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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 |
For the fiscal year ended December 31, 2009
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-51481
ELECTRO-OPTICAL SCIENCES, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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13-3986004 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
50 South Buckhout Street, Suite 1
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 |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Security Act. Yes o No þ
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. o
Indicate by check
mark whether the registrant has submitted electronically and posted on its corporate Web site,
if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of
large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o |
Accelerated filer þ |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
The aggregate market value of the 16,604,674 shares of common stock held by
non-affiliates of the registrant as of June 30, 2009 was $129,350,410 based on the last reported
sale price of $7.79 per share on the Nasdaq Capital Market on June 30, 2009. (For this computation,
the registrant excluded the market value of all the shares of its common stock held by Directors
and Officers of the registrant holding approximately 6.1% of the registrants outstanding shares;
such exclusion shall not be deemed to constitute an admission that any such person is an
affiliate of the registrant. There were no shareholders holding at least 10% of the Companys
common stock). The number of shares outstanding of the registrants common stock as of February 27,
2010 was 23,000,784 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement for the 2010 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.
2009 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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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.
Item 1. Business
Overview
We are a medical device company focused on the design, development and commercialization
of a non-invasive, point-of-care (in the doctors office) instrument to assist in the early diagnosis of melanoma. Our
flagship product, MelaFind®, features a hand-held imaging device that emits
light of multiple wavelengths to capture images of suspicious pigmented skin lesions and extract
data. The data are then analyzed utilizing image processing classification algorithms, trained on
our proprietary database of melanomas and benign lesions, to provide information to assist in the
management of the patient, including information useful in the decision of whether to biopsy the
lesion.
The components of the MelaFind® system include:
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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; and |
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our lesion classifiers, which are sophisticated mathematical algorithms that extract lesion feature
information and classify lesions. |
The MelaFind®
pre-market approval (PMA) application
was filed on June 9, 2009 and is under review at the
U.S. Food and Drug Administration (FDA). The pivotal trial conducted to establish the safety and effectiveness of
MelaFind® was performed under the auspices of a Protocol Agreement. In
addition, the MelaFind® PMA has been granted Expedited Review by the FDA. The
Company is actively working with the FDA during the review process. We have been informed that
MelaFind® will be reviewed by an FDA Advisory Panel, however, the date for
the Panel meeting has not yet been established. Upon obtaining approval from the FDA, we plan to
launch MelaFind® commercially in the United States.
To date, we have not generated any revenues from MelaFind®.
Cancers of the skin have a higher incidence than all other cancers combined, and the rates are
rising dramatically. It is estimated that there were over 120,000 new cases of melanoma in 2009,
and a similar number of new cases is projected for 2010. This has been seen to result in melanoma
being the cause of one death every hour of every day of the year in the U.S. Melanoma is
responsible for approximately 75% of skin cancer fatalities and is the deadliest of all skin
cancers as there is currently no cure for advanced stage melanoma. However, early detection of
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.
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Because early detection is critical to survival, the American Cancer Society recommends
that all Americans over the age of 20 undergo complete skin examinations during their periodic
health check-ups. Individuals with dysplastic nevi, a type of pigmented skin lesion associated
with an increased risk of melanoma, 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, as high as 40 to 1 for dermatologists and as high as 80 to 1 for primary
care physicians.
MelaFind® is designed to assist in the evaluation of pigmented skin lesions,
including atypical moles, that have one or more clinical or historical characteristics of melanoma,
before a final decision to biopsy has been rendered. MelaFind® acquires and displays
multi-spectral (from blue to near infrared) digital images of pigmented skin lesions and uses
automated image analysis and statistical pattern recognition to help identify lesions that should
be considered for biopsy to rule out melanoma.
To date, MelaFind® has been developed, trained and tested on a proprietary database
of over 10,000 skin lesions from over 7,000 patients at over 40 clinics. The Company believes this
is the largest such database in the US and a substantial barrier to competition. The landmark
MelaFind® pivotal trial, the largest prospective clinical study ever conducted in
melanoma detection, achieved sensitivity of greater than 95% (95% lower confidence bound) and
specificity statistically significantly higher than that of study clinicians.
We believe that with the assistance provided by MelaFind®,
physicians could diagnose more melanomas at the earliest, most curable stages with fewer false
positive biopsies, which would reduce both treatment costs and the number of unnecessary biopsies,
and improve quality of life.
Our objective is for MelaFind® to become an integral part of the
standard of care in melanoma detection.
All of our historical revenues have come from activities and products that have since been
discontinued, including our DIFOTI® product, a non-invasive imaging device
for the detection of dental cavities we discontinued in 2005, in order to focus our resources on
the development and commercialization of MelaFind®. In 2006 we completed an
exclusive sale and licensing agreement with KaVo Dental GmbH (KaVo), a leading dental equipment
manufacturer and subsidiary of Danaher Corporation, to further develop and commercialize
DIFOTI®. In accordance with the terms of the agreement, KaVo paid us an
up-front sum and made a second payment to us in July 2007. KaVo will pay us an annual royalty based
on the number of DIFOTI® related systems sold per calendar year following
commercial re-launch. The Company began earning the contractual minimum royalty in the second half
of 2008 and earned the minimum royalty in 2009 as KaVo had not re-launched the product as of
December 31, 2009.
The Market Opportunity
Cancer of the skin (non-melanoma and melanoma skin cancers combined) is the most common
of all cancers, with over 1.3 million projected cases annually, and is estimated to account for
more than 50% of all cancers. It is estimated that there were over 120,000 new cases of melanoma in
2009, and a similar number of new cases is projected for 2010. There are three significant forms
of skin cancer: basal cell, accounting for approximately 75% of skin cancer cases; squamous cell,
totaling approximately 20% of skin cancer cases; and melanoma, which accounts for an estimated 4%
of skin cancer cases, but is responsible for approximately 75% of all deaths from skin cancer. The
American Cancer Society projects over 10,000 deaths annually from skin cancer. Since 1973, the
mortality rate for melanoma has increased by 50%. Because approximately 62% of melanomas and 45% of
melanoma deaths occur prior to age 65, melanoma places significant burdens on the healthcare system
well beyond Medicare.
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Melanoma, if left untreated, can be fatal. If diagnosed and removed early in its
evolution, when confined to the outermost skin layer and deemed to be in situ, it is virtually
100% curable. Invasive melanomas that are thin and extend into the uppermost regions of the second
skin layer still have excellent cure rates (greater than 90%). However, once the cancer advances
into the deeper layers of skin, the risk of metastasis (spreading to other parts of the body)
increases. Metastases can occur when the tumor enters into lymphatic channels and newly formed
blood vessels, potentially resulting in significant morbidity (illness) and mortality (death). Once
the cancer has advanced and metastasized to other parts of the body, it is difficult to treat. At
this advanced stage, the five year survival rate is reported to be only 10%. Moreover, survival
prospects for those with advanced melanoma have not improved over the past three decades.
Melanoma is currently the fastest growing in incidents of cancer and the subject of
significant attention in the medical community. A recent publication from the National Cancer
Institute (report published in the July 10, 2008 online edition of the Journal of Investigative
Dermatology) indicates that the annual incidence of melanoma among young adult Caucasian women rose
50% between 1980 and 2004. Melanoma is the most common cancer in women aged 25 to 29 and the
number-one cancer killer of women ages 30 to 35. Melanoma is virtually 100% curable if caught
early, though no cure is currently available for advanced-stage 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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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 ten US patents. We will
continue to refine and optimize this technology in order to
position MelaFind® as the leading system for
assisting in the detection of melanoma. |
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Pursue the timely FDA approval of MelaFind®.
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®. The FDA has
informed us that the MelaFind® premarket
approval, or PMA, application would receive expedited review.
Expedited review means that the FDA will conduct a team review and
prioritize the PMA application. Upon obtaining PMA approval from
the FDA, we plan to commercially launch
MelaFind® in the United States. |
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Commercialize MelaFind® using multiple sales
and marketing strategies. Our internal sales and marketing effort
will commence following PMA approval and it will focus initially on
high volume, integrated dermatology practices and skin cancer
specialists, in key regions of the US. To enter the larger general
dermatology and primary care markets in the US, and for
international markets, we may establish partnerships with
pharmaceutical and/or diagnostic/device companies which have an
established presence in these markets. We intend to commence sales
of MelaFind® in selected US markets
immediately upon receiving PMA approval. The plan is for
physicians to offer examinations with
MelaFind® to their patients on a self-pay per
patient basis creating a recurring revenue stream. Once there is
sufficient evidence to support favorable coding and coverage
decisions and to obtain appropriate payment levels, we may pursue
national coverage decisions from the Centers for Medicare and
Medicaid Services (CMS) and private payers for third-party
reimbursement. |
Additionally, our strategy may include the potential acquisition of complementary
products and technologies in the dermatological arena.
Limitations of Current Melanoma Diagnosis
Melanomas are mainly diagnosed by dermatologists and 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 below the skin
surface.
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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.
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. This
results in a ratio of benign lesions biopsied to confirmed melanomas of up to 80 to 1.
MelaFind® Product Description
MelaFind® is a non-invasive system for assisting in the early
detection of melanoma. The MelaFind® system in commercial use will produce a
diagnostic report at the-point-of-care. The system is comprised of a hand-held imaging device, our
proprietary database of pigmented skin lesions and our lesion classifiers.
MelaFind® employs multiple wavelengths of light to obtain data from images of
suspicious lesions; and then the data are analyzed against our proprietary database of melanomas
and benign lesions using our sophisticated algorithms. The diagnostic report will contain objective
information about the lesion that may not be otherwise available, including information useful in
the decision to biopsy the lesion. The key components of the MelaFind® system
are listed below:
A hand-held imaging device, which is comprised of several components:
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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. |
Our proprietary database of pigmented skin lesions, which includes in vivo
MelaFind® images and corresponding histological results of over 10,000
biopsied skin lesions from over 7,000 patients, which we believe to be the largest such database in
the US and a substantial barrier to competition.
Our lesion classifiers are sophisticated mathematical algorithms. The brain of the
MelaFind® system, the Lesion Classifier, distinguishes melanoma from
non-melanoma using the lesion features extracted and measured by the hand-held imaging device. The
Lesion Classifiers are developed from our proprietary database of pigmented skin lesions and employ
sophisticated mathematical algorithms. The mathematical formulas and algorithms used by the Lesion
Classifiers are devised and optimized through the process of classifier training using lesions
from our proprietary database. Lesion Classifier development and training is an iterative process
involving: (1) selection of the lesion features that provide for optimal lesion discrimination; (2)
optimization of the mathematical formulas to differentiate benign lesions from melanoma; and (3)
expansion of the size and diversity of our proprietary lesion database. The performance of the
Lesion Classifiers is directly related to the size of the database used in classifier development,
as well as the degree to which the training database is representative of the lesions that will be
evaluated by MelaFind® in commercial use.
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.
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History of MelaFind®
MelaFind® Pivotal Clinical Trial History
In 2004, we entered into a binding Protocol Agreement with the FDA for our pivotal clinical
trial. A pivotal clinical trial is a blinded clinical study that is used by the FDA as the basis
for determining the effectiveness of a device in a PMA application. The Protocol Agreement
specified the inclusion criteria (description of patients and lesions eligible for the trial),
sample size, endpoints, and performance criteria necessary to establish the safety and
effectiveness of MelaFind®. The Protocol Agreement requires that the study
include at least 1,200 pigmented skin lesions and at least 93 eligible melanomas for analysis.
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.
The clinical studies of MelaFind® are considered by the FDA as NSR
studies. Consequently, the trials were conducted under the auspices of an abbreviated IDE. Clinical
trials must further comply with the 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. Although
we believe our clinical trial satisfies the FDA Protocol Agreement, they may ultimately be
determined to be inadequate to support approval of a PMA application, or 510(k) clearance.
In February 2009, the Company announced that a third party, independent bio-statistician had
provided positive top line results from the MelaFind® pivotal clinical trial.
This blinded study was conducted at seven centers across the U.S. and included 1,831 pigmented skin
lesions from 1,383 patients. Prior to the start of the study, the Company and the FDA entered into
a binding Protocol Agreement to stipulate the sensitivity and specificity endpoints that should be
used to determine the safety and effectiveness of MelaFind®. MelaFind®
detected 112 of 114 (98% measured sensitivity; lower confidence bound of 95%) melanomas that were
eligible and evaluable for primary sensitivity endpoint analysis, and 125 of 127 (98% measured
sensitivity; lower confidence bound greater than 95%) melanomas overall. Importantly,
MelaFind® detected 172/175 melanomas and borderline lesions (98% sensitivity; lower
confidence bound greater than 95%). The Protocol Agreement calls for sensitivity endpoints of
greater than 95% lower confidence bound (a lower confidence bound of greater than 95% indicates
that if the study were repeated, there would be less than a 5% chance that the sensitivity would be
below 95%). MelaFind®s specificity (9.5%), the ability to accurately rule out disease,
was significantly superior to that of the study dermatologists (3.7%), who are skin cancer experts
(p-value less than 0.02). The Protocol Agreement calls for MelaFind® to be more specific
than the study physicians at a p-value of less than 0.05 (a p-value of less than 0.05 indicates a
less than 5% probability that the observed difference was due to chance).
In order to generate a comparison with dermatologists ability to accurately detect melanoma,
the Company conducted a corollary pilot reader study with a different group of 39 dermatologists.
Using images and clinical histories of 23 randomly-selected melanomas from the
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pivotal study, this
group of dermatologists, on average, missed (i.e. would not have elected to biopsy) approximately 20%
of the melanomas, whereas the MelaFind® detected 22 of the 23 melanomas (biopsy
sensitivity of 96%).
We filed our PMA application, which includes the final study reports, to the FDA on June
9, 2009. The FDA has informed us that the MelaFind® premarket approval, or
PMA, application would receive expedited review. Expedited review means that the FDA will conduct a
team review and prioritize the PMA application. The FDA has also indicated to us that
MelaFind® will be the subject of a Panel Meeting, which will occur during the
review cycle.
Although we believe our clinical trial provides favorable data to support our PMA application,
upon evaluation the FDA may conclude differently. Delays in receipt of or failure to receive FDA
approval, the withdrawal of previously received approvals, or failure to comply with existing or
future regulatory requirements would have a material adverse effect on our business, financial
condition and results of operations. Even if granted, the approvals may include significant
limitations on the intended use and indications for use for which our products may be marketed.
Hardware and Software History
ASKION GmbH (ASKION), located in Germany, which specializes in precision optics, has
become an integral member of our MelaFind® development team and we expect to
continue to work with ASKION for the foreseeable future. ASKION produced the
MelaFind® hand-held imaging devices used in our pivotal clinical trials and
is currently building additional units and performing other additional developmental activities on
our behalf.
Through ASKION, the Company uses Carl Zeiss Jena GmbH (Zeiss) to build the lenses and lens
assemblies that are being used in MelaFind® system. In addition,
Zeiss provides the Company with certain technical consulting expertise for production scale-up of
the MelaFind® systems.
In developing the MelaFind® system, we have developed and tested several
generations of hand-held imaging devices. Commercial-grade systems were used in our pivotal
clinical trial. MelaFind® has been developed, trained and tested on over
10,000 skin lesions from over 7,000 patients at over 40 clinical sites.
The Company has obtained Underwriters Laboratories (UL) certification and Certification
Bodies Scheme (CB) test certification for MelaFind®. For
commercialization outside the US, approvals from appropriate regulatory bodies within other
countries will be required. The CB test certification is an international system of acceptance for
test reports and facilitates the process of obtaining product certification in many other countries
We intend to seek Conformite Europeenne (CE) mark approval following further interaction with
the FDA in the review and approval of MelaFind®.
MelaFind® Sales and Marketing
We plan to offer MelaFind® as a point-of-care service. This approach is
intended to provide us with recurring revenue corresponding to the number of patients examined and
to provide the physician with access to our technology without a significant capital investment.
Our sales and marketing strategy is to establish a regionally focused sales, marketing, and
distribution effort in the U.S. We plan to concentrate our commercialization efforts initially on
high volume, integrated dermatology practices and skin cancer experts in key regions. For
expansion to the general dermatology and primary care markets, and for international markets, we
may establish partnerships to accelerate the product introduction and to maximize the breadth of
the commercial opportunity. While we are exploring potential partnership opportunities we have not
yet established any such arrangements.
In addition, we believe that MelaFind® has significant potential among
primary care physicians, who are at the front line of early detection. Currently, primary care
physicians do not receive specialized training in the evaluation of pigmented skin lesions. We
believe that MelaFind® can greatly assist primary care physicians in their
evaluation.
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The MelaFind® Value Proposition for the Healthcare System
Upon FDA approval, we plan to offer MelaFind® on a self-pay
(non-reimbursed) basis. Based on market research with physicians and patients, we believe that a
self-pay model could support significant utilization of MelaFind®, especially in the
dermatologists offices.
Following the self-pay introduction of MelaFind®, we will look to build
a sufficient body of medical evidence to support favorable coding and coverage decisions at
appropriate payment levels by third-party payers. This strategy is consistent with the approach
that has been used to support positive coverage decisions by CMS and private payers for other
products. The value drivers include: (1) the diagnosis of melanoma at the early curable stages, as
opposed to advanced stages, allowing for both a greater opportunity to cure and a reduction in
treatment costs, and (2) reduced number of referrals for evaluation and biopsy of benign pigmented
skin lesions. We believe that the use of MelaFind® could result in
substantial savings to the US healthcare system.
Our Reimbursement Strategy
We may pursue Current Procedural Terminology (CPT) code and private insurance coverage, as
appropriate, following initial commercialization efforts, which will be undertaken on a self-pay
basis. We are aware of no CPT code that is specifically applicable to the use of
MelaFind®. We have engaged the services of expert consultants with extensive
experience in the CPT and coverage and payment decision processes to assist us in our strategy.
In the US, healthcare providers that utilize medical systems such as
MelaFind®, generally rely on third-party payers, including Medicare,
Medicaid, private health insurance carriers, and managed care organizations, to reimburse part, but
not necessarily all, of the costs and fees associated with the procedures performed using these
devices. Public and professional concern about the cost of medical care and new technologies has
evoked a variety of remedies. Third-party payers are increasingly challenging the pricing of
medical products and procedures. Guidelines have been established that recognize the need for
clinical strategies to assess the cost-effectiveness of new diagnostic tools or procedures
(Evidence-Based Medicine), in the hope of reducing the variations in diagnostic and treatment
protocols and reducing healthcare expenditures. Insurers are also attempting to curb
overutilization by applying a rational analysis of the costs versus benefits of new technologies.
It is critical to build a sufficient body of evidence to support favorable coding and coverage
decisions and to secure appropriate levels of payment from third-party payers. Assuming FDA
approval of MelaFind®, we are considering submitting an application for a new
CPT code to the American Medical Association (AMA) CPT Editorial Panel pursuant to the
establishment of significant clinical evidence to support favorable coding and coverage decisions.
If the CPT Editorial Panel concurs that a new CPT code is needed and appropriate, and we are able
to demonstrate that MelaFind® is reasonable and necessary for the Medicare
population, we anticipate that the new code would be referred to the 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 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 pursuant to the establishment of
significant clinical evidence to support favorable coding and coverage decisions and secure
appropriate payment levels. We believe it is likely that initially 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.
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One of the keys to securing reimbursement is the desire of physicians to use a new technology
in order to enhance their diagnostic acumen and improve the standard of care. Likewise, we believe
that once patients become aware of the availability of MelaFind®, they may
request that their physicians utilize MelaFind®. We believe that
MelaFind® will represent an improvement in the standard of care for the
detection of melanoma. As such, we anticipate that its adoption by physicians and reimbursement by
payers will be facilitated by medical and scientific evidence published in peer-reviewed journals
and presentations at scientific and medical meetings including the American Academy of Dermatology
annual and regional meetings. We plan to execute a publication strategy and to provide information
for continuing medical education efforts in order to communicate the potential of
MelaFind® to improve patient care. We also plan to sponsor clinical trials
following PMA approval in order to evaluate MelaFind® in additional settings.
We anticipate that the results of these studies will also be published in peer-reviewed journals
and presented at scientific and medical meetings. We anticipate that these studies will help to
demonstrate the potential of MelaFind® to improve patient care.
We recognize that a favorable reimbursement environment will have a significant impact on
MelaFind®s adoption and commercial success. Even if a procedure is eligible
for reimbursement, the level of reimbursement may not be adequate. In addition, third-party payers
may deny reimbursement if they determine that the device used in the treatment was not
cost-effective or was used for a non-approved indication. We have anticipated this need and we plan
to employ an active strategy to obtain medical coverage, identify appropriate coding and establish
adequate payment.
Competition
We are not aware of any direct competitors to MelaFind®. A number
of systems for visualization and assessment of pigmented skin lesions are in use or in development.
These include clinical (naked eye) examination, whole body mole mapping systems, dermoscopes (also
known as dermatoscopes), digital dermoscopes, spectrophotometric intercutaneous analysis
(analysis of skin structures through measurement of how they absorb light of different
wavelengths), confocal microscopy, and spectrophotometric (color) analysis. These systems rely on
physician experience and expertise in recognizing patterns that are associated with melanoma and
non-melanoma in order to render an interpretation and diagnosis.
The current primary method for detecting melanoma relies on physicians to interpret
whether a pigmented skin lesion is suspicious for melanoma (thereby requiring biopsy) based on
their ability to recognize patterns using clinical examination. Physicians use the ABCDE
criteria: Asymmetry, Border irregularity, Color variation, Diameter greater than 6 mm, and
Evolving-change in ABCD, in their assessment. Whole body mole mapping consists of periodic
photography of patients, typically those at high risk for developing melanoma. The pictures are
reviewed clinically. This service is provided at some diagnostic imaging centers and dermatology
offices. DigitalDerm, Inc. offers a computerized system for acquisition, storage, and review of the
pictures.
Dermoscopy, or epiluminescence microscopy, allows for non-invasive visualization of colors and
microstructures of the epidermis, the dermal-epidermal junction, and the papillary dermis not
visible to the naked eye. Manufacturers of dermoscopes include (but are not limited to) Welch
Allyn, Inc. (US), Heine Optotechnik (Germany), and 3Gen, LLC (US). Digital dermoscopes allow for
dermoscopic images to be visualized on a computer screen at larger magnification. In addition,
images may be stored and compared to images taken previously. Manufacturers of digital dermoscopes
include (but are not limited to) Derma Medical Systems, Inc. (Austria), ZN, High Medical Systems
S.P.A., Vision Technologies AG (Germany), Polartechnics, Ltd. (Australia), and Biomips Engineering
(Italy).
Dermoscopy is a tool used by approximately 25% of dermatologists in the U.S. 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.
9
Spectrophotometric intercutaneous analysis is a technique of visualizing collagen, blood,
and pigment. Astron Clinica (UK) manufactures a device utilizing this technique. During 2009,
Astron Clinica declared bankruptcy under UK law and was purchased by Biocompatibles International.
Confocal microscopy is an experimental approach for non-invasive visualization of skin structures
at the cellular level; such a device utilizing this technique is in development by Lucid, Inc.
(U.S.). Other imaging modalities, including molecular imaging in which tagged antibodies search
for cancer cell antigens, and molecular and genetic screening tests. Molecular-based approaches
are being investigated; Dermtech is exploring Messenger RNA analysis of surface cells for example.
In addition, Sci Base AB is developing electrical impedance technology for melanoma detection.
A spectrophotometer (an instrument for measuring absorption of light of different wavelengths)
is offered by Medical High Technologies S.P.A. (Switzerland). In contrast to
MelaFind®, the product does not perform automatic quality control of images
and has an external light source. We believe that the reported sensitivity of 80.4% would not gain
market approval. Further, we are not aware of comparative data on physicians performance in
corresponding data sets. The system does not have PMA approval, nor are we aware of efforts
directed to obtain PMA approval of the product.
Several additional approaches to detecting Melanoma have been identified. Balter Medical
(Norway) uses Optical Transfer Diagnosis to identify Melanomas. The technology measures how much
light is absorbed in healthy versus diseased tissue to determine whether cancer is present.
Raytheon Corporation, partnered with Arizona Cancer Center, utilizes satellite-based remote imaging
technology in detecting skin changes that could indicate the presence of cancer. Vanderbilt
University has introduced technology called Confocal Raman Micro-Spectroscopy which uses a
reflective laser to produce a molecular fingerprint of the underlying tissue to indicate the
presence or absence of disease. All of these technologies are at very early stages of development.
In November 2009, researchers at Ben Gurion University in Israel announced a new device that
detects cancerous skin tumors not visible to the naked eye. The Optical Spectro-Polarimetric
Imaging (OSPI) instrument reportedly diagnosed 73 types of lesions, some of them cancerous, in
initial testing.
In January 2010, Michelson Diagnostics Ltd, a UK based developer and manufacturer of Optical
Coherence Tomography (OCT) products, announced that the FDA has awarded it 510(k) clearance for its
VivoSighttm OCT scanning product.
VivoSighttm is a Multi-Beam OCT system indicated for use in the
two-dimensional, cross-sectional, real-time imaging of external tissues of the human body.
VivoSighttm is a Fourier-Domain OCT scanner that provides
sub-surface images of tissue at far higher resolution than is possible with existing technologies
such as ultrasound, CT or MRI, in 2D and 3D and in real time, using an easy-to-use lightweight
hand-held probe. VivoSighttm has no analysis capabilities and is
simply a visual device.
The broad market for precision optical imaging devices used for medical diagnosis is intensely
competitive, subject to rapid change and significantly affected by new product introductions and
other market activities of industry participants. If our products are approved for marketing, we
will potentially be subject to competition from major optical imaging companies, such as Raytheon
Corporation, General Electric Co., Siemens AG, Bayer AG, Olympus Corporation, Carl Zeiss AG
Deutschland and others, each of which manufactures and markets precision optical imaging products
for the medical market and could decide to develop or acquire a product to compete with
MelaFind®.
Manufacturing
We are currently focusing our manufacturing efforts on building
MelaFind® systems and in optimizing efficiency and larger-scale
manufacturing. For this crucial phase leading up to MelaFind® launch, we have
contracted with ASKION in Germany, which specializes in precision optics. Through ASKION, we have
contracted with Zeiss, an international optics house, to supply lenses and lens assemblies to be
used in the hand-held imaging devices.
In addition, we are utilizing Nexcore Technology Inc., an FDA GMP compliant and certified
ISO13485 and ISO9001 original equipment manufacturer of medical devices in New Jersey, to provide
the assembled MelaFind® carts and tested MelaFind®
systems incorporating the hand-held devices along with the processing computer, software and
operator controls.
10
Research and Development Efforts
We continue to develop refinements and improvements to the hardware and software,
including lesion classification algorithms, some of which are likely to require approval of a PMA
supplement. Our R&D plan also includes further improvements such as faster and easier software
downloads for future versions.
We have performed feasibility studies of a MelaFind® software add-on
feature called MelaMetertm, an enhancement to
MelaFind® that provides information regarding the depth of penetration of a
pigmented skin lesion. This information may be useful to physicians in determining the necessary
depth and breadth of a biopsy of a pigmented skin lesion. Initial clinical studies of
MelaMetertm demonstrate the ability of
MelaMetertm to non-invasively estimate the Breslow thickness (the
thickness of a cutaneous malignant melanoma measured from the epidermis to the deepest malignant
cells present) comparably to histological examination of excised lesions. We plan to continue the
development of MelaMetertm and seek its FDA approval after receiving
PMA approval of MelaFind®.
We further intend to explore and evaluate the potential use of our light based computer vision
platform in other applications, including the non-invasive detection of basal cell carcinoma, the
most common skin cancer, as well as squamous cell carcinoma of the skin. New hardware systems for
the imaging of blood and blood vessel patterns are needed since the majority of these cancers are
not pigmented and, accordingly, the MelaFind® system as currently developed
is not appropriate for these uses. However, we believe many software programs and algorithms used
in the MelaFind® system will be applicable with some modification.
The Company spent approximately $7,678,000, $12,508,000 and $10,950,000 in each of 2007, 2008
and 2009, respectively, on research and development.
Intellectual Property
Our
policy is to protect our intellectual property by obtaining U.S. and foreign patents to
protect technology, inventions and improvements important to the development of our business. To
date we have been awarded 17 U.S. patents with numerous foreign
counterparts, of which ten U.S. patents
and two Australian patents relate to various aspects of melanoma detection. Two of the U.S. patents
are design patents, while all others are utility patents. In addition, not counting two
provisional applications, we have eight additional U.S. utility patents currently pending, all of
which relate to MelaFind®, and have thirteen pending foreign patent
applications, of which twelve relate to MelaFind®, with four of the latter
currently in the European regional phase, and three pending in each of Australia, Canada and Japan.
Also, we have obtained non-exclusive licenses from several of our suppliers for critical components
of MelaFind®. We have not granted any significant licenses with respect to
our intellectual property other than licenses granted in connection with the discontinuation of
DIFOTI® operations (see Discontinued Business and Note 10 to our Financial
Statements.)
We cannot be certain that our patents will not be challenged or circumvented by competitors.
Whether a patent is infringed and is valid, or whether a patent application should be granted, are
all complex matters of science and law, and therefore we cannot be certain that, if challenged, our
patents, patent applications and/or other intellectual property rights would be upheld. If one or
more of those patents, patent applications or other intellectual property rights are invalidated,
rejected or found unenforceable, that could reduce or eliminate any competitive advantage.
We also rely on trade secrets and technical know-how in the manufacture and marketing of
MelaFind®. We require our employees, consultants and contractors to execute
confidentiality agreements with respect to our proprietary information.
11
We
have obtained U.S. trademark registrations for the following marks:
MelaFind® (both word and word-plus-design marks) and
DIFOTI® (word mark), 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. The same word mark has
been registered similarly in the European Union, Australia and New Zealand. In Europe, the same
mark is also registered in International Classes 016 (for printed reports) and 044 (as a service
mark). 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. Several additional trademark and service mark registrations are
pending, in International Classes 009, 010, 016 and 044.
We
also have registered the internet domain names:
www.melasciences.com,
www.eo-sciences.com, www.eosciences.com,
www.melafind.com, www.mela.us.com,
www.melafind.info, www.melafind.net,
www.melafind.org, www.melafind.us,
melafinder.com, www.melainc.com, www.difoti.com and
www.skinsurf.com.
The
following table lists our U.S. patents and patent applications relating to melanoma
detection:
|
|
US Patents Relating to Melanoma Detection |
|
|
|
|
|
|
|
|
|
Patent # |
|
|
Title |
|
Issued |
|
Expiration |
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems and Methods for the
Multispectral Imaging and |
|
|
|
|
|
6,081,612 |
|
|
Characterization of Skin Tissue |
|
06/27/00 |
|
02/27/18 |
|
|
|
|
Systems and Methods for the
Multispectral Imaging and |
|
|
|
|
|
6,208,749 |
|
|
Characterization of Skin Tissue |
|
03/27/01 |
|
02/27/18 |
|
|
|
|
Multispectral Imaging and Characterization of Biological |
|
|
|
|
|
6,307,957 |
|
|
Tissue |
|
10/23/01 |
|
02/27/20 |
|
|
|
|
Apparatus for Uniform Illumination |
|
|
|
|
|
6,626,558 |
|
|
of an Object |
|
09/30/03 |
|
08/31/21 |
|
|
|
|
Method for Optimizing the Number
of Good Assemblies Manufacturable |
|
|
|
|
|
6,657,798 |
|
|
From a Number of Parts |
|
12/02/03 |
|
02/10/23 |
|
6,710,947 |
|
|
Method for Assembling Lens Elements |
|
03/23/04 |
|
02/27/23 |
|
|
|
|
Integrated
CMOS Imaging Array & Dark Current Monitor |
|
|
|
|
|
7,102,672 |
|
|
Method of Controlling Data |
|
09/05/06 |
|
01/10/24 |
|
7,127,094 |
|
|
Gathered at Remote Locations |
|
10/24/06 |
|
03/11/25 |
|
D xxx,xxxx |
|
|
Medical Cart |
|
TBD |
|
TBD |
|
D xxx,xxxx |
|
|
Table Structure of a Medical Cart |
|
TBD |
|
TBD |
Filed Non-Provisional US Patent Applications Relating to Melanoma Detection
|
|
|
|
|
Published Pat Appl Ser # |
|
Title |
|
Filed |
|
|
|
|
|
US2008/0031537A1
|
|
Reducing noise in Digital Images
|
|
08/09/06 |
US2008/0214907A1
|
|
Quantitative Analysis of Skin Characteristics
|
|
03/02/07 |
US2008/0312952A1
|
|
Regulating Use of a Device to Perform a
Procedure on a Subject
|
|
06/12/07 |
US2009/0154781A1
|
|
Characterizing a Texture of an Image
|
|
12/14/07 |
US2009/0060304A1
|
|
Dermatology Information
|
|
09/04/08 |
WO2009/079367A1
|
|
Characterizing a Texture of an Image
(Continuation-in-Part)
|
|
12/12/08 |
Not yet published
|
|
Medical Cart
|
|
07/30/09 |
Not yet published
|
|
Storage Card
|
|
07/30/09 |
12
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 module.
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. Notices of Allowance were issued December 31, 2009 for the two design
patents (based on applications filed July 30, 2009) which describe novel design aspects of the
medical cart associated with MelaFind®.
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 seeks to protect devices and
methods for quantitative analysis of skin characteristics to identify lesions that require further
evaluation by physicians to rule out melanoma. Our June 12, 2007 patent filing relates to ways to
control use of our MelaFind® system, our December 14, 2007 filing, its
December 12, 2008 Continuation-in-Part application and the provisional application subsequently
filed on September 14, 2009, relates to a new method for characterizing the texture of an image.
Our September 4, 2008 patent filing concerns certain dermatology information associated with
MelaFind® and claims priority to a provisional application filed a year
earlier. The two utility patents filed on July 30, 2009 relate to various aspects of the medical
cart and the patient card used with MelaFind®, and supplement the two design
patents described above. The MelaFind® user interface
is described in a provisional patent application filed November 3, 2009.
We also have developed trade secret calibration methods, classifier programs, and search
engines. These programs have been developed over many years and incorporate decades of experience
in optical computer vision. In addition, our proprietary MelaFind® database
of over 10,000 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 proprietary 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 U.S. 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.
13
Unless an exemption applies, each medical device we wish to commercially distribute in the
U.S. will require either prior premarket notification, 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 pre-amendment Class III device in commercial distribution before
May 28, 1976, for which PMA applications have not been required. The FDA classifies
MelaFind® as a Class III device, requiring PMA approval.
A PMA application must be supported by valid scientific evidence, which typically
requires extensive data, including technical, pre-clinical, clinical, manufacturing and labeling
data, to demonstrate to the 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. The Companys PMA application has been submitted and found to be sufficiently complete
by the FDA. The FDA has begun 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 pre-approval inspections of the manufacturing facilities to ensure compliance with the
QSR, which requires manufacturers to follow design, testing, control, documentation and other
quality assurance procedures.
In October of 2004, we entered into a binding Protocol Agreement with the FDA, which is an
agreement for the conduct of the pivotal trial in order to establish the safety and effectiveness
of MelaFind®. In October 2006, we announced that the FDA had informed us
that when submitted, the MelaFind® PMA application would receive expedited
review. Expedited review means that upon filing our PMA , the FDA will conduct a team review and
prioritize the application. Upon obtaining premarket approval from the FDA, we plan to
commercially launch MelaFind® in the United States.
Notwithstanding the Protocol Agreement, the FDA can delay, limit or deny approval of a PMA
application for many reasons, including:
|
|
|
MelaFind® may not be safe or effective to the FDAs satisfaction; |
|
|
|
|
the data from our pre-clinical studies and clinical trials may be insufficient to support approval; |
|
|
|
|
the manufacturing process or facilities we use may not meet applicable requirements; and |
|
|
|
|
changes in FDA approval policies or adoption of new regulations may require additional data. |
If the FDA evaluations of both the PMA application and the manufacturing facilities are
favorable, the FDA will either issue an approval letter which indicates the PMA has been approved,
or an 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.
14
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.
The clinical studies of MelaFind® are considered by the FDA as NSR
studies. Consequently, the trials were conducted under the auspices of an abbreviated IDE. Clinical
trials must further comply with the 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. Although
we believe our clinical trial satisfies the FDA Protocol Agreement, they may ultimately be
determined to be inadequate to support approval of a PMA application, or 510(k) clearance.
Delays in receipt of or failure to receive FDA approval, the withdrawal of previously received
approvals, or failure to comply with existing or future regulatory requirements would have a
material adverse effect on our business, financial condition and results of operations. Even if
granted, the approvals may include significant limitations on the intended use and indications for
use for which our products may be marketed.
After a device is approved or cleared and placed in commercial distribution, numerous
regulatory requirements apply. These include:
|
|
|
establishment registration and device listing; |
|
|
|
|
QSR, which requires manufacturers to follow design,
testing, control, documentation and other quality assurance
procedures; |
|
|
|
|
labeling regulations, which prohibit the promotion of
products for unapproved or off-label uses and impose
other restrictions on labeling; |
|
|
|
|
medical device reporting regulations, which require that
manufacturers report to the FDA if a device may have caused
or contributed to a death or serious injury or
malfunctioned in a way that would likely cause or
contribute to a death or serious injury if it were to
recur; and |
15
|
|
|
corrections and removal reporting regulations, which require that manufacturers report
to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to
health posed by the device or to remedy a violation of the FD&C Act that may present a risk to
health. |
Also, the FDA may require us to conduct post-market studies or order us to establish and
maintain a system for tracking our products through the chain of distribution to the patient level.
The FDA enforces regulatory requirements by conducting periodic, unannounced inspections and market
surveillance. Inspections may include the manufacturing facilities of our subcontractors. Thus, we
must continue to spend time, money, and effort to maintain compliance.
Failure to comply with applicable regulatory requirements, including those applicable to
the conduct of our clinical trials, can result in enforcement action by the FDA, which may lead to
any of the following sanctions:
|
|
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warning letters; |
|
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|
|
fines and civil penalties; |
|
|
|
|
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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|
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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. |
Our contract manufacturers, specification developers, and some suppliers of components
are also required to manufacture our products in compliance with current Good Manufacturing
Practices (cGMP) requirements set forth in the QSR. The QSR requires a quality system for the
design, manufacture, packaging, labeling, storage, installation and servicing of marketed devices,
and includes extensive requirements with respect to quality management and organization, device
design, equipment, purchase and handling of components, production and process controls, packaging
and labeling controls, device evaluation, distribution, installation, complaint handling,
servicing, and record keeping. The FDA enforces the QSR through periodic unannounced inspections
that may include the manufacturing facilities of our subcontractors. We expect that our
subcontractors manufacturing facilities will be subject to domestic and international regulatory
inspection and review. If the FDA believes any of our contract manufacturers or regulated suppliers
are not in compliance with these requirements, it can shut down the manufacturing operations of our
contract manufacturers, require recall of our products, refuse to approve new marketing
applications, institute legal proceedings to detain or seize products, enjoin future violations, or
assess civil and criminal penalties against us or our officers or other employees. Any such action
by the FDA would have a material adverse effect on our business. We cannot assure you that we will
be able to comply with all applicable FDA regulations.
Non-FDA Government Regulation
The advertising of our MelaFind® product will be subject to both FDA and
Federal Trade Commission regulations. In addition, the sale and marketing of
MelaFind® will be subject to a complex system of federal and state laws and
regulations intended to deter, detect, and respond to fraud and abuse in the healthcare system.
These laws and regulations restrict and may prohibit pricing, discounting, commissions and other
commercial practices that may be typical outside of the healthcare business. In particular,
anti-kickback and self-referral laws and regulations will limit our flexibility in crafting
promotional programs and other financial arrangements in connection with the sale of our products
and
related services, especially with respect to physicians seeking reimbursement through Medicare
or Medicaid. These federal laws include, by way of example, the following:
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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 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 |
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the Civil Monetary Penalties Law, which authorizes the U.S. Department of Health and Human
Services (HHS) to impose civil penalties administratively for fraudulent or abusive acts. |
Sanctions for violating these federal laws include criminal and civil penalties that range
from punitive sanctions, damage assessments, money penalties, imprisonment, denial of Medicare and
Medicaid payments, or exclusion from the Medicare and Medicaid programs, or both. These laws also
impose an affirmative duty on those receiving Medicare or Medicaid funding to ensure that they do
not employ or contract with persons excluded from the Medicare and other government programs.
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. Federal and state legislation has 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
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permitting requirements or processes, hazardous or biological material storage or handling might require an unplanned capital investment or
relocation. Failure to comply with new or existing laws or regulations could harm our business,
financial condition and results of operations.
International Regulation
International sales of medical devices are subject to foreign government regulations, which
may vary substantially from country to country from having no regulations to having a premarket
notice or premarket acceptance. The time required to obtain approval in a foreign country may be
longer or shorter than that required for FDA approval, and the requirements may differ. There is a
trend towards harmonization of quality system standards among the
European Union, U.S., Canada and
certain other industrialized countries.
The European Union, which includes most of the major countries in Europe, has adopted numerous
directives and standards regulating the design, manufacture, clinical trials, labeling and adverse
event reporting for medical devices. Devices that comply with the requirements of a relevant
directive will be entitled to bear the CE conformity marking, indicating that the device conforms
to the essential requirements of the applicable directives and, accordingly, can be commercially
distributed throughout Europe. The method of assessing conformity varies depending on the class of
the product, but normally involves a combination of self-assessment by the manufacturer and a third
party assessment by a Notified Body. This third party assessment may consist of an audit of the
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 International Organization for Standardizations
(ISO) ISO 9000 series of standards for quality operations (an international standard for quality
management requirements maintained by 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 FDA approval prior to
commercialization in the U.S. The clinical studies of MelaFind® are considered
by the FDA as NSR. Consequently, the trials are conducted under the auspices of an abbreviated IDE.
We therefore only maintain limited domestic clinical trial liability insurance, as required by
certain clinical sites. We have placed clinical trial liability insurance in certain European
countries where required by statute or clinical site policy. Although we have general liability
insurance that we believe is appropriate, and anticipate obtaining adequate product liability
insurance before commercialization of MelaFind®, this insurance is and will
be subject to deductibles and coverage limitations. Our anticipated product liability insurance may
not be available to us in amounts and on acceptable terms, if at all, and, if available, the
coverages may not be adequate to protect us against any future product liability claims. If we are
unable to obtain insurance at an acceptable cost or on acceptable terms with adequate coverage or
otherwise protect against potential product liability claims, we will be exposed to significant
liabilities, which may harm our business.
Employees
As of December 31, 2009, we had 43 full-time and 5 part-time employees, of whom 24 were
engaged in research and development (including clinical and regulatory affairs), 7 in production
(including document control and quality assurance) and 17 in marketing, sales and administrative
activities. We believe that our relationship with our employees is good.
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Discontinued Business
In 2006 we completed an exclusive sale and licensing agreement with KaVo Dental GmbH (KaVo),
a leading dental equipment manufacturer and subsidiary of Danaher Corporation, to further develop
and commercialize DIFOTI®. In accordance with the terms of the agreement,
KaVo paid us an up-front sum and made a second payment to us in July 2007. KaVo will pay us an
annual royalty based on the number of DIFOTI® related systems sold per
calendar year following commercial re-launch. The Company began earning the contractual minimum
royalty in the second half of 2008 and earned the minimum royalty in 2009 as KaVo had not
re-launched the product as of year end.
Other
Since we believe it to be in the best interests of the Company to change its name to better
reflect the Companys focus on early melanoma detection, on February 24, 2010 we announced that the
Company will be doing business under the name MELA Sciences. Our Internet addresses are
www.melasciences.com and www.eosciences.com. Our annual report on Form 10-K, quarterly
reports on Forms 10-Q, current reports on Forms 8-K, and amendments to those reports are available,
without charge, on www.melasciences.com and www.eosciences.com as soon as
reasonably practical after they are filed electronically with the Securities and Exchange
Commission (SEC). Copies are also available, without charge, from MELA Sciences, 50 South
Buckhout Street, Suite 1, Irvington, New York, 10533, Attention: Secretary.
Item 1A. Risk Factors
You should carefully consider the following risk factors, as well as the other information
contained in this report. If any of the following risks actually occur, our business, financial
condition and results of operations would suffer. In that case, the trading price of our common
stock would likely decline.
Risks Relating to Our Business
We currently do not have, and may never develop, any commercialized products.
We currently do not have any commercialized products or any significant source of revenue. We
have invested substantially all of our time and resources over the last eight years in developing
MelaFind®. MelaFind® may require additional development
and clinical evaluation and it will require regulatory approval, significant marketing efforts and
substantial additional investment before it can provide us with any revenue. On June 9, 2009 the
MelaFind® PMA was filed to the FDA. 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 to the FDAs satisfaction; |
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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 continuing 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 continued
development or to commence the commercialization of MelaFind® and we will not
have adequate financial or other resources to achieve significant commercialization of
MelaFind®; |
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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. |
If we are unable to obtain regulatory approval for or successfully commercialize
MelaFind®, we will be unable to generate revenue.
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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 U.S. or in any foreign market. We plan initially to launch MelaFind®, once
approved, in the U.S. The regulatory approval process for MelaFind® in the U.S.
involves, among other things, successfully completing clinical trials and obtaining PMA approval
from the FDA. The PMA process requires us to prove the safety and effectiveness of
MelaFind® to the FDAs satisfaction. This process is expensive and uncertain,
and requires detailed and comprehensive scientific and human clinical data. FDA review may take
years after the PMA application was 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;
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changes in FDA approval policies or adoption of new regulations may require additional
data. |
No precedent has been established for FDA approval of a device such as
MelaFind® to assist in determining the appropriateness of biopsies of
suspicious pigmented skin lesions. While the Company believes that results from the
MelaFind® pivotal trial support a favorable PMA review, the FDA may not consider the
data gathered in the trial sufficient to support approval of a PMA. The FDA may determine that
additional clinical trials are necessary, in which case the PMA approval may be delayed for several
months or even years while the trials are conducted and the data acquired are submitted in an
amendment to the PMA. The occurrence of unexpected findings in connection with any subsequent
clinical trial that may be required by the FDA may prevent or delay obtaining PMA approval, and may
adversely affect coverage or reimbursement determinations. The FDA may require additional trials
following approval of MelaFind®. If we are unable to complete subsequent
clinical trials necessary to successfully support the MelaFind® PMA
application, our ability to commercialize MelaFind®, and our business,
financial condition, and results of operations would be materially adversely affected, thereby
threatening our ability to continue operations.
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 evaluation of almost all pigmented melanomas (other than
those on palms, soles of the feet, in or near the eye, and inaccessible areas such as the edge of
the nose). The final MelaFind® lesion classifier may not be able to identify
the maximum number of types of melanoma possible. The indications for use must specify those lesion
types for which the classifier has not been trained. Approximately five percent of melanoma lesions
may be amelanotic, meaning they are not pigmented. These lesions cannot be differentiated by
MelaFind®, which will be restricted to pigmented lesions. Approximately ten
percent of pigmented melanoma lesions are nodular, a type of melanoma that is often missed by
dermatologists in early stages. If nodular melanoma lesions are not sufficiently well-represented
in the MelaFind® training database, the classifier may not differentiate
nodular melanomas from non-melanomas with sufficient sensitivity and specificity. If we restrict
the indications for use of MelaFind® to exclude certain melanoma lesion
types, in addition to the other restrictions, then the size of the market for
MelaFind® and the rate of acceptance of MelaFind® by
physicians may be adversely affected.
If we wish to modify MelaFind® after receiving FDA approval,
including changes in indications or other modifications that could affect safety and effectiveness,
additional approvals could be required from the FDA. We may be required to submit extensive
pre-clinical and clinical data, depending on the nature of the changes. Any request by the FDA for
additional data, or any requirement by the FDA that we conduct additional clinical studies, could
delay the commercialization of MelaFind® and require us to make substantial
additional research, development and other expenditures. We may not obtain the necessary regulatory
approvals to market MelaFind® in the U.S. 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.
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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 U.S., 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 may 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 the 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 statutory provisions
intended to facilitate coverage determinations for new technologies. 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 U.S. 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.
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
U.S. government agencies, on classified projects. We have financed our operations since 1999
primarily through the sale of our equity securities and have devoted substantially all of our
resources to research and development relating to MelaFind®. Our net loss for
the year ended December 31, 2009 was approximately $18.5 million, and as of December 31, 2009, we
had an accumulated deficit of approximately $79.2 million. Our research and development expenses
may continue to increase in connection with our clinical trials and other development activities
related to MelaFind®. If we receive PMA approval for MelaFind®
from the FDA, we expect to incur significant sales, marketing expenses and manufacturing
expenses which will require additional funding.
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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 other products that enhance the visualization and
analysis of potential melanomas have been approved or are under development by: Welch Allyn, Inc.;
Heine Optotechnik; 3Gen, LLC; Derma Medical Systems, Inc.; Medical High Technologies S.P.A.; ZN
Vision Technologies AG; Polartechnics, Ltd.; Astron Clinica (now owned by Biocompatibles
International), Ltd.; Biomips Engineering, SciBase AB, Balter Medical, Michelson Diagnostics and
others. The broader market for precision optical imaging devices used for medical diagnosis is
intensely competitive, subject to rapid change, and significantly affected by new product
introductions and other market activities of industry participants. If our products are approved
for marketing, we will potentially be subject to competition from major optical imaging companies,
such as: Raytheon Corporation, General Electric Co.; Siemens AG; Bayer AG; Eastman Kodak Company;
Welch Allyn, Inc.; Olympus Corporation; Carl Zeiss AG Deutschland; and others, each of which
manufactures and markets precision optical imaging products for the medical market, and could
decide to develop or acquire a product to compete with MelaFind®. These
companies enjoy numerous competitive advantages, including:
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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. |
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.
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Some of these companies are working on potentially competing products or therapies, including
confocal microscopy (a type of scanning microscopy for 3-dimensional specimens, which produces
blur-free images at various depths), various forms of spectroscopy (a study of the way molecules
absorb and emit light), other imaging modalities, including molecular imaging in which tagged
antibodies search for cancer cell antigens, and molecular and genetic screening tests.
Molecular-based approaches are being investigated; Dermtech is exploring Messenger RNA analysis of
surface cells, for example. Several additional approaches to detecting Melanoma have been
identified. Balter Medical (Norway) uses Optical Transfer Diagnosis to identify Melanomas. The
technology measures how much light is absorbed in healthy versus diseased tissue to determine
whether cancer is present. Raytheon Corporation, partnered with Arizona Cancer Center, utilizes
satellite-based remote imaging technology in detecting skin changes that could indicate the
presence of cancer. Vanderbilt University has introduced technology called Confocal Raman
Micro-Spectroscopy. The technology uses a reflective laser to produce a molecular fingerprint of
the underlying tissue to indicate the presence or absence of disease. In addition, the National
Institutes of Health and other supporters of cancer research are presumptively seeking ways to
improve the diagnosis or treatment of melanoma by sponsoring corporate and academic research.
Researchers at Ben Gurion University in Israel announced a new device that detects cancerous skin
tumors not visible to the naked eye. The Optical Spectro-Polarimetric Imaging (OSPI) instrument
reportedly diagnosed 73 types of lesions, some of them cancerous, in initial testing. Michelson
Diagnostics Ltd, a UK based developer and manufacturer, announced that the FDA has awarded it
510(k) clearance for its VivoSighttm OCT scanning product.
VivoSighttm is a Multi-Beam OCT system indicated for use in the
two-dimensional, cross-sectional, real-time imaging of external tissues of the human body. 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.
For any additional clinical trials required for MelaFind® by the FDA or with
respect to clinical trials relating to the development of our core technology for other
applications, we depend on clinical investigators and clinical sites and other third parties to
manage the trials and to perform related data collection and analysis, and, as a result, we may
face costs and delays that are outside of our control.
With respect to any additional clinical studies for MelaFind® which are required by
the FDA or with respect to clinical trials relating to the development of the Companys core
technology for other applications, we rely on clinical investigators and clinical sites, some of
which are private practices, and some of which are research, university or government affiliated,
to enroll patients in our clinical trials. We rely on: pathologists and pathology laboratories; a
contract research organization to assist in monitoring, collection of data, and ensuring FDA Good
Clinical Practices (GCP) are observed at our sites; a consultant biostatistician; and other third
parties to manage the trial and to perform related data collection and analysis. However, we may
not be able to control the amount and timing of resources that clinical sites and other third
parties may devote to our clinical trials. If these clinical investigators and clinical sites fail
to enroll a sufficient number of patients in our clinical trials, or if the clinical sites fail to
comply adequately with the clinical protocols, we will be unable to complete these trials, which
could prevent us from obtaining regulatory approvals for MelaFind® or other
products developed from our core technology. Our agreements with clinical investigators and
clinical sites for clinical testing place substantial responsibilities on these parties and, if
these parties fail to perform as expected, our trials could be delayed or terminated. If these
clinical investigators, clinical sites or other third parties do not carry out their contractual
duties or obligations or fail to meet expected deadlines, or if the quality or accuracy of the
clinical data they obtain are compromised due to their failure to adhere to our clinical protocols
or for other reasons, our clinical trials may be extended, delayed or terminated, and we may be
unable to obtain regulatory approval for, or successfully commercialize,
MelaFind® or other products developed from our core technology.
In addition to the foregoing, any additional clinical studies for MelaFind® which
are required by the FDA and any clinical trials relating to the development of the Companys core
technology for other
applications may be delayed or halted, or be inadequate to support PMA approval, for numerous other
reasons, including, but not limited to, the following:
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the FDA, an Institutional Review Board (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. |
If MelaFind® is approved for reimbursement, we anticipate experiencing
significant pressures on pricing.
Even if Medicare covers a device for certain uses, that does not mean that the level of
reimbursement will be sufficient for commercial success. We expect to experience pricing pressures
in connection with the commercialization of MelaFind® and our future products
due to efforts by private and government-funded payers to reduce or limit the growth of healthcare
costs, the increasing influence of health maintenance organizations, and additional legislative
proposals to reduce or limit increases in public funding for healthcare services. Private payers,
including managed care payers, increasingly are demanding discounted fee structures and the
assumption by healthcare providers of all or a portion of the financial risk. Efforts to impose
greater discounts and more stringent cost controls upon healthcare providers by private and public
payers are expected to continue. Payers frequently review their coverage policies for existing and
new diagnostic tools and can, sometimes without advance notice, deny or change their coverage
policies. Significant limits on the scope of services covered or on reimbursement rates and fees on
those services that are covered could have a material adverse effect on our ability to
commercialize MelaFind® and therefore, on our liquidity and our business,
financial condition, and results of operations.
In some foreign markets, which we may seek to enter in the future, pricing and profitability
of medical devices are subject to government control. In the US, we expect that there will continue
to be federal and state proposals for similar controls. Also, the trends toward managed healthcare
in the US and proposed legislation intended to control the cost of publicly funded healthcare
programs could significantly influence the purchase of healthcare services and products, and may
force us to reduce prices for MelaFind® or result in the exclusion of
MelaFind® from reimbursement programs.
MelaFind® may never achieve market acceptance even if we obtain regulatory
approvals.
To date, only those patients who were treated by physicians involved in our
clinical trials have been evaluated using MelaFind®. Even if we obtain regulatory
approval, patients with suspicious lesions and physicians evaluating suspicious lesions may not
endorse MelaFind®. Physicians tend to be slow to change their diagnostic and medical
treatment practices because of perceived liability risks arising from the use of new products and
the uncertainty of third party reimbursement. Physicians may not utilize MelaFind® until
there is long-term clinical evidence to convince them to alter their existing methods of diagnosing
or evaluating suspicious lesions and there are recommendations from prominent physicians that
MelaFind® is effective. We cannot predict the speed at which physicians may adopt the
use of MelaFind®. By limiting the capital cost of MelaFind® to the
physician, we believe we will accelerate its adoption and usage. However, by charging on a per
patient basis we will increase the initial capital burden on the Company. If MelaFind®
receives the appropriate regulatory approvals but does not achieve an adequate level of acceptance
by patients, physicians and healthcare payers, we may not generate significant product revenue
and we may not become profitable. The degree of market acceptance of MelaFind® will
depend on a number of factors, including:
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perceived effectiveness of MelaFind®; |
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convenience of use; |
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cost of 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. |
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 evaluation 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®; however, there can be no assurance that
any such recommendations will be obtained. To date, the medical community outside the limited
circle of certain dermatologists specializing in melanoma has had little exposure to us and
MelaFind®. Because the medical community is often skeptical of new companies
and new technologies, we may be unable to gain access to potential customers in order to
demonstrate the operation and effectiveness of MelaFind®. Even if we gain
access to potential customers, no assurance can be given that members of the dermatological, or
later the general practice, medical community will perceive a need for or accept
MelaFind®. In particular, given the potentially fatal consequences of failing
to detect melanoma at the early, curable stages, practitioners may remain reluctant to rely upon
MelaFind® even after we receive approval from the FDA for marketing the
product. Any of the foregoing factors, or other currently unforeseen factors, could limit or
detract from market acceptance of MelaFind®. Insufficient market acceptance
of MelaFind® would have a material adverse effect on our business, financial
condition and results of operations.
We may be unable to complete the development and commence commercialization of
MelaFind® or other products without additional funding and we will not be
able to achieve significant commercialization without additional funding.
As of December 31, 2009 we had $29.7 million in cash and cash equivalents. Our operations
have consumed substantial amounts of cash for each of the last eight years. We currently believe
that our available cash and cash equivalents will be sufficient to fund our anticipated levels of
operations for at least the next twelve months. However, our business or operations may change in a
manner that would consume available resources more rapidly than we anticipate. We expect to
continue to spend substantial amounts on research and development. We will need additional funds to
fully commercialize the product, including development of a direct sales force and expansion of
manufacturing capacity. We expect that our cash used by operations will increase significantly in
each of the next several years, and should we encounter any material delays or impediments, we may
need additional funds to complete the development of MelaFind® and
commence commercialization, and achieve significant commercialization of
MelaFind®. Any additional equity financing may be dilutive to stockholders,
or may require us to grant a lender a security interest in our assets. The amount of funding we
will need will depend on many factors, including:
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the schedule, costs, and results of 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; |
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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 products, 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. |
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 product approval, we currently
plan to establish a small direct sales force to regionally market MelaFind®
in the U.S., focused on introducing it at high volume dermatologists offices and training their
staff in its use, but we have not made any final determinations regarding the use of a particular
marketing channel. We anticipate that we will need additional funds in order to fully implement
this marketing plan. In addition to being expensive, developing such a sales force is time
consuming and could delay or limit the success of any product launch. We may not be able to develop
this capacity on a timely basis or at all. Qualified direct sales personnel with experience in the
medical device market are in high demand, and there is no assurance that we will be able to hire or
retain an effective direct sales team. Similarly, qualified, independent medical device
representatives both within and outside the U.S. 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 U.S., 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.
26
We have limited manufacturing capabilities and manufacturing personnel, and if our manufacturing
capabilities are insufficient to produce an adequate supply of MelaFind®, our growth
could be limited and our business could be harmed.
We have no experience in manufacturing MelaFind® for commercial
distribution. We currently have limited resources, facilities and experience to commercially
manufacture MelaFind®. In order to produce MelaFind® in
the quantities we anticipate to meet market demand, we will need to increase our third-party
manufacturing capacity. There are technical challenges to increasing manufacturing capacity,
including equipment design and automation, material procurement, problems with production yields,
and quality control and assurance. Developing commercial-scale manufacturing facilities that meet
FDA requirements would require the investment of substantial additional funds and the hiring and
retaining of additional management and technical personnel who have the necessary manufacturing
experience.
We currently outsource production to contract manufacturers. Any difficulties in the ability
of third-party manufacturers to supply devices of the quality, at the times, and in the quantities
we need, could have a material adverse effect on our business, financial condition, and results of
operations. Similarly, when we enter into contracts for the third-party manufacture of our devices,
any revenue received will depend on the skills and efforts of others, and we do not know whether
these efforts will be successful. Manufacturers often encounter difficulties in scaling up
production of new products, including problems involving product yields, controlling and
anticipating product costs, quality control and assurance, component supply, and shortages of
qualified personnel. We cannot assure you that the third-party contract manufacturers with whom we
have developed or are developing relationships will have or sustain the ability to produce the
quantities of MelaFind® needed for development or commercial sales, or will
be willing to do so at prices that allow MelaFind® to compete successfully in
the market.
Assuming that MelaFind® receives regulatory approval, if we are unable
to manufacture or obtain a sufficient supply of product, maintain control over expenses, or
otherwise adapt to anticipated growth, or if we underestimate growth, we may not have the
capability to satisfy market demand, and our business will suffer. Additionally, if
MelaFind® receives regulatory approval and we then need to make manufacturing
changes, we may need to obtain additional approval for these changes.
MelaFind® is complex and may contain undetected design defects and
errors when first introduced, or errors that may be introduced when enhancements are released. Such
defects and errors may occur despite our testing, and may not be discovered until after our devices
have been shipped to and used by our customers. The existence of these defects and errors could
result in costly repairs, returns of devices, diversion of development resources and damage to our
reputation in the marketplace. Any of these conditions could have a material adverse impact on our
business, financial condition and results of operations. In addition, when we contract with
third-party manufacturers for the production of our products, these manufacturers may inadvertently
produce devices that vary from devices we have produced in unpredictable ways that cause adverse
consequences.
Our manufacturing operations are dependent upon third-party suppliers, making us vulnerable to
supply problems and price fluctuations, which could harm our business. We anticipate contracting
for final device assembly and integration, but no contract for such services on a commercial basis
has yet been procured.
Our manufacturing efforts currently rely on several vendors for critical materials:
FillFactory, a subsidiary of Cypress Semiconductor Corp., to manufacture and supply the
complementary metal oxide semiconductor sensor in MelaFind®, on Carl Zeiss
Jena GmbH (Zeiss) for lens and lens objective assemblies, A/B Electronics, AAEON, AmeriCad,
Applied Image, EpiGap, Lamothermic Precision, Canvys Electronics, Sandisk, SL Power Electronics and
others to provide services or components of our devices. We are working with ASKION in Germany,
which specializes in precision optics for the provision of the hand-held imaging devices. In
addition, we are utilizing Nexcore Technology Inc., an FDA good manufacturing practices (GMP)
compliant and certified ISO13485 and ISO9001 original equipment manufacturer of medical devices in
New Jersey, to provide the assembled MelaFind® carts and tested
MelaFind® systems.
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There can be no assurance that these third parties will meet their obligations. Each of these
suppliers is a sole-source supplier. Our contract manufacturers also rely on sole-source suppliers
to manufacture some of the components used in our products. Our manufacturers and suppliers may
encounter problems during manufacturing due to a variety of reasons, including failure to procure
their raw material on time,
failure to follow specific protocols and procedures, failure to comply with applicable
regulations, equipment malfunction and environmental factors, any of which could delay or impede
their ability to meet our demand. Our reliance on these outside manufacturers and suppliers also
subjects us to other risks that could harm our business, including:
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suppliers may make errors in manufacturing components that could negatively impact the
effectiveness or safety of our products, or cause delays in shipment of our products; |
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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. |
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 an agreement with ASKION to continue developmental engineering,
production and testing of our hand-held imaging device. Failure to maintain such an agreement with
ASKION on mutually acceptable terms would require us to expand our own manufacturing facilities or
obtain such services elsewhere. Similarly, through ASKION we have entered into a production
agreement with Zeiss for lenses and lens objective assemblies. The manufacturing agreement with
ASKION includes the integration of the Zeiss lenses in the hand-held imaging devices. Our planned
reliance upon an outside provider for assembly and production services subjects us to the risk of
adverse consequences from delays and defects caused by the failure of such outside supplier to meet
its contractual obligations, including confidentiality obligations in the case of Zeiss, which is
an affiliate of Carl Zeiss AG, a potential competitor. The failure by us or our supplier to produce
a sufficient number of hand-held imaging devices that can operate according to our specifications
could delay the commercial sale of MelaFind®, and would adversely affect both
our ability to successfully commercialize MelaFind® and our business,
financial condition and results of operations.
We will not be able to sell MelaFind® unless and until its design is verified
and validated in accordance with current good manufacturing practices as set forth in the U.S.
medical device Quality System Regulation.
We are in the process, but have not yet successfully completed, all the steps necessary to
verify and validate the design of the MelaFind® system that are required to
be performed prior to commercialization. If we are delayed or unable to complete verification and
validation successfully, we will not be able to sell MelaFind®, and we will
not be able to meet our plans for the commercialization of MelaFind®. Later
discovery of previously unknown problems with MelaFind®, including
manufacturing problems, or failure to comply with regulatory requirements such as the FDA QSR, may
result in restrictions on MelaFind® or its manufacturing processes,
withdrawal of MelaFind® from the market, patient or physician notification,
voluntary or mandatory recalls, fines, withdrawal of regulatory approvals, refusal to approve
pending applications or supplements to approved applications, refusal to permit the import or
export of our products, product seizures, injunctions or the imposition of civil or criminal
penalties. Should any of these enforcement actions occur, our business, financial condition and
results of operations could be materially and adversely affected.
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Assuming that MelaFind® is approved by regulatory authorities, if we or our
suppliers fail to comply with ongoing regulatory requirements, or if we experience unanticipated
problems with MelaFind®, it could be subject to restrictions or withdrawal
from the market.
Any product for which we obtain marketing approval, along with the manufacturing processes,
post-approval clinical data and promotional activities for such product, will be subject to
continuous review and periodic inspections by the FDA and other regulatory bodies. In particular,
we and our suppliers are required to comply with the QSR and other regulations which cover the
methods and documentation of the design, testing, production, control, quality assurance, labeling,
packaging, storage, promotion, distribution, and shipping of MelaFind®, and
with record keeping practices. We also will be subject to ongoing FDA requirements, including
required submissions of safety and other post-market information and reports and registration and
listing requirements. To the extent that we contract with third parties to manufacture some of our
products, our manufacturers will be required to adhere to current 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 in full compliance with cGMP
requirements before approval for marketing. The FDA enforces the QSR and other regulatory
requirements through unannounced inspections.
If we are found to be deficient in cGMP or QSR, we could be subject to 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. |
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 U.S. 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.
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The federal government regulates healthcare through various agencies, including but not
limited to the following: (i) the FDA, which administers the Food, Drug, and Cosmetic Act, as well
as other relevant laws; (ii) CMS, which administers the Medicare and Medicaid programs; (iii) the
Office of Inspector General (OIG) which enforces various laws aimed at curtailing fraudulent or
abusive practices, including by way of example, the Anti-Kickback Law, the Anti-Physician Referral
Law, commonly referred to as Stark, the Anti-Inducement Law, the Civil Money Penalty Law, and the
laws that authorize the OIG to exclude healthcare providers and others from participating in
federal healthcare programs; and (iv) the Office of Civil Rights, which administers the privacy
aspects of the Health Insurance Portability and Accountability Act of 1996 (HIPAA). All of the
aforementioned are agencies within HHS. Healthcare is also provided or regulated, as the case may
be, by the Department of Defense through its TriCare program, the Public Health Service within HHS
under the Public Health Service Act, the Department of Justice through the Federal False Claims Act
and various criminal statutes, and state governments 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. |
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.
Healthcare policy changes, including legislation pending in the U.S. Congress to reform the U.S.
healthcare system, may have a material adverse effect on us.
In response to perceived increases in health care costs in recent years, there have been and
continue to be proposals by the Obama administration, members of U.S. Congress, state governments,
regulators and third-party payers to control these costs and, more generally, to reform the U.S.
healthcare system. Certain of these proposals may limit the prices we are able to charge for
MelaFind® or the amount of reimbursement that may be available. In addition, new
legislation could limit MelaFinds® acceptance and availability. Moreover, legislative
proposals currently pending in the U.S. Congress would impose significant new taxes on medical
device makers. The adoption of some or all of these proposals could have a material adverse effect
on our Company.
We cannot predict whether legislation will be enacted, the final form any legislation might
take or the effects of such legislation. The current versions of both the House and Senate
proposals would impose significant new taxes on medical device makers. These taxes, if
implemented, would result in a significant increase in the tax burden on our industry, which could
have a material, negative impact on our Company. In summary, if legislation is enacted and
depending on the form it takes, it could change the way healthcare is developed and delivered, and
may materially impact our ability to successfully launch MelaFind® in the U.S.
marketplace.
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We must comply with complex statutes prohibiting fraud and abuse, and both we and physicians
utilizing MelaFind® could be subject to significant penalties for
noncompliance.
There are extensive federal and state laws and regulations prohibiting fraud and abuse in the
healthcare industry that can result in significant criminal and civil penalties. These federal laws
include: the anti-kickback statute which prohibits certain business practices and relationships,
including the payment or receipt of remuneration for the referral of patients whose care will be
paid by Medicare or other federal healthcare programs; the physician self-referral prohibition,
commonly referred to as the Stark Law; the anti-inducement law, which prohibits providers from
offering anything to a Medicare or Medicaid beneficiary to induce that beneficiary to use items or
services covered by either program; the Civil False Claims Act, which prohibits any person from
knowingly presenting or causing to be presented false or fraudulent claims for payment by the
federal government, including the Medicare and Medicaid programs and; the Civil Monetary Penalties
Law, which authorizes HHS to impose civil penalties administratively for fraudulent or abusive
acts. Sanctions for violating these federal laws include criminal and civil penalties that range
from punitive sanctions, damage assessments, money penalties, imprisonment, denial of Medicare and
Medicaid payments, or exclusion from the Medicare and Medicaid programs, or both. As federal and
state budget pressures continue, federal and state administrative agencies may also continue to
escalate investigation and enforcement efforts to root out waste and to control fraud and abuse in
governmental healthcare programs. Private enforcement of healthcare fraud has also increased, due
in large part to amendments to the Civil False Claims Act in 1986 that were designed to encourage
private persons to sue on behalf of the government. A violation of any of these federal and state
fraud and abuse laws and regulations could have a material adverse effect on our liquidity and
financial condition. An investigation into the use of MelaFind® by physicians may
dissuade physicians from either purchasing or using MelaFind® and could have a material
adverse effect on our ability to commercialize MelaFind®.
The application of the privacy provisions of HIPAA is uncertain.
HIPAA, among other things, protects the privacy and security of individually identifiable
health information by limiting its use and disclosure. HIPAA directly regulates covered entities
(insurers, clearinghouses, and most healthcare providers) and indirectly regulates business
associates with respect to the privacy of patients medical information. Certain entities that
receive and process protected health information are required to adopt certain procedures to
safeguard the security of that information. 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 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.
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A court could also order us to pay compensatory damages for such infringement, plus prejudgment
interest and could, in addition, treble the compensatory damages and award attorney fees. These
damages could be substantial and could harm our reputation, business, financial condition and
operating results. A court also could enter orders that temporarily, preliminarily or permanently
enjoin us and our customers from making, using, selling, offering to sell or importing
MelaFind®, and/or could enter an order mandating that we undertake certain
remedial activities. Depending on the nature of the relief ordered by the court, we could become
liable for additional damages to third parties.
We also may rely on our patents, patent applications and other intellectual property rights to
give us a competitive advantage. Whether a patent is valid, or whether a patent application should
be granted, is a complex matter of science and law, and therefore we cannot be certain that, if
challenged, our patents, patent applications and/or other intellectual property rights would be
upheld. If one or more of those patents, patent applications and other intellectual property rights
are invalidated, rejected or found unenforceable, that could reduce or eliminate any competitive
advantage we might otherwise have had.
New product development in the medical device industry is both costly and labor intensive with very
low success rates for successful commercialization; if we cannot successfully develop or obtain
future
products our growth would be delayed.
Our long-term success is dependent, in large part, on the design, development and
commercialization of MelaFind® and other new products and services in the
medical device industry. The product development process is time-consuming, unpredictable and
costly. There can be no assurance that we will be able to develop or acquire new products,
successfully complete clinical trials, obtain the necessary regulatory clearances or approvals
required from the FDA on a timely basis, or at all, manufacture our potential products in
compliance with regulatory requirements or in commercial volumes, or that
MelaFind® or other potential products will achieve market acceptance. In
addition, changes in regulatory policy for product approval during the period of product
development, and regulatory agency review of each submitted new application, may cause delays or
rejections. It may be necessary for us to enter into licensing arrangements in order to market
effectively any new products or new indications for existing products. There can be no assurance
that we will be successful in entering into such licensing arrangements on terms favorable to us or
at all. Failure to develop, obtain necessary regulatory clearances or approvals for, or
successfully 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 evaluation
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 U.S. The
clinical studies of MelaFind® are considered by the FDA as Non-Significant
Risk. Consequently, the trials are conducted under the auspices of an abbreviated Investigational
Device Exemption. We therefore only maintain limited domestic clinical trial liability insurance,
as required by certain clinical sites. We have obtained clinical trial liability insurance in
certain European countries where required by statute or clinical site policy. Although we have
general liability insurance that we believe is appropriate, and anticipate obtaining adequate
product liability insurance before commercialization of MelaFind®, this
insurance is and will be subject to deductibles and coverage limitations. Our anticipated product
liability insurance may not be available to us in amounts and on acceptable terms, if at all, and
if available, the 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.
32
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.
We may be adversely affected by a data center failure.
The success of MelaFind® is dependent upon our ability to protect our
data center against damage from fire, power loss, telecommunications failure, natural disaster,
sabotage or a similar catastrophic event. Substantially all of our computer equipment and data
operations are located in a single facility. Our prospective failure to maintain off-site copies of
information contained in our MelaFind® database, or our inability to use
alternative sites in the event we experience a natural disaster, hardware or software malfunction
or other interruption of our data center could adversely impact our business, financial condition
and results of operations. While the Company does provide off-site back-up for its critical data,
which we believe to be sufficient to meet our needs, there can be no assurance that our current
plan can anticipate every possible eventuality.
We may be adversely affected by breaches of online security.
Our MelaFind® lesion database does not contain any information that
allows us to identify specific patients. However, we must identify certain data as belonging to or
as derived from specific patients for regulatory, quality assurance and billing purposes. To the
extent that our activities involve the storage and transmission of confidential information,
security breaches could damage our reputation and expose us to a risk of loss, or to litigation and
possible liability. Our business may be materially adversely affected if our security measures do
not prevent 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.
We may use the internet as a medium to provide quality control calibration services to
physicians. We also plan to use the internet to inform the public about the availability of our
products and to market to and communicate with physicians who are potential or actual customers.
Our success will therefore depend in part on the continued growth and use of the internet. If our
ability to use the internet fails, it may materially adversely affect our business.
We will be obligated to comply with Federal Communications Commission regulations for radio
transmissions used by our products.
Versions of MelaFind® may rely on radio transmissions from the hand-held
imaging device to a base station that may be connected to the internet. Applicable requirements
will restrict us to a particular band of frequencies allocated to low power radio service for
transmitting data in support of specific diagnostic or therapeutic functions. Failure to comply
with all applicable restrictions on the use of such frequencies, or unforeseeable difficulties with
the use of such frequencies, could impede our ability to commercialize
MelaFind®.
33
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 a single building in Irvington, New York. We take
precautions to safeguard our facility, including insurance, health and safety protocols, contracted
off-site engineering services, and storage of computer data. However, a natural disaster, such as a
fire, flood or earthquake, could cause substantial delays in our operations or cause us to incur
additional expenses. The insurance we maintain against fires, floods, earthquakes and other natural
disasters may not be adequate to cover our losses in any particular case.
We may be liable for contamination or other harm caused by materials that we handle, and changes in
environmental regulations could cause us to incur additional expense.
Our manufacturing, research and development and clinical processes do not generally involve
the handling of potentially harmful biological materials or hazardous materials, but they may
occasionally do so. We are subject to federal, state and local laws and regulations governing the
use, handling, storage and disposal of hazardous and biological materials. If violations of
environmental, health and safety laws occur, we could be held liable for damages, penalties and
costs of remedial actions. These expenses or this liability could have a significant negative
impact on our business, financial condition and results of operations. We may violate
environmental, health and safety laws in the future as a result of human error, equipment failure
or other causes. Environmental laws could become more stringent over time, imposing greater
compliance costs and increasing risks and penalties associated with violations. We may be subject
to potentially conflicting and changing regulatory agendas of political, business and environmental
groups. Changes to or restrictions on permitting requirements or processes, hazardous or biological
material storage or handling might require an unplanned capital investment or relocation. Failure
to comply with new or existing laws or regulations could harm our business, financial condition and
results of operations.
Failure to obtain and maintain regulatory approval in foreign jurisdictions will prevent us from
marketing abroad.
Following commercialization of MelaFind® in the U.S., we may market
MelaFind® internationally. Outside the U.S., 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 U.S. and abroad. Approval by the FDA does
not ensure approval by regulatory authorities in other countries, and approval by one foreign
regulatory authority does not ensure approval by regulatory authorities in other foreign countries
or by the FDA. We have not taken any significant actions to obtain foreign regulatory approvals. We
may not be able to file for regulatory approvals and may not receive necessary approvals to
commercialize MelaFind® in any market on a timely basis, or at all. Our
inability or failure to comply with varying foreign regulation, or the imposition of new
regulations, could restrict our sale of products internationally.
Our success will depend on our ability to attract and retain our personnel.
We are highly dependent on our senior management, especially Joseph V. Gulfo, M.D., our
President and Chief Executive Officer and Dina Gutkowicz-Krusin, Ph.D., our Director of Clinical
Research. Our success will depend on our ability to retain our current senior management and to
attract and retain qualified personnel in the future, including scientists, clinicians, engineers
and other highly skilled personnel.
34
Competition for senior management personnel, as well as scientists, clinicians, engineers, and
experienced sales and marketing individuals, is intense, and we may not be able to retain our
personnel. The loss of the services of members of our senior management, scientists, clinicians or
engineers could prevent the implementation and completion of our objectives, including the
development and introduction of MelaFind®. The loss of a member of our senior
management or our professional staff would require the remaining executive officers to divert
immediate and substantial attention to seeking a replacement. Each of our officers may terminate
their employment at any time without notice and without cause or good reason.
We expect to expand our operations and grow our research and development, product development
and administrative operations. This expansion is expected to place a significant strain on our
management, and will require hiring a significant number of qualified personnel. Accordingly,
recruiting and retaining such personnel in the future will be critical to our success. There is
competition from other companies and research and academic institutions for qualified personnel in
the areas of our activities. If we fail to identify, attract, retain and motivate these highly
skilled personnel, we may be unable to continue our development and commercialization activities.
Our financial results for future periods will be affected by the attainment of milestones.
We have granted to certain employees stock options that vest with the attainment of various
time-based or controllable performance milestones. During the attainment of these milestones we
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 out of our
control. Upon the attainment of each of these relevant development milestones, which include FDA
approval of the MelaFind® PMA, there will be a significant compensation
charge based on the fair value of such options.
Risks Relating to our Common Stock
If we fail to maintain the adequacy of our internal controls, our ability to provide accurate
financial statements could be impaired and any failure to maintain our internal controls could have
an adverse effect on our stock price.
The Sarbanes-Oxley Act of 2002 (SOX), as well as rules subsequently implemented by the SEC,
the Public Company Accounting Oversight Board and the NASDAQ Capital Market, have required changes
in the corporate governance practices of public companies. Monitoring compliance with the existing
rules and implementing changes required by new rules may increase our legal and financial
compliance costs, divert management attention from operations and strategic opportunities, and make
legal, accounting and administrative activities more time-consuming and costly. On each of June 30,
2007, 2008 and 2009, our market capitalization exceeded $75 million. As a result we had our
independent registered public accounting firm attest to our compliance with Section 404 of SOX as
of December 31, 2007, 2008 and 2009. Since 2007, we have retained a consultant experienced in SOX
that assists us in the process of instituting changes to our internal procedures to satisfy the
requirements of the SOX. We have evaluated our internal control systems in order to allow us to
report on, and our independent registered public accounting firm to attest to, our internal
controls, as required by Section 404 of the SOX. As a small company with limited capital and human
resources, going forward we may need to divert managements time and attention away from our
business in order to ensure continued compliance with these regulatory requirements. We may require
new information technologies systems, the auditing of our internal controls, and compliance
training for our directors, officers and personnel. Such efforts may entail a significant expense.
If we fail to maintain the adequacy of our internal controls as such standards are modified,
supplemented or amended from time to time, we may not be able to ensure that we can conclude on an
ongoing basis that we have effective internal control over financial reporting in accordance with
Section 404 of the SOX. Any failure to maintain the adequacy of our internal controls could have an
adverse effect on timely and accurate financial reporting and the trading price of our common
stock.
An active trading market for our common stock may not be sustained.
An active public market for our common stock may not be sustained. Further, we cannot be
certain that the market price of our common stock will not decline below the amount required by
NASDAQ to maintain a listing on its Capital Market. Should we fail to meet the minimum standards
established by NASDAQ for its Capital Market, we could be de-listed meaning shareholders might be
subject to limited liquidity.
35
Our stock price may be volatile, meaning purchasers of our common stock could incur substantial
losses.
Our stock price has been and is likely to continue to be volatile. Between October 28, 2005
(the date of our initial public offering) and December 31, 2009, our stock price has ranged from
$2.29 to $11.73 per share. The stock market in general and the market for medical technology
companies in particular have experienced extreme volatility that has often been unrelated to the
operating performance of particular companies. The following factors, in addition to other risk
factors described in this section and general market and economic conditions, may have a
significant impact on the market price of our common stock:
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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, which could be dilutive to our shareholders. |
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.
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:
36
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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.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
We lease approximately 20,000 square feet of office, laboratory, and assembly space in a
building with the street address of 50 South Buckhout Street, Suite 1, Irvington, New York 10533.
The lease expires in December 2016. We believe that this facility is adequate to meet our current
and reasonably foreseeable requirements. We believe that we will be able to obtain additional
space, if required, on commercially reasonable terms.
Item 3. Legal Proceedings
We are not currently subject to any material legal proceedings, nor, to our knowledge, is
any material legal proceeding threatened against us. From time to time, we may be a party to
certain legal proceedings, incidental to the normal course of our business. While the outcome of
these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings
will have a material effect upon our financial condition or results of operations.
Itelm 4. Reserved
37
PART II
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 January
1, 2008 through December 31, 2009 as reported by the NASDAQ Capital Market:
|
|
|
|
|
|
|
|
|
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|
High |
|
|
Low |
|
Year Ended December 31, 2009 |
|
|
|
|
|
|
|
|
October 1 December 31, 2009 |
|
$ |
11.73 |
|
|
$ |
7.85 |
|
July 1 September 30, 2009 |
|
$ |
10.95 |
|
|
$ |
6.18 |
|
April 1 June 30, 2009 |
|
$ |
8.75 |
|
|
$ |
4.35 |
|
January 1 March 31, 2009 |
|
$ |
7.50 |
|
|
$ |
3.00 |
|
Year Ended December 31, 2008 |
|
|
|
|
|
|
|
|
October 1 December 31, 2008 |
|
$ |
5.37 |
|
|
$ |
2.29 |
|
July 1 September 30, 2008 |
|
$ |
7.98 |
|
|
$ |
4.50 |
|
April 1 June 30, 2008 |
|
$ |
9.99 |
|
|
$ |
5.71 |
|
January 1 March 31, 2008 |
|
$ |
6.50 |
|
|
$ |
3.84 |
|
As of January 31, 2010, there were approximately 146 holders of record of our common stock.
This number does not include the number of persons whose shares are in nominee or in street name
accounts through brokers.
Dividend Policy
We have never declared or paid cash dividends on our common stock. We currently intend to
retain our cash for the development of our business. We do not intend to pay cash dividends to our
stockholders in the foreseeable future.
Any future determination relating to our dividend policy will be made at the discretion of our
board of directors and will depend on then existing conditions, including our earnings, financial
condition, results of operations, level of indebtedness, contractual restrictions, capital
requirements, business prospects and other factors our board of directors may deem relevant. Our
board of directors ability to declare a dividend is also subject to limits imposed by Delaware
law.
Securities Authorized For Issuance Under Equity Compensation Plans
The information required by this Item concerning the 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 June 26, 2008, the Company filed a Form S-3 shelf registration statement for an
indeterminate number of shares of common stock, warrants to purchase shares of common stock and
units consisting of a combination thereof having an aggregate initial offering price not to exceed
$40 million. The SEC declared the registration statement effective on July 7, 2008 (File#
333-151935). Management has utilized this shelf registration statement to raise additional equity
capital by completing two registered direct offerings. The first was of 2,088,451 shares of the
Companys common stock for aggregate gross proceeds $11.9 million ($11 million approximate net
proceeds to the Company) at a per share offering price of $5.68. The offering closed on August 8,
2008. The second was of 2,400,000 shares of the Companys common stock for aggregate gross
proceeds $15 million ($13.70 million approximate net proceeds to the Company) at a per share
offering price of $6.25. The offering closed on July 22, 2009. Approximately $13.1 million remains
available for sale under the shelf registration statement as of December 31, 2009.
38
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 prospectuses filed with the SEC pursuant to Rule 424(b)(5) on July
31, 2008 and July 17, 2009.
Item 6. Selected Financial Data
The following table sets forth selected financial data. The financial information for the
years ended December 31, 2007, 2008, and 2009 and as of December 31, 2008 and 2009 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, 2005 and 2006 and as of
December 31, 2005, 2006, and 2007 have been derived from our audited financial statements not
included in this report. The historical results are not necessarily indicative of results of any
future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
(In thousands, except share and per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses |
|
$ |
3,822 |
|
|
$ |
7,574 |
|
|
$ |
7,678 |
|
|
$ |
12,508 |
|
|
$ |
10,950 |
|
General and administrative expenses |
|
|
2,636 |
|
|
|
4,526 |
|
|
|
5,400 |
|
|
|
5,766 |
|
|
|
7,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss from continuing
operations |
|
|
(6,458 |
) |
|
|
(12,100 |
) |
|
|
(13,078 |
) |
|
|
(18,274 |
) |
|
|
(18,581 |
) |
Interest income |
|
|
(174 |
) |
|
|
(728 |
) |
|
|
(1,054 |
) |
|
|
(468 |
) |
|
|
(45 |
) |
Other income, net |
|
|
|
|
|
|
|
|
|
|
(59 |
) |
|
|
(201 |
) |
|
|
(83 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(6,284 |
) |
|
|
(11,372 |
) |
|
|
(11,965 |
) |
|
|
(17,605 |
) |
|
|
(18,453 |
) |
(Loss) gain from discontinued
operations |
|
|
(442 |
) |
|
|
781 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(6,726 |
) |
|
|
(10,591 |
) |
|
|
(11,937 |
) |
|
|
(17,605 |
) |
|
|
(18,453 |
) |
Preferred stock deemed dividends |
|
|
(1,199 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock accretion |
|
|
(1,077 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to
common stockholders |
|
$ |
(9,002 |
) |
|
$ |
(10,591 |
) |
|
$ |
(11,937 |
) |
|
$ |
(17,605 |
) |
|
$ |
(18,453 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and
diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(2.44 |
) |
|
$ |
(1.01 |
) |
|
$ |
(0.84 |
) |
|
$ |
(1.08 |
) |
|
$ |
(.96 |
) |
Discontinued operations |
|
|
(0.13 |
) |
|
|
.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
common share |
|
$ |
(2.57 |
) |
|
$ |
(.94 |
) |
|
$ |
(.84 |
) |
|
$ |
(1.08 |
) |
|
$ |
(.96 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted
average number of common shares
outstanding |
|
|
3,508,835 |
|
|
|
11,293,783 |
|
|
|
14,220,466 |
|
|
|
16,282,176 |
|
|
|
19,293,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
(In thousands, except share and per share data) |
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
$ |
18,873 |
|
|
$ |
21,771 |
|
|
$ |
21,328 |
|
|
$ |
15,836 |
|
|
$ |
30,338 |
|
Total assets |
|
|
19,166 |
|
|
|
22,476 |
|
|
|
22,108 |
|
|
|
16,620 |
|
|
|
32,127 |
|
Total liabilities |
|
|
916 |
|
|
|
1,162 |
|
|
|
1,336 |
|
|
|
1,530 |
|
|
|
1,811 |
|
Accumulated deficit |
|
|
(20,633 |
) |
|
|
(31,225 |
) |
|
|
(43,162 |
) |
|
|
(60,767 |
) |
|
|
(79,220 |
) |
Total stockholders equity |
|
|
18,249 |
|
|
|
21,314 |
|
|
|
20,772 |
|
|
|
15,089 |
|
|
|
30,316 |
|
39
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, 2009 and the related notes appearing in Part II Item 8 of this report.
Overview
We are a medical device company focused on the design and development of a non-invasive,
point-of-care instrument to assist in the early diagnosis of melanoma. Our principal product,
MelaFind®, features a hand-held imaging device that emits multiple
wavelengths of light to capture images of suspicious pigmented skin lesions and extract data. We
currently do not have any commercialized products or any source of revenue. In 2006 we completed
an exclusive sale and licensing agreement with KaVo Dental GmbH (KaVo), a leading dental
equipment manufacturer and subsidiary of Danaher Corporation, to further develop and commercialize
DIFOTI®. In accordance with the terms of the agreement, KaVo paid us an
up-front sum and made a second payment to us in July 2007. KaVo will pay us an annual royalty based
on the number of DIFOTI® related systems sold per calendar year following
commercial re-launch. The Company began earning the contractual minimum royalty in the second half
of 2008 and earned the minimum royalty in 2009 as KaVo had not re-launched the product as of year
end.
We do not expect to have any significant continuing responsibility for the
DIFOTI® business.
Unless otherwise indicated, the following discussion relates to our continuing operations.
Our revenue for the foreseeable future will depend on the approval by the FDA of
MelaFind® and the commercialization of MelaFind®, and
may vary substantially from year to year and quarter to quarter. Our operating expenses may also
vary substantially from year to year and quarter to quarter based upon the results of our pivotal
clinical trial. The MelaFind® PMA was filed June 9, 2009, and is under
review at the FDA. The Company is actively working with the FDA during this process. The date for
the FDA Advisory Panel to review the MelaFind® PMA has not been established.
Upon obtaining approval from the FDA, we plan to launch MelaFind®
commercially in the United States.
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, 2009, we had an accumulated deficit of $79.2 million. We expect to continue to
spend significant amounts on the PMA submission, FDA approval process and commercialization costs
when we begin to introduce MelaFind® into the US market.
On October 28, 2005, we completed an initial public offering. We issued 4,000,000 shares of
common stock on October 28, 2005 and 262,300 shares of common stock on November 15, 2005, both
issuances at $5.00 per share. After deducting underwriting discounts and expenses and offering
related expenses, the initial public offering resulted in net proceeds to the Company of
approximately $17.7 million. On October 31, 2006 we entered into securities purchase agreements and
a registration rights agreement with certain accredited investors for the private placement of
2,312,384 shares of the 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.
40
On July 31, 2007, the Company entered into a securities purchase agreement and registration
rights agreement with certain accredited investors for the private placement of 2,000,178 shares of
the Companys common stock and warrants to purchase up to 500,041 shares of the Companys common
stock for aggregate gross proceeds of approximately $11.5 million and net proceeds of approximately
$10.7 million. This transaction closed on August 3, 2007.
In a transaction which closed August 8, 2008, the Company completed a registered direct
offering of 2,088,451 shares of common stock for aggregate gross proceeds of $11.9 million ($11
million net proceeds to the Company). Also, the Company completed a registered direct offering of
2,400,000 shares of common stock for aggregate gross proceeds of $15 million ($13.70 million net
proceeds to the Company) which closed July 22, 2009.
On May 7, 2009, the Company entered into a committed equity financing facility (CEFF) with
Kingsbridge Capital Limited, pursuant to which Kingsbridge committed to purchase from time to time
at the Companys sole discretion, up to the lesser of $45 million or 3,327,000 shares of the
Companys common stock, prior to May 7, 2012 subject to various conditions for individual sales,
including dollar, timing, and trading volume limitations, a minimum market per share price, and
other contractual and regulatory requirements. There is no assurance that the Company will satisfy
all the various conditions for individual sales enabling it to use all of the CEFF. In connection
with this CEFF, the Company issued a 5 year warrant, exercisable as of November 7, 2009, to
Kingsbridge to purchase up to 200,000 shares of our common stock at an exercise price of $11.35 per
share.
Under the CEFF, during 2009, the Company sold 1,824,941 shares of common stock to Kingsbridge
Capital Limited, at an average per share price of approximately $9.24, for gross proceeds of
approximately $16.9 million. A proportionate share of the CEFF originating expenses was allocated
to this sale from deferred offering costs. Net of expenses, proceeds from this sale were
approximately $16.8 million. As of December 31, 2009, legal, accounting, and other costs associated
with this agreement approximating $86 have been deferred and will be charged to equity as a
reduction of proceeds from the CEFF or operations should management decide to abandon the CEFF.
We believe that the proceeds from these transactions will be sufficient to fund our
anticipated level of operations for at least the next twelve months. We will however need to raise
additional funds in order to achieve significant commercialization of
MelaFind® and generate significant revenues. |
During January and February of 2010, the Company sold an additional 406,744 shares of common
stock under the CEFF with Kingsbridge Capital. (see Note 13)
During January and February of 2010, warrants for the purchase of 239,723 shares of the
Companys common stock were exercised. (see Note 13)
Most of our expenditures to date have been for research and development activities and general
and administrative expenses. Research and development expenses represent costs incurred for product
development, clinical trials and activities relating to regulatory filings and manufacturing
development efforts. We expense all of our research and development costs as they are incurred.
Our research and development expenses incurred for the year ended December 31, 2009 were
expenses related primarily to the development of MelaFind® and submission of
the MelaFind® PMA. We expect to continue to incur additional research and
development expenses relating to MelaFind® prior to its commercial launch in
the U.S. and selected markets outside the U.S. These additional expenses are subject to the risks and
uncertainties associated with clinical trials and the FDA regulatory review and approval process.
As a result, these additional expenses could exceed our estimated amounts, possibly materially,
especially if the FDA requires additional clinical trials to support approval of
MelaFind®.
General and administrative expenses consist primarily of salaries and related expenses and
general corporate activities and costs associated with our efforts toward development of a
commercial infrastructure to market and sell MelaFind®. We expect selling,
general and administrative expenses to increase as we build our sales force and marketing
capabilities to support placing MelaFind® in selected markets. |
41
At December 31, 2009, we had available net operating loss carryforwards for federal income tax
reporting purposes of approximately $31 million. The net operating loss carryforwards may be
available to offset future taxable income expiring at various dates through the year 2029. 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 annual report, we believe that the following accounting policies and
significant judgments and estimates relating to revenue recognition, stock-based compensation
charges, and accrued expenses are most critical to aid you in fully understanding and evaluating
our reported financial results.
Revenue Recognition
The Company has not received FDA approval for the sale of MelaFind® and
has had no revenues from products since the 2005 discontinuance of DIFOTI®
operations.
Stock-Based Compensation
We account for non-employee stock-based awards in which goods or services are the
consideration received for the equity instruments issued based on the fair value of the equity
instruments issued in accordance with FASB ASC 505-50, Equity Based Payments to Non-Employees.
We record compensation expense associated with stock options and other forms of equity
compensation in accordance with FASB ASC 718, Compensation-Stock Compensation, as interpreted by
SEC Staff Accounting Bulletins No. 107 and No. 110. A compensation charge is recorded, when it is
probable that performance conditions will be satisfied, over the period estimated to satisfy the
performance condition. The probability of vesting is updated at each reporting period and
compensation is adjusted prospectively. |
We have also granted to certain employees stock options that vest with the attainment of
performance milestones over which we have no control of the timing required to satisfy. Upon the
attainment of these performance milestones, there will be a significant compensation charge based
on the fair value of such options on the date granted.
Accrued Expenses
As part of the process of preparing financial statements, we are required to estimate accrued
expenses. This process involves identifying services that have been performed on our behalf and
estimating the level of service performed and the associated cost incurred for such service where
we have not been invoiced or otherwise notified of the actual cost. Examples of estimated accrued
expenses include:
|
|
|
professional service fees; |
|
|
|
|
contract clinical service fees; |
|
|
|
|
fees paid to contract manufacturers in conjunction with the
production of clinical components or materials; and |
42
|
|
|
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, 2009 Compared to Year Ended December 31, 2008
Research and Development Expense
Research and development expense decreased by $1,558 to $10,950 for the year ended December
31, 2009 from $12,508 for the year ended December 31, 2008. The decrease was primarily
attributable to a $1,952 reduction of our clinical trial costs following completion of the pivotal
trial and a $779 reduction in our development costs as the MelaFind® design
was finalized. Offsetting these decreases was increased spending of $946 in quality/regulatory
associated with the PMA submission and FDA review process.
General and Administrative Expense
General and administrative expense increased by $1,865 to $7,631 for the year ended December
31, 2009 from $5,766 for the year ending December 31, 2008. This was principally attributable to
an increase of $1,365 in marketing costs. The majority of this marketing increase took place in
the last quarter of 2009, and included the production of promotional materials being readied for
the projected launch of MelaFind® following FDA approval. Administrative
costs increased by $500 from the 2008 level, including compensation
costs of $292, recruiting of $120,
and temporary help of $30 as the Company increased its personnel capabilities preparing for
commercialization.
Interest (Income)/Expense
Interest income for the year ended December 31, 2009 was $45 compared to $468 for the year
ended December 31, 2008. The decrease reflected significantly lower interest rates available in
2009.
Other Income, net
Other income for the year ended December 31, 2009 decreased from the comparable period in 2008
by $118.
Income earned under our joint research contract with LOreal was $91 below the 2008 level as
the feasibility study was completed during the first quarter of 2009.
Earnings from the provision of DIFOTI® transitional services in
accordance with the terms of our DIFOTI® sale and license agreement with KaVo
decreased by $26 in 2009 compared to 2008 as the services were only provided in the first half of
2009. In accordance with the terms of our DIFOTI® sale and licensing
agreement, KaVo will pay us an annual royalty based on the number of DIFOTI®
related systems sold per calendar year following commercial re-launch. The Company began earning
the contractual minimum royalty in the second half of 2008. As KaVo has not re-launched
DIFOTI® as of year end 2009, the Company had royalty income of $20 in 2009
and $10 in 2008.
Loss on the abandonment/disposal of fixed assets was $20 in 2009. In connection with the
Companys move to a new facility and the termination of existing leases at year end 2009, leasehold
improvements with a net book value of $14 were abandoned and other fixed assets were disposed of
during 2009 at an additional loss of $6.
43
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Research and Development Expense
Research and development expense increased by $4,830 to $12,508 for the year ended December
31, 2008 from $7,678 for the year ended December 31, 2007. The increase was substantially
attributable to an increase in our clinical trial costs which increased by $1,984, product design
and consulting costs which increased by $1,543, regulatory and quality costs which increased by
$790 and manufacturing costs which increased by $559.
During 2008, the Company intensified its pivotal clinical trial activities completing the data
accrual phase of the MelaFind® pivotal trial in the third quarter of 2008 and
built the databases necessary to finalize the image processing classification algorithms (the
classifier) in the fourth quarter of the year. To accomplish this, clinical studies costs
increased by $1,430 and related pathology by $265. Steps undertaken during 2008 towards
preparation for commercialization included increases of $635 for functional and cosmetic design of
the cart to house MelaFind® and other product improvements of $673. In-house
capabilities increased $231, and use of consultants increased $525 in the quality and regulatory
areas to address the FDAs Quality System Regulation including documentation and software
validation. The increase in costs at ASKION, our European contract manufacturer, was additional
labor for the processes and production capability of commercial quantities of
MelaFind® units.
General and Administrative Expense
General and administrative expense increased by $366 to $5,766 for the year ended December 31,
2008 from $5,400 for the year ending December 31, 2007. This was principally attributable to an
increase in share based compensation costs of $473 reflecting a non-cash charge in connection with
the option cancellation and new option grant to the Companys President and Chief Executive
Officer. All other general and administrative costs decreased by a total of $107 from the 2007
level.
Interest (Income)/Expense
Interest income for the year ended December 31, 2008 was $468 compared to $1,054 for the year
ended December 31, 2007. The decrease for the year ended December 31, 2008 reflected an average of
over $3,000 less available to invest and significantly lower interest rates available in 2008.
Other Income, net
Other income for the year ended December 31, 2008 exceeded the same period in 2007 by $143.
Income earned under our joint research contract with LOreal was $83 above the 2007 level. In
accordance with the terms of our DIFOTI® sale/licensing agreement with KaVo,
$48 was earned through the provision of DIFOTI® transitional services and the
Company earned $10 as the contractual minimum royalty in the second half of 2008 as KaVo did not
re-launch DIFOTI® as of year end. There was no income earned from KaVo in
2007. Included in other income, net is the loss $4 on the sale of marketable securities in 2008.
Liquidity and Capital Resources (in thousands)
From inception, we have financed our operations primarily through the use of working capital
from the sale of equity securities. To date, we have not borrowed (other than by issuing
convertible notes, all of which have been converted into equity) or financed our operations through
equipment leases, financing loans or other debt instruments. As of December 31, 2009, we had
$29,673 in cash and cash equivalents as compared to $15,460 at December 31, 2008 in cash, cash
equivalents and marketable securities. The $14,213 increase in 2009 from 2008 reflects the $32,760
of net cash provided by 2009 financing activities offset by $17,303 of net cash used in operating
activities and $854 of net cash used in investing activities.
Our cash and cash equivalents at December 31, 2009 are liquid investments in cash with two
commercial banks and money market accounts held in accounts that substantially exceed FDIC limits.
44
Cash Flows from Operating Activities
Net cash used in operations was $17,303 for the year ended December 31, 2009. For the year
ended December 31, 2008, the net cash used in operations was $16,205. For both 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 $854 for the year ended December 31, 2009
principally relating to purchase of fixed assets offset by the sale of marketable securities. For
the year ended December 31, 2008 net cash provided by investing activities was $1,021 principally
relating to the sale of marketable securities less the purchase of fixed assets.
Cash Flows from Financing Activities
Net cash provided by financing activities was $32,760 for the year ended December 31, 2009 and
reflects the net proceeds received from our financing arrangement with Kingsbridge Capital, net
proceeds from our July 22, 2009 registered direct offering of common stock and proceeds from the
exercise of common stock options and warrants. For the year ended December 31, 2008, the net cash
flows provided by financing activities was $11,057, which included net proceeds from our August 8,
2008 registered direct offering of common stock and proceeds from the exercise of common stock
options and warrants.
Operating Capital and Capital Expenditure Requirements
We face certain risks and uncertainties, which are present in many emerging medical device
companies. At December 31, 2009, we had an accumulated deficit of $79.2 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 proceed with the
MelaFind® system approval process, expand our corporate infrastructure, and
prepare for the potential commercial launch of MelaFind®. We do not expect to
generate significant product revenue until we successfully obtain PMA approval for and begin
selling MelaFind®. In order to achieve significant commercialization of
MelaFind, we will need to obtain additional funding. We believe that our current cash, cash
equivalents and marketable securities and the interest we earn on these balances will be sufficient
to meet our anticipated cash needs for working capital and capital expenditures for at least the
next twelve months, whether or not we achieve commercial launch of MelaFind®.
If our existing cash is insufficient to satisfy our liquidity requirements, or if we develop
additional products, we may seek to sell additional equity or debt securities or obtain a credit
facility, which will be even more difficult due to the lack of available capital as a result of
current global economic crisis. If additional funds are raised through the issuance of debt
securities, these securities would have rights senior to those associated with our common stock and
could contain covenants that would restrict our operations. Any additional financing may not be
available in amounts or on terms acceptable to us, or at all. If we are unable to obtain this
additional financing, we may be required to reduce the scope of, delay or eliminate some or all of
planned product research development and commercialization activities, which could harm our
business.
Because of the numerous risks and uncertainties associated with the development of medical
devices such as MelaFind®, we are unable to estimate the exact amounts of
capital outlays and operating expenditures associated with our current and anticipated clinical
trials. Our future funding requirements will depend on many factors, including, but not limited to:
|
|
|
the schedule, costs, and results of our clinical trials; |
|
|
|
|
the success of our research and development efforts; |
|
|
|
|
the costs and timing of regulatory approval; |
|
|
|
|
reimbursement amounts for the use of
MelaFind® that we are able to obtain
from Medicare and third party payers, or the amount of
direct payments we are able to obtain from patients and/or
physicians utilizing MelaFind®;
|
45
|
|
|
the cost of commercialization activities, including product marketing and building a domestic
direct sales force; |
|
|
|
|
the emergence of competing or complementary technological developments; |
|
|
|
|
the costs of filing, prosecuting, defending and enforcing any patent claims and other rights,
including litigation costs and the results of such litigation; |
|
|
|
|
the costs involved in defending any patent infringement actions brought against us by third parties; |
|
|
|
|
our ability to establish and maintain any collaborative, licensing or other arrangements, and the
terms and timing of any such arrangements; and |
|
|
|
|
Our sales model, which limits the capital cost of MelaFind® to the physician, thereby
increasing the initial capital burden on us. |
Contractual Obligations
The following table summarizes our outstanding contractual obligations as of December 31, 2009
and the effect those obligations are expected to have on our liquidity and cash flows in future
periods:
Payments Due by Period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations |
|
|
|
|
|
|
Less Than |
|
|
|
|
|
|
|
|
|
More Than |
|
|
Total |
|
1 Year |
|
1-3 Years |
|
3-5 Years |
|
5 Years |
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases |
|
$ |
2,952 |
|
|
$ |
354 |
|
|
$ |
792 |
|
|
$ |
894 |
|
|
$ |
912 |
|
Total |
|
$ |
2,952 |
|
|
$ |
354 |
|
|
$ |
792 |
|
|
$ |
894 |
|
|
$ |
912 |
|
Our long-term obligations represent a non-cancelable operating lease for our laboratory,
assembly, and office space. The lease on approximately 20,000 square feet of office space expires
in December 2016.
Related Party Transactions (see Note 9 of Notes to Financial Statements)
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 $24 in 2007, $99 in 2008, and $24 in 2009.
This consulting agreement is terminable by either party on 30 days written notice.
Consulting Agreement with Marek Elbaum, Ph.D.
Effective May 31, 2005, the Company entered into a new consulting agreement with Marek Elbaum,
PhD, the Companys former President and Chief Science and Technology Officer. In consideration of
the services as Chief Scientist to be provided, the Company agreed to pay Dr. Elbaum a monthly fee
of $15. The term of this agreement extended for a period of two years and was automatically
renewable for an additional one year period. Dr. Elbaum and the Company entered into an amended
agreement effective June 1, 2007. Under the terms of the amended agreement, Dr. Elbaum was paid a
monthly fee of $9 through January 2009. Dr Elbaums contract was completed in January 2009.
Consulting Agreement with Robert Friedman, M.D.
During June 2005, the Company retained the services of Robert Friedman, M.D., for an initial
term of one year as a consultant and medical advisor to the Companys Board of Directors. In
consideration for these services, Dr. Friedman will be paid at a rate of $5 per day. This
consulting agreement is automatically renewed for successive one-year terms unless either party
terminates the agreement at least 30 days prior
46
to the expiration of the agreement. The amounts paid to Dr. Friedman amounted to $58 in 2007, $63
in 2008 and $43 in 2009.
Consulting Agreement with Gerald Wagner, Ph.D. (see also Note 8)
Effective April 1, 2006, the Company entered into an amended and restated consulting agreement
with Gerald Wagner, Ph.D., a member of the Companys Board of Directors and its former acting Chief
Operating Officer. Under this amended consulting agreement, the Company agreed to pay Dr. Wagner
the annual amount of $180 payable monthly over the term of the agreement. In addition, in
connection with his ongoing engagement as a consultant, Dr. Wagner received a stock option grant of
50,000 shares of the Companys common stock which vested upon commencement of the pivotal trial for
Melafind® in January 2007. In addition, on March 24, 2006, Dr. Wagner
received another stock option grant of 49,500 shares of the Companys common stock which vested
immediately.
With the start of the pivotal clinical trial in January 2007, Dr. Wagner transitioned out of
his role as acting Chief Operating Officer and entered into an amended and restated consulting
contract with the Company. Under the terms of the amended contract, Dr. Wagner is paid a monthly
retainer of $2.5 and will be paid $2.5 for each additional consulting day. This amended agreement
will end at the option of Dr. Wagner or the Company at any time, by providing fifteen days prior
written notice, or immediately upon the mutual agreement of the Company and Dr. Wagner. The amounts
paid to Dr. Wagner amounted to $45 in 2007, $70 in 2008 and $30 in 2009.
Consulting Agreement with Anne Egger
In March 2009, the Company entered into a consulting agreement with Anne Egger for certain
consulting services primarily focusing on physician advocacy. The agreement was for an initial
term of three months, and has subsequently been extended to run through October 2010, and may be
terminated by either party with 30 days notice. Under the terms of the agreement, Ms. Egger is
entitled to receive a consulting fee of $1.6 per day. Ms. Egger was appointed to the Companys
Board of Directors as of June 10, 2009. During the year ended December 31, 2009, Ms. Egger was
paid $71 under this agreement.
Off-Balance Sheet Arrangements
We do not currently have, nor have we ever had, any relationships with unconsolidated entities
or financial partnerships, such as entities often referred to as structured finance or special
purpose entities, which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage
in trading activities involving non-exchange traded contracts. As such, we are not materially
exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in
these relationships.
Recently Adopted Accounting Pronouncements
In June 2009, the FASB issued guidance now codified as Accounting Standards Codification (ASC)
Topic 105, Generally Accepted Accounting Principles (ASC Topic 105) as the single source of
authoritative non-governmental U.S. GAAP. ASC Topic 105 does not change current U.S. GAAP, but is
intended to simplify user access to all authoritative U.S. GAAP by providing all authoritative
literature related to a particular topic in one place (the Codification). On the effective date
of this Statement, the Codification superseded all then-existing non-SEC accounting and reporting
standards, and all other non-grandfathered non-SEC accounting literature not included in the
Codification became non-authoritative. The provisions of ASC Topic 105 are effective for interim
and annual periods ending after September 15, 2009. We adopted ASC Topic 105 in the third quarter
of 2009. This pronouncement had no effect on our consolidated financial position, results of
operations or cash flows, but impacted our financial reporting process by replacing all references
to pre-Codification standards with references to the applicable Codification topic.
47
In May 2009, the FASB issued new standards for subsequent events (ASC 855), which establishes
general standards of accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued. The new standards
are effective for interim and annual reporting periods ending after June 15, 2009. We adopted the
new standards during the third quarter of fiscal 2009 and, as the pronouncement only requires
additional disclosures, the adoption did not have an impact on our consolidated financial position,
results of operations or cash flows.
As of January 1, 2009, the Company implemented the transition guidance related to FASB Staff
Position (FSP) Emerging Issues Task Force (EITF) 03-6-1, Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating Securities, which is included in the
codification in ASC 260-10, Earnings Per Share (ASC 260-10). ASC 260 requires the Company to
treat unvested deferred stock units as participating securities in accordance with the two-class
method in the calculation of both basic and diluted earnings per share. ASC 260 must be applied
retrospectively. The adoption of ASC 260did not have any impact on our financial statements.
The Company has adopted FASB ASC 820, Fair Value Measurements and Disclosures (ASC 820) with
respect to its financial assets and liabilities. In February 2008, the FASB issued updated guidance
related to fair value measurements, which is included in the Codification in ASC 820, Fair Value
Measurements and Disclosures. The updated guidance provided a one year deferral of the effective
date of ASC 820 for non-financial assets and non-financial liabilities, except those that are
recognized or disclosed in the financial statements at fair value at least annually. The
implementation of the non-financial items measured on a non-recurring basis did not have a material
impact on the Companys financial statements.
In April 2008, the FASB issued ASC 350, Intangibles-Goodwill and Other (ASC 350). ASC 350 amends
the factors that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset. ASC 350 is effective for calendar-year
companies beginning January 1, 2009. The requirement for determining useful lives must be applied
prospectively to intangible assets acquired after the effective date and the disclosure
requirements must be applied prospectively to all intangible assets recognized as of, and
subsequent to, the effective date. The implementation of this standard did not have a material
impact on the Companys financial statements.
Recent Accounting Pronouncements
In October 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-13,
Multiple-Deliverable Revenue Arrangements, (amendments to FASB ASC Topic 605, Revenue
Recognition) (ASU 2009-13). ASU 2009-13 addresses how to determine whether an arrangement
involving multiple deliverables contains more than one unit of accounting and how the arrangement
consideration should be allocated among the separate units of accounting. The amendments eliminate
the residual method of revenue allocation and require revenue to be allocated using the relative
selling price method. ASU 2009-13 will be effective for fiscal years beginning on or after June 15,
2010 with early adoption permitted. The Company will adopt ASU 2009-13 upon commercialization of
our product and the onset of revenue generation.
In October 2009 the FASB issued ASU 2009-14 Software (ASC Topic 985): Certain Revenue Arrangements
That Include Software Elements (ASU No. 2009-14). This update affects companies that sell or
lease tangible products in an arrangement that contains software that is more than incidental to
the tangible products as a whole. The amendments in this update will be effective prospectively
for revenue arrangements entered into or materially modified in fiscal years beginning on or after
June 15, 2010. Early adoption is permitted, but only if adopted in tandem with ASU 2009-13. The
Company will adopt ASU 2009-14 upon commercialization of our product and the onset of revenue
generation.
In October 2009 the FASB issued ASU 2009-15 as an update to EITF 09-1 Accounting for own-share
lending arrangements in contemplation of a convertible debt issue or other financing. Under the
amendment if it becomes probable that a counter party to a share lending arrangement will default
the issuer of the share lending arrangement shall recognize an expense equal to the then fair
market value of the unreturned shares. The amendments in this update will be effective for fiscal
years beginning on or after December 15, 2009. The Company is currently assessing the impact of
the adoption of ASU 2009-15.
48
In January 2010, the FASB issued ASU 2010-6, an update that improves the requirements related to
Fair Value Measurements and Disclosures Subtopic 820-10 of the FASB Accounting Standards
Codification originally issued as FASB Statement 157. This update requires disclosures about
transfers between Level 1, Level 2 and Level 3 assets and the disaggregated activity in the roll
forward for level 3 Fair Value measurements. These new disclosures are effective for fiscal years
beginning after December 15, 2010 and for interim periods within those fiscal years. We do not
expect the adoption of ASU 2010-6 to have a material impact on our consolidated financial
statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Our exposure to market risk at December 31, 2009 is confined to our cash and cash equivalents.
We invest in cash and money market accounts with commercial banks. We currently do not hedge
interest rate exposure. While declines in interest rates do impact the amount of interest income
that our cash and cash equivalents will earn, we do not believe that we have any material exposure
to interest rate risk arising from our investments, due to the short-term nature of our
investments.
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
49
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, 2008 and 2009, and the related statements of operations, stockholders equity, and
cash flows for each of the years in the three-year period ended December 31, 2009. 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 audits to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Electro-Optical Sciences, Inc., as of December 31, 2008 and
2009, and the results of its operations and its cash flows for each of the years in the three-year
period ended December 31, 2009, in conformity with accounting principles generally accepted in the
United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Electro-Optical Sciences, Inc.s internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our
report dated March 3, 2010 expressed an unqualified opinion thereon.
/s/ Eisner LLP
New York, New York
March 3, 2010
50
ELECTRO-OPTICAL SCIENCES, INC.
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
ASSETS
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
15,069,939 |
|
|
$ |
29,673,420 |
|
Marketable securities |
|
|
390,512 |
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
375,612 |
|
|
|
664,962 |
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
15,836,063 |
|
|
|
30,338,382 |
|
Property and equipment, net |
|
|
643,383 |
|
|
|
1,571,956 |
|
Patents and trademarks, net |
|
|
94,908 |
|
|
|
83,008 |
|
Deferred financing costs |
|
|
|
|
|
|
85,570 |
|
Other assets |
|
|
45,276 |
|
|
|
48,000 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
16,619,630 |
|
|
$ |
32,126,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable (includes related parties of $17,500 as of
December 31, 2008, and $6,921 as of December 31, 2009) |
|
$ |
634,394 |
|
|
$ |
1,187,201 |
|
Accrued expenses |
|
|
832,228 |
|
|
|
590,600 |
|
Deferred income |
|
|
36,085 |
|
|
|
|
|
Other current liabilities |
|
|
27,466 |
|
|
|
33,285 |
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
1,530,173 |
|
|
|
1,811,086 |
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (Note 5) |
|
|
|
|
|
|
|
|
Stockholders Equity: |
|
|
|
|
|
|
|
|
Preferred stock $0.10 par value; authorized 10,000,000 shares: |
|
|
|
|
|
|
|
|
Issued and outstanding: none |
|
|
|
|
|
|
|
|
Common stock $0.001 par value; authorized 30,000,000 shares: |
|
|
|
|
|
|
|
|
Issued and outstanding 17,634,498 and 22,354,317 shares at
December 31, 2008 and 2009, respectively. |
|
|
17,634 |
|
|
|
22,354 |
|
Additional paid-in capital |
|
|
75,845,953 |
|
|
|
109,513,582 |
|
Accumulated other comprehensive loss |
|
|
(6,868 |
) |
|
|
|
|
Accumulated deficit |
|
|
(60,767,262 |
) |
|
|
(79,220,106 |
) |
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
15,089,457 |
|
|
|
30,315,830 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
16,619,630 |
|
|
$ |
32,126,916 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements
51
ELECTRO-OPTICAL SCIENCES, INC.
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
$ |
7,677,578 |
|
|
$ |
12,507,959 |
|
|
$ |
10,950,114 |
|
General and administrative |
|
|
5,400,371 |
|
|
|
5,766,238 |
|
|
|
7,631,251 |
|
|
|
|
|
|
|
|
|
|
|
Operating loss from continuing operations |
|
|
(13,077,949 |
) |
|
|
(18,274,197 |
) |
|
|
(18,581,365 |
) |
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
(1,054,130 |
) |
|
|
(467,587 |
) |
|
|
(45,259 |
) |
Other income, net |
|
|
(58,567 |
) |
|
|
(201,579 |
) |
|
|
(83,262 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,112,697 |
) |
|
|
(669,166 |
) |
|
|
(128,521 |
) |
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(11,965,252 |
) |
|
|
(17,605,031 |
) |
|
|
(18,452,844 |
) |
Gain on sale and licensing of discontinued operations |
|
|
27,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(11,937,444 |
) |
|
$ |
(17,605,031 |
) |
|
$ |
(18,452,844 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share |
|
$ |
(0.84 |
) |
|
$ |
(1.08 |
) |
|
$ |
(.96 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average number of
common shares outstanding |
|
|
14,220,466 |
|
|
|
16,282,176 |
|
|
|
19,293,761 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements
52
ELECTRO-OPTICAL SCIENCES, INC.
STATEMENTS OF STOCKHOLDERS EQUITY
Years Ended December 31, 2007, 2008 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Other |
|
|
|
|
|
|
Stockholders |
|
|
|
Common Stock |
|
|
Paid-in |
|
|
Comprehensive |
|
|
Accumulated |
|
|
Equity |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Loss |
|
|
Deficit |
|
|
(Deficiency) |
|
Balance at January 1, 2007 |
|
|
13,296,448 |
|
|
$ |
13,296 |
|
|
$ |
52,525,408 |
|
|
|
|
|
|
$ |
(31,224,787 |
) |
|
$ |
21,313,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of options |
|
|
105,256 |
|
|
|
106 |
|
|
|
114,421 |
|
|
|
|
|
|
|
|
|
|
|
114,527 |
|
Issuance of shares of common
stock and warrants in
connection with private
placement (net of expenses) |
|
|
2,000,178 |
|
|
|
2,000 |
|
|
|
10,713,847 |
|
|
|
|
|
|
|
|
|
|
|
10,715,847 |
|
Issuance of options to
consultant |
|
|
|
|
|
|
|
|
|
|
139,703 |
|
|
|
|
|
|
|
|
|
|
|
139,703 |
|
Share-based compensation
expense |
|
|
|
|
|
|
|
|
|
|
437,310 |
|
|
|
|
|
|
|
|
|
|
|
437,310 |
|
Other comprehensive
income/(loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,136 |
) |
|
|
|
|
|
|
(12,136 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,937,444 |
) |
|
|
(11,937,444 |
) |
Comprehensive loss
(sub-total) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,949,580 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
|
15,401,882 |
|
|
$ |
15,402 |
|
|
$ |
63,930,689 |
|
|
$ |
(12,136 |
) |
|
$ |
(43,162,231 |
) |
|
$ |
20,771,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of options |
|
|
141,823 |
|
|
|
141 |
|
|
|
73,234 |
|
|
|
|
|
|
|
|
|
|
|
73,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of warrants |
|
|
2,342 |
|
|
|
2 |
|
|
|
10,584 |
|
|
|
|
|
|
|
|
|
|
|
10,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares of common
stock in connection with a
public offering(net of
expenses) |
|
|
2,088,451 |
|
|
|
2,089 |
|
|
|
10,970,695 |
|
|
|
|
|
|
|
|
|
|
|
10,972,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
expense |
|
|
|
|
|
|
|
|
|
|
860,751 |
|
|
|
|
|
|
|
|
|
|
|
860,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,268 |
|
|
|
|
|
|
|
5,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,605,031 |
) |
|
|
(17,605,031 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
(sub-total) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,599,763 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
17,634,498 |
|
|
$ |
17,634 |
|
|
$ |
75,845,953 |
|
|
$ |
(6,868 |
) |
|
$ |
(60,767,262 |
) |
|
$ |
15,089,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of options |
|
|
151,457 |
|
|
|
152 |
|
|
|
212,119 |
|
|
|
|
|
|
|
|
|
|
|
212,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of warrants |
|
|
343,421 |
|
|
|
343 |
|
|
|
2,174,756 |
|
|
|
|
|
|
|
|
|
|
|
2,175,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares of common
stock in connection with a
public offering(net of
expenses) |
|
|
2,400,000 |
|
|
|
2,400 |
|
|
|
13,696,779 |
|
|
|
|
|
|
|
|
|
|
|
13,699,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares of common
stock in connection with a
Committed Equity Financing
Facility (CEFF) (net of
expenses) |
|
|
1,824,941 |
|
|
|
1,825 |
|
|
|
16,757,222 |
|
|
|
|
|
|
|
|
|
|
|
16,759,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
expense |
|
|
|
|
|
|
|
|
|
|
826,753 |
|
|
|
|
|
|
|
|
|
|
|
826,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,868 |
|
|
|
|
|
|
|
6,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,452,844 |
) |
|
|
(18,452,844 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss (sub-total) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,445,976 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
22,354,317 |
|
|
$ |
22,354 |
|
|
$ |
109,513,582 |
|
|
|
|
|
|
$ |
(79,220,106 |
) |
|
$ |
30,315,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements
53
ELECTRO-OPTICAL SCIENCES, INC.
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, |
|
|
December 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(11,965,252 |
) |
|
$ |
(17,605,031 |
) |
|
$ |
(18,452,844 |
) |
Gain on sale and licensing of discontinued operations |
|
|
27,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(11,937,444 |
) |
|
|
(17,605,031 |
) |
|
|
(18,452,844 |
) |
Adjustments to reconcile net loss to net cash used in operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued operations |
|
|
(27,808 |
) |
|
|
|
|
|
|
|
|
Loss on disposal/abandonment of fixed assets |
|
|
|
|
|
|
|
|
|
|
20,186 |
|
Depreciation and amortization |
|
|
223,706 |
|
|
|
308,977 |
|
|
|
314,352 |
|
Noncash compensation |
|
|
437,310 |
|
|
|
860,751 |
|
|
|
826,753 |
|
Amortization of unearned interest income-discontinued operations |
|
|
(12,320 |
) |
|
|
|
|
|
|
|
|
Common stock options and warrants issued for consulting fees |
|
|
139,703 |
|
|
|
|
|
|
|
|
|
Amortization of discount on marketable securities |
|
|
(519 |
) |
|
|
519 |
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in prepaid expenses and other current assets |
|
|
(67,920 |
) |
|
|
35,942 |
|
|
|
(289,350 |
) |
Increase in accounts payable and accrued expenses |
|
|
124,800 |
|
|
|
223,924 |
|
|
|
311,179 |
|
Increase in other current liabilities |
|
|
2,727 |
|
|
|
8,662 |
|
|
|
5,819 |
|
(Increase) decrease in other assets |
|
|
(6,118 |
) |
|
|
600 |
|
|
|
(2,724 |
) |
Increase (decrease) in deferred income |
|
|
74,946 |
|
|
|
(38,861 |
) |
|
|
(36,085 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(11,048,937 |
) |
|
|
(16,204,517 |
) |
|
|
(17,302,714 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Patent costs |
|
|
(40,006 |
) |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(252,847 |
) |
|
|
(313,020 |
) |
|
|
(1,251,211 |
) |
(Purchase) sale of marketable securities |
|
|
(1,731,522 |
) |
|
|
1,334,142 |
|
|
|
397,380 |
|
Proceeds from sale and licensing of discontinued operations |
|
|
500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(1,524,375 |
) |
|
|
1,021,122 |
|
|
|
(853,831 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from private placements/public offering |
|
|
11,501,023 |
|
|
|
11,909,057 |
|
|
|
15,000,000 |
|
Expenses related to private placement/public offering |
|
|
(785,176 |
) |
|
|
(936,273 |
) |
|
|
(1,300,821 |
) |
Proceeds from Committed Equity Financing Facility |
|
|
|
|
|
|
|
|
|
|
16,863,000 |
|
Expenses related to Committed Equity Financing Facility |
|
|
|
|
|
|
|
|
|
|
(189,523 |
) |
Proceeds from exercise of stock options |
|
|
114,527 |
|
|
|
73,375 |
|
|
|
212,271 |
|
Proceeds from exercise of stock warrants |
|
|
|
|
|
|
10,586 |
|
|
|
2,175,099 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
10,830,374 |
|
|
|
11,056,745 |
|
|
|
32,760,026 |
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(1,742,938 |
) |
|
|
(4,126,650 |
) |
|
|
14,603,481 |
|
Cash and cash equivalents at beginning of year |
|
|
20,939,527 |
|
|
|
19,196,589 |
|
|
|
15,069,939 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
19,196,589 |
|
|
$ |
15,069,939 |
|
|
$ |
29,673,420 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental Schedule of Noncash Investing and Financing
Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss (gain) on marketable securities |
|
$ |
12,136 |
|
|
$ |
(5,268 |
) |
|
$ |
(6,868 |
) |
The accompanying notes are an integral part of these financial statements
54
ELECTRO-OPTICAL SCIENCES, INC.
Notes to Financial Statements
(In thousands, except for share and per share data)
1. Principal Business Activities and Summary of Significant Accounting Policies:
Organization and Business
Electro-Optical Sciences, Inc., a Delaware corporation (the Company), is focused on the
development of a non-invasive, point-of-care instrument (MelaFind®) for
assisting in the early diagnosis of melanoma. The MelaFind® PMA was filed on
June 9, 2009 and is under review at the FDA. The pivotal trial conducted to establish the safety
and effectiveness of MelaFind® was performed under the auspices of a Protocol
Agreement. In addition, the MelaFind® PMA has been granted Expedited Review
by the FDA. The Company is actively working with the FDA during the review process. We have been
informed that MelaFind® will be reviewed by an FDA Advisory Panel, however,
the date for the Panel meeting has not yet been established. Upon obtaining approval from the FDA,
we plan to launch MelaFind® commercially in the United States.
To date, the Company has not generated any revenues from MelaFind®. All
of the Companys historical revenues have come from activities and products that have since been
discontinued. In 2005 the Company discontinued all operations associated with its
DIFOTI® product, 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, 2009, the Company has an accumulated deficit of $79.2 million and
anticipates that it will continue to incur net losses for the foreseeable future in the development
and commercialization of the Melafind® device. From inception, the Company
has financed operations primarily through the sale of convertible preferred stock and subsequently
sold common stock as part of an initial public offering on October 28, 2005, private placements in
November 2006 and August 2007, registered direct offerings which closed August 2008 and July 2009,
and the committed equity financing facility (CEFF) with Kingsbridge Capital Limited (refer to
Note 7, Stockholders Equity, for further details). With the exception of the additional funds
that will be needed in order to achieve significant commercialization of
MelaFind®, the Company believes that the proceeds from these transactions
will permit the Company to fund its anticipated levels of operations for at least the next twelve
months, whether or not we achieve commercial launch of 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
The Companys operations are confined to one business segment: the design and development of
MelaFind®.
Cash and Cash Equivalents
The Companys cash is held in nationally-chartered banks and the amounts the Company currently
maintains with these banks exceeds the current federal insurance limits provided by the Federal
Deposit Insurance Company. The Company has not experienced any loss of its cash or interest income.
Cash equivalents are highly liquid debt instruments with an original maturity of three months or
less at the date of acquisition. The carrying value of these instruments approximates fair value.
55
Marketable Securities
Marketable securities are classified as either held-to-maturity, available for sale or
trading. Held-to-maturity marketable securities are reported at amortized cost. Available for sale
marketable securities are reported at fair value, with unrealized gains and losses excluded from
earnings, and reported in other comprehensive income. Trading securities are reported at fair
value, with unrealized gains and losses included in earnings. The Company evaluates declines in
fair value of its investments in available-for-sale marketable securities to determine if these
declines are other than temporary. When a decline in value is determined to be
other-than-temporary, an impairment charge would be recorded and a new cost basis in the investment
would be established.
Under accounting guidance for fair value measurements and disclosures, the Company has
established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair
value as follows:
|
Level 1: |
|
Observable inputs such as quoted prices in active markets; |
|
|
Level 2: |
|
Inputs, other than the quoted prices in active markets, that are observable either
directly or indirectly; and |
|
|
Level 3: |
|
Unobservable inputs in which there is little or no market data requiring the
reporting entity to develop its own assumptions. |
The Company did not hold any marketable securities at December 31, 2009
Property and Equipment
Depreciation of property and equipment is provided for by the straight-line method over the
estimated useful lives of the related assets. Leasehold improvements are amortized over the lesser
of the assets useful lives or the remaining term of the lease.
Patents
Patents are carried at cost less accumulated amortization which is calculated on a
straight-line basis over a period of 15 years.
Revenue Recognition
The Company has not received FDA approval for the sale of MelaFind® and
has had no revenues from products other than from the sale of DIFOTI®
products.
Income Taxes
The Company accounts for income taxes using the asset and liability method of accounting for
deferred income taxes (see also 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.
With respect to uncertain tax positions, the Company would recognize the tax benefit from an
uncertain tax position only if it is more-likely-than-not that the tax position will be sustained
upon examination by the taxing authorities, based on the technical merits of the position. The tax
benefits to be recognized in the financial statements from such a position would be measured based
on the largest benefit that has a greater than fifty percent likelihood of being realized upon
ultimate resolution. The Companys reassessment of its tax positions did not have a material impact
on its results of operations and financial position.
56
Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires the use of estimates and assumptions by management that
affect reported amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The most significant estimates relate to stock-based
compensation arrangements and accrued expenses. Actual results could differ from these estimates.
Long-lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. An asset is
considered to be impaired when the sum of the undiscounted future net cash flows expected to result
from the use of the asset and its eventual disposition exceeds its carrying amount. The amount of
impairment loss, if any, is measured as the difference between the net book value of the asset and
its estimated fair value.
Research and Development
Research and development costs are expensed as incurred.
Stock-Based Compensation
The Company records compensation expense associated with stock options and other forms of equity compensation.
The Company grants to certain employees stock options that vest over a requisite service
period or with the attainment of performance milestones over which the Company has control of the
timing required to satisfy. A compensation charge is recorded over the service period or the
probable period estimated to satisfy the performance condition. The probability of vesting is
updated at each reporting period and the compensation charge is adjusted prospectively.
The Company also grants to certain employees stock options that vest with the attainment of
performance milestones over which the Company has no control of the timing required to satisfy.
Upon the attainment of these performance milestones, there will be a significant compensation
charge based on the fair value of such options on the date granted.
The Company accounts 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.
With equity instruments that are not immediately vested, compensation cost is measured on the
date such instruments vest or a performance commitment is reached. 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 and
accounts payable. The Company believes the financial instruments recorded values approximate
current values because of their nature and respective durations.
57
Net Loss per Common Share
Basic net loss per share 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 earnings (loss) per share gives effect to dilutive
options, warrants and other potential common shares outstanding during the period. Diluted net loss
per common share is equal to basic net loss per common share since all potentially dilutive
securities are anti-dilutive for each of the periods presented. Potential common stock equivalents
excluded consist of stock options and warrants which are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2007 |
|
2008 |
|
2009 |
|
Common stock options |
|
|
1,812,084 |
|
|
|
2,069,080 |
|
|
|
2,031,023 |
|
Warrants |
|
|
1,126,886 |
|
|
|
1,124,544 |
|
|
|
929,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,938,970 |
|
|
|
3,193,624 |
|
|
|
2,960,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 the year ended December 31, 2007, comprehensive loss was
$11,949 which includes a net loss of $11,937 and an unrealized loss on available-for-sale
marketable securities of $12. For the year ended December 31, 2008, comprehensive loss was $17,600
which includes a net loss of $17,605 and an unrealized gain on available-for-sale marketable
securities of $5. For the year ended December 31, 2009, comprehensive loss was $18,446 which
includes a net loss of $18,453 and an unrealized gain on available-for-sale marketable securities
of $7, which offsets the unrealized loss of $7 at December 31, 2008.
Recently Adopted Accounting Pronouncements
In June 2009, the FASB issued guidance now codified as Accounting Standards Codification (ASC)
Topic 105, Generally Accepted Accounting Principles (ASC Topic 105) as the single source of
authoritative non-governmental U.S. GAAP. ASC Topic 105 does not change current U.S. GAAP, but is
intended to simplify user access to all authoritative U.S. GAAP by providing all authoritative
literature related to a particular topic in one place (the Codification). On the effective date
of this Statement, the Codification superseded all then-existing non-SEC accounting and reporting
standards, and all other non-grandfathered non-SEC accounting literature not included in the
Codification became non-authoritative. The provisions of ASC Topic 105 are effective for interim
and annual periods ending after September 15, 2009. We adopted ASC Topic 105 in the third quarter
of 2009. This pronouncement had no effect on our consolidated financial position, results of
operations or cash flows, but impacted our financial reporting process by replacing all references
to pre-Codification standards with references to the applicable Codification topic.
In May 2009, the FASB issued new standards for subsequent events (ASC 855), which establishes
general standards of accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued. The new standards
are effective for interim and annual reporting periods ending after June 15, 2009. We adopted the
new standards during the third quarter of fiscal 2009 and, as the pronouncement only requires
additional disclosures, the adoption did not have an impact on our consolidated financial position,
results of operations or cash flows.
As of January 1, 2009, the Company implemented the transition guidance related to FASB Staff
Position (FSP) Emerging Issues Task Force (EITF) 03-6-1, Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating Securities, which is included in the
codification in ASC 260, Earnings Per Share (ASC 260-10). ASC 260 requires the Company to treat
unvested deferred stock units as participating securities in accordance with the two-class method
in the calculation of both basic and diluted earnings per share. ASC 260 must be applied
retrospectively. The adoption of ASC 260 did not have any impact on our financial statements.
58
The Company has adopted FASB ASC 820, Fair Value Measurements and Disclosures (ASC 820) with
respect to its financial assets and liabilities. In February 2008, the FASB issued updated guidance
related to fair value measurements, which is included in the Codification in ASC 820, Fair Value
Measurements and Disclosures. The updated guidance provided a one year deferral of the effective
date of ASC 820 for non-financial assets and non-financial liabilities, except those that are
recognized or disclosed in the financial statements at fair value at least annually. The
implementation of the non-financial items measured on a non-recurring basis did not have a material
impact on the Companys financial statements.
In April 2008, the FASB issued ASC 350, Intangibles-Goodwill and Other (ASC 350). ASC 350 amends
the factors that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset. ASC 350 is effective for calendar-year
companies beginning January 1, 2009. The requirement for determining useful lives must be applied
prospectively to intangible assets acquired after the effective date and the disclosure
requirements must be applied prospectively to all intangible assets recognized as of, and
subsequent to, the effective date. The implementation of this standard did not have a material
impact on the Companys financial statements.
Recent Accounting Pronouncements
In October 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-13,
Multiple-Deliverable Revenue Arrangements, (amendments to FASB ASC Topic 605, Revenue
Recognition) (ASU 2009-13). ASU 2009-13 addresses how to determine whether an arrangement
involving multiple deliverables contains more than one unit of accounting and how the arrangement
consideration should be allocated among the separate units of accounting. The amendments eliminate
the residual method of revenue allocation and require revenue to be allocated using the relative
selling price method. ASU 2009-13 will be effective for fiscal years beginning on or after June 15,
2010 with early adoption permitted. The Company will adopt ASU 2009-13 upon commercialization of
our product and the onset of revenue generation.
In October 2009 the FASB issued ASU 2009-14 Software (ASC Topic 985): Certain Revenue Arrangements
That Include Software Elements (ASU No. 2009-14). This update affects companies that sell or
lease tangible products in an arrangement that contains software that is more than incidental to
the tangible products as a whole. The amendments in this update will be effective prospectively
for revenue arrangements entered into or materially modified in fiscal years beginning on or after
June 15, 2010. Early adoption is permitted, but only if adopted in tandem with ASU 2009-13. The
Company will adopt ASU 2009-14 upon commercialization of our product and the onset of revenue
generation.
In October 2009 the FASB issued ASU 2009-15 as an update to EITF 09-1 Accounting for own-share
lending arrangements in contemplation of a convertible debt issue or other financing. Under the
amendment if it becomes probable that a counterparty to a share lending arrangement will default
the issuer of the share lending arrangement shall recognize an expense equal to the then fair
market value of the unreturned shares. The amendments in this update will be effective for fiscal
years beginning on or after December 15, 2009. The Company is currently assessing the impact of
the adoption of ASU 2009-15.
In January 2010, the FASB issued ASU 2010-6, an update that improves the requirements related to
Fair Value Measurements and Disclosures Subtopic 820-10 of the FASB Accounting Standards
Codification originally issued as FASB Statement 157. This update requires disclosures about
transfers between Level 1, Level 2 and Level 3 assets and the disaggregated activity in the roll
forward for level 3 Fair Value measurements. These new disclosures are effective for fiscal years
beginning after December 15, 2010 and for interim periods within those fiscal years. The Company
does not expect the adoption of ASU 2010-6 to have a material impact on the Companys financial
statements.
2. Marketable Securities:
The Companys marketable securities consist of corporate debt securities with a weighted
average maturity not in excess of twelve months. The Company classifies its marketable securities
as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized
gains and losses reported as a component of stockholders equity in accumulated other comprehensive
loss. Interest income, realized gains and losses, and declines in value of securities judged to be
other-than-temporary are included in the Companys statement of operations. As of December 31,
2009, the Company did not hold any marketable securities.
59
As described in Note 1, the Company has adopted ASC 820 which, among other things, defines
fair value, establishes a consistent framework for measuring fair value and expands disclosure for
each major asset and liability category measured at fair value on either a recurring or
nonrecurring basis. ASC 820 clarifies that fair value is an exit price, representing the amount
that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. As such, fair value is a market-based measurement that should be
determined based on assumptions that market participants would use in pricing an asset or
liability.
3. Property and Equipment:
Property and equipment, at cost, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
Estimated |
|
|
|
2008 |
|
|
2009 |
|
|
Useful Life |
|
Leasehold improvements |
|
$ |
186 |
|
|
$ |
519 |
|
|
Lease Term |
Laboratory and research equipment |
|
|
821 |
|
|
|
936 |
|
|
5 years |
Office furniture and equipment |
|
|
475 |
|
|
|
1,061 |
|
|
3-5 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,482 |
|
|
|
2,516 |
|
|
|
|
|
Accumulated depreciation and amortization |
|
|
839 |
|
|
|
944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
643 |
|
|
$ |
1,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense amounted to approximately $201, $286 and $302 for the years ended
December 31, 2007, 2008 and 2009, respectively.
4. Patents:
Patents as shown in the accompanying balance sheets are net of accumulated amortization
of $179 and $191 at December 31, 2008 and 2009, respectively Amortization expense related to all
patents was approximately $22, $23 and $12 for the years ended December 31, 2007, 2008 and 2009,
respectively. Amortization expense of currently held patents is expected to amount to $12, $12,
$10, $4 and $2 for the years ending December 31, 2010, 2011, 2012, 2013, and 2014, respectively.
5. Commitments and Contingencies:
The Company is obligated under a seven year non-cancelable operating lease for office,
lab, and manufacturing space expiring December 2016. The lease is subject to escalations for
increases in operating expenses. For the years ended December 31, the approximate aggregate minimum future payments due under this
lease are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
2016 |
|
$ |
2,952 |
|
|
$ |
354 |
|
|
$ |
382 |
|
|
$ |
410 |
|
|
$ |
439 |
|
|
$ |
455 |
|
|
$ |
456 |
|
|
$ |
457 |
|
Rent expense charged to operations amounted to approximately $305, $320 and $332 for the
years ended December 31, 2007, 2008, and 2009, respectively.
ASKION GmbH (ASKION), located in Gera Germany, which specializes in precision optics, has
become an integral member of the MelaFind® development team and the Company
expects to continue to work with ASKION for the foreseeable future. ASKION produced the
MelaFind® hand-held imaging devices used in our pivotal clinical trials and
is currently building additional units and performing other additional developmental activities.
Beginning in August 2006, the Company, primarily through ASKION, engaged Carl Zeiss Jena GmbH
(Zeiss) to build the lenses and assemblies, as well as provide certain technical consulting, for
the MelaFind® units which have been used in the Companys pivotal clinical
trials. This work was performed during 2007, 2008 and 2009, and is expected to continue on
commercial MelaFind® units throughout 2010.
60
The Company has an employment agreement with its President and Chief Executive Officer
(CEO) which provides for a base salary, stock options, and discretionary performance bonuses.
The agreement, which provides for automatic one year renewal terms, currently runs through the end
of 2010. Effective March 1, 2009, the Companys Board of Directors increased the Company President
and CEOs annual base salary to $313.6 and awarded him a bonus of $150 (see also Note 8).
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 SIMPLE IRA defined contribution plan covering all qualified employees.
An officer of the Company serves as trustee of the plan. The Company provides a matching
contribution of up to 3% of each employees salary. Company contributions to this plan amounted to
approximately $38, $72 and $103 for the years ended December 31, 2007, 2008 and 2009, respectively.
7. Stockholders Equity
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.
On July 31, 2007, the Company entered into a securities purchase agreement and a registration
rights agreement with certain accredited investors for the private placement of 2,000,178 shares of
the Companys common stock and warrants to purchase up to 500,041 shares of the Companys common
stock for aggregate gross proceeds of approximately $11.5 million and net proceeds of approximately
$10.7 million. The private placement closed August 3, 2007. Pursuant to the securities purchase
agreement, for a purchase price of $5.75 each investor received one share of the Companys common
stock and a warrant to purchase 0.25 of a share of common stock. The warrants are five-year
warrants with an exercise price of $8.00 per share.
Both of the private placements were completed pursuant to an exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended, and/or Regulation D promulgated
thereunder.
Pursuant to the terms of the registration rights agreements, the Company filed resale
registration statements covering the shares in both private placements, including the shares
issuable upon exercise of the warrants, with the SEC. In the unlikely event that the Company fails
to meet certain obligations, as described in the registration rights agreements, the holders would
be entitled to certain monetary damages.
However, in no event is the Company obligated to make payments in excess of 10% of the
aggregate purchase price of the common shares. The Company has concluded that it is unlikely that
the Company would be required to remit any payments to its investors for failing to maintain its
effectiveness. The Companys resale registration statements on Form S-3 were declared effective by
the Securities and Exchange Commission (Registration No. 333-139056 and Registration No.333-145740)
on February 12, 2007 and September 11, 2007, respectively.
On June 26, 2008, the Company filed a Form S-3 shelf registration statement for an
indeterminate number of shares of common stock, warrants to purchase shares of common stock and
units consisting of a combination thereof having an aggregate initial offering price not to exceed
$40 million. The SEC declared the registration statement effective on July 7, 2008 (file#
333-151935). Management utilized this shelf registration statement to raise additional equity
capital by completing a registered direct offering of 2,088,451 shares of the Companys common
stock for aggregate gross proceeds of $11.9 million ($11 million approximate net proceeds to the
Company) at a per share offering price of $5.68. The offering closed on August 8, 2008.
61
In addition, management utilized this shelf registration statement to raise additional equity
capital by completing a registered direct offering of 2,400,000 shares of the Companys common
stock for aggregate gross proceeds of $15 million ($13.7 million approximate net proceeds to the
Company) at a per share offering price of $6.25. The offering closed on July 22, 2009.
Approximately $13.1 million remains available under the Companys shelf registration statement as
of December 31, 2009.
On May 7, 2009, the Company entered into a committed equity financing facility (CEFF) with
Kingsbridge Capital Limited, pursuant to which Kingsbridge committed to purchase from time to time
at the Companys sole discretion, up to the lesser of $45 million or 3,327,000 shares of the
Companys common stock, prior to May 7, 2012 subject to various conditions for individual sales,
including dollar, timing, and trading volume limitations, a minimum market per share price, and
other contractual and regulatory requirements. There is no assurance that the Company will satisfy
all the various conditions for individual sales enabling it to use all of the CEFF. In connection
with this CEFF, the Company issued a 5 year warrant, exercisable as of November 7, 2009, to
Kingsbridge to purchase up to 200,000 shares of the Companys common stock at an exercise price of
$11.35 per share with a Black Scholes Fair Value of $678. The issuance of this warrant was deemed
to be a cost of the offering.
Under the CEFF, during 2009, the Company sold 1,824,941 shares of common stock to Kingsbridge
Capital Limited, at an average per share price of approximately $9.24, for gross proceeds of
approximately $16.9 million. A proportionate share of the CEFF originating expenses was allocated
to this sale from deferred offering costs. Net of expenses, proceeds from this sale were
approximately $16.8 million. As of December 31, 2009, legal, accounting, and other costs associated
with this agreement approximating $86 have been deferred and will be charged to equity as a
reduction of proceeds from the CEFF or operations should management decide to abandon the CEFF.
During January and February of 2010, the Company sold an additional 406,744 shares of common
stock under the CEFF with Kingsbridge Capital. (see Note 13)
During January and February of 2010, warrants for the purchase of 239,723 shares of the
Companys common stock were exercised. (see Note 13)
The Company will require additional funds to achieve significant commercialization of
MelaFind®.
As of December 31, 2009, the Company had 10,000,000 shares of $0.10 par value preferred stock
authorized and no shares issued and outstanding.
8. Stock-Based Compensation and Warrants:
Stock Options
The Company has one stock option plan under which the board of directors may currently grant
incentives to employees, directors, consultants and collaborating scientists in the form of
incentive stock options, nonqualified stock options and restricted stock awards. The Company also
has two other stock-based compensation plans pursuant to which stock options are outstanding but no
new grants may be made.
Stock awards under the Companys stock option plans have been granted at prices which are no
less than the market value of the stock on the date of the grant. Options granted under the 2005
Stock Incentive Plan (2005 Plan), are generally time-based or performance-based options and vesting
varies accordingly. Options under this plan expire up to a maximum of ten years from the date of
grant. Since the Company adopted the 2005 Plan, awards may not be granted under the Companys
previous stock option plans.
On October 10, 2008, the formula based option, issued in 2004 to the Companys President and
CEO from the Companys 2003 Stock Incentive Plan for 743,283 shares, at an exercise price of $0.46
a share, was cancelled. On October 10, 2008, the Companys President and CEO was granted stock
options for 900,000 shares of the Companys common stock at an exercise price of $3.75 (the closing
price on the grant date); 380,000 shares from the Companys 2005 Plan previously approved for
issuance by the Compensation Committee of the Board of Directors and the stockholders of the
Company, and 520,000 shares from the Companys 2005 Plan approved for issuance by the Compensation
Committee of the Board
of Directors subject to stockholder approval which was voted on and approved at the 2009 Annual
Meeting of Stockholders.
62
Of the 900,000 common shares underlying these stock options granted to the Companys President
and CEO, 180,000 shares vested immediately, 540,000 shares vest upon the Company receiving FDA
approval of its PMA application for MelaFind®; and 180,000 shares vest in four equal
annual installments commencing on the date of grant, the first anniversary of which was October 10,
2009. These 900,000 options expire ten years from the date of grant.
Compensation expense recognized in the Statement of Operations during 2007, 2008 and 2009 for
stock options and restricted stock awards amounted to $577, $861 and $827, respectively. Cash
received from options exercised under all share-based payment arrangements for the years ended
December 31, 2007, 2008 and 2009 was $115, $73 and $212, respectively.
The fair value of each option award granted after the adoption of FASB ASC 718 is estimated on
the date of grant using the Black-Scholes option valuation model and assumptions as noted in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended |
|
|
|
|
December 31, 2007 |
|
December 31, 2008 |
|
December 31, 2009 |
Expected life |
|
5 years |
|
5-10 years |
|
5-10 years |
Expected volatility |
|
|
60 |
% |
|
|
60 |
% |
|
|
60-66 |
% |
Risk-free interest rate |
|
|
3.41 - 5.02 |
% |
|
|
1.67 - 3.86 |
% |
|
|
1.69 - 2.67 |
% |
Dividend yield |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
The expected life of the options is based on the observed and expected time to full-vesting,
forfeiture and exercise. Groups of employees that have similar historical exercise behavior are
considered separately for valuation purposes. Starting with the three month period ending September
30, 2009, the expected volatility percentage is stated as calculated rather than as implied. The
expected volatility assumptions were determined based upon the historical volatility of the
Companys daily closing stock price. The calculated expected volatility approximates implied
volatility from other publicly-traded stock that was established at the time of our IPO. 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, 2009, stock options to purchase 2,031,023 shares of common stock at exercise
prices ranging from $1.00 to $11.11 per share are outstanding and are exercisable at various dates
through 2018. The total number of options exercisable at December 31, 2007, 2008, and 2009 was
609,901, 768,403 and 893,585 respectively, with weighted average exercise prices of $3.54, $4.30
and $5.06, respectively. The aggregate intrinsic value of the options exercisable at December 31,
2009 is $4,688.
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, 2007 |
|
|
1,689,412 |
|
|
$ |
2.88 |
|
|
|
4.2 |
|
|
|
|
|
Granted |
|
|
277,407 |
|
|
|
3.11 |
|
|
|
3.9 |
|
|
|
|
|
Exercised |
|
|
(105,256 |
) |
|
|
1.09 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(49,479 |
) |
|
|
5.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007 |
|
|
1,812,084 |
|
|
|
2.96 |
|
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,165,539 |
|
|
|
3.61 |
|
|
|
8.2 |
|
|
|
|
|
Exercised |
|
|
(141,823 |
) |
|
|
0.52 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(766,720 |
) |
|
|
0.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008 |
|
|
2,069,080 |
|
|
|
4.39 |
|
|
|
5.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
213,400 |
|
|
|
8.60 |
|
|
|
4.7 |
|
|
|
|
|
Exercised |
|
|
(151,457 |
) |
|
|
1.40 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(100,000 |
) |
|
|
3.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,2009 |
|
|
2,031,023 |
|
|
|
5.09 |
|
|
|
5.2 |
|
|
$ |
10,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
During the years ended December 31, 2007, 2008 and 2009 the weighted average fair value
of options granted, estimated as of the grant date using the Black-Scholes option valuation model,
was $4.11, $2.89 and $4.82 respectively per share. The total intrinsic value of options exercised
during the years ended December 31, 2007, 2008 and 2009 was
$558, $664 and $1,106, respectively.
The requisite service periods for options granted during 2007, 2008 and 2009 for employees and
consultants were four years and for options granted to directors the requisite service period were
one year.
The following table summarizes information about stock options outstanding at December
31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.00 |
|
|
65,971 |
|
|
2.3 years |
|
|
1.00 |
|
|
|
65,971 |
|
|
|
1.00 |
|
$1.01-$11.11 |
|
|
1,965,052 |
|
|
5.3 years |
|
|
5.22 |
|
|
|
827,614 |
|
|
|
5.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.00-$11.11 |
|
|
2,031,023 |
|
|
5.2 years |
|
$ |
5.09 |
|
|
|
893,585 |
|
|
$ |
5.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, of the total 2,031,023 options outstanding 1,137,438 have not
vested. Of this total unvested amount 816,313 will vest upon the attainment of certain milestones,
and the balance will vest over the requisite service period. There was $3,251 of total unrecognized
compensation cost related to unvested options, of which approximately $2,082 will be recognized
upon PMA approval, $374 upon achievement of other milestone and $795 upon completion of the
requisite service period over four years.
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®. Compensation expense of $162 was charged to operations in 2006.
With the start of the clinical trials in late January 2007, the Company recorded a $140 charge to
operations in the first quarter of 2007.
Warrants
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, and 143,125 remain outstanding
at December 31, 2009.
As previously discussed in connection with the Companys private placements, in November 2006
and August 2007 the Company issued warrants to purchase up to 346,857 and 500,041 shares of the
Companys common stock, respectively. At December 31, 2009, 173,963 of the 2006 warrants and
412,541 of the 2007 warrants were outstanding. The warrants are exercisable for five years at a
price of $6.70 and $8.00 per share, respectively.
In addition, in connection with the May 7, 2009 CEFF with Kingsbridge Capital, the Company
issued a 5 year warrant, exercisable as of November 30, 2009, to Kingsbridge to purchase up to
200,000 shares of the Companys common stock at an exercise price of $11.35 per share, with a Black
Scholes Fair Value of $678.
During January and February of 2010, warrants for the purchase of 239,723 shares of the
Companys common stock were exercised (see also Note 13).
9. Related Party Agreements (see also Note 5):
The Company has in place the following consulting agreements with related parties.
64
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 $24 in 2007, $99 in 2008, and $24 in 2009.
This consulting agreement is terminable by either party on 30 days written notice.
Consulting Agreement with Marek Elbaum, Ph.D.
Effective May 31, 2005, the Company entered into a new consulting agreement with Marek Elbaum,
PhD, the Companys former President and Chief Science and Technology Officer. In consideration of
the services as Chief Scientist, the Company agreed to pay Dr. Elbaum a monthly fee of $15. The
term of this agreement extended for a period of two years and was automatically renewable for an
additional one year period. Dr. Elbaum and the Company entered into an amended agreement effective
June 1, 2007. Under the terms of the amended agreement, Dr. Elbaum was paid a monthly fee of $9
through January 2009. Dr Elbaums contract was completed in January 2009.
Consulting Agreement with Robert Friedman, M.D.
During June 2005, the Company retained the services of Robert Friedman, M.D., for an initial
term of one year as a consultant and medical advisor to the Companys Board of Directors. In
consideration for these services, Dr. Friedman will be paid at a rate of $5 per day. This
consulting agreement is automatically renewed for successive one-year terms unless either party
terminates the agreement at least 30 days prior to the expiration of the agreement. The amounts
paid to Dr. Friedman amounted to $58 in 2007, $63 in 2008 and $43 in 2009.
Consulting Agreement with Gerald Wagner, Ph.D. (see also Note 8)
Effective April 1, 2006, the Company entered into an amended and restated consulting agreement
with Gerald Wagner, Ph.D., a member of the Companys Board of Directors and its former acting Chief
Operating Officer. Under this amended consulting agreement, the Company agreed to pay Dr. Wagner
the annual amount of $180 payable monthly over the term of the agreement. In addition, in
connection with his ongoing engagement as a consultant, Dr. Wagner received a stock option grant of
50,000 shares of the Companys common stock which vested upon commencement of the pivotal trial for
Melafind® in January 2007. In addition, on March 24, 2006, Dr. Wagner
received another stock option grant of 49,500 shares of the Companys common stock which vested
immediately.
With the start of the pivotal clinical trial in January 2007, Dr. Wagner transitioned out of
his role as acting Chief Operating Officer and entered into an amended and restated consulting
contract with the Company. Under the terms of the amended contract, Dr. Wagner is paid a monthly
retainer of $2.5 and will be paid $2.5 for each additional consulting day. This amended agreement
will end at the option of Dr. Wagner or the Company at any time, by providing fifteen days prior
written notice, or immediately upon the mutual agreement of the Company and Dr. Wagner. The amounts
paid to Dr. Wagner amounted to $45 in 2007, $70 in 2008 and $30 in 2009.
Consulting Agreement with Anne Egger
In March 2009, the Company entered into a consulting agreement with Anne Egger for certain
consulting services primarily focusing on physician advocacy. The agreement was for an initial
term of three months, and has subsequently been extended to run through October 2010, and may be
terminated by either party with 30 days notice. Under the terms of the agreement, Ms. Egger is
entitled to receive a consulting fee of $1.6 per day. Ms. Egger was appointed to the Companys
Board of Directors as of June 10, 2009. During the year ended December 31, 2009, Ms. Egger was
paid $71 under this agreement.
65
10. Other Income (including gain on sale of discontinued operations):
During March 2007, the Company entered into an agreement with LOreal to study the feasibility
of using the Companys novel multi-spectral imaging technology for the evaluation and
differentiation of pigmented skin lesions of cosmetic importance. Pursuant to the agreement,
LOreal was responsible for all costs and expenses incurred in connection with the Feasibility
Program, and reimbursed EOS for expenses incurred by EOS with respect to the Feasibility Program.
The Feasibility Program was concluded during 2009.
During the years ended December 31, 2007, 2008 and 2009, the Company earned $59, $141and $50
respectively, recorded as other income, to offset expenses incurred by EOS under the Feasibility
Program with LOreal. Amounts received from LOreal in advance of being earned have been recorded
as deferred income.
In 2005, the Company discontinued all operations associated with its
DIFOTI® product, in order to focus its resources and attention on the
development and commercialization of MelaFind®. In 2006 the Company completed
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 the Company
$500 and made a second payment of $500 in July 2007. KaVo will pay the Company an annual royalty
based on the number of DIFOTI® related systems sold per calendar year
following commercial re-launch. The Company began earning the contractual minimum royalty in the
second half of 2008 $10 and again earned the minimum royalty in 2009 $20 as KaVo had not
re-launched the product as of year end.
For the year ended December 31, 2007, the Company recorded a gain of $28 on the sale of its
discontinued operations. Costs associated with the 2006 sale and licensing transaction with KaVo
were lower than expected and the December 31, 2006 accrual to capture these expenses was partially
reversed in 2007.
11. Income Taxes:
The Company has incurred net losses since inception, accordingly, it has not provided for
income taxes for the years ended December 31, 2007, 2008 and 2009.
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, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
Computed expected tax benefit |
|
$ |
(4,068 |
) |
|
$ |
(5,986 |
) |
|
$ |
(6,274 |
) |
State tax benefit, net of federal effect |
|
|
(718 |
) |
|
|
(1,056 |
) |
|
|
(1,107 |
) |
Increase in the valuation allowance |
|
|
4,786 |
|
|
|
7,042 |
|
|
|
7,381 |
|
|
|
|
|
|
|
|
|
|
|
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, 2008 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2009 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
10,389 |
|
|
$ |
13,289 |
|
Capitalized research and developmental costs |
|
|
11,868 |
|
|
|
16,019 |
|
Non-cash compensation |
|
|
1,352 |
|
|
|
1,682 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
23,609 |
|
|
|
30,990 |
|
Less valuation allowance |
|
|
(23,609 |
) |
|
|
(30,990 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
66
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, 2008 and
2009. The Companys valuation allowance against its deferred tax assets increased by $4,786, $7,042
and $7,381 for the years ended December 31, 2007, 2008 and 2009, respectively.
At December 31, 2009, the Company has net operating loss carryforwards of approximately $31
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 materially impact the Companys ability to
utilize its net operating losses in the future. However, any future equity raise by the Company may
limit the use of these net operating loss carryforwards.
FASB ASC 740 Income Taxes contains guidance with respect to uncertain tax positions which
applies to all tax positions and clarifies the recognition of tax benefits in the financial
statements by providing for a two-step approach of recognition and measurement. The first step
involves assessing whether the tax position is more likely than not to be sustained upon
examination based upon its technical merits. The second step involves measurement of the amount to
recognize. Tax positions that meet the more likely than not threshold are measured at the largest
amount of tax benefit that is greater than 50% likely of being realized upon ultimate finalization
with the taxing authority.
The Company adopted FASB ASC 740 on January 1, 2007. As a result of this implementation of ASC
740, the Company recognized no material adjustment in the liability for unrecognized income tax
benefits. At the adoption date of January 1, 2007, the Company did not have any unrecognized tax
benefits which would favorably affect the effective tax rate if recognized in future periods, or
accrued penalties and interest. If such matters were to arise, the Company would recognize interest
and penalties related to income tax matters in income tax expense. The earliest open tax year
subject to examination is 2006.
12. Quarterly Operating Results (Unaudited)
The following is a summary of operating results by quarter for the years ended December 31,
2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(3,990 |
) |
|
$ |
(3,835 |
) |
|
$ |
(5,048 |
) |
|
$ |
(5,580 |
) |
Net loss |
|
$ |
(3,990 |
) |
|
$ |
(3,835 |
) |
|
$ |
(5,048 |
) |
|
$ |
(5,580 |
) |
Basic and diluted net loss per
share of common stock |
|
$ |
(0.23 |
) |
|
$ |
(0.22 |
) |
|
$ |
(0.26 |
) |
|
$ |
(0.25 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(4,277 |
) |
|
$ |
(4,951 |
) |
|
$ |
(4,200 |
) |
|
$ |
(4,177 |
) |
Net loss |
|
$ |
(4,277 |
) |
|
$ |
(4.951 |
) |
|
$ |
(4,200 |
) |
|
$ |
(4,177 |
) |
Basic and diluted net loss per share
of common stock |
|
$ |
(0.28 |
) |
|
$ |
(0.32 |
) |
|
$ |
(0.25 |
) |
|
$ |
(0.23 |
) |
13. Subsequent Events
Under the May 7, 2009 CEFF with Kingsbridge Capital Limited, subsequent to December 31, 2009 and
through March 4, 2010 the Company sold 406,744 shares of Company common stock at an average per
share price of approximately $9.22, for gross proceeds of $3.75 million. A
67
proportionate share of
the CEFF originating expenses was allocated to this sale from deferred financing costs. Net of expenses,
proceeds from this sale were approximately $3.727 million.
To date, the Company has sold 2,231,685 shares under the CEFF leaving 1,095,315 shares available
for sale under the CEFF, exclusive of the 200,000 outstanding warrants held by Kingsbridge.
On ten consecutive days from December 16, 2009 through December 30, 2009 the closing price of the
Companys common stock was not less than $10.05 or 150% of the exercise price of the warrants
issued at $6.70 per share in connection with the financing that closed in November 2006. As a
result of this trading activity, and in accordance with the terms of the warrant, on January 5,
2010 the Company required the holders to exercise their warrants within 30 days. As a result,
warrants to purchase 173,963 shares of common stock, representing all of the outstanding 2006
warrants, were exercised resulting in gross proceeds to the company of $1.165 million.
In January 2010, warrants to purchase 65,760 shares of the Companys common stock, issued in
connection with the private placement financing that closed in August 2007, were exercised. The
exercise of these warrants at $8.00 per common share resulted in approximately $526 of proceeds to
the Company.
Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures
Our companys management, with the participation of our chief executive officer and our chief
financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934) as of December 31, 2009.
Based on such evaluation, our chief executive officer and our chief financial officer have
concluded that, as of December 31, 2009, our disclosure controls and procedures were effective to
ensure that the information we are required to disclose in reports that we file or submit to the
SEC is (1) recorded, processed, summarized and reported within the time periods specified under the
rules and forms of the SEC and (2) accumulated and communicated to our management, including our
chief executive officer and our chief financial officer, as appropriate to allow timely decisions
regarding required disclosures.
Report of Management on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting and for the assessment of the effectiveness of internal control over financial
reporting. Under the rules of the SEC, internal control over financial reporting procedures is
defined as a process designed to provide reasonable assurance regarding the reliability of our
financial reporting and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America.
Internal control over financial reporting includes maintaining records, that in reasonable detail,
accurately and fairly reflect our transactions and our dispositions of assets; provide reasonable
assurance that transactions are recorded as necessary for preparation of our financial statements
in accordance with accounting principles generally accepted in the United States of America;
provide reasonable assurance that receipts and expenditures of company assets are made only in
accordance with management authorization; and provide reasonable assurance regarding the prevention
or the timely detection of the unauthorized acquisition, use or disposition of company assets that
could have a material effect on our financial statements. Because of its inherent limitations,
internal control over financial reporting may not provide absolute assurance that a misstatement of
our financial statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of our internal control over financial
reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal ControlIntegrated Framework. Based on this evaluation, management
concluded that the companys internal control over financial reporting was effective as of December
31, 2009.
68
Eisner LLP, the independent registered public accounting firm, has issued their report on our
internal control over financial reporting as of December 31, 2009. Their report is included in this
Item 9A.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Electro-Optical Sciences, Inc.
We have audited Electro-Optical Sciences, Inc.s internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The Companys
management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting, included in
the accompanying Report of Management on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of the effectiveness to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our
opinion, Electro-Optical Sciences, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on the criteria
established in Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the balance sheets of Electro-Optical Sciences, Inc. as of December 31, 2008
and December 31, 2009, and the related statements of operations, stockholders equity and cash
flows for each of the years in the three-year period ended December 31, 2009, and our report dated
March 3, 2010 expressed an unqualified opinion on those financial statements.
/s/ Eisner LLP
New York, New York
March 3, 2010
69
Change in internal control over financial reporting
There were no changes in our internal control over financial reporting during the quarter
ended December 31, 2009 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Limitations on the effectiveness of controls
Our disclosure controls and procedures are designed to provide reasonable, not absolute,
assurance that the objectives of our disclosure control system are met. Because of inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues, if any, within a company have been detected.
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
The information required by this item will be contained in our definitive proxy statement to
be filed with the Securities and Exchange Commission in connection with the Annual Meeting of our
Stockholders (the Proxy Statement), which is expected to be filed no later than 120 days after
the end of our fiscal year ended December 31, 2009, and is incorporated in this report by
reference.
Item 11. Executive Compensation
The information required by this item will be set forth in the Proxy Statement and is
incorporated in this report by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
The information required by this item will be set forth in the Proxy Statement and is
incorporated in this report by reference.
70
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be set forth in the Proxy Statement and is
incorporated in this report by reference.
Item 14. Principal Accountant Fees and Services
The information required by this item will be set forth in the Proxy Statement and is
incorporated in this report by reference.
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.
71
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) |
4 .4
|
|
Form of Warrant.(13) |
4 .5
|
|
Warrant dated May 7, 2009 issued by Electro-Optical Sciences, Inc. to
Kingsbridge Capital Limited (16) |
10 .1*
|
|
Form of Indemnification Agreement for directors and executive officers.(2) |
10 .2*
|
|
1996 Stock Option Plan.(3) |
10 .3*
|
|
2003 Stock Incentive Plan, as amended.(3) |
10 .4*
|
|
2005 Stock Incentive Plan.(2) |
10 .5*
|
|
Employment Agreement dated as of January 5, 2004 between the Registrant and
Joseph V. Gulfo.(3) |
10 .6
|
|
Consulting Agreement dated as of May 31, 2005 between the Registrant and
Marek Elbaum.(3) |
10 .7
|
|
Lease Agreement dated as of December 16, 1998, by and between the Registrant
and Bridge Street Properties LLC, for office space located at One Bridge
Street, Irvington, New York.(3) |
10 .8
|
|
First Amendment to the Lease Agreement dated as of May 17, 2001 by and
between the Registrant and Bridge Street Properties LLC.(3) |
10 .9
|
|
Second Amendment to the Lease Agreement dated as of June 19, 2003 by and
between the Registrant and Bridge Street Properties LLC.(3) |
10 .10
|
|
Lease Agreement dated as of November 23, 2004, by and between the Registrant
and Bridge Street Properties LLC, for office space located at 3 West Main
Street, Irvington, New York.(3) |
10 .11*
|
|
Consulting Agreement dated as of June 20, 2003 between the Registrant and
Breaux Castleman, as amended.(1) |
10 .12
|
|
Consulting Agreement dated as of June 1, 2005 between the Registrant and
Robert Friedman, M.D.(1) |
10 .13
|
|
Third Amendment dated as of June 6, 2005, by and between the Registrant and
Bridge Street Properties LLC, for office space located at 1 Bridge Street,
Irvington, New York.(1) |
10 .14
|
|
Production Agreement between the Registrant and ASKION GmbH dated as of
January 25, 2006.(4) |
10 .15*
|
|
Amended and Restated Consulting Agreement effective as of April 1, 2006
between the Registrant and Gerald Wagner Consulting LLC.(11) |
10 .16*
|
|
Employment Offer Letter, dated April 24, 2006, between the Registrant and
Richard I. Steinhart.(5) |
10 .17*
|
|
Employment Offer Letter, dated May 30, 2006, between the Registrant and
Christiano S. Butler.(6) |
10 .18
|
|
Securities Purchase Agreement among the Registrant and the purchasers
identified on the signature pages thereto, dated as of October 31, 2006.(8) |
10 .19
|
|
Securities Purchase Agreement among the Registrant and the purchasers
identified on the signature pages thereto, dated as of October 31, 2006.(8) |
10 .20
|
|
Registration Rights Agreement among the Registrant and the purchasers
identified on the signature pages thereto, dated as of October 31, 2006.(8) |
10 .21
|
|
Licensing Agreement between the Registrant and KaVo Dental GmbH, dated as of
December 5, 2006.(9) |
10 .22*
|
|
Amendment No. 1 to Amended and Restated Consulting Agreement dated as of
January 30, 2007 by and among the Registrant, Gerald Wagner and Gerald Wagner
Consulting LLC. (10) |
10 .23
|
|
Research and Feasibility Agreement between Registrant and LOreal S.A. dated
as of March 26, 2007.(12) |
10 .24
|
|
Securities Purchase Agreement among the Registrant and the purchasers
identified on the signature pages thereto, dated as of July 31, 2007.(13) |
10 .25
|
|
Registration Rights Agreement among the Registrant and the purchasers
identified on the signature pages thereto, dated as of July 31, 2007.(13) |
10 .26
|
|
Fifth Amendment dated as of August 24, 2007, by and between the Registrant
and Bridge Street Commercial, LLC, for office space located at 1 Bridge
Street, Irvington, New York. (14) |
72
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Title |
|
|
|
10. 27
|
|
Placement Agency Agreement by and between the Registrant and Needham & Company,
LLC, dated as of July 31, 2008.(15) |
10. 28
|
|
Form of Subscription Agreement between and Registrant and each investor.(15) |
10. 29
|
|
Common Stock Purchase Agreement
dated as of May 7, 2009 between Electro-Optical
Sciences, Inc. and Kingsbridge Capital Limited.(16) |
10. 30
|
|
Registration Rights Agreement dated as of May 7, 2009 between Electro-Optical
Sciences, Inc. and Kingsbridge Capital Limited.(16) |
10. 31
|
|
Agreement of Lease, dated as of July 14, 2009, by and between Stanford Bridge
LLC and Electro-Optical Sciences, Inc. (17) |
10. 32
|
|
Placement Agency Agreement dated July 16, 2009 among the Company, Needham &
Company, LLC and Oppenheimer & Co, Inc.(18) |
10. 33
|
|
Form of Subscription Agreement between the Company and each investor thereto (18) |
21 .1#
|
|
Subsidiaries of Registrant. |
23 .1#
|
|
Consent of Eisner LLP |
31 .1#
|
|
Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
31 .2#
|
|
Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
32 .1#
|
|
Certifications of Chief Executive Officer and Chief Financial Officer Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
* |
|
Indicates management compensatory plan, contract or arrangement |
|
(1) |
|
Incorporated by reference to the 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. Portions of this agreement have been omitted pursuant to a request for confidential
treatment. |
|
(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. |
|
(12) |
|
Incorporated by reference to the Registrants Current Report on Form 8-K filed on March 28, 2007. |
|
(13) |
|
Incorporated by reference to the Registrants Current Report on Form 8-K filed on August 1, 2007. |
73
|
|
|
(14) |
|
Incorporated by reference to the Registrants Quarterly Report on Form 10-Q filed on November 8,
2007. |
|
(15) |
|
Incorporated by reference to the Registrants Current Report on Form 8-K filed on July 31, 2008. |
|
(16) |
|
Incorporated by reference to the Registrants Current Report on Form 8-K filed on May 8, 2009. |
|
(17) |
|
Incorporated by reference to the Registrants Current Report on Form 8-K filed on July 14, 2009. |
|
(18) |
|
Incorporated by reference to the Registrants Current Report on Form 8-K filed on July 17, 2009. |
# Filed herewith.
74
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities and Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
|
ELECTRO-OPTICAL SCIENCES, INC.
|
|
|
By: |
/s/ Joseph V. Gulfo, M.D.
|
|
|
|
Joseph V. Gulfo, M.D. |
|
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
Dated: March 4, 2010
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 4, 2010 |
|
|
|
|
|
/s/ Richard I. Steinhart
Richard I. Steinhart
|
|
Vice President, Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
|
|
March 4, 2010 |
|
|
|
|
|
/s/ Breaux Castleman
Breaux Castleman
|
|
Chairman of the Board of Directors
|
|
March 4, 2010 |
|
|
|
|
|
/s/ Sidney Braginsky
Sidney Braginsky
|
|
Director
|
|
March 4, 2010 |
|
|
|
|
|
/s/ George C. Chryssis
George C. Chryssis
|
|
Director
|
|
March 4, 2010 |
|
|
|
|
|
/s/ Martin D. Cleary
Martin D. Cleary
|
|
Director
|
|
March 4, 2010 |
|
|
|
|
|
/s/ Anne Egger
Anne Egger
|
|
Director
|
|
March 4, 2010 |
|
|
|
|
|
/s/ Dan W. Lufkin
Dan W. Lufkin
|
|
Director
|
|
March 4, 2010 |
|
|
|
|
|
/s/ Charles Stiefel
Charles Stiefel
|
|
Director
|
|
March 4, 2010 |
|
/s/ Gerald Wagner, PhD.
Gerald Wagner, PhD.
|
|
Director |
|
March 4, 2010 |
75
exv21w1
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
The Registrant does not have any subsidiaries.
76
exv23w1
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements of Electro-Optical
Sciences, Inc. (the Company) on Forms S-3 (File No. 333-139056, File No. 333-145740, File No.
333-151935 and File No. 333-159274) and on Forms S-8 (File No. 333-136183 and File No. 333-161286)
of our reports dated March 3, 2010 with respect to our audits of the balance sheets of
Electro-Optical Sciences, Inc. as of December 31, 2008 and 2009, and the related statements of
operations, stockholders equity and cash flows for each of the years in the three-year period
ended December 31, 2009, and our audit of the Companys internal control over financial reporting
as of December 31, 2009, included in the December 31, 2009 annual report on Form 10-K of
Electro-Optical Sciences, Inc.
We also consent to the reference to our firm under the heading Experts in the Registration
Statements on Forms S-3 (File No. 333-139056, File No. 333-145740, File No. 333-151935 and File No.
333-159274).
/s/ Eisner LLP
New York, New York
March 3, 2010
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exv31w1
Exhibit 31.1
CERTIFICATION
I, Joseph V. Gulfo, certify that:
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I have reviewed this report on Form 10-K of Electro-Optical Sciences, Inc.; |
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2. |
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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; |
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3. |
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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; |
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4. |
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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: |
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a) |
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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; |
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b) |
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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; |
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c) |
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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; |
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d) |
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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 |
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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): |
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a) |
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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 |
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b) |
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any fraud whether or not material,
that involves management or other
employees who have a significant role
in the registrants internal control
over financial reporting. |
Date: March 3, 2010
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/s/ Joseph V. Gulfo, M.D.
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Joseph V. Gulfo, M.D. |
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President and Chief Executive Officer
(Principal Executive Officer) |
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exv31w2
Exhibit 31.2
CERTIFICATION
I, Richard I. Steinhart, certify that:
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I have reviewed this report on Form 10-K of Electro-Optical Sciences, Inc.; |
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2. |
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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; |
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3. |
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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; |
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4. |
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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: |
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a) |
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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; |
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b) |
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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; |
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c) |
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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; |
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d) |
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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. |
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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): |
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a) |
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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 |
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b) |
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any fraud whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: March 3, 2010
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/s/ Richard I. Steinhart
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Richard I. Steinhart |
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Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer) |
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exv32w1
Exhibit 32.1
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
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, 2009 (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.
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/s/ Joseph V. Gulfo, M.D.
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Joseph V. Gulfo, M.D. |
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President and Chief Executive Officer
(Principal Executive Officer) March 3, 2010 |
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/s/ Richard I. Steinhart
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Richard I. Steinhart |
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Vice President & Chief Financial Officer
(Principal Accounting and Financial Officer) March 3, 2010 |
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* |
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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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