delays or
rejections. It may be necessary for us to enter into licensing
arrangements, in order to market effectively any new products or
new indications for existing products. There can be no assurance
that we will be successful in entering into such licensing
arrangements on terms favorable to us or at all. Failure to
develop, obtain necessary regulatory clearances or approvals
for, or successfully market potential new products could have a
material adverse effect on our business, financial condition and
results of operations.
We
face the risk of product liability claims and may not be able to
obtain or maintain adequate insurance.
Our business exposes us to the risk of product liability claims
that is inherent in the testing, manufacturing and marketing of
medical devices, including those which may arise from the misuse
or malfunction of, or design flaws in, our products. We may be
subject to product liability claims if
MelaFind®
causes, or merely appears to have caused, an injury or if a
patient alleges that
MelaFind®
failed to provide appropriate diagnostic information on a lesion
where melanoma was subsequently found to be present. Claims may
be made by patients, healthcare providers or others involved
with
MelaFind®.
MelaFind®
will require PMA approval prior to commercialization in the US.
The clinical studies of
MelaFind®
are considered by the FDA as NSR. Consequently, the trials are
conducted under the auspices of an abbreviated IDE. We therefore
do not maintain domestic clinical trial liability insurance. We
have obtained clinical trial liability insurance in certain
European countries where required by statute or clinical site
policy. Although we have general liability insurance that we
believe is appropriate, and anticipate obtaining adequate
product liability insurance before commercialization of
MelaFind®,
this insurance is and will be subject to deductibles and
coverage limitations. Our anticipated product liability
insurance may not be available to us in amounts and on
acceptable terms, if at all, and if available, the coverage 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
coverage, 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.
35
We may
be adversely affected by a data center failure.
The success of
MelaFind®
is dependent upon our ability to protect our data center against
damage from fire, power loss, telecommunications failure,
natural disaster, sabotage or a similar catastrophic event.
Substantially all of our computer equipment and data operations
are located in a single facility. Our prospective failure to
maintain off-site copies of information contained in our
MelaFind®
database, or our inability to use alternative sites in the event
we experience a natural disaster, hardware or software
malfunction or other interruption of our data center, or any
interruption in the ability of physicians to obtain access to
our
MelaFind®
server and its database could adversely impact our business,
financial condition and results of operations.
We may
be adversely affected by breaches of online
security.
Our
MelaFind®
lesion database does not contain any information that allows us
to identify specific patients. However, we must identify certain
data as belonging to or as derived from specific patients for
regulatory, quality assurance and billing purposes. To the
extent that our activities involve the storage and transmission
of confidential information, security breaches could damage our
reputation and expose us to a risk of loss, or to litigation and
possible liability. Our business may be materially adversely
affected if our security measures do not prevent security
breaches. In addition, such information may be subject to HIPAA
privacy and security regulations, the potential violation of
which may trigger concerns by healthcare providers, which may
adversely impact our business, financial condition and results
of operations.
We are
dependent upon telecommunications and the
internet.
The connection between the
MelaFind®
hand-held imaging device and the central server in our offices
will be dependent on the internet. We plan to 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 is connected to the internet.
Applicable requirements will restrict us to a particular band of
frequencies allocated to low power radio service for
transmitting data in support of specific diagnostic or
therapeutic functions. Failure to comply with all applicable
restrictions on the use of such frequencies, or unforeseeable
difficulties with the use of such frequencies, could impede our
ability to commercialize
MelaFind®.
All of
our operations are conducted at a single location. Any
disruption at our facility could increase our
expenses.
All of our operations are conducted at two adjacent buildings in
Irvington, New York. We take precautions to safeguard our
facility, including insurance, health and safety protocols,
contracted off-site engineering services, provision for off-site
manufacturing, and storage of computer data. However, a natural
disaster, such as a fire, flood or earthquake, could cause
substantial delays in our operations, damage or destroy our
manufacturing equipment or inventory, and cause us to incur
additional expenses. The insurance we maintain against fires,
floods, earthquakes and other natural disasters may not be
adequate to cover our losses in any particular case.
36
We may
be liable for contamination or other harm caused by materials
that we handle, and changes in environmental regulations could
cause us to incur additional expense.
Our manufacturing, research and development and clinical
processes do not generally involve the handling of potentially
harmful biological materials or hazardous materials, but they
may occasionally do so. We are subject to federal, state and
local laws and regulations governing the use, handling, storage
and disposal of hazardous and biological materials. If
violations of environmental, health and safety laws occur, we
could be held liable for damages, penalties and costs of
remedial actions. These expenses or this liability could have a
significant negative impact on our business, financial condition
and results of operations. We may violate environmental, health
and safety laws in the future as a result of human error,
equipment failure or other causes. Environmental laws could
become more stringent over time, imposing greater compliance
costs and increasing risks and penalties associated with
violations. We may be subject to potentially conflicting and
changing regulatory agendas of political, business and
environmental groups. Changes to or restrictions on permitting
requirements or processes, hazardous or biological material
storage or handling might require an unplanned capital
investment or relocation. Failure to comply with new or existing
laws or regulations could harm our business, financial condition
and results of operations.
Failure
to obtain and maintain regulatory approval in foreign
jurisdictions will prevent us from marketing
abroad.
Following commercialization of
MelaFind®
in the US, we may market
MelaFind®
internationally. Outside the US, we can market a product only if
we receive a marketing authorization and, in some cases, pricing
approval, from the appropriate regulatory authorities. The
approval procedure varies among countries and can involve
additional testing, and the time required to obtain approval may
differ from that required to obtain FDA approval.
The foreign regulatory approval process may include all of the
risks associated with obtaining FDA approval, in addition to
other risks. Foreign regulatory bodies have established varying
regulations governing product standards, packaging requirements,
labeling requirements, import restrictions, tariff regulations,
duties and tax requirements. We may not obtain foreign
regulatory approvals on a timely basis, if at all. Foreign
regulatory agencies, as well as the FDA, periodically inspect
manufacturing facilities both in the US and abroad. Approval by
the FDA does not ensure approval by regulatory authorities in
other countries, and approval by one foreign regulatory
authority does not ensure approval by regulatory authorities in
other foreign countries or by the FDA. We have not taken any
significant actions to obtain foreign regulatory approvals. We
may not be able to file for regulatory approvals and may not
receive necessary approvals to commercialize
MelaFind®
in any market on a timely basis, or at all. 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., MBA, 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 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
37
in the future will be critical to our success. There is
competition from other companies and research and academic
institutions for qualified personnel in the areas of our
activities. If we fail to identify, attract, retain and motivate
these highly skilled personnel, we may be unable to continue our
development and commercialization activities.
Our
financial results for future periods may be adversely affected
by changes required by financial and accounting regulatory
agencies.
Our reported financial results may be adversely affected by
changes in accounting principles generally accepted in the US.
Generally accepted accounting principles in the US are subject
to interpretation by the Financial Accounting Standards Board
(FASB), the American Institute of Certified Public Accountants,
the Securities and Exchange Commission (SEC), and various bodies
formed to promulgate and interpret appropriate accounting
principles. A change in these principles or interpretations
could have a significant effect on our reported financial
results, and could affect the reporting of transactions
completed before the announcement of a change.
Our
financial results for future periods will be affected by the
attainment of milestones.
We have granted to certain employees stock options that vest
with the attainment of various performance 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 there
could be a significant compensation charge based on the 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 and
provide accurate financial statements could cause our stock
price to decrease substantially.
We face increased legal, accounting, administrative and other
costs and expenses as a public company. The Sarbanes-Oxley Act
of 2002 (SOX), as well as new rules subsequently implemented by
the SEC, the Public Company Accounting Oversight Board and the
NASDAQ Capital Market, require changes in the corporate
governance practices of public companies. We expect these new
rules and regulations to increase our legal and financial
compliance costs, to divert management attention from operations
and strategic opportunities, and to make legal, accounting and
administrative activities more time-consuming and costly. We
have retained a consultant to assist us and we are in the
process of instituting changes to our internal procedures to
satisfy the requirements of the SOX. We are evaluating our
internal controls 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. We have retained and are currently working with a
consultant experienced in SOX compliance. While we believe we
have made substantial progress on satisfying the requirements,
and anticipate being able to fully implement the requirements
relating to internal controls and all other aspects of
Section 404 of the SOX in a timely fashion, we cannot be
certain as to the timing of completion of our evaluation,
testing and remediation actions or the impact of the same on our
operations. As a small company with limited capital and human
resources, we will need to divert managements time and
attention away from our business in order to ensure compliance
with these regulatory requirements. Implementing these changes
may require new information technologies systems, the auditing
of our internal controls, and compliance training for our
directors, officers and personnel. Such efforts would require a
potentially significant expense. If we fail to maintain the
adequacy of our internal controls as such standards are
modified, supplemented or amended from time to time, we may not
be able to provide accurate financial statements and comply with
the SOX. Any failure to maintain the adequacy of our internal
controls and provide accurate financial statements could cause
the trading price of our common stock to decrease substantially.
38
Risks
Relating to our Common Stock
An
active trading market for our common stock may not
develop.
An active public market for our common stock may not continue to
develop or be sustained. Further, we cannot be certain that the
market price of our common stock will not decline below the
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 is likely to be volatile, meaning purchasers of our
common stock could incur substantial losses.
Our stock price is likely to be volatile. The stock market in
general and the market for medical technology companies in
particular have experienced extreme volatility that has often
been unrelated to the operating performance of particular
companies. The following factors, in addition to other risk
factors described in this section and general market and
economic conditions, may have a significant impact on the market
price of our common stock:
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results of our research and development efforts and our clinical
trials;
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|
|
the timing of regulatory approval for our products;
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|
failure of any of our products, if approved, to achieve
commercial success;
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|
the announcement of new products or product enhancements by us
or our competitors;
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|
regulatory developments in the US and foreign countries;
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ability to manufacture our products to commercial standards;
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developments concerning our clinical collaborators, suppliers or
marketing partners;
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|
changes in financial estimates or recommendations by securities
analysts;
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public concern over our products;
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developments or disputes concerning patents or other
intellectual property rights;
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|
product liability claims and litigation against us or our
competitors;
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the departure of key personnel;
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|
the strength of our balance sheet;
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|
variations in our financial results or those of companies that
are perceived to be similar to us;
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|
changes in the structure of and third-party reimbursement in the
US and other countries;
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|
changes in accounting principles or practices;
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|
general economic, industry and market conditions; and
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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.
39
If our
directors, executive officers, and principal stockholders choose
to act together, they may have the ability to influence all
matters submitted to stockholders for approval.
As of February 28, 2007, our directors, executive officers,
holders of more than 5% of our common stock, and their
affiliates in the aggregate, beneficially owned approximately
36.9% of our outstanding common stock. As a result, these
stockholders, subject to any fiduciary duties owed to our other
stockholders under Delaware law, will be able to exercise a
controlling influence over matters requiring stockholder
approval, including the election of directors and approval of
significant corporate transactions, and will have significant
control over our management and policies. Some of these persons
or entities may have interests that are different from yours.
For example, these stockholders may support proposals and
actions with which you may disagree or which are not in your
interests. The concentration of ownership could delay or prevent
a change in control of our company or otherwise discourage a
potential acquirer from attempting to obtain control of our
company, which in turn could reduce the price of our common
stock. In addition, these stockholders, some of whom have
representatives sitting on our board of directors, could use
their voting influence to maintain our existing management and
directors in office, delay or prevent changes of control of our
company, or support or reject other management and board
proposals that are subject to stockholder approval, such as
amendments to our employee stock plans and approvals of
significant financing transactions.
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:
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set limitations on the removal of directors;
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|
limit who may call a special meeting of stockholders;
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|
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;
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|
do not permit cumulative voting in the election of our
directors, which would otherwise permit less than a majority of
stockholders to elect directors;
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|
prohibit stockholder action by written consent, thereby
requiring all stockholder actions to be taken at a meeting of
our stockholders; and
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|
provide our board of directors the ability to designate the
terms of and issue a new series of preferred stock without
stockholder approval.
|
In addition, Section 203 of the Delaware General
Corporation Law generally limits our ability to engage in any
business combination with certain persons who own 15% or more of
our outstanding voting stock or any of our associates or
affiliates who at any time in the past three years have owned
15% or more of our outstanding voting stock.
These provisions may have the effect of entrenching our
management team and may deprive you of the opportunity to sell
your shares to potential acquirers at a premium over prevailing
prices. This potential inability to obtain a control premium
could reduce the price of our common stock.
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Item 1B.
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Unresolved
Staff Comments.
|
Not applicable.
We lease approximately 2,800 square feet of office space at
3 West Main Street, Suite 201, Irvington, New York,
and an additional 4,950 square feet of office, laboratory,
and assembly space in an adjacent building with the street
address of 1 Bridge Street, Suite 15, Irvington, New York.
The lease on the
40
2,800 square feet of space expires in November 2010. The
lease on the 4,950 square feet of space expires in June
2009. 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.
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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.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of security holders during
the fourth quarter of fiscal year 2006.
PART II
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Item 5.
|
Market
for Registrants 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 October 28, 2005 through
December 31, 2006 as reported by the NASDAQ Capital Market:
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High
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Low
|
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Year Ended December 31,
2006
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October 1
December 31, 2006
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$
|
8.10
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|
$
|
5.26
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July 1
September 30, 2006
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$
|
7.34
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|
$
|
4.74
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|
April 1 June 30,
2006
|
|
$
|
8.92
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|
$
|
5.52
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|
January 1, 2006
March 31, 2006
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|
$
|
6.20
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|
|
$
|
5.20
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Year Ended December 31,
2005
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October 28
December 31, 2005
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|
$
|
8.68
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|
|
$
|
5.26
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As of February 28, 2007, there were approximately 208
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.
41
Securities
Authorized For Issuance Under Equity Compensation
Plans
The information required by this Item concerning the
Companys 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 October 28, 2005, the Company completed an initial
public offering. The Company issued 4,000,000 shares of
common stock on October 28, 2005 and 262,300 shares of
common stock on November 15, 2005, both issuances at
$5.00 per share. After deducting underwriting discounts and
expenses and offering-related expenses, the initial public
offering resulted in net proceeds to the Company of $17,687,000.
A summary of the terms of the initial public offering can be
found in the Companys registration statement on
Form S-1,
as amended (File
No. 333-125517),
which was declared effective by the Securities and Exchange
Commission on October 28, 2005.
No payments for expenses in conjunction with the initial public
offering were made directly or indirectly to (i) any of our
directors, officers or their associates, (ii) any person(s)
owning 10% or more of any class of our equity securities or
(iii) any of our affiliates.
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)(4) on October 28, 2005.
Use of
Proceeds from the Sale of Unregistered Securities
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 Companys common stock and
warrants to purchase up to 346,857 shares of the
Companys common stock for aggregate gross proceeds of
approximately $13.2 million, and approximately
$12.5 million in net proceeds. The transaction closed
November 3, 2006. Pursuant to the securities purchase
agreements, for a purchase price of $5.70 each investor received
one share of the Companys common stock and a warrant to
purchase 0.15 of a share of common stock. The warrants are
five-year warrants with an exercise price of $6.70 per
share. The private placement was completed pursuant to an
exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, and Regulation D
promulgated thereunder. Pursuant to the terms of the
registration rights agreement, the Company filed a resale
registration statement on December 1, 2006 covering the
shares, including the shares issuable upon exercise of the
warrants. The Companys resale registration statement on
Form S-3
was declared effective
(file #333-139056)
February 12, 2007.
No payments for expenses in conjunction with the 2006 private
placement were made directly or indirectly to (i) any of
our directors, officers or their associates, (ii) any
person(s) owning 10% or more of any class of our equity
securities or (iii) any of our affiliates.
The net proceeds have been invested in certificates of deposit
with a commercial bank. 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.
42
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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,
2004, 2005 and 2006 and as of December 31, 2005 and 2006
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 Managements 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,
2002 and 2003 and as of December 31, 2002, 2003, and 2004
has 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.
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Year Ended December 31,
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2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
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|
(In thousands, except share and per share data)
|
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Statements of Operations
Data:
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from grants
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|
$
|
547
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of grant revenue
|
|
|
564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
511
|
|
|
|
1,034
|
|
|
|
1,234
|
|
|
|
2,636
|
|
|
|
4,526
|
|
Research and development
|
|
|
404
|
|
|
|
828
|
|
|
|
1,892
|
|
|
|
3,822
|
|
|
|
7,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss from continuing
operations
|
|
|
(932
|
)
|
|
|
(1,862
|
)
|
|
|
(3,126
|
)
|
|
|
(6,458
|
)
|
|
|
(12,100
|
)
|
Interest (income)/expense
|
|
|
8
|
|
|
|
76
|
|
|
|
67
|
|
|
|
(174
|
)
|
|
|
(728
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) from continuing operations
|
|
|
(940
|
)
|
|
|
(1,938
|
)
|
|
|
(3,193
|
)
|
|
|
(6,284
|
)
|
|
|
(11,372
|
)
|
(Loss) gain from discontinued
operations
|
|
|
(201
|
)
|
|
|
(12
|
)
|
|
|
(426
|
)
|
|
|
(442
|
)
|
|
|
781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,141
|
)
|
|
|
(1,950
|
)
|
|
|
(3,619
|
)
|
|
|
(6,726
|
)
|
|
|
(10,591
|
)
|
Preferred stock deemed dividends
|
|
|
(214
|
)
|
|
|
(322
|
)
|
|
|
(676
|
)
|
|
|
(1,199
|
)
|
|
|
|
|
Preferred stock accretion
|
|
|
(180
|
)
|
|
|
(25
|
)
|
|
|
(258
|
)
|
|
|
(1,077
|
)
|
|
|
|
|
Stock distribution of preferred
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
|
|
|
|
|
|
|
(102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common
stockholders
|
|
$
|
(1,535
|
)
|
|
$
|
(2,399
|
)
|
|
$
|
(4,553
|
)
|
|
$
|
(9,002
|
)
|
|
$
|
(10,591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and
diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.87
|
)
|
|
$
|
(1.48
|
)
|
|
$
|
(2.34
|
)
|
|
$
|
(2.44
|
)
|
|
$
|
(1.01
|
)
|
Discontinued operations
|
|
|
(0.13
|
)
|
|
|
(0.01
|
)
|
|
|
(0.24
|
)
|
|
|
(0.13
|
)
|
|
|
.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
common share
|
|
$
|
(1.00
|
)
|
|
$
|
(1.49
|
)
|
|
$
|
(2.58
|
)
|
|
$
|
(2.57
|
)
|
|
$
|
(.94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average
number of shares outstanding
|
|
|
1,534,760
|
|
|
|
1,614,897
|
|
|
|
1,766,608
|
|
|
|
3,508,835
|
|
|
|
11,293,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
111
|
|
|
$
|
217
|
|
|
$
|
6,813
|
|
|
$
|
18,873
|
|
|
$
|
21,771
|
|
Total assets
|
|
|
344
|
|
|
|
432
|
|
|
|
7,096
|
|
|
|
19,166
|
|
|
|
22,476
|
|
Total liabilities
|
|
|
529
|
|
|
|
650
|
|
|
|
691
|
|
|
|
916
|
|
|
|
1,162
|
|
Redeemable convertible preferred
stock
|
|
|
2,244
|
|
|
|
4,067
|
|
|
|
9,955
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
(8,518
|
)
|
|
|
(10,288
|
)
|
|
|
(13,907
|
)
|
|
|
(20,633
|
)
|
|
|
(31,225
|
)
|
Total stockholders
equity/(deficiency)
|
|
|
(4,657
|
)
|
|
|
(4,285
|
)
|
|
|
(3,550
|
)
|
|
|
18,249
|
|
|
|
21,314
|
|
43
|
|
Item 7.
|
Managements
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, 2006
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
flagship product,
MelaFind®,
features a hand-held imaging device that emits multiple
wavelengths of light to capture images of suspicious pigmented
skin lesions and extract data. We currently do not have any
commercialized products or any significant source of revenue;
however, the financial results for all periods discussed below
account for the revenues and the related expenses associated
with our
DIFOTI®
product, a non-invasive imaging device for the detection of
dental cavities, as a discontinued operation. We decided to
discontinue all operations associated with our
DIFOTI®
product effective as of April 5, 2005, in order to focus
our resources and attention on the development and
commercialization of
MelaFind®.
On December 11, 2006 we announced that we had signed an
exclusive licensing agreement with KaVo, a leading dental
equipment manufacturer, to further develop and commercialize
DIFOTI®.
In accordance with the terms of the agreement, KaVo paid us an
up-front sum and will make a second payment to us later in 2007.
If KaVo is successful in commercializing
DIFOTI®,
KaVo will pay us an annual royalty based on the number of
systems sold per calendar year following their commercial
re-launch of
DIFOTI®.
With the completion of this transaction 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 on the timing of the
pivotal trial that began in January 2007 and its patient
enrollment. 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, 2006, we had an
accumulated deficit of $31.2 million. We expect to continue
to spend significant amounts on the development of
MelaFind®.
We expect to incur significant commercialization costs when we
begin to introduce
MelaFind®
into the US market.
On October 28, 2005, 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 Companys common stock and
warrants to purchase up to 346,857 shares of the
Companys 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. We believe that the proceeds from these
two transactions will be sufficient to fund our anticipated
level of operations through mid-2008. 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,
44
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, 2006 were expenses related primarily to
the development of
MelaFind®.
We expect to incur additional research and development expenses
relating to
MelaFind®
prior to its commercial launch in the US and selected markets
outside the US. 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.
General and administrative expenses consist primarily of
salaries and related expenses, general corporate activities and
costs associated with our efforts to obtain PMA approval for
MelaFind®
and toward development of a commercial infrastructure to market
and sell
MelaFind®.
We anticipate that general and administrative expenses will
increase as a result of the expected expansion of our
operations, facilities and other activities associated with the
planned expansion of our business, together with the additional
costs associated with operating as a public company. We expect
selling, general and administrative expenses to increase as we
build our sales force and marketing capabilities to support
placing
MelaFind®
in selected markets.
At December 31, 2005 and December 31, 2006, we had
available net operating loss carryforwards for federal income
tax reporting purposes of approximately $14.0 million and
approximately $16.6 million, respectively. The net operating
loss carryforwards may be available to offset future taxable
income expiring at various dates through the year 2026. The
Companys ability to utilize its net operating losses may
be significantly limited due to changes in the companys
ownership as defined by federal income tax regulations.
Critical
Accounting Policies and Significant Judgments and
Estimates
Our managements discussion and analysis of our financial
condition and results of operations are based on our financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the US. The
preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements as well
as the reported revenues and expenses during the reporting
periods. On an ongoing basis, we evaluate our judgments related
to accounting estimates. We base our estimates on historical
experience and on various other factors that we believe are
reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under
different assumptions or conditions.
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
We decided to discontinue all operations associated with our
DIFOTI®
product effective as of April 5, 2005 and account for the
DIFOTI®
revenue and expenses as a discontinued operation. Revenue from
the
DIFOTI®
product sales had been recognized at the time of delivery and
acceptance, after consideration of all the terms and conditions
of the customer contract. The
DIFOTI®
products which were being sold prior to December 31, 2004
included a
30-day
return policy. Revenue on these products was recognized after
the shipment was made and the
30-day
return period had elapsed.
DIFOTI®
products sold subsequent to December 31, 2004 were sold
without a right of return and revenue was therefore recognized
after the shipment was made. Deferred revenues at
December 31, 2004 consisted of revenues that were billed or
paid in advance of the shipment of the product. With the
completion of the sale and licensing transaction to KaVo in
December 2006, we do not expect to have any significant
continuing responsibility for the
DIFOTI®
business.
We currently do not have any products approved for sale.
45
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,
Accounting for Equity Instruments that Are Issued to Other
Than Employees for Acquiring, or in Conjunction With Selling,
Goods or Services.
Prior to January 1, 2006 we applied the intrinsic-value
method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations to account for our
fixed-plan employee stock options. Under this method, no
compensation expense had been recorded for awards granted with
no intrinsic value. Namely, on the date of grant only if the
then current market price of the underlying stock exceeded the
exercise price would there be a compensation charge. FASB
Statement No. 123, Accounting for Stock-Based
Compensation, as amended by Statement of Financial Accounting
Standards (SFAS) No. 148, Accounting for Stock-Based
Compensation, Transition and Disclosure established
accounting and disclosure requirements using a fair-value based
method of accounting for stock-based employee compensation
plans. As allowed by SFAS Nos.123 and 148, we elected to
continue to apply the intrinsic-value based method of accounting
for employee stock options described above until January 1,
2006 and adopted only the disclosure requirements of
SFAS 123. Prior to October 28, 2005, our common stock
had not been publicly traded. As a result, the determination of
the fair value of our common stock involved considerable
judgment. In making this determination, we evaluated, among
other things, our common stock transactions, the pricing of
private equity sales, the rights and preferences of the security
being valued, current market conditions, and company specific
operational milestones. Since our initial public offering, the
fair value of stock-based compensation has been based on the
price of our common stock on the measurement date.
Effective January 1, 2006, the Company began recording
compensation expense associated with stock options and other
forms of equity compensation in accordance with Statement of
Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment (SFAS 123R), as interpreted by
SEC Staff Accounting Bulletin No. 107. The Company
adopted the modified prospective transition method provided for
under SFAS 123R, and consequently, has not retroactively
adjusted results from prior periods. Under this transition
method, compensation cost associated with stock options
recognized in 2006 includes: 1) amortization related to the
remaining unvested portion of all stock option awards granted
prior to January 1, 2006 over the requisite service period
based on the grant-date fair value estimated in accordance with
the original provisions of SFAS 123, Accounting for
Stock-Based Compensation; and 2) amortization related
to all stock option awards granted on or subsequent to
January 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123R. A
compensation charge is recorded when it is probable that
performance 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.
In May 2005, we amended stock option agreements for
125,000 shares of our common stock in the aggregate of
three key employees to immediately vest upon the completion of
our initial public offering. In the fourth quarter of 2005, the
Company recorded a charge to operations in the amount of
$544,000 with respect to these options based upon the initial
public offering price of $5.00 per share.
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 could
be a significant compensation charge based on the fair value of
such options.
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
46
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, 2006 Compared to Year Ended
December 31, 2005
Research
and Development Expense
Research and development expense increased by $3,752 to $7,574
for the year ended December 31, 2006 from $3,822 for the
year ended December 31, 2005. This increase was primarily
attributable to a
step-up of
$2,483 in product development costs associated with
MelaFind®.
Approximately $1,700 of the increase was spent with ASKION, and
approximately $540 of the increase was spent with several other
suppliers to our R&D program. In addition we had an increase
in personnel costs of $437, an increase in our clinical study
costs of $121 and an increase in costs associated with our
regulatory and FDA work of $87. We currently expect at least
this level of spending to continue for 2007.
In addition we recorded a $623 share-based compensation
charge for certain research and development personnel for the
year ended December 31, 2006. This expense includes charges
in accordance with SFAS 123R, related to the issuance of
stock options.
General
and Administrative Expense
General and administrative expense increased by $1,890 to $4,526
for the year ended December 31, 2006 from $2,636 for the
year ended December 31, 2005. The increase was attributable
to higher personnel costs of $184 and reimbursement and pre
marketing activities of $283. Higher costs associated with our
status as a public company for an entire year totaled $829 and
consisted primarily of increased legal fees of $420, accounting
and related services of $259, and stockholder relations costs of
$150. We also incurred higher insurance costs of $180 that were
primarily related to increased directors and officers insurance
coverage. Additionally, our franchise tax expense increased by
$98, and we incurred increased strategic consulting expenses of
$235. Our general overhead also increased by $306, which
included a rent increase of $53.
In addition we recorded a $412 share based compensation
charge in accordance with SFAS 123R. During 2005 we
recorded a share based compensation charge of $638 that was
principally related to the immediate vesting of 125,000 options
upon completion of our initial public offering. Therefore, for
2006 we had a decrease in share based compensation of $226.
47
Interest
(Income)/Expense
Interest income for the year ended December 31, 2006 was
$728 compared to $174 for the year ended December 31, 2005.
The increase for the year ended December 31, 2006 was
directly attributable to an increase in cash and cash
equivalents generated as a result of our initial public offering
on October 28, 2005 and our November 2006 financing, and
the proceeds from the sale and licensing of our
DIFOTI®
assets.
Gain
(Loss) from Discontinued Operations
The gain on the sale and licensing of our discontinued
operations in the year ended December 31, 2006 was $781,
compared with the loss on discontinued operations of $442 for
the year ended December 31, 2005. The gain in 2006 resulted
from the sale and licensing transaction of
DIFOTI®
assets with KaVo, and the 2005 loss related to our decision to
discontinue
DIFOTI®
operations in April 2005.
Year
Ended December 31, 2005 Compared to Year Ended
December 31, 2004
Research
and Development Expense
Research and development expense increased by $1,930 to $3,822
for the year ended December 31, 2005, from $1,892 for the
year ended December 31, 2004. Of this increase, $494 was
attributable to higher personnel and personnel related costs as
we increased headcount to support our research and development
programs, and higher outside product development and research
consulting fees in the amount of $882 and $494 respectively,
which relates to the development of our
MelaFind®
product. In addition, regulatory expense increased by $60 which
represents actions taken by the Company to fully comply with FDA
quality system regulations. For the year ended December 31,
2005 research and development costs were approximately 59% of
total operating expenses. We expect our research and development
expenses to increase in connection with our clinical trials and
other development activities as we advance our
MelaFind®
pivotal study and complete the PMA regulatory approval process.
General
and Administrative Expense
General and administrative expense increased by $1,402 to $2,636
for the year ended December 31, 2005 from $1,234 for the
year ended December 31, 2004. The change was due to higher
personnel and personnel related costs of $291 associated with
the addition of key management positions, and $392 related to
rent, utilities and moving expenses associated with an office
expansion and a lease renewal. The increase in share-based
compensation of $465 is principally attributable to the
immediate vesting of 125,000 stock options upon completion of
the initial public offering. In addition, information technology
consulting fees and the higher professional services cost
associated with being a public company contributed to $233 of
the overall increase. For the year ended December 31, 2005,
general and administrative expenses were approximately 41% of
total operating expenses. We expect that our general and
administrative expenses will increase to support the additional
costs associated with being a public company.
Interest
(Income)/Expense
Interest income for the year ended December 31, 2005 was
$174 and is compared to $28 in interest income and $95 in
interest expense for the corresponding period in 2004. The
increase in interest income for the year ended December 31,
2005 was due to the higher average cash, cash equivalents and
marketable securities balance compared to the prior year period.
The interest expense for the year ended December 31, 2004
was principally related to an imputed interest charge of $80 in
connection with financings from related parties.
Liquidity
and Capital Resources
From inception, we have financed our operations primarily
through the use of working capital from the sale of equity
securities and by applying for and obtaining a series of
National Institute of Health Small Business Innovative Research
grants and similar grants. To date, we have not borrowed (other
than by issuing
48
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, 2006,
we had $20,940 in cash and cash equivalents as compared to
$18,505 of cash and cash equivalents at December 31, 2005,
an increase of $2,435. The increase resulted primarily from the
net proceeds of approximately $12,500 from the Companys
2006 private placement, offset by cash used in operating
activities. Our cash and cash equivalents at December 31,
2006 are liquid investments in cash and certificates of deposit
with a commercial bank, investment grade securities, and money
market accounts.
Cash
Flows from Operating Activities
Net cash used in operations was $10,141 for the year ended
December 31, 2006. For the years ended December 31,
2004 and 2005 the net cash used in operations was $3,065 and
$5,831 respectively. 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 used in our investing activities was $44 for the year
ended December 31, 2006 principally relating to the
purchase of fixed assets and patent costs offset by the proceeds
received from the sale and licensing of our
DIFOTI®
assets. For the year ended December 31, 2004, net cash used
in investing activities was $6,677 and was principally related
to the purchase of marketable equity securities, and for the
year ended December 31, 2005, net cash provided by
investing activities was $6,502, which was principally related
to the redemption of marketable securities.
Cash
Flows from Financing Activities
Net cash provided by financing activities was $12,620 for the
year ended December 31, 2006 and reflects the net proceeds
received from our November 3, 2006 private placement
financing. For the years ended December 31, 2004 and 2005
the net cash flows provided by financing activities were $9,733
and $17,725 respectively. In 2004, financing cash flows
reflected the proceeds from the issuance of preferred stock and
notes payable. In 2005, financing cash flows reflect proceeds
from the initial public offering.
Operating
Capital and Capital Expenditure Requirements
We face certain risks and uncertainties, which are present in
many emerging medical device companies. At December 31,
2006, we had an accumulated deficit of $31.2 million. To
date, we have not commercialized our principal product,
MelaFind®.
We anticipate that we will continue to incur net losses for the
foreseeable future as we continue to develop the
MelaFind®
system, expand our clinical development team and corporate
infrastructure, and prepare for the potential commercial launch
of
MelaFind®.
We do not expect to generate significant product revenue until
we successfully obtain PMA approval for and begin selling
MelaFind®.
In order to achieve significant commercialization of
MelaFind®
we will need to obtain additional funding. We believe that the
net proceeds from our initial public offering and our
November 3, 2006 financing, our current cash and cash
equivalents and interest we earn on these balances will be
sufficient to meet our anticipated cash needs for working
capital and capital expenditures through mid-2008. 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. If additional funds are raised through the issuance of
debt securities, these securities could have rights senior to
those associated with our common stock and could contain
covenants that would restrict our operations. Any additional
financing may not be available in amounts or on terms acceptable
to us, or at all. If we are unable to obtain this additional
financing, we may be required to reduce the scope of, delay or
eliminate some or all of planned product research development
and commercialization activities, which could harm our business.
Because of the numerous risks and uncertainties associated with
the development of medical devices such as
MelaFind®,
we are unable to estimate the exact amounts of capital outlays
and operating expenditures
49
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; and
|
|
|
|
our ability to establish and maintain any collaborative,
licensing or other arrangements, and the terms and timing of any
such arrangements.
|
Contractual
Obligations
The following table summarizes our outstanding contractual
obligations as of December 31, 2006 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
|
|
$
|
795
|
|
|
$
|
249
|
|
|
$
|
441
|
|
|
$
|
105
|
|
|
|
|
|
Total
|
|
$
|
795
|
|
|
$
|
249
|
|
|
$
|
441
|
|
|
$
|
105
|
|
|
|
|
|
Our long-term obligations are two non-cancelable operating
leases for space expiring in June 2009 and November 2010. The
lease on 4,950 square feet of office, laboratory and
assembly space expires in June 2009, and the lease on
2,800 square feet of office space expires in November 2010.
Related
Party Transactions
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.
Recent
Accounting Developments
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
50
fair value measurements. This statement is effective for
financial statements issued for fiscal years beginning after
November 15, 2007; however, earlier application is
encouraged. We do not expect the adoption of SFAS 157 to
have a material impact on our financial statements.
In October 2006, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 155, Accounting for Certain
Hybrid Financial Instruments-an amendment of Statements
No. 133 and 140 (FAS 155). FAS 155 is
effective for fiscal years that begin on or after
October 1, 2006 and permits companies the option to use a
fair value measurement for certain hybrid financial instruments
that contain an embedded derivative that would otherwise require
bifurcation under under FAS 133. The Company does not
expect the adoption of FAS 155 to have a material impact on
its financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48), which prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
FIN 48 is effective for fiscal years beginning after
December 15, 2006. We do not expect the adoption of
FIN 48 to have a material impact on our financial
reporting, and we are currently evaluating the impact, if any,
the adoption of FIN 48 will have on our disclosure
requirements.
On December 16, 2004 the FASB issued Statement No. 123
(revised 2004), Share-Based Payment (SFAS 123R).
This Statement requires that the cost resulting from all
share-based payment transactions be recognized in the financial
statements and establishes fair value as the measurement
objective in accounting for all share-based payment
arrangements. On March 29, 2005, the SEC issued
Staff Accounting Bulletin No. 107, Stock-Based
Payment, which summarizes the views of the staff regarding
the interaction between SFAS 123R and certain SEC rules and
regulations, and provides the staffs views regarding the
valuation of share-based payment arrangements for public
companies. SFAS 123R was originally effective as of the
beginning of the first interim or annual reporting period after
June 15, 2005. However, on April 14, 2005 the SEC
announced a new rule that amended the effective date for
SFAS 123R. The new rule allows companies to implement
SFAS 123R at the beginning of their next fiscal year,
instead of the next reporting period beginning after
June 15, 2005. As such, we adopted SFAS 123R as of the
beginning of the first quarter of 2006 and applied the modified
prospective application transition method, as permitted by the
statement. Under such transition method, upon the adoption of
SFAS 123R, our financial statements for periods prior to
the effective date of the statement will not be restated.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Our exposure to market risk at December 31, 2006 is
confined to our cash and cash equivalents. 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. Due to the short-term nature of our
investments, we do not believe that we have any material
exposure to interest rate risk arising from our investments.
51
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
INDEX TO
FINANCIAL STATEMENTS
52
Report
of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Electro-Optical Sciences, Inc.
We have audited the accompanying balance sheets of
Electro-Optical Sciences, Inc. as of December 31, 2005 and
2006, and the related statements of operations,
stockholders equity (deficiency), and cash flows for each
of the years in the three-year period ended December 31,
2006. These financial statements are the responsibility of the
Companys 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 audit 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, 2005
and 2006, and the results of its operations and its cash flows
for each of the years in the three-year period ended
December 31, 2006, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 1 to the financial statements,
effective January 1, 2006 the Company changed its method of
accounting for stock-based compensation in accordance with
Statement of Financial Accounting Standards No. 123
(Revised 2004) Share-Based Payment.
New York, New York
March 9, 2007
53
ELECTRO-OPTICAL
SCIENCES, INC.
BALANCE
SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
(includes $12,000,000 in certificates of deposit as of
December 31, 2006)
|
|
$
|
18,505,030
|
|
|
$
|
20,939,527
|
|
Receivable from sale and licensing
of discontinued operations, net
|
|
|
|
|
|
|
487,680
|
|
Prepaid expenses and other current
assets
|
|
|
210,940
|
|
|
|
343,634
|
|
Assets held for sale
|
|
|
156,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
18,872,647
|
|
|
|
21,770,841
|
|
Property and equipment, net
|
|
|
175,369
|
|
|
|
564,471
|
|
Patents and trademarks, net
|
|
|
84,052
|
|
|
|
100,630
|
|
Other assets
|
|
|
33,612
|
|
|
|
39,758
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
19,165,680
|
|
|
$
|
22,475,700
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable (includes related
parties of $11,263 as of December 31, 2005, and $53,987 as
of December 31, 2006)
|
|
$
|
329,462
|
|
|
$
|
641,036
|
|
Accrued expenses (includes related
parties of $15,000 as of December 31, 2005, and 34,257 as
of December 31, 2006)
|
|
|
570,052
|
|
|
|
504,670
|
|
Other current liabilities
|
|
|
16,828
|
|
|
|
16,077
|
|
|
|
|
|
|
|
|
|
|
Total Current
Liabilities
|
|
|
916,342
|
|
|
|
1,161,783
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
(Note 5)
|
|
|
|
|
|
|
|
|
Stockholders
Equity:
|
|
|
|
|
|
|
|
|
Common stock
$0.001 par value; authorized 30,000,000 shares:
|
|
|
|
|
|
|
|
|
Issued and outstanding
10,837,833 shares at December 31, 2005 and
13,296,448 shares at December 31, 2006
|
|
|
10,838
|
|
|
|
13,296
|
|
Additional paid-in capital
|
|
|
38,934,420
|
|
|
|
52,525,408
|
|
Deferred compensation
|
|
|
(62,610
|
)
|
|
|
|
|
Accumulated deficit
|
|
|
(20,633,310
|
)
|
|
|
(31,224,787
|
)
|
|
|
|
|
|
|
|
|
|
Stockholders
Equity
|
|
|
18,249,338
|
|
|
|
21,313,917
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Stockholders Equity
|
|
$
|
19,165,680
|
|
|
$
|
22,475,700
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements
54
ELECTRO-OPTICAL
SCIENCES, INC.
STATEMENTS
OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
1,891,551
|
|
|
$
|
3,821,712
|
|
|
$
|
7,574,744
|
|
General and administrative
|
|
|
1,234,210
|
|
|
|
2,636,064
|
|
|
|
4,525,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss from continuing
operations
|
|
|
(3,125,761
|
)
|
|
|
(6,457,776
|
)
|
|
|
(12,100,533
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
(27,935
|
)
|
|
|
(173,888
|
)
|
|
|
(728,053
|
)
|
Interest expense
|
|
|
94,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,041
|
|
|
|
(173,888
|
)
|
|
|
(728,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(3,192,802
|
)
|
|
|
(6,283,888
|
)
|
|
|
(11,372,480
|
)
|
Loss from discontinued operations
|
|
|
(426,344
|
)
|
|
|
(442,459
|
)
|
|
|
|
|
Gain on sale and licensing of
discontinued operations
|
|
|
|
|
|
|
|
|
|
|
781,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(3,619,146
|
)
|
|
|
(6,726,347
|
)
|
|
|
(10,591,477
|
)
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock deemed dividends
|
|
|
676,218
|
|
|
|
1,198,439
|
|
|
|
|
|
Preferred stock accretion
|
|
|
257,545
|
|
|
|
1,077,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss Attributable to Common
Stockholders
|
|
$
|
(4,552,909
|
)
|
|
$
|
(9,002,278
|
)
|
|
$
|
(10,591,477
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic
and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
(2.34
|
)
|
|
|
(2.44
|
)
|
|
|
(1.01
|
)
|
Discontinued operations
|
|
|
(0.24
|
)
|
|
|
(0.13
|
)
|
|
|
.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
common share
|
|
$
|
(2.58
|
)
|
|
$
|
(2.57
|
)
|
|
$
|
(.94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average
number of common shares outstanding
|
|
|
1,766,608
|
|
|
|
3,508,835
|
|
|
|
11,293,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements
55
ELECTRO-OPTICAL
SCIENCES, INC.
STATEMENTS
OF STOCKHOLDERS EQUITY (DEFICIENCY)
Years Ended December 31, 2004, 2005 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders
|
|
|
|
Series A
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Notes
|
|
|
Deferred
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Receivable
|
|
|
Compensation
|
|
|
Deficit
|
|
|
(Deficiency)
|
|
|
Balance at January 1, 2004
|
|
|
198,000
|
|
|
$
|
972,311
|
|
|
|
1,684,760
|
|
|
$
|
1,685
|
|
|
$
|
5,119,923
|
|
|
$
|
(69,000
|
)
|
|
$
|
(22,500
|
)
|
|
$
|
(10,287,817
|
)
|
|
$
|
(4,285,398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of common stock
|
|
|
|
|
|
|
|
|
|
|
124,998
|
|
|
|
125
|
|
|
|
137,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137,500
|
|
Deferred compensation on-stock
option awards to employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159,300
|
|
|
|
|
|
|
|
(159,300
|
)
|
|
|
|
|
|
|
|
|
Issuance of options to non-employee
directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,450
|
|
Preferred stock accretion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(257,545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(257,545
|
)
|
Warrants issued in connection with
preferred Series C stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,643,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,643,392
|
|
Beneficial conversion feature in
connection with preferred Series C stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,465,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,465,003
|
|
Issuance of options to consultants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,800
|
|
Issuance of warrants to consultant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120,396
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,500
|
|
|
|
|
|
|
|
22,500
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,619,146
|
)
|
|
|
(3,619,146
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
198,000
|
|
|
$
|
972,311
|
|
|
|
1,809,758
|
|
|
$
|
1,810
|
|
|
$
|
9,611,094
|
|
|
$
|
(69,000
|
)
|
|
$
|
(159,300
|
)
|
|
$
|
(13,906,963
|
)
|
|
$
|
(3,550,048
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock accretion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,077,492
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,077,492
|
)
|
Value of employee options vesting
on attainment of milestone
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
479,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
479,000
|
|
Issuance of options to consultant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138,000
|
|
Exercise of option by non-employee
directors
|
|
|
|
|
|
|
|
|
|
|
27,500
|
|
|
|
28
|
|
|
|
15,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,350
|
|
Exercise of options by former
employees
|
|
|
|
|
|
|
|
|
|
|
23,361
|
|
|
|
23
|
|
|
|
23,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,382
|
|
Restricted stock award to employee
|
|
|
|
|
|
|
|
|
|
|
11,488
|
|
|
|
12
|
|
|
|
62,598
|
|
|
|
|
|
|
|
(62,610
|
)
|
|
|
|
|
|
|
|
|
Retirement of note receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,000
|
|
|
|
|
|
|
|
|
|
|
|
69,000
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159,300
|
|
|
|
|
|
|
|
159,300
|
|
Warrants exchanged
for common
stock
|
|
|
|
|
|
|
|
|
|
|
1,305,321
|
|
|
|
1,305
|
|
|
|
(1,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock in
connection with the Initial Public offering
|
|
|
(198,000
|
)
|
|
|
(972,311
|
)
|
|
|
3,398,105
|
|
|
|
3,398
|
|
|
|
12,001,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,032,665
|
|
Issuance of shares of common stock
in connection with the Initial Public Offering (net of expenses)
|
|
|
|
|
|
|
|
|
|
|
4,262,300
|
|
|
|
4,262
|
|
|
|
17,682,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,686,528
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,726,347
|
)
|
|
|
(6,726,347
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements
56
ELECTRO-OPTICAL
SCIENCES, INC.
STATEMENTS
OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(3,192,802
|
)
|
|
$
|
(6,283,888
|
)
|
|
$
|
(11,372,480
|
)
|
Loss from discontinued operations
|
|
|
(426,344
|
)
|
|
|
(442,459
|
)
|
|
|
|
|
Gain on sale and licensing of
discontinued operations
|
|
|
|
|
|
|
|
|
|
|
781,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(3,619,146
|
)
|
|
|
(6,726,347
|
)
|
|
|
(10,591,477
|
)
|
Adjustments to reconcile net loss
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
(9,000
|
)
|
|
|
(1,000
|
)
|
|
|
|
|
Gain on sale of discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
(781,003
|
)
|
Depreciation and amortization
|
|
|
35,860
|
|
|
|
49,098
|
|
|
|
138,358
|
|
Noncash compensation and
amortization of deferred compensation
|
|
|
172,950
|
|
|
|
672,800
|
|
|
|
874,241
|
|
Common stock options and warrants
issued for consulting fees
|
|
|
193,196
|
|
|
|
138,000
|
|
|
|
161,934
|
|
Retirement of stock subscription
receivable for consulting services
|
|
|
|
|
|
|
34,500
|
|
|
|
|
|
Amortization of discount on
marketable securities
|
|
|
(10,001
|
)
|
|
|
(33,502
|
)
|
|
|
|
|
Imputed interest expense from
bridge loan
|
|
|
80,000
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in receivables
|
|
|
20,662
|
|
|
|
8,128
|
|
|
|
|
|
Decrease (increase) in inventories
|
|
|
3,110
|
|
|
|
(16,122
|
)
|
|
|
|
|
Increase in prepaid expenses and
other current assets
|
|
|
(36,211
|
)
|
|
|
(181,507
|
)
|
|
|
(132,694
|
)
|
(Decrease) increase in accounts
payable and accrued expenses
|
|
|
(7,676
|
)
|
|
|
332,110
|
|
|
|
196,193
|
|
Increase (decrease) in deferred
revenues
|
|
|
106,335
|
|
|
|
(106,335
|
)
|
|
|
|
|
Increase (decrease) in other
current liabilities
|
|
|
5,308
|
|
|
|
(456
|
)
|
|
|
(751
|
)
|
Increase in other assets
|
|
|
|
|
|
|
|
|
|
|
(6,146
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(3,064,613
|
)
|
|
|
(5,830,633
|
)
|
|
|
(10,141,345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent costs
|
|
|
(3,166
|
)
|
|
|
(5,316
|
)
|
|
|
(35,491
|
)
|
Purchases of property and equipment
|
|
|
(88,884
|
)
|
|
|
(121,239
|
)
|
|
|
(508,547
|
)
|
(Purchase) sale of marketable
securities
|
|
|
(6,584,750
|
)
|
|
|
6,628,253
|
|
|
|
|
|
Proceeds from sale and licensing of
discontinued operations
|
|
|
|
|
|
|
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
investing activities
|
|
|
(6,676,800
|
)
|
|
|
6,501,698
|
|
|
|
(44,038
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from private placement
financing
|
|
|
|
|
|
|
|
|
|
|
13,180,598
|
|
Expenses related to private
placement financing
|
|
|
|
|
|
|
|
|
|
|
(675,211
|
)
|
Proceeds from exercise of stock
options
|
|
|
|
|
|
|
|
|
|
|
88,065
|
|
Proceeds from exercise of stock
warrants
|
|
|
|
|
|
|
|
|
|
|
26,428
|
|
Proceeds from Initial Public
Offering
|
|
|
|
|
|
|
21,311,500
|
|
|
|
|
|
Expenses related to Initial Public
Offering
|
|
|
|
|
|
|
(3,624,972
|
)
|
|
|
|
|
Proceeds from issuance of
Series C preferred stock
|
|
|
9,171,480
|
|
|
|
|
|
|
|
|
|
Expenses related to Series C
preferred stock offering
|
|
|
(447,553
|
)
|
|
|
|
|
|
|
|
|
Repayment of notes payable to
stockholders
|
|
|
(48,000
|
)
|
|
|
|
|
|
|
|
|
Proceeds from issuance of notes
payable
|
|
|
920,000
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
137,500
|
|
|
|
38,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
9,733,427
|
|
|
|
17,725,260
|
|
|
|
12,619,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and
cash equivalents
|
|
|
(7,986
|
)
|
|
|
18,396,325
|
|
|
|
2,434,497
|
|
Cash and cash equivalents at
beginning of year
|
|
|
116,691
|
|
|
|
108,705
|
|
|
|
18,505,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of year
|
|
$
|
108,705
|
|
|
$
|
18,505,030
|
|
|
$
|
20,939,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow
Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
14,976
|
|
|
|
|
|
|
|
|
|
Supplemental Schedule of Noncash
Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable from sale and licensing
of discontinued operations
|
|
|
|
|
|
|
|
|
|
$
|
487,680
|
|
Notes payable exchanged for
Series C preferred stock
|
|
$
|
1,015,000
|
|
|
|
|
|
|
|
|
|
Preferred stock accretion
|
|
$
|
257,545
|
|
|
$
|
1,077,492
|
|
|
|
|
|
Reclassification of inventories and
patents to assets held for sale
|
|
|
|
|
|
$
|
156,677
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements
57
ELECTRO-OPTICAL
SCIENCES, INC.
(In thousands, except for share and per share data)
(For the Years Ended December 31, 2006, 2005 and
2004)
|
|
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 design and 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 a PMA with the
FDA, it is placed at the beginning of the FDAs queue and
receives additional review resources. While the expedited review
could shorten the
MelaFind®
FDA approval process, there can be no assurance that this will
be the case. Upon obtaining premarket approval from the FDA, the
Company plans to launch
MelaFind®
in the United States. The pivotal clinical trial commenced in
January 2007 and will include up to 20 U.S. clinical study
sites. If the pivotal trial and FDA approval process proceeds as
anticipated, management believes that PMA approval could come as
early as the first half of 2008.
To date, the Company has not generated any revenues from
MelaFind®.
All of the Companys historical revenues have come from
activities and products that have since been discontinued,
including 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, 2006, the Company has an accumulated
deficit of $31,225 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 and a private placement in
November 2006 (refer to Note 7, Stockholders
Equity, for further details). The Company believes that
the proceeds from these transactions will permit the Company to
fund our anticipated levels of operations through mid-2008.
However, the Company will require additional funds to
commercialize
MelaFind®.
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
Statement of Financial Accounting Standards (SFAS) No. 131,
Disclosures about Segments of an Enterprise and Related
Information, requires an enterprise to report segment
information based on how management internally evaluates the
operating performance of its business units (segments). The
Companys operations are confined to one business segment:
the design and development of
MelaFind®.
Cash
and Cash Equivalents
The Company maintains cash in bank deposit accounts certificates
of deposit which, at times, may exceed federally insured limits.
The Company has not experienced any losses on these accounts.
Cash equivalents
58
ELECTRO-OPTICAL
SCIENCES, INC.
Notes to
Financial Statements (Continued)
include all 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.
Marketable
Securities
Marketable securities are classified in accordance with
SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities.
Held-to-maturity
securities are reported at amortized cost. Available for sale
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.
Assets
Held for Sale
Assets held for sale at December 31, 2005 consisted of
DIFOTI®
related inventories and patents (see Note 10 to the
financial statements).
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
DIFOTI®.
Income
Taxes
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards 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.
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.
59
ELECTRO-OPTICAL
SCIENCES, INC.
Notes to
Financial Statements (Continued)
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
Prior to January 1, 2006, the Company applied the
intrinsic-value method of accounting prescribed by the
Accounting Principles Board (APB) Opinion No. 25 and
related interpretations to account for the Companys
fixed-plan employee stock options. Under this method, no
compensation expense has been recorded for awards granted with
no intrinsic value. Namely, on the date of grant only if the
then current market price of the underlying stock exceeded the
exercise price would there be a compensation charge.
SFAS No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation, Transition and
Disclosure, established accounting and disclosure
requirements using a fair-value based method of accounting for
stock-based employee compensation plans. As allowed by
SFAS No. 123 and No. 148, the Company elected to
continue to apply the intrinsic-value based method of accounting
for employee stock options described above until January 1,
2006, and had adopted only the disclosure requirements of
SFAS No. 123. Had the Company elected to recognize
compensation cost based on the fair value of the options granted
at the grant date, as prescribed by SFAS No. 123, the
Companys net loss and net loss per share would have been
adjusted to the pro forma amounts indicated below:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
Net loss attributable to common
stockholders, as reported
|
|
$
|
(4,553
|
)
|
|
$
|
(9,002
|
)
|
Add: stock-based employee
compensation included in reported net loss, net of income tax
effect
|
|
|
173
|
|
|
|
638
|
|
Deduct: stock-based employee
compensation expense determined under fair-value-based method,
net of related tax effect
|
|
|
(186
|
)
|
|
|
(539
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(4,566
|
)
|
|
$
|
(8,903
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share,
as reported
|
|
$
|
(2.58
|
)
|
|
$
|
(2.57
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share,
pro forma
|
|
$
|
(2.58
|
)
|
|
$
|
(2.54
|
)
|
|
|
|
|
|
|
|
|
|
The per share weighted-average fair value of stock options
granted during 2004 and 2005 was $3.00 and $3.63 respectively on
the dates of grant using the Black-Scholes option-pricing model.
The following weighted-average assumptions were used:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
2005
|
|
|
Expected volatility
|
|
60%
|
|
|
60
|
%
|
Risk free interest rate
|
|
3.17% to 3.94%
|
|
|
4.39
|
%
|
Stock option life (in years)
|
|
5
|
|
|
5
|
|
Expected dividend yield
|
|
0%
|
|
|
0
|
%
|
60
ELECTRO-OPTICAL
SCIENCES, INC.
Notes to
Financial Statements (Continued)
Effective January 1, 2006, the Company began recording
compensation expense associated with stock options and other
forms of equity compensation in accordance with Statement of
Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment (SFAS 123R), as interpreted by
SEC Staff Accounting Bulletin No. 107. The Company
adopted the modified prospective transition method provided for
under SFAS 123R, and consequently, has not retroactively
adjusted results from prior periods. Under this transition
method, compensation cost associated with stock options
recognized in 2006 includes: (1) amortization related to
the remaining unvested portion of all stock option awards
granted prior to January 1, 2006 over the requisite service
period based on the grant-date fair value estimated in
accordance with the original provisions of SFAS 123,
Accounting for Stock-Based Compensation; and
(2) amortization related to all stock option awards granted
on or subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the
provisions of SFAS 123R. A compensation charge is recorded
when it is probable that performance conditions will be
satisfied. The probability of vesting is updated at each
reporting period and compensation is adjusted via a cumulative
catch-up
adjustment or prospectively depending upon the nature of the
change.
As a result of the adoption of SFAS 123R, incremental
compensation expense for the year ended December 31, 2006
amounted to $812. At December 31, 2006 total unrecognized
compensation cost amounted to approximately $2,475, with respect
to 1,101,128 unvested options which will be amortized over the
ensuing four years.
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 Companys financial instruments consist principally of
cash and cash equivalents, marketable securities, accounts
receivable 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
61
ELECTRO-OPTICAL
SCIENCES, INC.
Notes to
Financial Statements (Continued)
stock equivalents excluded consist of stock options, warrants
and redeemable convertible preferred stock which are summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Common stock options
|
|
|
965,203
|
|
|
|
1,115,415
|
|
|
|
1,689,412
|
|
Warrants
|
|
|
2,758,923
|
|
|
|
298,280
|
|
|
|
626,845
|
|
Redeemable convertible preferred
stock
|
|
|
3,398,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,122,231
|
|
|
|
1,413,695
|
|
|
|
2,316,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
Companys balance sheet. For each of the three years 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 the respective year ends.
Recent
Accounting Developments
In September 2006, the Financial Accounting Standards Board
( FASB) issued SFAS No. 157, Fair
Value Measurements. This statement defines fair value,
establishes a framework for measuring fair value and expands
disclosures about fair value measurements. This statement is
effective for financial statements issued for fiscal years
beginning after November 15, 2007; however, earlier
application is encouraged. The Company does not expect the
adoption of SFAS 157 will have a material impact on its
financial statements.
In July 2006, FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48), which prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company does not expect the adoption
of FIN 48 to have a material impact on its financial
reporting and is currently evaluating the impact, if any, the
adoption of FIN 48 will have on the Companys
disclosure requirements.
In February 2006, the FASB issued SFAS Statement
No. 155, Accounting for Certain Hybrid Financial
Instruments-an amendment of Statements No. 133 and
140 (FAS 155). FAS 155 is effective for fiscal
years that begin on or after October 1, 2006 and permits
companies the option to use a fair value measurement for certain
hybrid financial instruments that contain an embedded derivative
that would otherwise require bifurcation under FAS 133. The
Company does not expect the adoption of FAS 155 to have a
material impact on its financial statements.
On December 16, 2004, the FASB issued Statement
No. 123 (revised 2004), Share-Based Payment
(SFAS 123R). This Statement requires that the cost
resulting from all share-based payment transactions be
recognized in the financial statements and establishes fair
value as the measurement objective in accounting for all
share-based payment arrangements. The Company adopted
SFAS 123R as of the beginning of the first quarter of 2006
and began expensing the cost of equity instruments awarded as
part of the employee stock incentive plans over the requisite
service period related to such awards. The Company has elected
to implement this new standard under the modified prospective
application. Under the modified prospective application, the
Company has expensed the cost of new or modified awards over the
requisite service period and the cost of previously granted
unvested awards for the requisite service period remaining after
62
ELECTRO-OPTICAL
SCIENCES, INC.
Notes to
Financial Statements (Continued)
December 31, 2005. The Companys financial statements
for periods prior to the effective date of the statement have
not been restated. The impact of this statement on the
Companys financial position or its results of operations
depends upon various factors including its future compensation
strategy. The Company expects that the effect of applying this
statement on its results of operations as it relates to existing
option plans will continue to have a material effect on its
financial statements.
|
|
2.
|
Marketable
Securities:
|
Prior to December 31, 2005, all marketable securities
held-to-maturity
were redeemed or liquidated at their approximate carrying
values. The Company realized a loss of $3 on the proceeds from
the sale of $6,628 of
held-to-maturity
securities during the year ended December 31, 2005. All
marketable securities purchased during 2006 consisted of
available-for-sale
securities which were held to redemption prior to
December 31, 2006 and experienced no gain or loss.
|
|
3.
|
Property
and Equipment:
|
Property and equipment, at cost, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
2005
|
|
|
2006
|
|
|
Useful Life
|
|
|
Leasehold improvements
|
|
$
|
86
|
|
|
$
|
154
|
|
|
|
Lease Term
|
|
Laboratory and research equipment
|
|
|
131
|
|
|
|
497
|
|
|
|
5 years
|
|
Office furniture and equipment
|
|
|
190
|
|
|
|
265
|
|
|
|
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
407
|
|
|
|
916
|
|
|
|
|
|
Accumulated depreciation and
amortization
|
|
|
232
|
|
|
|
352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
175
|
|
|
$
|
564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense amounted to approximately $18, $34 and $120
for the years ended December 31, 2004, 2005 and 2006,
respectively.
Patents are shown in the accompanying balance sheets net of
accumulated amortization of $115 and $134 at December 31,
2005 and 2006, 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, $15 and $18 for the years ended
December 31, 2004, 2005 and 2006, respectively.
63
ELECTRO-OPTICAL
SCIENCES, INC.
Notes to
Financial Statements (Continued)
|
|
5.
|
Commitments
and Contingencies:
|
The Company is obligated under two non cancelable operating
leases for office space expiring June 2009 and November 2010.
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,
|
|
|
|
|
2007
|
|
$
|
249
|
|
2008
|
|
|
253
|
|
2009
|
|
|
188
|
|
2010
|
|
|
105
|
|
|
|
|
|
|
|
|
$
|
795
|
|
|
|
|
|
|
Rent expense charged to operations amounted to approximately
$110, $202 and $255 for the years ended December 31, 2004,
2005 and 2006, respectively.
In August 2006, the Company engaged Zeiss to build the lenses
and assemblies, as well as provide certain technical consulting,
for the
MelaFind®
units which will be used in the Companys pivotal clinical
trials and we expect this work to continue into 2007. Total
payments to Zeiss amounted to $120 in 2006.
On March 24, 2006, the Company entered into an amended and
restated consulting agreement with Gerald Wagner, Ph.D.,
then Acting Chief Operating Officer and a member of the
Companys Board of Directors. The effective date of this
amended and restated agreement is April 1, 2006. Under this
amended consulting agreement, the Company agreed to pay
Dr. Wagner an annual amount of $180 payable monthly over
the term of the agreement. The agreement provided for
termination at the option of Dr. Wagner or the Company, at
any time by providing thirty days prior written notice or
immediately upon the mutual agreement of the Company and
Dr. Wagner. (See Note 9) With the start of our
pivotal clinical trial in January 2007, Dr. Wagner has
transitioned out of his role as our acting Chief Operating
Officer and has entered into a second amended consulting
contract with the Company. Under the terms of the amended
contract, Dr. Wagner will be 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 (see Note 9).
In January 2006, the Company entered into an agreement with
ASKION to produce and test commercial grade
MelaFind®
hand-held imaging device systems. Under the agreement, ASKION is
to produce up to 40
MelaFind®
imaging devices for the Company to be utilized in the
Companys pivotal trial which will be conducted at up to 20
clinical study sites in the United States. The Company is
required to make payments to ASKION upon delivery of the
MelaFind®
systems. We expect to maintain a relationship, which has evolved
as a
month-to-month
agreement, with ASKION and continue with development activities
throughout 2007.
During January 2004, the Company entered into an employment
agreement with its President and Chief Executive Officer
(Dr. Gulfo) through December 31, 2005, which provided
for a base salary of $175, stock options and performance
bonuses. The agreement provides for automatic one year renewal
terms and renewed automatically for 2007. Effective May 31,
2006, his salary was increased to $235, and he received a bonus
in the amount of $50.
Also during January 2004, the Company amended its employment
agreement with its former President and Chief Science and
Technology Officer. The agreement was originally entered into in
May 2003 with a three-year term. The amended agreement included
a salary of $175 and provided for stock options and performance
bonuses. As of May 31, 2005, a new consulting agreement was
entered into with this former employee, which superseded the
amended employment agreement (see Note 9).
64
ELECTRO-OPTICAL
SCIENCES, INC.
Notes to
Financial Statements (Continued)
The Company is not currently subject to any material legal
proceedings, nor to managements knowledge is any material
legal proceeding threatened against the Company.
|
|
6.
|
Employee
Benefit Plan:
|
The Company has a defined contribution plan under
Section 401(k) of the Internal Revenue Code 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 employees salary. Company contributions to
this plan amounted to approximately $25, $35 and $42 for the
years ended December 31, 2004, 2005 and 2006, respectively.
During June 2003, the Company completed a private placement
whereby investors agreed to acquire up to 1,400,000 preferred
Series C units. Each unit consisted of one share of
Series C redeemable convertible preferred stock and one
warrant to purchase one share of the Companys common stock
at an exercise price of $13.00 per share. Of the
1,400,000 units, the first tranche of 663,717 units
was sold for an aggregate of $1,500. Costs associated with this
issuance amounted to $252 and the accretion to redemption value
for the unamortized balance of $227 for the years ended
December 31, 2004 and 2005 is presented in the recorded
accretion table below. The value of the warrants was
de minimus. For the year ended December 31, 2003 $25
was accreted.
In connection with the private placement, 150,000 shares of
the Companys common stock were sold to the promoters, who
are related parties, at $.46 per share. Notes of $69 were
received for this purchase and were shown as a reduction in
stockholders equity (deficiency) at December 31,
2004. The notes bore interest at 3.06% and were due
June 20, 2008. Interest income amounted to approximately $2
and $1 for the years ended December 31, 2004 and 2005,
respectively. During June 2005, the notes were retired by a cash
payment and consulting services rendered.
During 2004, the second tranche of the Series C private
placement was completed and an additional 486,725 of
Series C units were issued for total proceeds of $1,100. An
additional 427 units were distributed in order to comply
with minimum ownership provisions. The value of the distribution
was de minimus. In order to induce the investment in this
second tranche, the Company issued additional warrants to
purchase 60,840 shares of Series C redeemable
convertible preferred stock at a price of $4.52 per share.
These warrants were valued at $179.
During May 2004, the Company obtained bridge loans in the amount
of $1,000 from related parties. The loans bore interest at 1.57%
and were payable on December 31, 2004. During October 2004
these loans were converted into 442,469 preferred Series C
units at a price of $2.26 per unit. The warrants were
valued at $327. The Company also sold approximately
125,000 shares of the Companys common stock to the
lenders at $.46 per share for $57. The Company ascribed a
value to the common stock and recorded an imputed interest
charge of $80.
During October 2004, the Company completed a second private
placement and sold 3,578,081 preferred Series C units for
total proceeds of approximately $8,100 at a price of
$2.26 per unit. The warrants were valued at $2,643. Costs
of the Series C private placement amounted to approximately
$448 and the accretion to redemption value for this amount for
the years ended December 31, 2004 and 2005 is presented in
the recorded accretion table below.
During 2004, the Company issued 4,507,702 shares of
Series C redeemable convertible preferred stock with
2,253,792 warrants to purchase common stock at $13.00 per
share and 60,840 Series C redeemable convertible preferred
stock warrants at an exercise price of $4.52 per share for
gross proceeds of $10,186. The net proceeds of $9,738 were
allocated to redeemable convertible preferred stock and
additional paid-in capital
65
ELECTRO-OPTICAL
SCIENCES, INC.
Notes to
Financial Statements (Continued)
based on the relative fair values of the preferred stock and
warrants. The fair value of the warrants was determined using
the Black-Scholes method. The assumptions used to value these
warrants are described in Note 8. The Company recorded a
beneficial conversion feature of $1,465.
The following table summarizes the recorded accretion to
redemption value for the Series C for the years ended
December 31, 2004 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion
|
|
|
Year Ended
|
|
|
|
Total
|
|
|
Period in
|
|
|
December 31,
|
|
|
|
Amount
|
|
|
Months
|
|
|
2004
|
|
|
2005
|
|
|
2003 Series C financing costs
|
|
$
|
252
|
|
|
|
60
|
|
|
$
|
51
|
|
|
$
|
42
|
|
2004 Series C financing costs
|
|
|
448
|
|
|
|
44
|
|
|
|
20
|
|
|
|
102
|
|
Value of Series C warrants
|
|
|
2,643
|
|
|
|
44
|
|
|
|
120
|
|
|
|
601
|
|
Beneficial Conversion
Series C
|
|
|
1,465
|
|
|
|
44
|
|
|
|
67
|
|
|
|
333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,808
|
|
|
|
|
|
|
$
|
258
|
|
|
$
|
1,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During October 2005, the Company completed an initial public
offering. The Company issued 4,000,000 shares of the
Companys common stock on October 28, 2005 and another
262,300 shares on November 15, 2005, both issuances at
$5.00 per share. After deducting underwriting discounts and
expenses and offering-related expenses, the initial public
offering resulted in net proceeds to the Company of
approximately $17,687. In connection with the initial public
offering, all of the outstanding shares of the Companys
redeemable convertible preferred stock were automatically
converted into 3,398,105 shares of the Companys
common stock and all related deemed but unpaid dividends on the
redeemable convertible preferred stock were forfeited. In
addition, the Company issued 1,305,321 shares of the
Companys common stock in exchange for 2,610,643
outstanding warrants (a conversion ratio of one share of common
stock for two warrants). The Company recorded this transaction
as an exchange of equity instruments at fair value which had no
net effect on stockholders equity. The fair value of the
warrants was determined using the Black-Scholes method and
assumed the following: common stock value of $10.00 per
share, remaining warrant life of 6.25 years, risk-free
interest rate of 3.2%, and an expected volatility of 60%. A
summary of the terms of the initial public offering can be found
in the Companys registration statement on
Form S-1,
as amended (File
No. 33-125517),
which was declared effective by the Securities and Exchange
Commission on October 28, 2005.
In December 2005, the Company issued a restricted common stock
award of 11,488 shares to an employee at the closing market
price of the Companys stock on the date of grant, and
compensation expense in the amount of $63 for this award 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 Companys common stock and
warrants to purchase up to 346,857 shares of the
Companys 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 Companys common stock and a
warrant to purchase 0.15 of a share of the Companys common
stock. The warrants are five-year warrants with an exercise
price of $6.70 per share. Pursuant to the registration
rights agreement, the Company has filed a resale registration
statement covering the shares, including the shares issuable
upon the exercise of the warrants with the SEC. In the event
that the Company fails to meet certain deadlines, as defined,
the holders would be entitled to certain monetary damages.
However, in no event would the Company be 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 obtain an effective registration
statement or failing to maintain its
66
ELECTRO-OPTICAL
SCIENCES, INC.
Notes to
Financial Statements (Continued)
effectiveness. The Companys resale registration statement
on
Form S-3
was declared effective by the Securities and Exchange Commission
(file #333-139056)
February 12, 2007.
As of December 31, 2006, the Company had
10,000,000 shares of $10 par value preferred stock
authorized and no shares issued and outstanding.
|
|
8.
|
Stock-Based
Compensation and Warrants:
|
Stock
Options
The Company has three stock option plans (the Plans)
which allow the board of directors to grant incentives to
employees, directors, consultants and collaborating scientists
in the form of incentive stock options, nonqualified stock
options and restricted stock awards.
Stock awards under the Companys most recent plan have been
granted at prices which are equal to the market value of the
stock on the date of the grant. Options granted under this plan,
the 2005 Stock Incentive Plan (2005 Plan), are
generally time-based or performance-based options and vesting
varies accordingly. Options under this plan expire five years
from the date of grant. Since the Company adopted the 2005 Plan,
awards are generally not issued under the Companys
previous stock option plans.
The compensation expense recognized in the Statement of
Operations during 2006 for stock options and restricted stock
awards amounted to $1,036. Cash received from options exercised
under all share-based payment arrangements for the year ended
December 31, 2006 was $88.
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 Twelve
|
|
|
|
Months Ended
|
|
|
|
December 31, 2006
|
|
|
Expected life
|
|
|
5 years
|
|
Expected volatility
|
|
|
60
|
%
|
Risk-free interest rate
|
|
|
5.04
|
%
|
Dividend yield
|
|
|
0
|
%
|
The expected life of the options is based on the observed and
expected time to post-vesting, forfeiture and exercise. Groups
of employees that have similar historical exercise behavior are
considered separately for valuation purposes. The expected
volatility is based on implied volatility from other
publicly-traded options and other factors. The risk-free
interest rate is based on the continuous rates provided by the
U.S. Treasury with a term equal to the expected life of the
option. The expected dividend yield is zero as the Company has
never paid dividends and does not currently anticipate paying
any in the foreseeable future.
At December 31, 2006, stock options to purchase
1,689,412 shares of common stock at exercise prices ranging
from $.40 to $7.75 per share are outstanding and are
exercisable at various dates through 2013. The total number of
options exercisable at December 31, 2004, 2005, and 2006
was 428,739, 572,607, and 588,284, respectively, with weighted
average exercise prices of $.89, $1.07, and $2.47 respectively.
There are 668,260 shares available for future grant under
the Companys stock option plans as of December 31,
2006. Pursuant to the 2005 Plan, on January 1, 2007 the
authorized number of options to purchase shares of common stock
automatically increased by an amount equal to 3% of the
outstanding shares of common stock.
67
ELECTRO-OPTICAL
SCIENCES, INC.
Notes to
Financial Statements (Continued)
The status of the Companys 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, 2004
|
|
|
290,678
|
|
|
$
|
1.12
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
679,525
|
|
|
|
.46
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(5,000
|
)
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2004
|
|
|
965,203
|
|
|
|
.66
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
212,780
|
|
|
|
2.43
|
|
|
|
|
|
|
$
|
248
|
|
Exercised
|
|
|
(50,881
|
)
|
|
|
.76
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(11,687
|
)
|
|
|
4.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2005
|
|
|
1,115,415
|
|
|
|
.95
|
|
|
|
4.4
|
|
|
|
4,935
|
|
Granted
|
|
|
748,822
|
|
|
|
5.56
|
|
|
|
4.1
|
|
|
|
1,259
|
|
Exercised
|
|
|
(135,450
|
)
|
|
|
.65
|
|
|
|
N/A
|
|
|
|
730
|
|
Forfeited or expired
|
|
|
(39,375
|
)
|
|
|
6.76
|
|
|
|
N/A
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
1,689,412
|
|
|
|
2.88
|
|
|
|
4.2
|
|
|
|
7,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at
December 31, 2006
|
|
|
588,284
|
|
|
|
2.47
|
|
|
|
4.2
|
|
|
|
2,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2006 the weighted
average fair value of each option granted, estimated as of the
grant date using the Black-Scholes option valuation model, was
$4.15 per share. The total intrinsic value of options
exercised during the year ended December 31, 2006 was $730.
The requisite service periods for options granted during 2006
for employees and consultants were five years.
The following table summarizes information about stock options
outstanding at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$ .01-$ .46
|
|
|
851,508
|
|
|
|
2.6 years
|
|
|
$
|
.46
|
|
|
|
208,753
|
|
|
$
|
.46
|
|
$ .47-$1.00
|
|
|
182,904
|
|
|
|
5.2 years
|
|
|
|
1.00
|
|
|
|
181,031
|
|
|
|
1.00
|
|
$1.01-$7.75
|
|
|
655,000
|
|
|
|
4.4 years
|
|
|
|
6.55
|
|
|
|
198,500
|
|
|
|
5.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ .01-$7.75
|
|
|
1,689,412
|
|
|
|
4.2 years
|
|
|
$
|
2.88
|
|
|
|
588,284
|
|
|
$
|
2.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, of the total 1,689,412 options
outstanding, 1,101,128 have not vested. Of this total nonvested
amount, 980,855 will vest upon the attainment of certain
milestones and the balance will vest over the requisite service
period. As of December 31, 2006, there was $2,475 of total
unrecognized compensation cost related to nonvested options.
During 2004, the Company issued options to acquire
27,750 shares of the Companys common stock at an
exercise price of $.46 per share, valued at approximately
$73, to outside consultants. The fair value for these options
granted to outside consultants was calculated using the
Black-Scholes method. For the options granted during 2004 to
outside consultants, the assumptions used in the Black-Scholes
model were: common
68
ELECTRO-OPTICAL
SCIENCES, INC.
Notes to
Financial Statements (Continued)
stock valued ranged from $0.46 to $4.00, expected life of
5 years, risk-free interest rate ranged from 3.39% to
3.94%, and an expected volatility of 60%.
During December 2004, the Company issued 262,500 options to
certain employees and Board members. The value of 62,500 of
these options resulted in a charge to operations in the amount
of $150 and $71 during the years ended December 31, 2004
and 2005, respectively. The share based compensation expense for
these option grants represented the amount by which the fair
value per common share of $4.00 exceeded the exercise price per
share of $0.46. The remaining 200,000 aforementioned stock
options issued vest upon the attainment of certain milestones.
As contemplated by the employment agreement with Dr. Gulfo,
its President and Chief Executive Officer, the Company has
granted to Dr. Gulfo three stock options. The first two
stock option grants for a total of 81,753 shares of the
Companys common stock have fully vested. The number of
shares of the Companys common stock subject to the third
stock option can only be calculated at the time of FDA approval
of
MelaFind®
(the FDA Approval Option Grant). The number of
shares under this option is equal to that number of shares of
the Companys common stock equal to four percent of the
Companys fully diluted capital stock at the time of FDA
approval of
MelaFind®
minus the 81,753 options granted to Dr. Gulfo. At
December 31, 2006, total unvested, unearned options under
Dr. Gulfos third option amounted to 542,755 (based on
the fully diluted capital stock of the Company as of
December 31, 2006 and assuming that FDA approval of
MelaFind®
had been granted as of December 31, 2006).
In May 2005, the Company amended option agreements for
125,000 shares in the aggregate of three key employees to
immediately vest upon the completion of a successful initial
public offering. In the fourth quarter 2005, the Company
recorded a charge to operations in the amount of $544 with
respect to these options based upon the initial public offering
price of $5.00 per share.
Pursuant to a consulting agreement, upon the closing of the
initial public offering, the Company issued an option to
purchase 50,000 shares of common stock with an exercise
price equal to the initial public offering price of $5.00 to a
member of the Companys Board of Directors. The fair value
of these options was based on the Black-Scholes option-pricing
model using the following assumptions: 60% volatility, expected
dividend yield of 0%, an expected life of 5 years and
risk-free interest rate of 4.375%, and the Company recognized
compensation expense of $138 during the year ended
December 31, 2005, as these options vested immediately.
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 Companys common stock which
vested immediately and 50,000 shares which vested upon
commencement of the pivotal trial for MelaFind. The exercise
price for these stock option grants was the closing price per
share of the Companys common stock on the option grant
date which was $5.87 per share. The fair value of these
option grants was determined using the Black-Scholes option
valuation model on the date of the grant. Compensation expense
of $162 was charged to operations during the first quarter 2006.
At December 31, 2006, total unrecognized compensation
amounted to $219.
On April 24, 2006, the Company entered into an agreement
with Richard I. Steinhart to serve as the Companys
Vice-President of Finance and Chief Financial Officer. In
accordance with that agreement Mr. Steinhart received a
five year option under the Companys 2005 Plan to purchase
up to 100,000 shares of the Companys common stock at
$5.82 per share.
On May 29, 2006, the Company entered into an agreement with
Christiano S. Butler to serve as the Companys
Vice-President of Technical Support. In accordance with that
agreement, Mr. Butler received a five year option under the
Companys 2005 Plan to purchase up to 40,000 shares of
the Companys common stock at $7.60.
69
ELECTRO-OPTICAL
SCIENCES, INC.
Notes to
Financial Statements (Continued)
At the Companys May 22, 2006 Board of Directors
meeting, the Board approved managements recommendation to
award stock options to a group of 27 employees. A total of
315,500 options to acquire shares of the Companys common
stock (excluding Mr. Steinharts and
Mr. Butlers options) were awarded to Company
employees under the Companys 2005 Plan.
On December 1, 2006, 30,000 options priced at $7.75 were
granted to the members of the Companys Board of Directors.
These five-year options to purchase the Companys common
stock vest one year from the date of grant.
Warrants
Warrants outstanding at December 31, 2006 include a
5-year
warrant to purchase 75,000 shares of common stock at an
exercise price of $7.00 per share issued to one of the
Companys consultants in 2004 and a
7-year
warrant to purchase 54,988 shares of Series C
preferred stock at an exercise price of $4.52 per share
issued in connection with the sale of Series C redeemable
convertible preferred stock. Upon completion of the
Companys initial public offering on October 28, 2005,
the Series C preferred stock warrants became exercisable
for an aggregate of 54,988 shares of the Companys
common stock.
In connection with the Companys initial public offering in
October 2005, the Company issued 150,000 warrants to the
underwriters to purchase shares of the Companys common
stock at $6.25 per share. These
5-year
warrants became exercisable on October 28, 2006.
Additionally, as previously discussed, in connection with the
Companys private placement in November 2006, the Company
issued warrants to purchase up to 346,857 shares of the
Companys common stock. The warrants are exercisable for
five years with a price of $6.70 per share.
|
|
9.
|
Related
Party Consulting 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 Companys Board
of Directors, for consulting services related to the FDA
approval of
MelaFind®
and the Companys business and financial strategy. Under
this agreement, Mr. Castleman receives compensation for
each month of services rendered. The Company made payments
pursuant to this consulting agreement of $22 in 2004, $26 in
2005 and $29 in 2006. This consulting agreement is terminable by
either party on 30 days written notice.
Consulting
Agreement with Marek Elbaum, Ph.D.
Pursuant to a consulting agreement effective as of May 31,
2005, the Company retained Marek Elbaum, Ph.D., the
Companys founder and former President and Chief Science
and Technology Officer, as the Companys Chief Scientist.
In consideration of the services to be provided, the Company has
agreed to pay Dr. Elbaum a monthly fee of $15. The term of
this agreement extends for a period of two years and is
automatically renewable for an additional one year period. In
the event of a non-renewal, and in the event that
Dr. Elbaums services terminate as a result of his
death or disability, the Company will pay to Dr. Elbaum a
termination fee of $100.
Consulting
Agreement with Robert Friedman, M.D.
Effective as of June 1, 2005, the Company retained the
services of Robert Friedman, M.D., for an initial term of
one year as a consultant, medical advisor to our Board of
Directors, and in connection with the
70
ELECTRO-OPTICAL
SCIENCES, INC.
Notes to
Financial Statements (Continued)
clinical testing of
MelaFind®.
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 $30 in 2005 and $42 in 2006.
Consulting
Agreement with Gerald Wagner, Ph.D. (see also Note 5
and Note 8)
On March 24, 2006, the Company entered into an amended and
restated consulting agreement with Gerald Wagner, Ph.D., a
member of the Companys Board of Directors and its former
acting Chief Operating Officer. The effective date of this
amended and restated agreement was April 1, 2006. Under
this amended consulting agreement, the Company agreed to pay
Dr. Wagner the annual amount of $180,000 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 Companys
common stock which vested upon commencement of the pivotal trial
for
Melafind®
in January 2007. Also, on March 24, 2006, Dr. Wagner
received another stock option grant of 49,500 shares of the
Companys common stock which vested immediately.
With the start of our pivotal clinical trial in January 2007,
Dr. Wagner has transitioned out of his role as our acting
Chief Operating Officer and has signed an amendment to his
amended and restated consulting contract with the Company. Under
the terms of the amended contract, Dr. Wagner will be 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.
|
|
10.
|
Sale and
Licensing of Discontinued Operations:
|
Effective April 5, 2005, the Company decided to discontinue
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 for the current and prior periods have been excluded
from continuing operations and have been reported as
discontinued operations. The assets and liabilities of the
business have been classified as held for sale in the
accompanying balance sheet. 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
a second payment of $500 is due no later than July 1, 2007.
Beginning in 2008 or earlier, 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. The Company has 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. Royalties, if any, will be recorded when
earned.
Losses attributable to
DIFOTI®
operations discontinued in April 2005 amounted to $426 and $442
for the years ended December 31, 2004 and 2005 respectively.
At December 31, 2005, assets held for sale consisted of
DIFOTI®
related inventories and patents.
Because the Company incurred net losses, it did not provide for
income taxes for the years ended December 31, 2004, 2005
and 2006.
71
ELECTRO-OPTICAL
SCIENCES, INC.
Notes to
Financial Statements (Continued)
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,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Computed expected tax benefit
|
|
$
|
(1,085
|
)
|
|
$
|
(2,136
|
)
|
|
$
|
(3,866
|
)
|
State tax benefit, net of federal
effect
|
|
|
(192
|
)
|
|
|
(377
|
)
|
|
|
(682
|
)
|
Increase in the valuation allowance
|
|
|
1,277
|
|
|
|
2,513
|
|
|
|
4,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2005 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
5,599
|
|
|
$
|
6,621
|
|
Capitalized research and
developmental costs
|
|
|
1,452
|
|
|
|
4,252
|
|
Non-cash compensation
|
|
|
505
|
|
|
|
919
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
7,556
|
|
|
|
11,792
|
|
Less valuation allowance
|
|
|
(7,556
|
)
|
|
|
(11,792
|
)
|
|
|
|
|
|
|
|
|
|
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 Companys 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, 2005 and
2006. The Companys valuation allowance against its
deferred tax assets increased by $1,440, $2,691, and $4,236 for
the years ended December 31, 2004, 2005 and 2006
respectively.
The Company has net operating loss carryforwards of
approximately $16.6 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 Companys 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 hamper the
Companys ability to utilize its net operating losses in
the future.
72
ELECTRO-OPTICAL
SCIENCES, INC.
Notes to
Financial Statements (Continued)
|
|
12.
|
Quarterly
Operating Results (Unaudited)
|
The following is a summary of operating results by quarter for
the years ended December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(2,889
|
)
|
|
$
|
(2,928
|
)
|
|
$
|
(2,425
|
)
|
|
$
|
(3,130
|
)
|
Gain on sale of discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
781
|
|
Net Loss
|
|
$
|
(2,889
|
)
|
|
$
|
(2,928
|
)
|
|
$
|
(2,425
|
)
|
|
$
|
(2,349
|
)
|
Net loss attributable to common
stockholders
|
|
$
|
(2,889
|
)
|
|
$
|
(2,928
|
)
|
|
$
|
(2,425
|
)
|
|
$
|
(2,349
|
)
|
Basic and diluted net loss per
share of common stock
|
|
$
|
(0.27
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.18
|
)
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(1,114
|
)
|
|
$
|
(1,365
|
)
|
|
$
|
(1,371
|
)
|
|
$
|
(2,434
|
)
|
Loss from discontinued operations
|
|
$
|
(129
|
)
|
|
$
|
(201
|
)
|
|
$
|
(72
|
)
|
|
$
|
(40
|
)
|
Net Loss
|
|
$
|
(1,243
|
)
|
|
$
|
(1,566
|
)
|
|
$
|
(1,443
|
)
|
|
$
|
(2,474
|
)
|
Net loss attributable to
common stockholders
|
|
$
|
(1,928
|
)
|
|
$
|
(2,247
|
)
|
|
$
|
(2,125
|
)
|
|
$
|
(2,702
|
)
|
Basic and diluted net loss per
share of common stock
|
|
$
|
(1.07
|
)
|
|
$
|
(1.24
|
)
|
|
$
|
(1.14
|
)
|
|
$
|
(0.32
|
)
|
73
|
|
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
Based on their evaluation as of December 31, 2006, our
Chief Executive Officer and Principal Financial Officer have
concluded that our disclosure controls and procedures (as
defined in
Rules 13a-15(e)
and
15d-15(e) of
the Securities Exchange Act of 1934, as amended) were
sufficiently effective to ensure that the information required
to be disclosed by us in this annual report on
Form 10-K
was recorded, processed, summarized and reported within the time
periods specified in the SECs rules and
Form 10-K.
Change
in internal control over financial reporting
There were no changes in our internal control over financial
reporting during the quarter ended December 31, 2006 that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Limitations
on the effectiveness of controls
Our disclosure controls and procedures are designed to provide
reasonable, not absolute, assurance that the objectives of our
disclosure control system are met. Because of inherent
limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues, if any,
within a company have been detected.
|
|
Item 9B.
|
Other
Information.
|
Not applicable.
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
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, 2006, 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
|
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
|
The information required by this item will be set forth in the
Proxy Statement and is incorporated in this report by reference.
74
|
|
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.
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.
75
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
Investors 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)
|
|
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 1, 2005 between the Registrant and Gerald Wagner
Consulting, LLC.(1)
|
|
10
|
.12*
|
|
Consulting Agreement dated as of
June 20, 2003 between the Registrant and Breaux Castleman,
as amended.(1)
|
|
10
|
.13
|
|
Consulting Agreement dated as of
June 1, 2005 between the Registrant and Robert Friedman,
M.D.(1)
|
|
10
|
.14
|
|
Task Order Agreement dated as of
July 13, 2005 between the Registrant and Battelle Memorial
Institute.(2)
|
|
10
|
.15
|
|
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
|
.16
|
|
Production Agreement between the
Registrant and ASKION GmbH dated as of January 25, 2006.(4)
|
|
10
|
.17*
|
|
Amended and Restated Consulting
Agreement effective as of April 1, 2006 between the
Registrant and Gerald Wagner Consulting LLC.(11)
|
|
10
|
.18*
|
|
Resignation Agreement, dated
April 24, 2006, between the Registrant and Karen
Krumeich.(5)
|
|
10
|
.19*
|
|
Employment Offer Letter, dated
April 24, 2006, between the Registrant and Richard I.
Steinhart.(5)
|
|
10
|
.20*
|
|
Employment Offer Letter, dated
May 30, 2006, between the Registrant and Christiano S.
Butler.(6)
|
|
10
|
.21
|
|
Securities Purchase Agreement
among the Registrant and the purchasers identified on the
signature pages thereto, dated as of October 31, 2006.(8)
|
|
10
|
.22
|
|
Securities Purchase Agreement
among the Registrant and the purchasers identified on the
signature pages thereto, dated as of October 31, 2006.(8)
|
|
10
|
.23
|
|
Registration Rights Agreement
among the Registrant and the purchasers identified on the
signature pages thereto, dated as of October 31, 2006.(8)
|
|
10
|
.24
|
|
Placement Agency Agreement by and
between the Registrant and Jefferies & Company, Inc.,
dated as of October 31, 2006.(7)
|
|
10
|
.25
|
|
Licensing Agreement between the
Registrant and KaVo Dental GmbH, dated as of December 5,
2006.(9)
|
|
10
|
.26*
|
|
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)
|
76
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Title
|
|
|
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#
|
|
Certification of Chief Executive
Officer and Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
|
|
|
|
* |
|
Indicates management compensatory plan, contract or arrangement |
|
(1) |
|
Incorporated by reference to the Registrants Registration
Statement on
Form S-1,
as amended (File
No. 333-125517),
as filed on July 15, 2005. |
|
(2) |
|
Incorporated by reference to the Registrants Registration
Statement on
Form S-1,
as amended (File
No. 333-125517),
as filed on August 8, 2005. |
|
(3) |
|
Incorporated by reference to the Registrants Registration
Statement on
Form S-1,
as amended (File
No. 333-125517),
as filed on June 3, 2005. |
|
(4) |
|
Incorporated by reference to the Registrants Current
Report on
Form 8-K
filed on January 31, 2006. |
|
(5) |
|
Incorporated by reference to the Registrants Current
Report on
Form 8-K
filed on April 27, 2006. |
|
(6) |
|
Incorporated by reference to the Registrants Current
Report on
Form 8-K
filed on June 2, 2006. |
|
(7) |
|
Incorporated by reference to the Registrants Current
Report on
Form 8-K
filed on November 1, 2006. |
|
(8) |
|
Incorporated by reference to the Registrants Current
Report on
Form 8-K
filed on November 8, 2006. |
|
(9) |
|
Incorporated by reference to the Registrants Current
Report on
Form 8-K
filed on December 11, 2006. |
|
(10) |
|
Incorporated by reference to the Registrants Current
Report on
Form 8-K
filed on January 31, 2007. |
|
(11) |
|
Incorporated by reference to the Registrants Annual Report
on
Form 10-K
filed on March 29, 2006. |
|
# |
|
Filed herewith. |
77
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.
Joseph V. Gulfo
President and Chief Executive Officer
(Principal Executive Officer)
Dated: March 15, 2007
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.
Joseph
V. Gulfo, M.D.
|
|
Director, President and
Chief Executive Officer
(Principal Executive Officer)
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Richard
I. Steinhart
Richard
I. Steinhart
|
|
Vice President, Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Breaux
Castleman
Breaux
Castleman
|
|
Chairman of the Board of Directors
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Sidney
Braginsky
Sidney
Braginsky
|
|
Director
|
|
March 15, 2007
|
|
|
|
|
|
/s/ George
C. Chryssis
George
C. Chryssis
|
|
Director
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Martin
D. Cleary
Martin
D. Cleary
|
|
Director
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Dan
W. Lufkin
Dan
W. Lufkin
|
|
Director
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Gerald
Wagner, PhD.
Gerald
Wagner, PhD.
|
|
Director
|
|
March 15, 2007
|
78
EX-21.1
Exhibit 21.1
SUBSIDIARIES
OF THE REGISTRANT
The Registrant does not have any subsidiaries.
79
EX-23.1
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. on
Form S-3
(File
No. 333-139056)
and
Form S-8
(File
No. 333-136183)
of our report dated March 9, 2007, on our audits of the
financial statements of Electro-Optical Sciences, Inc. as of
December 31, 2005 and 2006 and for each of the years in the
three-year period then ended, which report is included in the
Annual Report of Electro-Optical Sciences, Inc. on
Form 10-K
for the year ended December 31, 2006.
/s/ Eisner LLP
New York, New York
March 15, 2007
80
EX-31.1
Exhibit 31.1
CERTIFICATION
BY THE CHIEF EXECUTIVE OFFICER PURSUANT TO
RULE 13A-14(A)
UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Joseph V. Gulfo, certify that:
1. I have reviewed this report on
Form 10-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 registrants other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act
Rules 13a-15(e)
and
15d-15(e)
)and internal control over financial reporting (as defined in
Exchange Act
Rules 13a-15(f)
and
15d-15(f))
for the registrant and have:
a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared;
b) designed such internal control over financial reporting,
or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of the financial statements for external purposes in
accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrants
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) disclosed in this report any change in the
registrants internal control over financial reporting that
occurred during the registrants most recent fiscal quarter
that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over
financial reporting; and
5. The registrants other certifying officer and I
have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrants
auditors and the audit committee of the registrants board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in
the design or operations of internal control over financial
reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and
report financial information; and
b) any fraud whether or not material, that involves
management or other employees who have a significant role in the
registrants internal control over financial reporting.
/s/ Joseph
V. Gulfo, M.D.
Joseph V. Gulfo, M.D.
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 15, 2007
81
EX-31.2
Exhibit 31.2
CERTIFICATION
BY THE CHIEF FINANCIAL OFFICER PURSUANT TO
RULE 13A-14(A)
UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Richard I. Steinhart, certify that:
1. I have reviewed this report on
Form 10-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 registrants other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act
Rules 13a-15(e)
and
15d-15(e)
)and internal control over financial reporting (as defined in
Exchange Act
Rules 13a-15(f)
and
15d-15(f))
for the registrant and have:
a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared;
b) designed such internal control over financial reporting,
or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of the financial statements for external purposes in
accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrants
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) disclosed in this report any change in the
registrants internal control over financial reporting that
occurred during the registrants most recent fiscal quarter
that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over
financial reporting; and
5. The registrants other certifying officer and I
have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrants
auditors and the audit committee of the registrants board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in
the design or operations of internal control over financial
reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and
report financial information; and
b) any fraud whether or not material, that involves
management or other employees who have a significant role in the
registrants internal control over financial reporting.
Richard I. Steinhart
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
Date: March 15, 2007
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EX-32.1
Exhibit 32.1
CERTIFICATIONS
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Each of the undersigned officers of Electro-Optical Sciences,
Inc.(the Company) hereby certifies to his knowledge
that the Companys annual report on
Form 10-K
for the period ended December 31, 2006 (the
Report), as filed with the Securities and Exchange
Commission on the date hereof, fully complies with the
requirements of Section 13(a) or 15(d), as applicable, of
the Securities Exchange Act of 1934, as amended, and that the
information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
Joseph V. Gulfo
President and Chief Executive Officer
(Principal Executive Officer)
March 15, 2007
Richard I. Steinhart
Vice President & Chief Financial Officer
(Principal Accounting and Financial Officer)
March 15, 2007
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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. |
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