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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 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 10533  (Address, including zip code, of registrants principal executive offices)
 (914) 591-3783
Registrants telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
 Title of Each Class
Common stock, $0.001 par value
    
    Name of Each Exchange on Which Registered
The NASDAQ Stock Market LLC
 Securities registered pursuant to Section 12(g) of the Act:
None
 o þ
 o þ
 þ o
 o o
 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 þ
  DOCUMENTS INCORPORATED BY REFERENCE




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MELA SCIENCES, INC.
2010 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
 PagePART IItem 1. Business
    
    
    2Item 1A. Risk Factors
    
    
    19Item 1B. Unresolved Staff Comments
    
    
    36Item 2. Properties
    
    
    36Item 3. Legal Proceedings
    
    
    36Item 4. [Reserved]
    
    
    36PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
    
    
    37Item 6. Selected Financial Data
    
    
    38Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    39Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    46Item 8. Financial Statements and Supplementary Data
    
    
    46Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
    
    
    62Item 9A. Controls and Procedures
    
    
    62Item 9B. Other Information
    
    
    65PART IIIItem 10. Directors, Executive Officers, and Corporate Governance
    
    
    65Item 11. Executive Compensation
    
    
    65Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    66Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    66Item 14. Principal Accountant Fees and Services
    
    
    66PART IVItem 15. Exhibits and Financial Statements Schedules
    
    
    66EX-23.1: CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONSEX-23.1EX-31.1EX-31.2EX-32.1
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This Annual Report on Form 10-K , including the sections labeled Managements Discussion and
Analysis of Financial Condition and Results of Operations, contains forward-looking statements that
you should read in conjunction with the financial statements and notes to financial statements that
we have included elsewhere in this report. These statements are based on our current expectations,
assumptions, estimates and projections about our business and our industry, and involve known and
unknown risks, uncertainties, and other factors that may cause our or our industrys results,
levels of activity, performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied in, or contemplated by, the
forward-looking statements. We generally identify these statements by words or phrases that contain
words such as believe, anticipate, assuming, expect, intend, plan, will, may,
should, estimate, predict, potential, continue, contemplate, or the negative of such
terms or other similar expressions. Our actual results and the timing of events may differ
significantly from the results discussed in the forward-looking statements, and you should not
place undue reliance on these statements. Factors that might cause such a difference include those
discussed below under the section Risk Factors, as well as those discussed elsewhere in this
Annual Report on Form 10-K . We disclaim any intent or obligation to update any forward-looking
statements as a result of developments occurring after the period covered by this report or
otherwise.
 
 Item 1. Business
 Overview
 ®
 ®
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    a hand-held imaging device, which employs high precision optics and multi-spectral illumination
(multiple colors of light including near infra-red);
    
    our proprietary databaseof pigmented skin lesions, which we believe to be the largest in the US; and
    
    our lesion classifiers, which are sophisticated mathematical algorithms that extract lesion feature
information and classify lesions.
 ® ® ®
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in situ in
situ
  A B C D E P R U
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 ®
 The Market Opportunity
 in situ
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in situ
 Journal of Investigative Dermatology
 Our Strategy
 ®
 
    
    Establish MelaFind®as the leading technology
for aiding in the detection of early melanoma.We have invested
considerable capital and expertise into developing our core
technology platform, which is protected by twelve U.S. and two
Australian patents. We will continue to refine and optimize this
technology in order to position MelaFind® as
the leading system for aiding in the detection of early melanoma.
    
    Pursue the timely FDA approval of MelaFind®.
We entered into a binding Protocol Agreement with the U.S. Food and
Drug Administration (FDA), which is an agreement for the conduct
of the pivotal trial in order to establish the safety and
effectiveness of MelaFind®. The FDA has
informed us that the MelaFind® pre-market
approval, or PMA, application would receive expedited review.
On November 18, 2010, the Companys PMA application for MelaFind® was reviewed by
the FDAs General and Plastic Surgery Devices Panel. The Panel voted favorably on all three questions instructed
by the FDA. The FDA advisory Panel vote is non-binding on the FDA. In February 2011, the Company submitted a PMA amendment containing a revised indications for use statement limiting
MelaFind® to use by dermatologists, based on discussions that ensued during
the Panel meeting. The Company has requested a meeting with the FDA to review the Panel outcome as well as the Companys PMA and PMA amendment.
 Upon obtaining PMA approval
from the FDA, we plan to launch MelaFind®
commercially in the United States.
    
    Commercialize MelaFind®using multiple sales
and marketing strategies.We intend to commence commercialization
of MelaFind®in selected U.S. markets
immediately upon receiving PMA approval from the FDA and
internationally upon achieving CE marking and regulatory review.
Our marketing effort will focus initially on high volume,
integrated dermatology practices and skin cancer specialists, in
key regions of the U.S. and Europe. To enter the larger general
dermatology markets in the U.S., and internationally, we may
establish partnerships with pharmaceutical and/or diagnostic/device
companies which have an established presence in these markets. The
plan is for dermatologists to offer their patients examinations
with MelaFind® on a self-pay per patient
basis creating a recurring revenue stream. Once there is sufficient
evidence to support favorable coding and coverage decisions and to
obtain appropriate payment levels, we may pursue national coverage
decisions from the Centers for Medicare and Medicaid Services
(CMS) and private payers for third-party reimbursement.
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Limitations of Current Melanoma Diagnosis
 ® ®
  MelaFind  ® Product Description
 ® ® ® ® ®
 A hand-held imaging device
 
    
    an illuminator that shines 10 different specific wavelengths of light, including near infra-red bands;
    
    a lens system composed of nine elements that creates images of the light reflected from the lesions;
    
    a photon (light) sensor; and
    
    an image processor employing proprietary algorithms to extract many discrete characteristics or
features from the images.
 Our proprietary database of pigmented skin lesions in vivo ®
 Our lesion classifiers . ® Lesion Classifier, Lesion Classifiers Lesion
Classifiers Lesion Classifier Lesion Classifiers ®
 ® sensitivity specificity ® Lesion Classifier ®
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®
 History of MelaFind ®
 MelaFind ® Pivotal Clinical Trial History
 ®
 ®
 ®
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® ® ®
  Hardware and Software History
 ® ®
 ® ®
 ® ®
 ® ®
 MelaFind ® Sales and Marketing
 ®
 The MelaFind ® Value Proposition for the Healthcare System
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Our Reimbursement Strategy
 ®
 ®
 ® ® ® ®
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Competition
 ®
 A B C D E P R U ®
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tm tm tm
    ®
 Manufacturing
 ® ®
 ® ®
 Research and Development Efforts
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® tm ® tm tm tm ®
 ® ®
  Intellectual Property
 ® ® ® ®
  ®
 ® ®
 www.melasciences.com www.eo-sciences.com www.eosciences.com www.melafind.com www.mela.us.com www.melafind.info www.melafind.net www.melafind.org www.melafind.us melafinder.com www.melainc.com, www.difoti.com www.skinsurf.com.
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##### Table of Contents



U.S. Patents Relating to MelaFind ®
 Patent #
    
    Title
    
    
    Issued
    
    
    Expiration6,081,612
    
    Systems and Methods for theMultispectral Imaging andCharacterization of Skin Tissue
    
    
    06/27/00
    
    
    
    02/27/186,208,749
    
    Systems and Methods for theMultispectral Imaging andCharacterization of Skin Tissue
    
    
    03/27/01
    
    
    
    02/27/186,307,957
    
    Multispectral Imaging andCharacterization of Biological Tissue
    
    
    10/23/01
    
    
    
    06/27/206,626,558
    
    Apparatus for Uniform Illumination ofan Object
    
    
    09/30/03
    
    
    
    08/31/216,657,798
    
    Method for Optimizing the Number ofGood Assemblies Manufacturable From aNumber of Parts
    
    
    12/02/03
    
    
    
    02/10/236,710,947
    
    Method for Assembling Lens Elements
    
    
    03/23/04
    
    
    
    02/27/237,102,672
    
    Integrated CMOS Imaging Array & DarkCurrent Monitor
    
    
    09/05/06
    
    
    
    01/10/247,127,094
    
    Method of Controlling Data Gathered atRemote Locations
    
    
    10/24/06
    
    
    
    03/11/25D613,866
    
    Medical Cart
    
    
    04/13/10
    
    
    
    04/13/24D613,867
    
    Table Structure of a Medical Cart
    
    
    04/13/10
    
    
    
    04/13/247,813,586
    
    Reducing Noise in Digital Images
    
    
    10/12/10
    
    
    
    05/31/277,894,651
    
    Quantitative Analysis of SkinCharacteristics
    
    
    02/22/11
    
    
    
    03/19/29
 Pending Non-Provisional U.S. Patent Applications Relating to MelaFind ®
 Published Pat Appl Ser #
    
    Title
    
    
    FiledUS2008/0312952A1
    
    Regulating Use of a Device to
Perform a Procedure on a Subject
    
    
    06/12/07US2009/0154781A1
    
    Characterizing a Texture of an Image
    
    
    12/14/07US2009/0060304A1
    
    Dermatology Information
    
    
    09/04/08WO2009/079367A1
    
    Characterizing a Texture of an Image  (CIP)
    
    
    12/12/08US2011/0025007 A1
    
    Medical Cart
    
    
    07/30/09US2011/0024507 A1
    
    Storage Card
    
    
    07/30/09WO2011/014614A2
    
    Medical Cart (CIP)
    
    
    07/29/10WO2011/014656A2
    
    Storage Cart (CIP)
    
    
    07/29/10TBP 02/09/12
    
    Assessing Features for Classification
    
    
    08/06/10TBP 03/17/11
    
    Characterizing a Texture of an Image (CIP)
    
    
    09/07/10US2011/0019888A1
    
    Reducing Noise in Digital Images (CIP)
    
    
    10/06/10TBP 05/05/11
    
    Showing Skin Lesion Information
    
    
    11/01/10
  ® ® ® ® ®
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® ®
 ® ® ® ® ®
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  FDA Regulation
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® ®
 ® ®
 ®
  
    
    MelaFind® may not be safe or effective to the FDAs satisfaction;
    
    the data from our pre-clinical studies and clinical trials may be insufficient to support approval;
    
    the manufacturing process or facilities we use may not meet applicable requirements; and
    
    changes in FDA approval policies or adoption of new regulations may require additional data.
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®
 ®
   
    
    establishment registration and device listing;
    
    QSR, which requires manufacturers to follow design,
testing, control, documentation and other quality assurance
procedures;
    
    labeling regulations, which prohibit the promotion of
products for unapproved or off-label uses and impose
other restrictions on labeling;
    
    medical device reporting regulations, which require that
manufacturers report to the FDA if a device may have caused
or contributed to a death or serious injury or
malfunctioned in a way that would likely cause or
contribute to a death or serious injury if it were to
recur; and
    
    corrections and removals reporting regulations, which
require that manufacturers report to the FDA field
corrections and product recalls or removals if undertaken
to reduce a risk to health posed by the device or to remedy
a violation of the FD&C Act that may present a risk to
health.
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
    
    warning letters;
    
    fines and civil penalties;
    
    unanticipated expenditures;
    
    delays in approving or refusal to approve our applications, including supplements;
    
    withdrawal of FDA approval;
    
    product recall or seizure;
    
    interruption of production;
    
    operating restrictions;
    
    injunctions; and
    
    criminal prosecution.
  Non-FDA Government Regulation
 ® ®
 
    
    the anti-kickback statute prohibits certain business
practices and relationships that might affect the provision
and cost of healthcare services reimbursable under
Medicare, Medicaid and other federal healthcare programs,
including the payment or receipt of remuneration for the
referral of patients whose care will be paid by Medicare or
other federal healthcare programs;
    
    the physician self-referral prohibition, commonly referred
to as the Stark Law, which prohibits referrals by
physicians of Medicare or Medicaid patients to providers of
a broad range of designated healthcare services in which
the physicians or their immediate family members have
ownership interests or with which they have certain other
financial arrangements;
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
    
    the anti-inducement law, which prohibits providers from
offering anything to a Medicare or Medicaid beneficiary to
induce that beneficiary to use items or services covered by
either program;
    
    the Civil False Claims Act, which prohibits any person from
knowingly presenting or causing to be presented false or
fraudulent claims for payment by the federal government,
including the Medicare and Medicaid programs; and
    
    the Civil Monetary Penalties Law, which authorizes the U.S.
Department of Health and Human Services (HHS) to impose
civil penalties administratively for fraudulent or abusive
acts.
   qui tam
 Environmental Regulation
  International Regulation
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®
   Product Liability and Insurance
 ® ® ® ® ®
 Employees
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Other
 www.melasciences.com www.melasciences.com
 
 Item 1A. Risk Factors
 You should carefully consider the following risk factors, as well as the other information
contained in this report. If any of the following risks actually occur, our business, financial
condition and results of operations would suffer. In that case, the trading price of our common
stock would likely decline.
 Risks Relating to Our Business
 We currently do not have, and may never develop, any commercialized products.
 ® ®
 
    
    we may not be able to obtain regulatory approvals for MelaFind®, or the approved indication
may be narrower than we seek;
    
    MelaFind® may not prove to be safe and effective in clinical trials to the FDAs satisfaction;
    
    physicians may not receive any reimbursement from third-party payers, or the level of reimbursement may be
insufficient to support widespread adoption of MelaFind®;
    
    we may experience delays in our continuing development program;
    
    any products that are approved may not be accepted in the marketplace by physicians or patients;
    
    we may not have adequate financial or other resources to complete the continued development or to commence the
commercialization of MelaFind® and we will not have adequate financial or other resources to
achieve significant commercialization of MelaFind®;
    
    we may not be able to manufacture our products in commercial quantities or at an acceptable cost; and
    
    rapid technological change may make our technology and products obsolete.
 ®
 We have not received, and may never receive, FDA or international regulatory approval to market
MelaFind ®
 ® ® ®
 
    
    MelaFind® may not be safe or effective to the FDAs satisfaction;
    
    the data from our pre-clinical studies and clinical trials may be insufficient to support approval;
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
    
    the manufacturing process or facilities we use may not meet applicable requirements; and
    
    changes in FDA approval policies or adoption of new regulations may require additional data.
 ® ® ® ® ®
 If MelaFind ® receives FDA or international regulatory approval, it may be
only for narrow indications.
 ® ® ® ® ® ® ®
 ® ® ® ®
 MelaFind ® may not be commercially viable if we fail to obtain an adequate
level of reimbursement by Medicare and other third party payers. The markets for
MelaFind ® may also be limited by the indications for which its use may be
reimbursed.
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® ®
  We have incurred losses for a number of years, and anticipate that we will incur continued losses
for the foreseeable future.
 ® ® ®
  We expect to operate in a highly competitive market, we may face competition from large,
well-established medical device manufacturers with significant resources, and we may not be able to
compete effectively.
 ® ®
 
    
    significantly greater name recognition;
    
    established relations with healthcare professionals, customers and third-party payers;
    
    established distribution networks;
    
    additional lines of products, and the ability to offer rebates, higher discounts or incentives to gain a
competitive advantage;
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
    
    greater experience in conducting research and development, manufacturing, clinical trials, obtaining
regulatory approval for products, and marketing approved products; and
    
    greater financial and human resources for product development, sales and marketing, and patent litigation.
  Technological breakthroughs in the diagnosis or treatment of melanoma could render
MelaFind ® obsolete.
 ®
        MelaFind ®
 For any additional clinical trials required for MelaFind ® by the FDA or with
respect to clinical trials relating to the development of our core technology for other
applications, we depend on clinical investigators and clinical sites and other third parties to
manage the trials and to perform related data collection and analysis, and, as a result, we may
face costs and delays that are outside of our control.
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®
 
    
    the FDA, an Institutional Review Board (IRB) or other regulatory authorities place our clinical trial on hold;
    
    patients do not enroll in clinical trials at the rate we expect;
    
    patient follow-up is not at the rate we expect;
    
    IRBs and third-party clinical investigators delay or reject our trial protocol;
    
    third-party organizations do not perform data collection and analysis in a timely or accurate manner;
    
    regulatory inspections of our clinical trials or manufacturing facilities, among other things, require us to
undertake corrective action or suspend or terminate our clinical trials, or invalidate our clinical trials;
    
    changes in governmental regulations or administrative actions; and
    
    the interim or final results of the clinical trial are inconclusive or unfavorable as to safety or effectiveness.
 If MelaFind ® is approved for reimbursement, we anticipate experiencing
significant pressures on pricing.
 ® ®
 ® ®
 MelaFind ® may never achieve market acceptance even if we obtain regulatory
approvals.
 ® ® ® ® ® ® ® ®
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    perceived effectiveness of MelaFind®;
    
    convenience of use;
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
    
    cost of use of MelaFind®;
    
    availability and adequacy of third-party coverage or reimbursement;
    
    approved indications and product labeling;
    
    publicity concerning MelaFind®or competitive products;
    
    potential advantages over alternative diagnostic methodologies;
    
    introduction and acceptance of competing products or technologies; and
    
    extent and success of our sales, marketing and distribution efforts.
 ® ® ® ® ® ® ® ® ® ®
 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 in product creation and enhancement, and meeting competitive services and
technologies;
    
    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;
    
    the cost of commercialization activities, including product marketing and building a domestic direct sales force;
    
    the amount of direct payments we are able to obtain from patients and/or physicians utilizing MelaFind®;
    
    the costs of filing, prosecuting, defending and enforcing any patent claims and other rights;
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
    
    the costs involved in defending any patent infringement actions or
other litigation claims brought against us by third parties;
    
    the costs of maintaining inventory and other manufacturing expenses; and
our ability to establish and maintain any collaborative, licensing or
other arrangements, and the terms and timing of any such arrangements.
   If we are unable to establish sales, marketing and distribution capabilities or enter into and
maintain arrangements with third parties to sell, market and distribute
MelaFind ® , our business may be harmed.
 ® ® ®
 ®
 We have limited manufacturing capabilities and manufacturing personnel, and if our manufacturing
capabilities are insufficient to produce an adequate supply of MelaFind ® , our growth
could be limited and our business could be harmed.
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® ®
 ® ®
 ®
 Our manufacturing operations are dependent upon third-party suppliers, making us vulnerable to
supply problems and price fluctuations, which could harm our business. We anticipate contracting
for final device assembly and integration, but no contract for such services on a commercial basis
has yet been procured.
 ® ®
  
    
    suppliers may make errors in manufacturing components that could negatively impact the
effectiveness or safety of our products, or cause delays in shipment of our products;
    
    we may not be able to obtain adequate supply in a timely manner or on commercially reasonable terms;
    
    we may have difficulty locating and qualifying alternative suppliers for our sole-source suppliers;
    
    switching components may require product redesign and submission to the FDA of a PMA supplement or
possibly a separate PMA, either of which could significantly delay production;
    
    our suppliers manufacture products for a range of customers, and fluctuations in demand for the
products these suppliers manufacture for others may affect their ability to deliver components to
us in a timely manner; and
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
    
    our suppliers may encounter financial hardships unrelated to our
demand for components, which could inhibit their ability to fulfill
our orders and meet our requirements.
  ® ®
 We may be required to purchase obsolete parts for MelaFind ® :
 ® ®
 We will not be able to sell MelaFind ® unless and until its design is verified
and validated in accordance with current good manufacturing practices as set forth in the U.S.
medical device Quality System Regulation (QSR).
 ® ® ® ® ® ®
 Upon MelaFind ® approval by regulatory authorities, if we or our
suppliers fail to comply with ongoing regulatory requirements, or if we experience unanticipated
problems with MelaFind ® , it could be subject to restrictions or withdrawal
from the market.
 ®
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®
 
    
    warning letters;
    
    fines and civil penalties;
    
    unanticipated expenditures;
    
    delays in approving or refusal to approve MelaFind®;
    
    withdrawal of approval by the FDA or other regulatory bodies;
    
    product recall or seizure;
    
    interruption of production;
    
    operating restrictions;
    
    injunctions; and
    
    criminal prosecution.
  We are involved in a heavily regulated sector, and our ability to remain viable will depend on
favorable government decisions at various points by various agencies.
 ®
   
    
    billing for services;
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
    
    quality of medical equipment and services;
    
    confidentiality, maintenance and security issues associated
with medical records and individually identifiable health
information;
    
    false claims; and
    
    labeling products.
  Healthcare policy changes, including recent legislation reforming the U.S. healthcare system, may
have a material adverse effect on us.
   We must comply with complex statutes prohibiting fraud and abuse, and both we and physicians
utilizing MelaFind ® could be subject to significant penalties for
noncompliance.
 ® ® ®
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The application of the privacy provisions of HIPAA is uncertain.
 ®
 We may become subject to claims of infringement or misappropriation of the intellectual property
rights of others, which could prohibit us from shipping affected products, require us to obtain
licenses from third parties or to develop non-infringing alternatives, and subject us to
substantial monetary damages and injunctive relief. Our patents may also be subject to challenge on
validity grounds, and our patent applications may be rejected.
 ® ® ®
 ®
 ®
  New product development in the medical device industry is both costly and labor intensive with very
low success rates for successful commercialization; if we cannot successfully develop or obtain
future products our growth would be delayed.
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® ®
 We face the risk of product liability claims and may not be able to obtain or maintain adequate
insurance.
 ® ® ® ® ® ®
 ® ®
  We have become subject to claims in securities and shareholders actions which if determined
adversely to the Company could have a material adverse impact on our business.
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We may be adversely affected by a data center failure.
 ® ®
 We may be adversely affected by breaches of online security.
 ®
 We are dependent upon telecommunications and the internet.
  We will be obligated to comply with Federal Communications Commission regulations for radio
transmissions used by our products.
 ® ®
 All of our operations are conducted at a single location. Any disruption at our facility could
increase our expenses.
  We may be liable for contamination or other harm caused by materials that we handle, and changes in
environmental regulations could cause us to incur additional expense.
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Failure to obtain and maintain regulatory approval in foreign jurisdictions will prevent us from
marketing abroad.
  ®
 Our success will depend on our ability to attract and retain our personnel.
  ®
  Our financial results for future periods will be affected by the attainment of milestones.
 ®
 Climate control policy changes, including regulations issued by the Environmental Protection Agency
and negotiated international treaties, could have an impact on our Company.
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Results could be impacted by the effects of, and changes in, world-wide economic and capital market
conditions.
  Risks Relating to our Common Stock
 If we fail to maintain the adequacy of our internal controls, our ability to provide accurate
financial statements could be impaired and any failure to maintain our internal controls could have
an adverse effect on our stock price.
  An active trading market for our common stock may not be sustained.
  Our stock price may 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 U.S. and foreign countries;
    
    ability to manufacture our products to commercial standards;
    
    developments concerning our clinical collaborators, suppliers or marketing partners;
 34




---



##### Table of Contents




    
    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.
  Our charter documents and Delaware law may inhibit a takeover that stockholders consider favorable
and could also limit the market price of our stock.
  
    
    set limitations on the removal of directors;
    
    limit who may call a special meeting of stockholders;
    
    establish advance notice requirements for nominations for
election to our board of directors or for proposing matters
that can be acted upon at stockholder meetings;
    
    do not permit cumulative voting in the election of our
directors, which would otherwise permit less than a
majority of stockholders to elect directors;
    
    prohibit stockholder action by written consent, thereby
requiring all stockholder actions to be taken at a meeting
of our stockholders; and
    
    provide our board of directors the ability to designate the
terms of and issue a new series of preferred stock without
stockholder approval.
   35




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##### Table of Contents



Item 1B.
    
    Unresolved Staff Comments
  
 Item 2.
    
    Properties
  
 Item 3.
    
    Legal Proceedings
 Randall J. Pederson, Individually and on Behalf of All
Others Similarly Situated v. MELA Sciences, Inc., Joseph V. Gulfo, Richard I. Steinhart, and Breaux
Castleman, Amy Steigman, Individually
and on Behalf of All Others Similarly Situated v. MELA Sciences, Inc., Joseph V. Gulfo, Richard I.
Steinhart, and Breaux Castleman Martin Slove and Linda Slove,
Individually and on Behalf of All Others Similarly Situated v. MELA Sciences, Inc., Joseph V.
Gulfo, Richard I. Steinhart, and Breaux Castleman, In re MELA Sciences,
Inc. Securities Litigation ®
 Barry Jaffess
v. Joseph V. Gulfo, Breaux Castleman, Sidney Braginsky, George C. Chryssis, Martin D. Cleary, Anne
Egger, Charles Stiefel, Gerald Wagner, and Dan W. Lufkin
   
 Item 4.
    
    Reserved
 36




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##### Table of Contents



PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
 Market Information
  High
    
    
    LowYear Ended December 31, 2010October 1  December 31, 2010
    
    $
    8.32
    
    
    $
    2.51July 1  September 30, 2010
    
    $
    7.50
    
    
    $
    5.90April 1  June 30, 2010
    
    $
    9.25
    
    
    $
    5.51January 1  March 31, 2010
    
    $
    12.24
    
    
    $
    6.43Year Ended December 31, 2009October 1  December 31, 2009
    
    $
    11.73
    
    
    $
    7.85July 1  September 30, 2009
    
    $
    10.95
    
    
    $
    6.18April 1  June 30, 2009
    
    $
    8.75
    
    
    $
    4.35January 1  March 31, 2009
    
    $
    7.50
    
    
    $
    3.00
  Dividend Policy
   Securities Authorized For Issuance Under Equity Compensation Plans
 Number of securitiesremaining available underNumber of securities to
    
    Weighted-average
    
    equity compensation plansbe issued upon exercise
    
    exercise price of
    
    (excluding securities reflectedPlan Category at 12/31/2010
    
    of outstanding options
    
    outstanding options
    
    in the first column )Equity
compensation plans approved by stockholders
    
    
    2,132,879
    
    
    $
    5.19
    
    
    1,623,189Equity
compensation plans not approved by stockholders
    
    
    
    
    
    
    
    
    
    Total
    
    
    2,132,879
    
    
    $
    5.19
    
    
    1,623,189
 37




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##### Table of Contents



Item 6. Selected Financial Data
 The following table sets forth selected financial data. The financial information for the
years ended December 31, 2008, 2009, and 2010 and as of December 31, 2009 and 2010 has been
derived from our audited financial statements and related notes appearing in Part II Item 8 of this
report and should be read together with such financial statements and the Managements Discussion
and Analysis of Financial Condition and Results of Operations section appearing in Part II Item 7
of this report. The financial information for the years ended December 31, 2006 and 2007 and as of
December 31, 2006, 2007, and 2008 have been derived from our audited financial statements not
included in this report. The historical results are not necessarily indicative of results of any
future periods.
 Year Ended December 31,2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010(In thousands, except share and per share data)Statements of Operations Data:Research and development expenses
    
    $
    7,574
    
    
    $
    7,678
    
    
    $
    12,508
    
    
    $
    10,950
    
    
    $
    11,497General and administrative expenses
    
    
    4,526
    
    
    
    5,400
    
    
    
    5,766
    
    
    
    7,631
    
    
    
    8,738Operating loss from continuing
operations
    
    
    (12,100
    )
    
    
    (13,078
    )
    
    
    (18,274
    )
    
    
    (18,581
    )
    
    
    (20,235
    )Interest income
    
    
    (728
    )
    
    
    (1,054
    )
    
    
    (468
    )
    
    
    (45
    )
    
    
    (32
    )Other income, net
    
    
    
    
    
    
    (59
    )
    
    
    (201
    )
    
    
    (83
    )
    
    
    (280
    )Loss from continuing operations
    
    
    (11,372
    )
    
    
    (11,965
    )
    
    
    (17,605
    )
    
    
    (18,453
    )
    
    
    (19,923
    )Gain from discontinued operations
    
    
    781
    
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (10,591
    )
    
    $
    (11,937
    )
    
    $
    (17,605
    )
    
    $
    (18,453
    )
    
    $
    (19,923
    )Net income ( loss) per share,
basic and diluted:Continuing operations
    
    $
    (1.01
    )
    
    $
    (0.84
    )
    
    $
    (1.08
    )
    
    $
    (.96
    )
    
    $
    (.83
    )Discontinued operations
    
    
    .07
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Basic and diluted net loss per
common share
    
    $
    (.94
    )
    
    $
    (.84
    )
    
    $
    (1.08
    )
    
    $
    (.96
    )
    
    $
    (.83
    )Basic and diluted weighted
average number of common shares
outstanding
    
    
    11,293,783
    
    
    
    14,220,466
    
    
    
    16,282,176
    
    
    
    19,293,761
    
    
    
    24,043,135
 As of December 31,2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010(In thousands)Balance Sheet
Data:Total current assets
    
    $
    21,771
    
    
    $
    21,328
    
    
    $
    15,836
    
    
    $
    30,338
    
    
    $
    31,044Total assets
    
    
    22,476
    
    
    
    22,108
    
    
    
    16,620
    
    
    
    32,127
    
    
    
    33,589Total current
liabilities
    
    
    1,162
    
    
    
    1,336
    
    
    
    1,530
    
    
    
    1,811
    
    
    
    1,686Total liabilities
    
    
    1,162
    
    
    
    1,336
    
    
    
    1,530
    
    
    
    1,811
    
    
    
    1,790Accumulated deficit
    
    
    (31,225
    )
    
    
    (43,162
    )
    
    
    (60,767
    )
    
    
    (79,220
    )
    
    
    (99,143
    )Total stockholders
equity
    
    
    21,314
    
    
    
    20,772
    
    
    
    15,089
    
    
    
    30,316
    
    
    
    31,799
 38




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion contains forward-looking statements, which involve risks and
uncertainties. Our actual results could differ from those anticipated in these forward-looking
statements as a result of various factors, including those set forth above under the caption Risk
Factors. You should read the following discussion and analysis of our financial condition and
results of operations together with our financial statements for the year ended December 31, 2010
and the related notes appearing in Part II Item 8 of this report.
 Overview
 ®
  ® ® ®
 ® ®
 ®
 ® ®
 ® ®
  ®
 ®
 39




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##### Table of Contents



® ® ® ®
 ® ®
  Critical Accounting Policies and Significant Judgments and Estimates
   Revenue Recognition
 ®
 Stock-Based Compensation
  Compensation-Stock Compensation
  40




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##### Table of Contents



Accrued Expenses
  
    
    professional service fees;
    
    contract clinical and regulatory related service fees;
    
    fees paid to contract manufacturers in conjunction with the
production of MelaFind® components or
materials; and
    
    fees paid to third party data collection organizations and
investigators in conjunction with the clinical trials and
FDA and other regulatory review..
  Results of Operations (in thousands)
 Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
 Research and Development Expense
  General and Administrative Expense
  Interest (Income)/Expense
  Other Income, net
   41




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##### Table of Contents



Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
 Research and Development Expense
 ®
 General and Administrative Expense
 ®
 Interest (Income)/Expense
  Other Income, net
     Liquidity and Capital Resources (in thousands)
   42




---



##### Table of Contents



Cash Flows from Operating Activities
  Cash Flows from Investing Activities
  43




---



##### Table of Contents



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 in product creation and enhancement, and meeting competitive services and
technologies;
    
    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;
    
    the cost of commercialization activities, including product marketing and building a domestic direct sales force;
    
    the amount of direct payments we are able to obtain from patients and/or physicians utilizing MelaFind®;
    
    the costs of filing, prosecuting, defending and enforcing any patent claims and other rights;
    
    the costs involved in defending any patent infringement actions or other litigation claims brought against us by third
parties;
    
    the costs of maintaining or potentially building our inventory and other manufacturing expenses; and
    
    our ability to establish and maintain any collaborative, licensing or other arrangements, and the terms and timing of any
such arrangements.
 44




---



##### Table of Contents



Contractual Obligations
   Contractual ObligationsLess Than
    
    
    
    
    
    
    
    
    
    
    More ThanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 Years(Dollars in thousands)Operating Leases
    
    $
    2,598
    
    
    $
    382
    
    
    $
    849
    
    
    $
    911
    
    
    $
    456Total
    
    $
    2,598
    
    
    $
    382
    
    
    $
    849
    
    
    $
    911
    
    
    $
    456
  Related Party Transactions
 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.
 ®
  45




---



##### Table of Contents



Consulting Agreement with Anne Egger
  Off-Balance Sheet Arrangements
  Recently Adopted Accounting Pronouncements
  
 Item 7A. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 8. Financial Statements and Supplementary Data
 INDEX TO FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    
    47Balance Sheets as of December 31, 2009 and 2010
    
    
    48Statements of Operations for the years ended December 31, 2008, 2009 and 2010
    
    
    49Statements of Stockholders Equity for the years ended December 31, 2008, 2009 and 2010
    
    
    50Statements of Cash Flows for the years ended December 31, 2008, 2009 and 2010
    
    
    51Notes to Financial Statements
    
    
    52
 46




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Report of Independent Registered Public Accounting Firm
 
      
 47




---



##### Table of Contents



MELA SCIENCES, INC.

BALANCE SHEETS
 December 31,
    
    
    December 31,2009
    
    
    2010ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    29,673,420
    
    
    $
    30,520,812Prepaid expenses and other current assets
    
    
    664,962
    
    
    
    523,672Total Current Assets
    
    
    30,338,382
    
    
    
    31,044,484Property and equipment, net
    
    
    1,571,956
    
    
    
    2,073,602Patents and trademarks, net
    
    
    83,008
    
    
    
    71,108Deferred financing costs
    
    
    85,570
    
    
    
    62,391Other assets
    
    
    48,000
    
    
    
    337,705Total Assets
    
    $
    32,126,916
    
    
    $
    33,589,290LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable (includes related parties of
$6,921 as of December 31, 2009)
    
    $
    1,187,201
    
    
    $
    1,096,505Accrued expenses
    
    
    590,600
    
    
    
    559,975Other current liabilities
    
    
    33,285
    
    
    
    29,538Total Current Liabilities
    
    
    1,811,086
    
    
    
    1,686,018Long Term Liabilities:Deferred rent
    
    
    
    
    
    
    104,304Total Long Term Liabilities
    
    
    
    
    
    
    104,304Total Liabilities
    
    
    1,811,086
    
    
    
    1,790,322COMMITMENTS,  CONTINGENCIES AND LITIGATION (Note 4)Stockholders Equity:Preferred stock  $0.10 par value; authorized
10,000,000 shares:Issued and outstanding: none
    
    
    
    
    
    
    Common stock  $0.001 par value; authorized
45,000,000 shares:Issued and outstanding 22,354,317 and
25,262,538 shares at December 31, 2009 and
2010, respectively.
    
    
    22,354
    
    
    
    25,263Additional paid-in capital
    
    
    109,513,582
    
    
    
    130,916,326Accumulated deficit
    
    
    (79,220,106
    )
    
    
    (99,142,621
    )Total Stockholders Equity
    
    
    30,315,830
    
    
    
    31,798,968Total Liabilities and Stockholders Equity
    
    $
    32,126,916
    
    
    $
    33,589,290
  48




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MELA SCIENCES, INC.


STATEMENTS OF OPERATIONS
 Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2008
    
    
    2009
    
    
    2010Operating expenses:Research and development
    
    $
    12,507,959
    
    
    $
    10,950,114
    
    
    $
    11,496,634General and administrative
    
    
    5,766,238
    
    
    
    7,631,251
    
    
    
    8,738,203Operating loss
    
    
    (18,274,197
    )
    
    
    (18,581,365
    )
    
    
    (20,234,837
    )Interest income
    
    
    (467,587
    )
    
    
    (45,259
    )
    
    
    (31,582
    )Other income, net
    
    
    (201,579
    )
    
    
    (83,262
    )
    
    
    (280,740
    )(669,166
    )
    
    
    (128,521
    )
    
    
    (312,322
    )Net loss
    
    $
    (17,605,031
    )
    
    $
    (18,452,844
    )
    
    $
    (19,922,515
    )Basic and diluted
net loss per common share
    
    $
    (1.08
    )
    
    $
    (.96
    )
    
    $
    (.83
    )Basic and diluted
weighted average number
of common shares
outstanding
    
    
    16,282,176
    
    
    
    19,293,761
    
    
    
    24,043,135
  49




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MELA SCIENCES, INC.

STATEMENTS OF STOCKHOLDERS EQUITY
Years Ended December 31, 2008, 2009 and 2010
 Accumulated
    
    
    
    
    
    
    TotalAdditional
    
    
    Other
    
    
    
    
    
    
    StockholdersCommon Stock
    
    
    Paid-in
    
    
    Comprehensive
    
    
    Accumulated
    
    
    EquityShares
    
    
    Amount
    
    
    Capital
    
    
    Loss
    
    
    Deficit
    
    
    (Deficiency)Balance at January 1, 2008
    
    
    15,401,882
    
    
    $
    15,402
    
    
    $
    63,930,689
    
    
    $
    (12,136
    )
    
    $
    (43,162,231
    )
    
    $
    20,771,724Exercise of options
    
    
    141,823
    
    
    
    141
    
    
    
    73,234
    
    
    
    
    
    
    
    
    
    
    
    73,375Exercise of warrants
    
    
    2,342
    
    
    
    2
    
    
    
    10,584
    
    
    
    
    
    
    
    
    
    
    
    10,586Issuance of shares of common
stock in connection with a
public offering(net of
expenses)
    
    
    2,088,451
    
    
    
    2,089
    
    
    
    10,970,695
    
    
    
    
    
    
    
    
    
    
    
    10,972,784Share-based compensation
expense
    
    
    
    
    
    
    
    
    
    
    860,751
    
    
    
    
    
    
    
    
    
    
    
    860,751Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,268
    
    
    
    
    
    
    
    5,268Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,605,031
    )
    
    
    (17,605,031
    )Comprehensive loss
(sub-total)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,599,763
    )Balance at December 31, 2008
    
    
    17,634,498
    
    
    $
    17,634
    
    
    $
    75,845,953
    
    
    $
    (6,868
    )
    
    $
    (60,767,262
    )
    
    $
    15,089,457Exercise of options
    
    
    151,457
    
    
    
    152
    
    
    
    212,119
    
    
    
    
    
    
    
    
    
    
    
    212,271Exercise of warrants
    
    
    324,290
    
    
    
    324
    
    
    
    2,174,775
    
    
    
    
    
    
    
    
    
    
    
    2,175,099Cashless exercise of warrants
    
    
    19,131
    
    
    
    19
    
    
    
    (19
    )
    
    
    
    
    
    
    
    
    
    
    Issuance of shares of common
stock in connection with a
public offering(net of
expenses)
    
    
    2,400,000
    
    
    
    2,400
    
    
    
    13,696,779
    
    
    
    
    
    
    
    
    
    
    
    13,699,179Issuance of shares of common
stock in connection with a
Committed Equity Financing
Facility (CEFF) (net of
expenses)
    
    
    1,824,941
    
    
    
    1,825
    
    
    
    16,757,222
    
    
    
    
    
    
    
    
    
    
    
    16,759,047Share-based compensation
expense
    
    
    
    
    
    
    
    
    
    
    826,753
    
    
    
    
    
    
    
    
    
    
    
    826,753Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,868
    
    
    
    
    
    
    
    6,868Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,452,844
    )
    
    
    (18,452,844
    )Comprehensive loss (sub-total)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,445,976
    )Balance at December 31, 2009
    
    
    22,354,317
    
    
    $
    22,354
    
    
    $
    109,513,582
    
    
    
    
    
    
    $
    (79,220,106
    )
    
    $
    30,315,830Exercise of options
    
    
    12,944
    
    
    
    13
    
    
    
    33,075
    
    
    
    
    
    
    
    
    
    
    
    33,088Cashless exercise of options
    
    
    16,262
    
    
    
    16
    
    
    
    (16
    )
    
    
    
    
    
    
    
    
    
    
    Exercise of warrants
    
    
    239,723
    
    
    
    240
    
    
    
    1,691,394
    
    
    
    
    
    
    
    
    
    
    
    1,691,634Cashless exercise of warrants
    
    
    32,548
    
    
    
    33
    
    
    
    (33
    )
    
    
    
    
    
    
    
    
    
    
    Issuance of shares of common
stock in connection with a
public offering(net of
expenses)
    
    
    2,200,000
    
    
    
    2,200
    
    
    
    15,231,471
    
    
    
    
    
    
    
    
    
    
    
    15,233,671Issuance of shares of common
stock in connection with a
Committed Equity Financing
Facility (CEFF) (net of
expenses)
    
    
    406,744
    
    
    
    407
    
    
    
    3,719,697
    
    
    
    
    
    
    
    
    
    
    
    3,720,104Share-based compensation
expense
    
    
    
    
    
    
    
    
    
    
    727,156
    
    
    
    
    
    
    
    
    
    
    
    727,156Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,922,515
    )
    
    
    (19,922,515
    )Balance at December 31, 2010
    
    
    25,262,538
    
    
    $
    25,263
    
    
    $
    130,916,326
    
    
    
    
    
    
    $
    (99,142,621
    )
    
    $
    31,798,968
  50




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##### Table of Contents



MELA SCIENCES, INC.

STATEMENTS OF CASH FLOWS
 Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2008
    
    
    2009
    
    
    2010Cash flows from operating activities:Net loss
    
    $
    (17,605,031
    )
    
    $
    (18,452,844
    )
    
    $
    (19,922,515
    )Adjustments to reconcile net loss to net
cash used in operating activities:Gain on sale of fixed assets
    
    
    
    
    
    
    
    
    
    
    (8,811
    )Loss on disposal/abandonment of fixed
assets
    
    
    
    
    
    
    20,186Depreciation and amortization
    
    
    308,977
    
    
    
    314,352
    
    
    
    552,860Noncash compensation
    
    
    860,751
    
    
    
    826,753
    
    
    
    727,156Amortization of discount on marketable
securities
    
    
    519
    
    
    
    
    
    
    
    Changes in operating assets and
liabilities:Decrease (increase) in prepaid expenses
and other current assets
    
    
    35,942
    
    
    
    (289,350
    )
    
    
    141,290Increase (decrease) in accounts payable
and accrued expenses
    
    
    223,924
    
    
    
    311,179
    
    
    
    (121,321
    )Increase (decrease) in other current
liabilities
    
    
    8,662
    
    
    
    5,819
    
    
    
    (3,747
    )Decrease (increase) in other assets
    
    
    600
    
    
    
    (2,724
    )
    
    
    (289,705
    )Increase in deferred rent
    
    
    
    
    
    
    
    
    
    
    104,304Decrease in deferred income
    
    
    (38,861
    )
    
    
    (36,085
    )
    
    
    Net cash used in operating activities
    
    
    (16,204,517
    )
    
    
    (17,302,714
    )
    
    
    (18,820,489
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (313,020
    )
    
    
    (1,251,211
    )
    
    
    (1,044,079
    )Sale of marketable securities
    
    
    1,334,142
    
    
    
    397,380
    
    
    
    Proceeds from disposal of fixed assets
    
    
    
    
    
    
    
    
    
    
    10,284Net cash provided by (used in)
investing activities
    
    
    1,021,122
    
    
    
    (853,831
    )
    
    
    (1,033,795
    )Cash flows from financing activities:Net proceeds from private
placements/public offering
    
    
    10,972,784
    
    
    
    13,699,179
    
    
    
    15,233,671Net proceeds from Committed Equity
Financing Facility
    
    
    
    
    
    
    16,673,477
    
    
    
    3,743,283Proceeds from exercise of stock options
    
    
    73,375
    
    
    
    212,271
    
    
    
    33,088Proceeds from exercise of stock warrants
    
    
    10,586
    
    
    
    2,175,099
    
    
    
    1,691,634Net cash provided by financing
activities
    
    
    11,056,745
    
    
    
    32,760,026
    
    
    
    20,701,676Net (decrease) increase in cash and
cash equivalents
    
    
    (4,126,650
    )
    
    
    14,603,481
    
    
    
    847,392Cash and cash equivalents at beginning
of year
    
    
    19,196,589
    
    
    
    15,069,939
    
    
    
    29,673,420Cash and cash equivalents at end of
year
    
    $
    15,069,939
    
    
    $
    29,673,420
    
    
    $
    30,520,812Supplemental Schedule of Noncash
Investing and Financing Activities:Unrealized loss (gain) on marketable
securities
    
    $
    (5,268
    )
    
    $
    (6,868
    )
    
    $
    Amortization of deferred financing costs
    
    
    
    
    
    $
    103,953
    
    
    $
    23,179
  51




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##### Table of Contents



MELA SCIENCES, INC.

Notes to Financial Statements
(In thousands, except for share and per share data)
 1. Principal Business Activities and Summary of Significant Accounting Policies:
 Organization and Business
 ® ® ® ®
 ® ®
 ®
 ® ®
 ®
 ® ® ®
 Business Segments
 ®
 52




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##### Table of Contents



Cash and Cash Equivalents
  Property and Equipment
  Patents
  Revenue Recognition
 ®
 Income Taxes
    Estimates
  Long-lived Assets
  Research and Development
  53




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##### Table of Contents



Stock-Based Compensation
      Financial Instruments
  Net Loss per Common Share
  Year Ended December 31,2008
    
    
    2009
    
    
    2010Common stock options
    
    
    2,069,080
    
    
    
    2,031,023
    
    
    
    2,132,879Warrants
    
    
    1,124,544
    
    
    
    929,629
    
    
    
    546,781Total
    
    
    3,193,624
    
    
    
    2,960,652
    
    
    
    2,679,660
 Comprehensive loss
  54




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##### Table of Contents



Recently Adopted Accounting Pronouncements
  2. Property and Equipment:
  December 31,
    
    
    Estimated2009
    
    
    2010
    
    
    Useful LifeLeasehold improvements
    
    $
    519
    
    
    $
    786
    
    
    Lease TermLaboratory and research equipment
    
    
    936
    
    
    
    975
    
    
    3-5 yearsOffice furniture and equipment
    
    
    1,061
    
    
    
    1,774
    
    
    3-5 years2,516
    
    
    
    3,535Accumulated depreciation and amortization
    
    
    944
    
    
    
    1,461$
    1,572
    
    
    $
    2,074
  3. Patents:
  4. Commitments, Contingencies and Litigation:
  2011
    
    $
    3822012
    
    
    4102013
    
    
    4392014
    
    
    4552015
    
    
    4562016
    
    
    456$
    2,598
  ® ®
 ® ®
 55




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##### Table of Contents



Randall J.
Pederson, Individually and on Behalf of All Others Similarly Situated v. MELA Sciences, Inc.,
Joseph V. Gulfo, Richard I. Steinhart, and Breaux Castleman, Amy Steigman, Individually and on Behalf of All Others Similarly Situated
v. MELA Sciences, Inc., Joseph V. Gulfo, Richard I. Steinhart, and Breaux Castleman Martin Slove and Linda Slove, Individually and on Behalf of All Others
Similarly Situated v. MELA Sciences, Inc., Joseph V. Gulfo, Richard I. Steinhart, and Breaux
Castleman, In re MELA Sciences, Inc. Securities Litigation ®
 Barry Jaffess
v. Joseph V. Gulfo, Breaux Castleman, Sidney Braginsky, George C. Chryssis, Martin D. Cleary, Anne
Egger, Charles Stiefel, Gerald Wagner, and Dan W. Lufkin
    5. Employee Benefit Plan:
  6. Stockholders Equity
   56




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##### Table of Contents



®
 57




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##### Table of Contents



7. Stock-Based Compensation and Warrants:
 Stock Options
    ®
   For the Year EndedDecember 31, 2008
    
    
    December 31, 2009
    
    
    December 31, 2010Expected life
    
    5 years
    
    
    5-10 years
    
    
    5-10 yearsExpected volatility
    
    
    60
    %
    
    
    60-66
    %
    
    
    60-67
    %Risk-free interest rate
    
    
    1.67-3.86
    %
    
    
    1.69-2.67
    %
    
    
    2.26-3.56
    %Dividend yield
    
    
    0
    
    
    
    0
    
    
    
    0
   58




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##### Table of Contents



WeightedWeighted
    
    
    AverageAverage
    
    
    RemainingExercise
    
    
    Contractual
    
    
    AggregateNumber of
    
    
    Price per
    
    
    Term in
    
    
    IntrinsicShares
    
    
    Share
    
    
    Years
    
    
    ValueOutstanding at January 1, 2008
    
    
    1,812,084
    
    
    $
    2.96
    
    
    
    3.5Granted
    
    
    1,165,539
    
    
    
    3.61
    
    
    
    8.2Exercised
    
    
    (141,823
    )
    
    
    0.52Forfeited or expired
    
    
    (766,720
    )
    
    
    0.52Outstanding at December 31, 2008
    
    
    2,069,080
    
    
    
    4.39
    
    
    
    5.8Granted
    
    
    213,400
    
    
    
    8.60
    
    
    
    4.7Exercised
    
    
    (151,457
    )
    
    
    1.40Forfeited or expired
    
    
    (100,000
    )
    
    
    3.84Outstanding at December 31, 2009
    
    
    2,031,023
    
    
    
    5.09
    
    
    
    5.2Granted
    
    
    250,300
    
    
    
    6.12
    
    
    
    8.6Exercised
    
    
    (29,206
    )
    
    
    3.92Forfeited or expired
    
    
    (119,238
    )
    
    
    5.72Outstanding at December 31,2010
    
    
    2,132,879
    
    
    
    5.19
    
    
    
    5.4
    
    
    $
    115Vested and exercisable at December 31, 2010
    
    
    942,916
    
    
    
    5.42
    
    
    
    3.2
    
    
    
    115
   Options OutstandingWeighted-
    
    
    
    
    
    
    Options ExercisableAverage
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Remaining
    
    
    Average
    
    
    
    
    
    
    AverageNumber
    
    
    Contractual
    
    
    Exercise
    
    
    Number
    
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    
    Life
    
    
    Price
    
    
    Exercisable
    
    
    Price$1.00
    
    
    48,952
    
    
    1.9 years
    
    
    1.00
    
    
    
    48,952
    
    
    
    1.00$1.01-$4.50
    
    
    1,146,652
    
    
    6.9 years
    
    
    3.83
    
    
    
    371,364
    
    
    
    3.88$4.51-$11.11
    
    
    937,275
    
    
    7.1 years
    
    
    7.07
    
    
    
    522,600
    
    
    
    6.93$1.00-$11.11
    
    
    2,132,879
    
    
    5.2 years
    
    $
    5.19
    
    
    
    942,916
    
    
    $
    5.42
  Warrants
 Issued
    
    2005
    
    
    2006
    
    
    2007
    
    
    2009
    
    
    TotalOutstanding at December 31, 2009
    
    
    143,125
    
    
    
    173,963
    
    
    
    412,541
    
    
    
    200,000
    
    
    
    929,629Exercised
    
    
    (32,548
    )
    
    
    (173,963
    )
    
    
    (65,760
    )
    
    
    
    
    
    
    (272,271
    )Forfeited
    
    
    (87,452
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (87,452
    )Expired
    
    
    (23,125
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,125
    )Outstanding at December 31, 2010
    
    
    
    
    
    
    
    
    
    
    346,781
    
    
    
    200,000
    
    
    
    546,781
 59




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##### Table of Contents



8. Related Party Agreements (see also Note 4):
  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.
 ®
  60




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##### Table of Contents



Consulting Agreement with Anne Egger
  9. Other Income (including gain on sale of discontinued operations):
    10. Income Taxes:
   Year Ended December 31,2008
    
    
    2009
    
    
    2010Computed expected tax benefit
    
    $
    (5,986
    )
    
    $
    (6,274
    )
    
    $
    (6,774
    )State tax benefit, net of federal effect
    
    
    (1,056
    )
    
    
    (1,107
    )
    
    
    (1,195
    )Increase in the valuation allowance
    
    
    7,042
    
    
    
    7,381
    
    
    
    7,969Provision for income taxes
    
    $
    
    
    
    $
    
    
    
    $
    
  December 31,2009
    
    
    2010Deferred tax assets:Net operating loss carryforwards
    
    $
    13,289
    
    
    $
    16,681Capitalized research and developmental costs
    
    
    16,019
    
    
    
    20,389Non-cash compensation
    
    
    1,682
    
    
    
    1,889Total deferred tax assets
    
    
    30,990
    
    
    
    38,959Less valuation allowance
    
    
    (30,990
    )
    
    
    (38,959
    )Net deferred tax assets
    
    $
    
    
    
    $
    
  61




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##### Table of Contents



11. Quarterly Operating Results (Unaudited)
  Quarter EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2010Net loss
    
    $
    (5,051
    )
    
    $
    (4,591
    )
    
    $
    (4,955
    )
    
    $
    (5,326
    )Basic and diluted net loss per share of common stock
    
    $
    (0.22
    )
    
    $
    (0.20
    )
    
    $
    (0.20
    )
    
    $
    (0.21
    )2009Net loss
    
    $
    (3,990
    )
    
    $
    (3,835
    )
    
    $
    (5,048
    )
    
    $
    (5,580
    )Basic and diluted net loss per share of common stock
    
    $
    (0.23
    )
    
    $
    (0.22
    )
    
    $
    (0.26
    )
    
    $
    (0.25
    )
  
 Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 Evaluation of disclosure controls and procedures
   62




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##### Table of Contents



Report of Management on Internal Control Over Financial Reporting.
   Internal ControlIntegrated Framework
  63




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
       /s/ EisnerAmper LLPNew York, New YorkMarch 2, 2011
 64




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##### Table of Contents



Change in internal control over financial reporting
  Limitations on the effectiveness of controls
  
 Item 9B. Other Information
  
 
 PART III
 
 Item 10. Directors, Executive Officers, and Corporate Governance
  
 Item 11. Executive Compensation
  65




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##### Table of Contents



Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accountant Fees and Services
  
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
 Exhibits and Financial Statement Schedules:
 Financial Statements
  Financial Statement Schedules
  Exhibits
  66




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##### Table of Contents



EXHIBIT INDEX
 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)4.4
    
    Form of Warrant.(13)4.5
    
    Warrant dated May 7, 2009 issued by Electro-Optical Sciences, Inc. to Kingsbridge Capital Limited (16)10.1*
    
    Form of Indemnification Agreement for directors and executive officers.(2)10.2*
    
    1996 Stock Option Plan.(3)10.3*
    
    2003 Stock Incentive Plan, as amended.(3)10.4*
    
    2005 Stock Incentive Plan.(2)10.5*
    
    Employment Agreement dated as of January 5, 2004 between the Registrant and Joseph V. Gulfo.(3)10.6
    
    Consulting Agreement dated as of May 31, 2005 between the Registrant and Marek Elbaum.(3)10.7*
    
    Consulting Agreement dated as of June 20, 2003 between the Registrant and Breaux Castleman, as
amended.(1)10.8
    
    Consulting Agreement dated as of June 1, 2005 between the Registrant and Robert Friedman, M.D.(1)10.9
    
    Production Agreement between the Registrant and ASKION GmbH dated as of January 25, 2006.(4)10.10*
    
    Amended and Restated Consulting Agreement effective as of April 1, 2006 between the Registrant and
Gerald Wagner Consulting LLC.(10)10.11*
    
    Employment Offer Letter, dated April 24, 2006, between the Registrant and Richard I. Steinhart.(5)10.12
    
    Licensing Agreement between the Registrant and KaVo Dental GmbH, dated as of December 5, 2006.(9)10.13*
    
    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. (9)10.14
    
    Research and Feasibility Agreement between Registrant and LOreal S.A. dated as of March 26, 2007.(11)10.15
    
    Fifth Amendment dated as of August 24, 2007, by and between the Registrant and Bridge Street Commercial,
LLC, for office space located at 1 Bridge Street, Irvington, New York. (12)
 67




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##### Table of Contents



ExhibitNumber
    
    Exhibit Title10.16
    
    Common Stock Purchase Agreement dated as of May 27 between Electro-Optical Sciences, Inc. and
Kingsbridge Capital Limited.(13)10.17
    
    Registration Rights Agreement dated as of May 7, 2009 between Electro-Optical Sciences, Inc. and
Kingsbridge Capital Limited.(13)10.18
    
    Agreement of Lease, dated as of July 14, 2009, by and between Stanford Bridge LLC and
Electro-Optical Sciences, Inc. (14)10.19
    
    Underwriter Agreement dated as of June 30, 2010 among MELA Sciences, Needham & Company, LLC and
Leerink Swann LLC(15)23.1#
    
    Consent of EisnerAmper LLP31.1#
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2#
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1#
    
    Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Indicates management compensatory plan, contract or arrangement(1)
    
    Incorporated by reference to the 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.
Portions of this agreement have been omitted pursuant to a request for confidential treatment.(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 December 11, 2006.(9)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K filed on January 31, 2007.(10)
    
    Incorporated by reference to the Registrants Annual Report on Form 10-K filed on March 29, 2006.(11)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K filed on March 28, 2007.(12)
    
    Incorporated by reference to the Registrants Quarterly Report on Form 10-Q filed on November 8, 2007.(13)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K filed on May 8, 2009.(14)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K filed on July 14, 2009.(15)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K filed on June 30, 2010#
    
    Filed herewith. 68




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SIGNATURES
  MELA SCIENCES, INC.By:
    /s/  Joseph V. Gulfo, M.D.Joseph V. Gulfo, M.D.President and Chief Executive Officer
(Principal Executive Officer)   Signature
    
    Title
    
    Date/s/ Joseph V. Gulfo, M.D.

Joseph V. Gulfo, M.D.
    
    Director, President and
Chief Executive Officer
(Principal Executive Officer)
    
    March 3, 2011/s/ Richard I. Steinhart

Richard I. Steinhart
    
    Vice President, Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
    
    March 3, 2011/s/ Breaux Castleman
    
    Chairman of the Board of Directors
    
    March 3, 2011Breaux Castleman/s/ Sidney Braginsky
    
    Director
    
    March 3, 2011Sidney Braginsky/s/ George C. Chryssis
    
    Director
    
    March 3, 2011George C. Chryssis/s/ Martin D. Cleary
    
    Director
    
    March 3, 2011Martin D. Cleary/s/ Anne Egger
    
    Director
    
    March 3, 2011Anne Egger/s/ Gerald Wagner, PhD.
    
    Director
    
    March 3, 2011Gerald Wagner, PhD.
 69