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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2009
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                      to
 Commission file number 000  51481
 ELECTRO-OPTICAL SCIENCES, INC.
 (Exact name of Registrant as specified in its charter)
 Delaware
    
    13-3986004(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)3 West Main Street, Suite 201Irvington, New York
    
    10533(Address of Principal Executive offices)
    
    (Zip Code)
 Registrants Telephone Number, including area code:
(914) 591-3783
  þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company o
  o o
  o þ




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##### 



Electro-Optical Sciences, Inc.
Table of Contents
 PagePART I. FINANCIAL INFORMATIONITEM 1. Financial StatementsCondensed Balance Sheets as of March 31, 2009 (unaudited) and December 31, 2008
    
    
    2Condensed Statements of Operations (unaudited) for the three month period
ended March 31, 2009 and 2008
    
    
    3Condensed Statements of Cash Flows (unaudited) for the three month period
ended March 31, 2009 and 2008
    
    
    4Notes to Condensed Financial Statements (unaudited)
    
    
    5ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    15ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    23ITEM 4. Controls and Procedures
    
    
    23PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    24ITEM 1A. Risk Factors
    
    
    24ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    27ITEM 3. Defaults Upon Senior Securities
    
    
    27ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    27ITEM 5. Other Information
    
    
    27ITEM 6. Exhibits
    
    
    28SIGNATURES
    
    
    29EXHIBIT INDEX
    
    
    30EX-31.1:CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATION
  1




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ELECTRO-OPTICAL SCIENCES, INC.
 
 CONDENSED BALANCE SHEETS
 March 31,
    
    
    December 31,2009
    
    
    2008(unaudited)
    
    
    *ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    11,253,771
    
    
    $
    15,069,939Marketable securities
    
    
    391,980
    
    
    
    390,512Prepaid expenses and other current assets
    
    
    304,400
    
    
    
    375,612Total Current Assets
    
    
    11,950,151
    
    
    
    15,836,063Property and equipment, net
    
    
    566,288
    
    
    
    643,383Patents and trademarks, net
    
    
    91,933
    
    
    
    94,908Other assets
    
    
    46,339
    
    
    
    45,276Total Assets
    
    $
    12,654,711
    
    
    $
    16,619,630LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable (includes related parties of
$15,000 as of March 31, 2009 and $17,500 as of
December 31, 2008)
    
    $
    655,395
    
    
    $
    634,394Accrued expenses
    
    
    753,244
    
    
    
    832,228Deferred income
    
    
    
    
    
    
    36,085Other current liabilities
    
    
    23,866
    
    
    
    27,466Total Current Liabilities
    
    
    1,432,505
    
    
    
    1,530,173COMMITMENTS AND CONTINGENCIES (Note 9)Stockholders EquityPreferred stock  $.10 par value; authorized
10,000,000 shares; issued and outstanding: noneCommon stock  $.001 par value; authorized
30,000,000 shares; issued and outstanding
17,639,498 shares at March 31, 2009 and
17,634,498 at December 31, 2008
    
    
    17,639
    
    
    
    17,634Additional paid-in capital
    
    
    75,966,815
    
    
    
    75,845,953Accumulated other comprehensive loss
    
    
    (5,400
    )
    
    
    (6,868
    )Accumulated deficit
    
    
    (64,756,848
    )
    
    
    (60,767,262
    )Stockholders Equity
    
    
    11,222,206
    
    
    
    15,089,457Total Liabilities and Stockholders Equity
    
    $
    12,654,711
    
    
    $
    16,619,630
 
 *
    
    Derived from the audited balance sheet as of December 31, 2008  2




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ELECTRO-OPTICAL SCIENCES, INC.
 
 CONDENSED STATEMENTS OF OPERATIONS
 (unaudited)
 Three months ended March 31,2009
    
    
    2008Operating expenses:Research and development
    
    $
    2,534,414
    
    
    $
    3,045,093General and administrative
    
    
    1,526,740
    
    
    
    1,439,795Operating loss
    
    
    (4,061,154
    )
    
    
    (4,484,888
    )Interest income
    
    
    25,483
    
    
    
    181,972Other income, net
    
    
    46,085
    
    
    
    26,086Net loss
    
    
    (3,989,586
    )
    
    $
    (4,276,830
    )Basic and diluted net loss
per common share
    
    $
    (0.23
    )
    
    $
    (0.28
    )Basic and diluted weighted
average number of common
shares outstanding
    
    
    17,635,331
    
    
    
    15,401,882
  3




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ELECTRO-OPTICAL SCIENCES, INC.
 
 CONDENSED STATEMENTS OF CASH FLOWS
 (unaudited)
 Three Months Ended March 31,2009
    
    
    2008Cash flows from operating activities:Net loss
    
    $
    (3,989,586
    )
    
    $
    (4,276,830
    )Adjustments to reconcile net loss to net cash used in operating
activities:Depreciation and amortization
    
    
    80,070
    
    
    
    65,479Noncash compensation
    
    
    118,567
    
    
    
    111,807Deferred income
    
    
    (36,085
    )
    
    
    (7,437
    )Amortization of discount on marketable securities
    
    
    
    
    
    
    (285
    )Changes in operating assets and liabilities:Increase in other assets
    
    
    (1,063
    )
    
    
    Decrease in prepaid expenses and other current assets
    
    
    71,212
    
    
    
    198,376(Decrease) increase in accounts payable and accrued expenses
    
    
    (57,983
    )
    
    
    405,384(Decrease) increase in other current liabilities
    
    
    (3,600
    )
    
    
    4,251Net cash used in operating activities
    
    
    (3,818,468
    )
    
    
    (3,499,255
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    
    
    
    
    (231,492
    )Sale of marketable securities
    
    
    
    
    
    
    434,404Net cash provided by investing activities
    
    
    
    
    
    
    202,912Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    2,300
    
    
    
    Net cash provided by financing activities
    
    
    2,300
    
    
    
    Net decrease in cash and cash equivalents
    
    
    (3,816,168
    )
    
    
    (3,296,343
    )Cash and cash equivalents at beginning of period
    
    
    15,069,939
    
    
    
    19,196,589Cash and cash equivalents at end of period
    
    $
    11,253,771
    
    
    $
    15,900,246Supplemental Schedule of Non-cash Investing and Financing ActivitiesUnrealized loss on marketable securities
    
    $
    1,468
    
    
    $
    3,368
  4




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ELECTRO-OPTICAL SCIENCES, INC.
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 (In thousands, except for share and per share data)
 (unaudited)
 1. ORGANIZATION AND BASIS OF PRESENTATION
 ®
 ®
 
    
    a hand-held imaging device, which employs high precision optics and multi-spectral illumination
(multiple colors of light including near infra-red);
    
    a proprietary databaseof pigmented skin lesions, which we believe to be the largest in the U.S.; and
    
    lesion classifiers, which are sophisticated mathematical algorithms that extract lesion feature
information and classify lesions.
 ® ® ® ®
 ® ®
 ®
 ®
 5




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®
   2. MARKETABLE SECURITIES
  March 31, 2009UnrealizedFair Value
    
    
    Gain (Loss)Corporate debt securities
    
    $
    392
    
    
    $
    ( 5
    )
  3. COMPREHENSIVE LOSS
  6




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4. USE OF ESTIMATES
  5. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
  Accounting for Assets
Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies
   7




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6. RECENT ACCOUNTING PRONOUNCEMENTS
  
    
    FSP FAS 157-4, Determining Fair Value When the Volume and Level
of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly, provides additional
guidance to companies for determining fair values of financial
instruments for which there is no active market or quoted prices may
represent distressed transactions. The guidance includes a reaffirmation
of the need to use judgment in certain circumstances.
    
    FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial
Instruments,requires companies to provide additional fair value information for certain
financial instruments in interim financial statements, similar to what is currently
required to be disclosed on an annual basis
    
    FSP FAS 115-2, FAS 124-2, and EITF 99-20-2, Recognition and Presentation of
Other-Than-Temporary Impairments, amends the existing guidance regarding impairments for
investments in debt securities. Specifically, it changes how companies determine if an
impairment is considered to be other-than-temporary and the related accounting. This
standard also provides for increased disclosures.
  7. NET LOSS PER COMMON SHARE
  March 31,2009
    
    2008Common stock options
    
    
    2,051,580
    
    
    
    1,919,584Warrants
    
    
    1,124,544
    
    
    
    1,126,886Total
    
    
    3,176,124
    
    
    
    3,046,470
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8. STOCK-BASED COMPENSATION
     For the Three Months
    
    For the Three MonthsEnded March 31, 2009
    
    Ended March 31, 2008Expected life
    
    5
    years
    
    5
    yearsExpected volatility
    
    
    60
    %
    
    
    60
    %Risk-free interest rate
    
    
    1.69
    %
    
    
    2.95
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
   ®
 9




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WeightedWeighted
    
    AverageAverage
    
    RemainingExercise
    
    Contractual
    
    AggregateNumber of
    
    Price per
    
    Term in
    
    IntrinsicShares
    
    Share
    
    Years
    
    ValueOutstanding at December 31, 2008
    
    
    2,069,080
    
    
    $
    4.39
    
    
    
    5.8Granted
    
    
    7,500
    
    
    
    4.19
    
    
    
    4.8Exercised
    
    
    (5,000
    )
    
    
    0.46
    
    
    
    Forfeited or expired
    
    
    (20,000
    )
    
    
    1.37
    
    
    
    Outstanding at March 31, 2009
    
    
    2,051,580
    
    
    $
    4.43
    
    
    
    5.6
    
    
    $
    1,341Vested and exercisable at March 31, 2009
    
    
    779,942
    
    
    $
    4.37
    
    
    
    3.9
    
    
    $
    692
 Options OutstandingWeighted-
    
    
    
    
    
    Options ExercisableAverage
    
    Weighted
    
    
    
    
    
    Weighted-Remaining
    
    Average
    
    
    
    
    
    AverageNumber
    
    Contractual
    
    Exercise
    
    Number
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    Life
    
    Price
    
    Exercisable
    
    Price$.01-$.46
    
    
    110,000
    
    
    0.7 years
    
    $
    .46
    
    
    
    60,000
    
    
    $
    .46$.47-$1.00
    
    
    104,578
    
    
    2.7 years
    
    $
    1.00
    
    
    
    104,578
    
    
    $
    1.00$1.01-$7.75
    
    
    1,837,002
    
    
    6.0 years
    
    $
    4.86
    
    
    
    615,364
    
    
    $
    5.33$.01-$7.75
    
    
    2,051,580
    
    
    5.6 years
    
    $
    4.43
    
    
    
    779,942
    
    
    $
    4.37
    9. COMMITMENTS AND CONTINGENCIES
  2009
    
    2010
    
    2011$ 175
    
    $186
    
    $15
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®
 ®
   10. STOCKHOLDERS EQUITY
      11




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11. WARRANTS
       12. RELATED PARTY CONSULTING AGREEMENTS
  Consulting Agreement with Breaux Castleman
 ®
 Consulting Agreement with Marek Elbaum, Ph.D.
  12




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Consulting Agreement with Robert Friedman, M.D.
 ®
  Consulting Agreement with Gerald Wagner, Ph.D.
  ®
  13. OTHER INCOME
  13




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® ® ®
 14. SUBSEQUENT EVENTS
   14




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ELECTRO-OPTICAL SCIENCES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   Overview
 ®
 ®
 ® ®
 ®
 15




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Liquidity and Capital Resources
       16




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®
  Cash Flows from Operating Activities (in thousands)
  Cash Flows from Investing Activities
 ®
 Cash Flows from Financing Activities
  Operating Capital and Capital Expenditure Requirements
 ® ® ® ® ®
  ®
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
    
    The schedule, costs, and results of our clinical trials;
    
    The success of our research and development efforts;
    
    The costs and timing of regulatory approval;
    
    Reimbursement amounts for the use of MelaFind®that we are
able to obtain from Medicare and third party payers, or the amount of
direct payments we are able to obtain from patients and/or physicians
utilizing MelaFind®;
    
    The cost of commercialization activities, including product marketing
and building a domestic direct sales force;
    
    The emergence of competing or complementary technological developments;
    
    The costs of filing, prosecuting, defending and enforcing any patent
claims and other rights, including litigation costs and the results of
such litigation;
    
    The costs involved in defending any patent infringement actions
brought against us by third parties; and
    
    Our ability to establish and maintain any collaborative, licensing or
other arrangements, and the terms and timing of any such arrangements.
 Contractual Obligations
  Less than
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    1 year
    
    1-3 years
    
    4-5 years
    
    5 yearsOperating leases
    
    $
    376
    
    
    $
    221
    
    
    $
    155
    
    
    $
    
    
    
    $
    
  Results of Operations (in thousands)
 ®
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##### Table of Contents



Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
 Research and Development Expense
  
    
    clinical studies costs - in the first three months of 2009 the number of study sites was
decreased from the same period in 2008 when the pivotal clinical trial data acquisition phase
was fully engaged. Additionally, activity in the confirmation of data was likewise
significantly curtailed with the completion of the pivotal clinical trial. Clinical studies
costs decreased ($617).
    
    quality and regulatory -costs were increased in the first quarter of 2009 as we moved
closer to PMA submission making extensive use of consultants to assist in this process. In
the first quarter of 2008, we were not near the completion of the pivotal clinical trial
process. Regulatory costs increased $331.
    
    development activities -in the first three months of 2009, we experienced a significant
decrease in design costs and process development for MelaFind® as the product had
become defined and finalized through the more extensive development efforts of 2008.
Development costs decreased ($290).
 General and Administrative Expense
 ® ®
  
    
    pre-marketing activities being accelerated during the first quarter of 2009 following
announcement of positive top-line results from the pivotal clinical trial. There were limited
pre-marketing efforts during the three month period ended March 31, 2008, while the data
acquisition phase of the pivotal clinical trial continued. Pre-marketing expenses increased
$104.
    
    increased legal costs primarily associated with disclosure requirements and other
activities requiring legal assistance and advice surrounding the release of top-line results
from our pivotal clinical trial. Legal fees increased $97.
    
    other administrative costs were reduced in the first quarter of 2009 primarily due to the
fact that no discretionary bonuses were paid in 2009 as had been paid in 2008. Other
administrative costs decreased ($104)
 Interest Income/Expense
  Other Income
  19




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Critical Accounting Policies and Significant Judgments and Estimates
   Revenue Recognition
  Stock-Based Compensation
 Share-Based
Payment
  Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services .
 Accrued Expenses
  
    
    professional service fees;
    
    contract clinical service fees;
    
    fees paid to contract manufacturers in conjunction with the production
of clinical components or materials; and
    
    fees paid to third party data collection organizations and
investigators in conjunction with the clinical trials.
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Related Party Transactions
 ®
      Off-Balance Sheet Arrangements
  Recently Adopted Accounting Pronouncements
  21




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Accounting for Assets
Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies
    Recent Accounting Pronouncements
  
    
    FSP FAS 157-4, Determining Fair Value When the Volume and Level
of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly, provides additional
guidance to companies for determining fair values of financial
instruments for which there is no active market or quoted prices may
represent distressed transactions. The guidance includes a reaffirmation
of the need to use judgment in certain circumstances.
    
    FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial
Instruments,requires companies to provide additional fair value information for certain
financial instruments in interim financial statements, similar to what is currently
required to be disclosed on an annual basis
 22




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
    
    FSP FAS 115-2, FAS 124-2, and EITF 99-20-2, Recognition and Presentation of
Other-Than-Temporary Impairments, amends the existing guidance regarding impairments for
investments in debt securities. Specifically, it changes how companies determine if an
impairment is considered to be other-than-temporary and the related accounting. This
standard also provides for increased disclosures.
  
 ITEM 3.
 Quantitative and Qualitative Disclosures about Market Risk
  
 ITEM 4.
 Controls and Procedures
 Evaluation of disclosure controls and procedures
  Change in internal control over financial reporting
  Limitations on the effectiveness of controls
  23




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 Our business and operations entail a variety of serious risks and uncertainties, including those
described in Item 1A of our Form 10-K for the year ended December 31, 2008. In addition, the
following risk factors have changed during the three months ended March 31, 2009:
 We have incurred losses for a number of years, and anticipate that we will incur continued losses
for the foreseeable future.
 ® ® ®
 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.
 ®
  
    
    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®;
 24




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
    
    the cost of commercialization activities, including product marketing
and building a domestic direct sales force;
    
    the emergence of competing or complementary technological developments;
    
    the costs of filing, prosecuting, defending and enforcing any patent
claims and other rights, including litigation costs and the results of
such litigation;
    
    the costs involved in defending any patent infringement actions
brought against us by third parties; and
    
    our ability to establish and maintain any collaborative, licensing or
other arrangements, and the terms and timing of any such arrangements.
  Our stock price is likely to be volatile, meaning purchasers of our common stock could incur
substantial losses.
  
    
    results of our research and development efforts and our clinical trials;
    
    the timing of regulatory approval for our products;
    
    failure of any of our products, if approved, to achieve commercial success;
    
    the announcement of new products or product enhancements by us or our competitors;
    
    regulatory developments in the US and foreign countries;
    
    ability to manufacture our products to commercial standards;
    
    developments concerning our clinical collaborators, suppliers or marketing partners;
    
    changes in financial estimates or recommendations by securities analysts;
    
    public concern over our products;
    
    developments or disputes concerning patents or other intellectual property rights;
    
    product liability claims and litigation against us or our competitors;
    
    the departure of key personnel;
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
    
    the strength of our balance sheet;
    
    variations in our financial results or those of companies that are perceived to be similar to us;
    
    changes in the structure of and third-party reimbursement in the US and other countries;
    
    changes in accounting principles or practices;
    
    general economic, industry and market conditions; and
    
    future sales of our common stock.
  If our directors, executive officers, and principal stockholders choose to act together, they may
have the ability to influence all matters submitted to stockholders for approval.
  Results could be impacted by the effects of, and changes in, world-wide economic and capital market
conditions
  26




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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
    
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information
 (a)
    
    Not applicable(b)
    
    Not applicable
 27




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Item 6. Exhibits
 ExhibitNumber
    
    Exhibit Title31.1#
    
    Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of
1934, as amended.31.2#
    
    Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of
1934, as amended.32.1#
    
    Certification 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.
 
 #
    
    Filed herewith 28




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SIGNATURES
  ELECTRO-OPTICAL SCIENCES, INC.By:
    /s/ Richard I. SteinhartRichard I. SteinhartVice President and Chief Financial Officer
(Principal Accounting and Financial Officer)  29




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EXHIBIT INDEX
 Exhibit No.
    
    Description31.1
    
    Certification by the Chief Executive Officer pursuant to
Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange
Act of 1934, as amended.31.2
    
    Certification by the Chief Financial Officer pursuant to
Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange
Act of 1934, as amended.32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 30