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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, 2007
 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 201
    
    10533Irvington, New York
    
    (Zip Code)(Address of Principal Executive offices)
 Registrants Telephone Number, including area code:
(914) 591-3783
  þ o
  o o þ
  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, 2007 (unaudited) and December 31, 2006
    
    
    2Condensed Statements of Operations (unaudited) for the three months ended
March 31, 2007 and 2006
    
    
    3Condensed Statements of Cash Flows (unaudited) for the three months ended
March 31, 2007 and 2006
    
    
    4Notes to Financial Statements (unaudited)
    
    
    5ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    12ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    22ITEM 4. Controls and Procedures
    
    
    22PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    22ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22ITEM 3. Defaults Upon Senior Securities
    
    
    22ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    22ITEM 5. Other Information
    
    
    23ITEM 6. Exhibits
    
    
    23SIGNATURES
    
    
    26EXHIBIT INDEX
    
    
    27EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATION
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ELECTRO-OPTICAL SCIENCES, INC.
 
 CONDENSED BALANCE SHEETS
 March 31,
    
    
    December 31,2007
    
    
    2006(unaudited)
    
    
    *ASSETSCurrent Assets:Cash and cash equivalents (includes $12,000,000 in certificates of deposit
as of March 31, 2007 and December 31, 2006)
    
    $
    18,156,833
    
    
    $
    20,939,527Receivable from sale and licensing of discontinued operations
    
    
    493,802
    
    
    
    487,680Prepaid expenses and other current assets
    
    
    255,969
    
    
    
    343,634Total Current Assets
    
    
    18,906,604
    
    
    
    21,770,841Property and equipment, net
    
    
    664,564
    
    
    
    564,471Patents and trademarks, net
    
    
    117,423
    
    
    
    100,630Other assets
    
    
    39,758
    
    
    
    39,758Total Assets
    
    $
    19,728,349
    
    
    $
    22,475,700LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable (includes related parties of $53,987 as of December 31,
2006)
    
    $
    486,274
    
    
    $
    641,036Accrued expenses (includes related parties of $34,527 as of December 31,
2006)
    
    
    554,556
    
    
    
    504,670Other current liabilities
    
    
    15,494
    
    
    
    16,077Total Current Liabilities
    
    
    1,056,324
    
    
    
    1,161,783COMMITMENTS AND CONTINGENCIES (Note 7)Stockholders EquityCommon stock  $.001 par value; authorized 30,000,000 shares; issued and
outstanding 13,372,483 shares at March 31, 2007 and 13,296,448 shares at
December 31, 2006
    
    
    13,372
    
    
    
    13,296Additional paid-in capital
    
    
    52,876,973
    
    
    
    52,525,408Accumulated deficit
    
    
    (34,218,320
    )
    
    
    (31,224,787
    )Stockholders Equity
    
    
    18,672,025
    
    
    
    21,313,917Total Liabilities and Stockholders Equity
    
    $
    19,728,349
    
    
    $
    22,475,700
 
 *
    
    Derived from the audited balance sheet as of December 31, 2006  2




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ELECTRO-OPTICAL SCIENCES, INC.
 
 CONDENSED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three months endedMarch 31,2007
    
    
    2006Operating expenses:Research and development
    
    $
    1,953,368
    
    
    $
    1,985,233General and administrative
    
    
    1,311,190
    
    
    
    1,083,687Operating loss
    
    
    (3,264,558
    )
    
    
    (3,068,920
    )Interest income
    
    
    271,025
    
    
    
    180,052Net loss
    
    $
    (2,993,533
    )
    
    $
    (2,888,868
    )Net loss per common
share, basic and diluted:
    
    
    (0.22
    )
    
    
    (0.27
    )Basic and diluted
weighted average number
of Common shares
outstanding
    
    
    13,369,305
    
    
    
    10,851,873
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##### Table of Contents



ELECTRO-OPTICAL SCIENCES, INC.
 
 CONDENSED STATEMENTS OF CASH FLOWS
 (unaudited)
 Three Months Ended March 31,2007
    
    
    2006Cash flows from operating activities:Net Loss
    
    $
    (2,993,533
    )
    
    $
    (2,888,868
    )Adjustments to reconcile net loss to net cash used in operating
activities:Depreciation and amortization
    
    
    48,898
    
    
    
    16,973Noncash compensation and amortization of deferred compensation
    
    
    126,633
    
    
    
    121,919Common stock options issued for consulting fees
    
    
    139,703
    
    
    
    161,934Amortization of unearned interest income  discontinued operations
    
    
    (6,122
    )Changes in operating assets and liabilities:Decrease/ (increase) in prepaid expenses and other current assets
    
    
    87,665
    
    
    
    (24,331
    )(Decrease)/ increase in accounts payable and accrued expenses
    
    
    (104,876
    )
    
    
    130,871Decrease in other current liabilities
    
    
    (583
    )
    
    
    (6,787
    )Net cash used in operating activities
    
    
    (2,702,215
    )
    
    
    (2,488,289
    )Cash flows from investing activities:Patent costs
    
    
    (22,242
    )
    
    
    (1,889
    )Purchases of property and equipment
    
    
    (143,542
    )
    
    
    (198,304
    )Purchase of marketable securities
    
    
    
    
    
    
    (7,850,179
    )Net cash used in investing activities
    
    
    (165,784
    )
    
    
    (8,050,372
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    85,305
    
    
    
    28,085Net cash provided by financing activities
    
    
    85,305
    
    
    
    28,085Net decrease cash and cash equivalents
    
    
    (2,782,694
    )
    
    
    (10,510,576
    )Cash and cash equivalents at beginning of period
    
    
    20,939,527
    
    
    
    18,505,030Cash and cash equivalents at end of period
    
    $
    18,156,833
    
    
    $
    7,994,454
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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
 ® ® ® ®
 ® ® ® ® ® ®
 ® ®
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2. USE OF ESTIMATES
  3. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
  4. RECENT ACCOUNTING DEVELOPMENTS
   5. NET LOSS PER COMMON SHARE
  6




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March 31,2007
    
    2006Common stock options
    
    
    1,605,565
    
    
    
    1,190,976Warrants
    
    
    626,845
    
    
    
    298,280Total
    
    
    2,232,410
    
    
    
    1,489,256
 6. STOCK-BASED COMPENSATION
       For the three MonthsEnded March 31, 2006Expected life
    
    5 yearsExpected volatility
    
    
    60
    %Risk-free interest rate
    
    
    4.8
    %Dividend Yield
    
    
    0
    %
  7




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WeightedWeighted
    
    AverageAverage
    
    RemainingExercise
    
    Contractual
    
    AggregateNumber of
    
    Price per
    
    Term in
    
    IntrinsicShares
    
    Share
    
    Years
    
    ValueOutstanding at December 31, 2006
    
    
    1,689,412
    
    
    $
    2.88
    
    
    
    4.2GrantedExercised
    
    
    (76,035
    )
    
    
    1.12Forfeited or expired
    
    
    (7,812
    )
    
    
    6.82Outstanding at March 31, 2007
    
    
    1,605,565
    
    
    
    2.94
    
    
    
    4.0
    
    
    $
    4,445Vested and exercisable at March 31, 2007
    
    
    586,622
    
    
    
    3.11
    
    
    
    4.0
    
    
    $
    1,431
 Options OutstandingWeighted-
    
    
    
    Options ExercisableAverage
    
    Weighted
    
    
    
    
    
    Weighted-Remaining
    
    Average
    
    
    
    
    
    AverageNumber
    
    Contractual
    
    Exercise
    
    Number
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    Life
    
    Price
    
    Exercisable
    
    Price$.01-$.46
    
    
    814,196
    
    
    2.4 years
    
    $
    .46
    
    
    
    171,753
    
    
    $
    .46$.47-$1.00
    
    
    148,869
    
    
    4.9 years
    
    $
    1.00
    
    
    
    148,869
    
    
    $
    1.00$1.01-$7.75
    
    
    642,500
    
    
    4.2 years
    
    $
    6.54
    
    
    
    266,000
    
    
    $
    5.99$.01-$7.75
    
    
    1,605,565
    
    
    4.0 years
    
    $
    2.94
    
    
    
    586,622
    
    
    $
    3.11
   ® ® ®
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7. COMMITMENTS AND CONTINGENCIES
   2007
    
    2008
    
    2009
    
    2010$
    166
    
    
    $
    253
    
    
    $
    188
    
    
    $
    105
  ®
  ® ® ®
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8. PRIVATE PLACEMENT
   9. WARRANTS
    10. RELATED PARTY CONSULTING AGREEMENTS:
  Consulting Agreement with Breaux Castleman
 ®
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Consulting Agreement with Marek Elbaum, Ph.D.
  Consulting Agreement with Robert Friedman, M.D.
 ®
  Consulting Agreement with Gerald Wagner, Ph.D.
 ®
  11. SALE AND LICENSING OF DISCONTINUED OPERATIONS
 ® ® ® ® ®
 11




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ITEM 2.
 ELECTRO-OPTICAL SCIENCES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   Overview
 ® ® ® ® ® ® ®
  ®
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®
  ®
  ® ® ® ®
 ® ® ®
 Critical Accounting Policies and Significant Judgments and Estimates
  13




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Revenue Recognition
  Stock-Based Compensation and Deferred Compensation
 Share-Based Payment Accounting for Stock
Issued to
Employees Accounting for Stock-Based Compensation
  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.
  14




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Results of Operations (in thousands)
 ® ® ®
 Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006
 Research and Development Expense
 ®
 General and Administrative Expense
  Interest Income/Expense
  Liquidity and Capital Resources
  15




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Cash Flows from Operating Activities
  Cash Flows from Investing Activities
 ®
 Cash Flows from Financing Activities
  Operating Capital and Capital Expenditure Requirements
 ® ® ® ® ®
 ®
 ®
 
    
    The schedule, costs, and results of our clinical trials;
    
    The success of our research and development efforts;
    
    The costs and timing of regulatory approval;
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
    
    Reimbursement amounts for the use of MelaFind®
that we are able to obtain from Medicare and third party payers, or
the amount of direct payments we are able to obtain from patients
and/or physicians utilizing MelaFind®;
    
    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
    
    $
    1,050
    
    
    $
    363
    
    
    $
    687
   Related Party Transactions
 ®
   17




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Off-Balance Sheet Arrangements
  Recently Adopted Accounting Pronouncements
  Recent Accounting Developments
   18




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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, 2006. In addition, the
following risk factors have changed during the three months ended March 31, 2007:
 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®;
    
    the cost of commercialization activities, including product marketing
and building a domestic direct sales force;
 19




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
    
    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;
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
    
    the departure of key personnel;
    
    the strength of our balance sheet;
    
    variations in our financial results or those of companies that are perceived to be similar to us;
    
    changes in the structure of and third-party reimbursement in the US and other countries;
    
    changes in accounting principles or practices;
    
    general economic, industry and market conditions; and
    
    future sales of our common stock.
  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.
  21




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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
  ITEM 4T. Controls and Procedures
  
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 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.
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Item 5. Other Information.
   
 Item 6. Exhibits
 ExhibitNumber
    
    Exhibit Title3.1
    
    Fourth Amended and Restated Certificate of Incorporation of the Registrant.(1)3.2
    
    Third Amended and Restated Bylaws of the Registrant.(2)4.1
    
    Specimen Stock Certificate.(2)4.2
    
    Second Amended and Restated Investors Rights Agreement dated as of October
26, 2004 by and among the Registrant and the parties listed therein.(3)4.3
    
    Form of Warrant.(7)10.1*
    
    Form of Indemnification Agreement for directors and executive officers.(2)10.2*
    
    1996 Stock Option Plan.(3)10.3*
    
    2003 Stock Incentive Plan, as amended.(3)10.4*
    
    2005 Stock Incentive Plan.(2)10.5*
    
    Employment Agreement dated as of January 5, 2004 between the Registrant and
Joseph V. Gulfo.(3)10.6
    
    Consulting Agreement dated as of May 31, 2005 between the Registrant and
Marek Elbaum.(3)10.7
    
    Lease Agreement dated as of December 16, 1998, by and between the Registrant
and Bridge Street Properties LLC, for office space located at One Bridge
Street, Irvington, New York.(3)10.8
    
    First Amendment to the Lease Agreement dated as of May 17, 2001 by and
between the Registrant and Bridge Street Properties LLC.(3)10.9
    
    Second Amendment to the Lease Agreement dated as of June 19, 2003 by and
between the Registrant and Bridge Street Properties LLC.(3)10.10
    
    Lease Agreement dated as of November 23, 2004, by and between the Registrant
and Bridge Street Properties LLC, for office space located at 3 West Main
Street, Irvington, New York.(3)10.11*
    
    Consulting Agreement dated as of June 1, 2005 between the Registrant and
Gerald Wagner Consulting, LLC.(1)10.12*
    
    Consulting Agreement dated as of June 20, 2003 between the Registrant and
Breaux Castleman, as amended.(1)10.13
    
    Consulting Agreement dated as of June 1, 2005 between the Registrant and
Robert Friedman, M.D.(1)10.14
    
    Task Order Agreement dated as of July 13, 2005 between the Registrant and
Battelle Memorial Institute.(2)10.15
    
    Third Amendment dated as of June 6, 2005, by and between the Registrant and
Bridge Street Properties LLC, for office space located at 1 Bridge Street,
Irvington, New York.(1)10.16
    
    Production Agreement between the Registrant and ASKION GmbH dated as of
January 25, 2006.(4)10.17*
    
    Amended and Restated Consulting Agreement effective as of April 1, 2006
between the Registrant and Gerald Wagner Consulting LLC.(11)10.18*
    
    Resignation Agreement, dated April 24, 2006, between the Registrant and Karen
Krumeich.(5)10.19*
    
    Employment Offer Letter, dated April 24, 2006, between the Registrant and
Richard I. Steinhart.(5)10.20*
    
    Employment Offer Letter, dated May 30, 2006, between the Registrant and
Christiano S. Butler.(6)10.21
    
    Securities Purchase Agreement among the Registrant and the purchasers
identified on the signature pages thereto, dated as of October 31, 2006.(8)10.22
    
    Securities Purchase Agreement among the Registrant and the purchasers
identified on the signature pages thereto, dated as of October 31, 2006.(8)10.23
    
    Registration Rights Agreement among the Registrant and the purchasers
identified on the signature pages thereto, dated as of October 31, 2006.(8)
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ExhibitNumber
    
    Exhibit Title10.24
    
    Placement Agency Agreement by and between the Registrant and Jefferies &
Company, Inc., dated as of October 31, 2006.(7)10.25
    
    Licensing Agreement between the Registrant and KaVo Dental GmbH, dated as of
December 5, 2006.(9)10.26*
    
    Amendment No. 1 to Amended and Restated Consulting Agreement dated as of
January 30, 2007 by and among the Registrant, Gerald Wagner and Gerald Wagner
Consulting LLC. (10)10.27
    
    Research and Feasibility Agreement between the Registrant and LOreal S.A.
dated as of March 26, 2007. (12)
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ExhibitNumber
    
    Exhibit Title31.1#
    
    Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.31.2#
    
    Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.32.1#
    
    Certification of Chief Executive Officer and
Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Indicates management compensatory plan, contract or arrangement(1)
    
    Incorporated by reference to the Registrants Registration Statement on Form S-1, as amended
(File No. 333-125517), as filed on July 15, 2005.(2)
    
    Incorporated by reference to the Registrants Registration Statement on Form S-1, as amended
(File No. 333-125517), as filed on August 8, 2005.(3)
    
    Incorporated by reference to the Registrants Registration Statement on Form S-1, as amended
(File No. 333-125517), as filed on June 3, 2005.(4)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K filed on January 31,
2006.(5)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K filed on April 27, 2006.(6)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K filed on June 2, 2006.(7)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K filed on November 1,
2006.(8)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K filed on November 8,
2006.(9)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K filed on December 11,
2006.(10)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K filed on January 31,
2007.(11)
    
    Incorporated by reference to the Registrants Annual Report on Form 10-K filed on March 29, 2006.(12)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K filed on March 28, 2007#
    
    Filed herewith. 25




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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)  26




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EXHIBIT INDEX
 Exhibit Number
    
    Description31.1
    
    Certification by the Chief Executive Officer pursuant
to Rule 13a-14(a) under the Securities Exchange Act of
193431.2
    
    Certification by the Chief Financial Officer pursuant
to Rule 13a-14(a) under the Securities Exchange Act of
193432.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
 27