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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 September 30, 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 
Incorporation or Organization)
    
    (I.R.S. Employer
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
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  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 September 30, 2009 (unaudited) and December 31, 2008
    
    
    2Condensed Statements of Operations (unaudited) for the three and nine month
periods ended September 30, 2009 and 2008
    
    
    3Condensed Statements of Cash Flows (unaudited) for the nine month periods ended
September 30, 2009 and 2008
    
    
    4Notes to Condensed Financial Statements (unaudited)
    
    
    5ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    17ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    25ITEM 4. Controls and Procedures
    
    
    26PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    26ITEM 1A. Risk Factors
    
    
    26ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29ITEM 3. Defaults Upon Senior Securities
    
    
    29ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    29ITEM 5. Other Information
    
    
    29ITEM 6. Exhibits
    
    
    30SIGNATURES
    
    
    31EXHIBIT INDEX
    
    
    32EX-31.1EX-31.2EX-32.1
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ELECTRO-OPTICAL SCIENCES, INC.
 
 CONDENSED BALANCE SHEETS
 September 30,
    
    
    December 31,2009
    
    
    2008(unaudited)
    
    
    *ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    24,779,013
    
    
    $
    15,069,939Marketable securities
    
    
    
    
    
    
    390,512Prepaid expenses and other current assets
    
    
    410,517
    
    
    
    375,612Total Current Assets
    
    
    25,189,530
    
    
    
    15,836,063Property and equipment, net
    
    
    663,763
    
    
    
    643,383Patents and trademarks, net
    
    
    85,983
    
    
    
    94,908Deferred offering costs
    
    
    140,407
    
    
    
    Other assets
    
    
    48,000
    
    
    
    45,276Total Assets
    
    $
    26,127,683
    
    
    $
    16,619,630LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable (includes related parties of $13,906
as of September 30, 2009 and $17,500 as of December
31, 2008)
    
    $
    838,669
    
    
    $
    634,394Accrued expenses
    
    
    658,007
    
    
    
    832,228Deferred income
    
    
    
    
    
    
    36,085Other current liabilities
    
    
    28,835
    
    
    
    27,466Total Current Liabilities
    
    
    1,525,511
    
    
    
    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 21,002,269 shares at
September 30, 2009 and 17,634,498 at December 31,
2008
    
    
    21,002
    
    
    
    17,634Additional paid-in capital
    
    
    98,220,977
    
    
    
    75,845,953Accumulated other comprehensive loss
    
    
    
    
    
    
    (6,868
    )Accumulated deficit
    
    
    (73,639,807
    )
    
    
    (60,767,262
    )Stockholders Equity
    
    
    24,602,172
    
    
    
    15,089,457Total Liabilities and Stockholders Equity
    
    $
    26,127,683
    
    
    $
    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 September 30,
    
    
    Nine months ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Operating expenses:Research and development
    
    $
    2,801,208
    
    
    $
    3,325,122
    
    
    $
    7,636,224
    
    
    $
    9,994,205General and administrative
    
    
    2,262,571
    
    
    
    1,043,111
    
    
    
    5,361,123
    
    
    
    3,957,585Operating loss
    
    
    (5,063,779
    )
    
    
    (4,368,233
    )
    
    
    (12,997,347
    )
    
    
    (13,951,790
    )Interest income
    
    
    7,589
    
    
    
    105,569
    
    
    
    42,357
    
    
    
    380,167Other income
    
    
    8,329
    
    
    
    62,752
    
    
    
    82,445
    
    
    
    143,610Net loss:
    
    $
    (5,047,861
    )
    
    $
    (4,199,912
    )
    
    $
    (12,872,545
    )
    
    $
    (13,428,013
    )Basic and diluted net
loss per common share
    
    $
    (0.26
    )
    
    $
    (0.25
    )
    
    $
    (0.70
    )
    
    $
    (0.85
    )Basic and diluted weighted
average number of common
shares outstanding
    
    
    19,760,367
    
    
    
    16,678,852
    
    
    
    18,358,579
    
    
    
    15,832,391
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ELECTRO-OPTICAL SCIENCES, INC.
 
 CONDENSED STATEMENTS OF CASH FLOWS
 (unaudited)
 Nine Months Ended September 30,2009
    
    
    2008Cash flows from operating activities:Net loss
    
    $
    (12,872,545
    )
    
    $
    (13,428,013
    )Adjustments to reconcile net loss to net cash used in operating
activities:Depreciation and amortization
    
    
    233,599
    
    
    
    225,825Non-cash compensation
    
    
    410,621
    
    
    
    248,140Amortization of discount on marketable securities
    
    
    
    
    
    
    519Changes in operating assets and liabilities:Increase in other assets
    
    
    (2,724
    )
    
    
    (Increase) decrease in prepaid expenses and other current assets
    
    
    (34,904
    )
    
    
    263,072Increase in accounts payable and accrued expenses
    
    
    30,054
    
    
    
    685,286Decrease in deferred income
    
    
    (36,085
    )
    
    
    (72,861
    )Increase in other current liabilities
    
    
    1,369
    
    
    
    8,642Net cash used in operating activities
    
    
    (12,270,615
    )
    
    
    (12,069,390
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (245,054
    )
    
    
    (298,733
    )Proceeds from sale of marketable securities
    
    
    397,380
    
    
    
    934,347Net cash provided by investing activities
    
    
    152,326
    
    
    
    635,614Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    167,807
    
    
    
    34,770Proceeds from exercise of stock warrants
    
    
    121,672
    
    
    
    10,586Proceeds from registered direct offering-financing
    
    
    15,000,000
    
    
    
    11,909,057Expenses relating to registered direct offering-financing
    
    
    (1,249,593
    )
    
    
    (941,438
    )Proceeds from Committed Equity Financing Facility
    
    
    7,977,000
    
    
    
    Expenses relating to Committed Equity Financing Facility
    
    
    (189,523
    )
    
    
    Net cash provided by financing activities
    
    
    21,827,363
    
    
    
    11,012,975Net increase (decrease) in cash and cash equivalents
    
    
    9,709,074
    
    
    
    (420,801
    )Cash and cash equivalents at beginning of period
    
    
    15,069,939
    
    
    
    19,196,589Cash and cash equivalents at end of period
    
    $
    24,779,013
    
    
    $
    18,775,788Supplemental Schedule of Non-cash Investing and Financing ActivitiesUnrealized gain on marketable securities
    
    $
    6,868
    
    
    $
    10,237
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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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®
   6




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2. MARKETABLE SECURITIES
 Accounting for Certain Investments in Debt and Equity
Securities
  3. COMPREHENSIVE LOSS
    4. USE OF ESTIMATES
  5. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
  7




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6. RECENT ACCOUNTING PRONOUNCEMENTS
   8




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7. NET LOSS PER COMMON SHARE
  September 30,2009
    
    2008Common stock options
    
    
    2,038,073
    
    
    
    1,949,616Warrants
    
    
    1,297,985
    
    
    
    1,124,544Total
    
    
    3,336,058
    
    
    
    3,074,160
 8. STOCK-BASED COMPENSATION
    9




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For the Nine Months
    
    For the Nine MonthsEnded September 30, 2009
    
    Ended September 30, 2008Expected life
    
    5 years
    
    5 yearsExpected volatility
    
    60-65%
    
    60%Risk-free interest rate
    
    1.69-2.67%
    
    2.95-3.72%Dividend yield
    
    0%
    
    0%
     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
    
    
    112,600
    
    
    
    6.88
    
    
    
    4.7Exercised
    
    
    (83,607
    )
    
    
    2.01
    
    
    
    Forfeited or expired
    
    
    (60,000
    )
    
    
    4.64
    
    
    
    Outstanding at September 30, 2009
    
    
    2,038,073
    
    
    $
    4.62
    
    
    
    5.3
    
    
    $
    10,107Vested and exercisable at September 30, 2009
    
    
    798,210
    
    
    $
    4.65
    
    
    
    3.4
    
    
    $
    3,933
 Options OutstandingWeighted-
    
    
    
    
    
    Options ExercisableAverage
    
    Weighted
    
    
    
    
    
    Weighted-Remaining
    
    Average
    
    
    
    
    
    AverageNumber
    
    Contractual
    
    Exercise
    
    Number
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    Life
    
    Price
    
    Exercisable
    
    Price$.01-$.46
    
    
    90,000
    
    
    0.2 years
    
    $
    .46
    
    
    
    65,000
    
    
    $
    .46$.47-$1.00
    
    
    65,971
    
    
    2.6 years
    
    $
    1.00
    
    
    
    65,971
    
    
    $
    1.00$1.01-$8.32
    
    
    1,882,102
    
    
    5.6 years
    
    $
    4.95
    
    
    
    667,239
    
    
    $
    5.42$.01-$8.32
    
    
    2,038,073
    
    
    5.3 years
    
    $
    4.62
    
    
    
    798,210
    
    
    $
    4.65
  10




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9. COMMITMENTS AND CONTINGENCIES
   2009
    
    2010
    
    2011
    
    2012
    
    2013
    
    2014-16$85
    
    $
    356
    
    
    $
    384
    
    
    $
    412
    
    
    $
    441
    
    
    $
    1,329
 ®
 ®
   10. STOCKHOLDERS EQUITY
  11




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12




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11. WARRANTS
        12. RELATED PARTY CONSULTING AGREEMENTS
  13




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Consulting Agreement with Breaux Castleman
 ®
 Consulting Agreement with Marek Elbaum, Ph.D.
   Consulting Agreement with Robert Friedman, M.D.
 ®
  Consulting Agreement with Gerald Wagner, Ph.D.
 ®
  14




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Consulting Agreement with Anne Egger
  13. OTHER INCOME
  ® ® ®
 14. SUBSEQUENT EVENTS
     15




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ELECTRO-OPTICAL SCIENCES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   Overview
 ®
 ®
 ®
 ®
 ®
 17




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®
 ® ® ® ®
  Liquidity and Capital Resources
       18




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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 (in thousands)
   Less than
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    1 year
    
    1-3 years
    
    4-5 years
    
    5 yearsOperating leases
    
    $
    3,008
    
    
    $
    351
    
    
    $
    782
    
    
    $
    888
    
    
    $
    987
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Results of Operations (in thousands)
 ® ®
 ® ® ® ®
 Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008
 Research and Development Expense
  
    
    clinical studies costs  in the third quarter of 2009 the pivotal trial study sites were
shut down leaving only ongoing data acquisition sites. In the third quarter of 2008, all
sites of the pivotal clinical trial data acquisition phase were fully engaged. Clinical
studies costs decreased $343.
 
    
    quality and regulatory costs  were increased in the third quarter of 2009 with activities
in support of the review of our PMA , making extensive use of consultants to assist in this
process. Quality and regulatory costs increased $48 period to period.
 
    
    development activities in the third quarter of 2009, we experienced a significant decrease
in design and process development costs for MelaFind® as the product had become
defined and finalized. There were more extensive development efforts of 2008. Development
costs decreased $229 from the prior year.
 General and Administrative Expense
 ® ®
  
    
    pre-marketing activities intensified during the third quarter of 2009 following the
submission of the MelaFind® PMA. in June. There were limited
pre-marketing efforts during the nine month period ended September 30, 2008 while the data
acquisition phase of the pivotal clinical trial continued. Pre-marketing expenses in 2009
increased $492 over the same period in 2008.
 
    
    in the third quarter of 2009 there were increased legal activities relating to regulatory
requirements and patent activities associated with protecting MelaFind®
intellectual property. Legal and patent expense increased $108 over the same period a year
earlier.
 
    
    information technology department upgrades and other one-time staffing related employee
costs increased general and administrative related costs $466 in the three months ending
September 30, 2009 over the same period a year earlier. For the quarter, non-cash expenses of
depreciation and share-based compensation were $94 higher in 2009 than in 2008.
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Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
 Research and Development Expense
  
    
    clinical studies costs  in the first nine months of 2009 we closed down the pivotal
clinical trial study sites which, in the same period in 2008,` were fully engaged. Clinical
studies costs decreased $1,958 from the prior period.
 
    
    quality and regulatory the nine month cost level was increased in 2009 as we intensified
activities in support of the PMA submission and review, making extensive use of consultants
to assist in this process. In the first nine months of 2008, we were not yet in the position
to be preparing the PMA. Quality and regulatory costs increased $701 over the prior period.
 
    
    development activities in the first nine 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 $1,101 from the prior period.
 General and Administrative Expense
 ® ®
  
    
    pre-marketing activities accelerated throughout the first nine months of 2009 following
announcement of positive top-line results from the pivotal clinical trial and particularly in
the third quarter, following the submission of the MelaFind® PMA.
There were limited pre-marketing efforts during the nine month period ended September 30,
2008, while the data acquisition phase of the pivotal clinical trial continued. Pre-marketing
expenses increased $603 over the prior period.
 
    
    in 2009 there has been increased legal and investor relations activities involving required
disclosures and investor notification; such as the release of top-line results from our
pivotal clinical trial and the submission of our PMA. Patent expenses have increased
associated with protecting MelaFind® intellectual property. Legal, patent
and investor relations expenses increased $188 over the same period in 2008.
 
    
    information technology department upgrades and other one-time staffing related employee costs
increased general and administrative related costs $358 in the first nine months over the same
period a year earlier. Non-cash expenses of depreciation and share-based compensation were
$234 higher in 2009 than in 2008 through nine months.
 Critical Accounting Policies and Significant Judgments and Estimates
  22




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Revenue Recognition
  Stock-Based Compensation
 Stock Compensation
  Equity-based payments to non-employees.
 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.
  23




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Off-Balance Sheet Arrangements
  Recently Adopted Accounting Pronouncements
      24




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Recent Accounting Pronouncements
    
 ITEM 3.
 Quantitative and Qualitative Disclosures about Market Risk
  25




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ITEM 4.
 Controls and Procedures
 Evaluation of disclosure controls and procedures
  Change in internal control over financial reporting
  Limitations on the effectiveness of controls
  
 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 materially changed during the nine months ended September 30, 2009:
 We have incurred losses for a number of years, and anticipate that we will incur continued losses
for the foreseeable future.
 ® ® ®
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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;
    
    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.
  27




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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;
    
    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.
  28




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Results could be impacted by the effects of, and changes in, world-wide economic and capital market
conditions
  
 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
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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 30




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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)  31




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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.
 32