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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, 2010
 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
 MELA SCIENCES, INC.
 (Exact name of Registrant as specified in its charter)
 Delaware(State or Other Jurisdiction of 
Incorporation or Organization)
    
    13-3986004(I.R.S. Employer
Identification No.)50 South Buckhout Street, Suite 1
Irvington, New York(Address of Principal Executive offices)
    
    10533(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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MELA Sciences, Inc.
Table of Contents
 PagePART I. FINANCIAL INFORMATIONITEM 1. Financial StatementsCondensed Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009
    
    
    2Condensed Statements of Operations (unaudited) for the three and nine month periods ended
September 30, 2010 and 2009
    
    
    3Condensed Statements of Cash Flows (unaudited) for the nine month periods ended September
30, 2010 and 2009
    
    
    4Notes to Condensed Financial Statements (unaudited)
    
    
    5ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    18ITEM 4. Controls and Procedures
    
    
    19PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    19ITEM 1A. Risk Factors
    
    
    19ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    21ITEM 3. Defaults Upon Senior Securities
    
    
    21ITEM 4. Reserved
    
    
    21ITEM 5. Other Information
    
    
    21ITEM 6. Exhibits
    
    
    22SIGNATURES
    
    
    23EXHIBIT INDEX
    
    
    24EX-31.1EX-31.2EX-32.1
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MELA SCIENCES, INC.
 
 CONDENSED BALANCE SHEETS
 September 30,
    
    
    December 31,2010
    
    
    2009(unaudited)
    
    
    *ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    35,755,664
    
    
    $
    29,673,420Prepaid expenses and other current assets
    
    
    393,156
    
    
    
    664,962Total Current Assets
    
    
    36,148,820
    
    
    
    30,338,382Property and equipment, net
    
    
    2,235,365
    
    
    
    1,571,956Patents and trademarks, net
    
    
    74,083
    
    
    
    83,008Deferred financing costs
    
    
    62,391
    
    
    
    85,570Other assets
    
    
    337,705
    
    
    
    48,000Total Assets
    
    $
    38,858,364
    
    
    $
    32,126,916LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable (includes related parties of $2,350
as of September 30, 2010 and $6,921 as of December
31, 2009)
    
    $
    1,058,124
    
    
    $
    1,187,201Accrued expenses
    
    
    717,878
    
    
    
    590,600Other current liabilities
    
    
    29,726
    
    
    
    33,285Total Current Liabilities
    
    
    1,805,728
    
    
    
    1,811,086Long Term Liabilities:Deferred rent
    
    
    78,228
    
    
    
    Total Long Term Liabilities
    
    
    78,228
    
    
    
    Total Liabilities
    
    
    1,883,956
    
    
    
    1,811,086COMMITMENTS AND CONTINGENCIES (Note 7)Stockholders EquityPreferred stock  $.10 par value; authorized
10,000,000 shares; issued and outstanding: noneCommon stock  $.001 par value; authorized
45,000,000 shares at September 30, 2010 and
30,000,000 at December 31, 2009; issued and
outstanding 25,230,535 shares at September 30, 2010
and 22,354,317 at December 31, 2009
    
    
    25,231
    
    
    
    22,354Additional paid-in capital
    
    
    130,766,982
    
    
    
    109,513,582Accumulated deficit
    
    
    (93,817,805
    )
    
    
    (79,220,106
    )Stockholders Equity
    
    
    36,974,408
    
    
    
    30,315,830Total Liabilities and Stockholders Equity
    
    $
    38,858,364
    
    
    $
    32,126,916
 
 *
    
    Derived from the audited balance sheet as of December 31, 2009  2




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MELA SCIENCES, INC.
 
 CONDENSED STATEMENTS OF OPERATIONS  (unaudited)
 Three months ended September 30,
    
    
    Nine months ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Operating expenses:Research and development
    
    $
    2,936,671
    
    
    $
    2,801,208
    
    
    $
    8,276,430
    
    
    $
    7,636,224General and administrative
    
    
    2,033,172
    
    
    
    2,262,571
    
    
    
    6,352,492
    
    
    
    5,361,123Operating loss
    
    
    (4,969,843
    )
    
    
    (5,063,779
    )
    
    
    (14,628,922
    )
    
    
    (12,997,347
    )Interest income
    
    
    9,741
    
    
    
    7,589
    
    
    
    13,702
    
    
    
    42,357Other income
    
    
    4,998
    
    
    
    8,329
    
    
    
    17,521
    
    
    
    82,445Net loss:
    
    $
    (4,955,104
    )
    
    $
    (5,047,861
    )
    
    $
    (14,597,699
    )
    
    $
    (12,872,545
    )Basic and diluted net loss per common share
    
    $
    (0.20
    )
    
    $
    (0.26
    )
    
    $
    (0.62
    )
    
    $
    (0.70
    )Basic and diluted weighted average number of
common shares outstanding
    
    
    25,110,970
    
    
    
    19,760,367
    
    
    
    23,636,446
    
    
    
    18,358,579
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MELA SCIENCES, INC.
 
 CONDENSED STATEMENTS OF CASH FLOWS  (unaudited)
 Nine Months Ended September 30,2010
    
    
    2009Cash flows from operating activities:Net loss
    
    $
    (14,597,699
    )
    
    $
    (12,872,545
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    396,878
    
    
    
    233,599Noncash compensation
    
    
    562,799
    
    
    
    410,621Gain on disposal of fixed assets
    
    
    (27
    )Changes in operating assets and liabilities:Decrease (increase) in prepaid expenses and other current assets
    
    
    271,806
    
    
    
    (34,904
    )Increase in deferred rent
    
    
    78,228
    
    
    
    (Decrease) increase in accounts payable and accrued expenses
    
    
    (1,799
    )
    
    
    30,054Decrease in deferred income
    
    
    
    
    
    
    (36,085
    )(Decrease) increase in other current liabilities
    
    
    (3,559
    )
    
    
    1,369Increase in other assets
    
    
    (289,705
    )
    
    
    (2,724
    )Net cash used in operating activities
    
    
    (13,583,078
    )
    
    
    (12,270,615
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (1,052,835
    )
    
    
    (245,054
    )Proceeds from sale of fixed assets
    
    
    1,500
    
    
    
    Sale of marketable securities
    
    
    
    
    
    
    397,380Net cash (used in) provided by investing activities
    
    
    (1,051,335
    )
    
    
    152,326Cash flows from financing activities:Proceeds from exercise of stock options and warrants
    
    
    1,717,703
    
    
    
    289,479Net proceeds related to public offering
    
    
    15,255,671
    
    
    
    13,750,407Proceeds from Committed Equity Financing Facility
    
    
    3,750,000
    
    
    
    7,977,000Expenses related to Committed Equity Financing Facility
    
    
    (6,717
    )
    
    
    (189,523
    )Net cash provided by financing activities
    
    
    20,716,657
    
    
    
    21,827,363Net increase in cash and cash equivalents
    
    
    6,082,244
    
    
    
    9,709,074Cash and cash equivalents at beginning of period
    
    
    29,673,420
    
    
    
    15,069,939Cash and cash equivalents at end of period
    
    $
    35,755,664
    
    
    $
    24,779,013Supplemental Schedule of Non-cash Investing and Financing ActivitiesUnrealized gain on marketable securities
    
    $
    
    
    
    $
    6,868Deferred financing costs charged to additional paid-in capital
    
    $
    23,179
    
    
    $
    49,115
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MELA 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. COMPREHENSIVE LOSS
    3. USE OF ESTIMATES
  4. RECENT ACCOUNTING PRONOUNCEMENTS
  6




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. NET LOSS PER COMMON SHARE
  September 30,2010
    
    
    2009Common stock options
    
    
    2,171,273
    
    
    
    2,038,073Warrants
    
    
    614,906
    
    
    
    1,297,985Total
    
    
    2,786,179
    
    
    
    3,336,058
 6. STOCK-BASED COMPENSATION
     For the Nine Months
    
    
    For the Nine MonthsEnded September 30, 2010
    
    
    Ended September 30, 2009Expected life
    
    5-10 years
    
    5 yearsExpected volatility
    
    
    61-67%
    
    
    
    60%Risk-free interest rate
    
    
    2.26-3.56%
    
    
    
    1.69-2.54%Dividend yield
    
    
    0%
    
    
    
    0%
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WeightedWeighted
    
    
    AverageAverage
    
    
    RemainingExercise
    
    
    Contractual
    
    
    AggregateNumber of
    
    
    Price per
    
    
    Term in
    
    
    IntrinsicShares
    
    
    Share
    
    
    Years
    
    
    ValueOutstanding at December 31, 2009
    
    
    2,031,023
    
    
    $
    5.09
    
    
    
    5.2Granted
    
    
    197,800
    
    
    
    6.85
    
    
    
    8.4Exercised
    
    
    (5,925
    )
    
    
    4.40
    
    
    
    Forfeited or expired
    
    
    (51,625
    )
    
    
    5.56
    
    
    
    Outstanding at September 30, 2010
    
    
    2,171,273
    
    
    $
    5.24
    
    
    
    4.9
    
    
    $
    3,534Vested and exercisable at September 30, 2010
    
    
    921,710
    
    
    $
    5.17
    
    
    
    2.9
    
    
    $
    1,427
 Options OutstandingWeighted-
    
    
    
    
    
    
    Options ExercisableAverage
    
    
    Weighted
    
    
    
    
    
    
    Weighted-Remaining
    
    
    Average
    
    
    
    
    
    
    AverageNumber
    
    
    Contractual
    
    
    Exercise
    
    
    Number
    
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    
    Life
    
    
    Price
    
    
    Exercisable
    
    
    Price$.01-$1.00
    
    
    55,971
    
    
    2.1 years
    
    $
    1.00
    
    
    
    55,971
    
    
    $
    1.00$1.01-$4.50
    
    
    1,096,777
    
    
    7.0 years
    
    $
    3.85
    
    
    
    327,739
    
    
    $
    3.90$4.51-$11.11
    
    
    1,018,525
    
    
    2.8 years
    
    $
    6.96
    
    
    
    538,000
    
    
    $
    6.38$.01-$11.11
    
    
    2,171,273
    
    
    4.9 years
    
    $
    5.24
    
    
    
    921,710
    
    
    $
    5.17
    7. COMMITMENTS AND CONTINGENCIES
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Year ended December 31,2010 remaining three months
    
    $
    892011
    
    
    3822012
    
    
    4102013
    
    
    4392014
    
    
    4552015
    
    
    4552016
    
    
    456$
    2,686
   ® ®
 ® ®
   8. STOCKHOLDERS EQUITY
    9




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9. WARRANTS
     10. RELATED PARTY CONSULTING AGREEMENTS
  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
  11




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Consulting Agreement with Anne Egger
  11. OTHER INCOME
   ® ® ®
 12. SUBSEQUENT EVENT
 ®
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MELA SCIENCES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   Overview
 ®
 ®
 ® ® ® ® ®
 ® ®
 ® ®
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Liquidity and Capital Resources
       ®
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Cash Flows from Operating Activities (in thousands)
  Cash Flows from Investing Activities (in thousands)
  Cash Flows from Financing Activities (in thousands)
  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;
    
    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;
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
    
    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
    
    $
    2,686
    
    
    $
    375
    
    
    $
    835
    
    
    $
    907
    
    
    $
    569
  Results of Operations
 ®
 Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
 Research and Development Expense
  General and Administrative Expense
  Interest Income
  Other Income
  Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
 Research and Development Expense
 ®
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General and Administrative Expense
    Interest Income
  Other Income
  Critical Accounting Policies and Significant Judgments and Estimates
   Revenue Recognition
  Stock-Based Compensation
 Stock Compensation
  Equity-based Payments to Non-employees
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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.
  Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
  
 ITEM 3.
 Quantitative and Qualitative Disclosures about Market Risk
  18




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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, 2009. In addition, the
following risk factors have changed during the nine months ended September 30, 2010:
 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.
 ®
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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.
  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;
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
    
    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.
  Climate control policy changes, including legislation pending in the U.S. Congress and negotiated
international treaties, could have an impact on our Company.
 ®
 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. Reserved
 
 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 22




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SIGNATURES
  MELA SCIENCES, INC.By:
    /s/ Richard I. SteinhartRichard I. SteinhartVice President and Chief Financial Officer
(Principal Accounting and Financial Officer)  23




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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.
 24