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MELA > SEC Filings for MELA > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for MELA SCIENCES, INC. /NY

Form 10-Q for MELA SCIENCES, INC. /NY


8-Nov-2013

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This management's discussion and analysis of financial condition and results of operations is intended to provide information to help you better understand and evaluate our financial condition and results of operations. We recommend that you read this section in conjunction with our unaudited condensed financial statements and accompanying notes included under Part I, Item 1 of this Quarterly Report and our financial statements and accompanying notes in our Annual Report on Form 10-K for the year ended December 31, 2012. We have experienced and expect to continue to experience volatility in our operating loss resulting from MelaFind® launch activities that can vary significantly period-to-period. Therefore we believe that period-to-period comparisons of our historical results of operations may not be meaningful and should not be relied on as indicative of our future performance.

This quarterly report on Form 10-Q, including the following 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. Words such as "believe", "anticipate," "expect," "intend," "plan," "will," "may" "should," "estimate," "predict," "potential," "continue," or the negative of such terms or other similar expressions, identify forward-looking statements. 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 heading "Risk Factors," as well as those discussed elsewhere in this quarterly report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2012. 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. Factors that might cause such a difference include whether MelaFind® achieves market acceptance.

Overview

We are a medical device company focused on the commercialization of our flagship product, MelaFind®, and the further design and development of MelaFind® and our technology. MelaFind® is a non-invasive, point-of-care (in the doctor's office) instrument to aid in the detection of melanoma. MelaFind®features a hand-held component that emits light of multiple wavelengths to capture digital data from clinically atypical pigmented skin lesions. The data are then analyzed utilizing sophisticated classification algorithms that were 'trained' on our proprietary database of melanomas and benign lesions, to provide information to assist in the management of the patient's disease, including information useful in the decision of whether to biopsy the lesion.

Based on the insights we have received from our KOLs and our experience in Germany, we are exploring the transition of MelaFind® from a melanoma scoring technology to a dermal imaging and metrics clinical tool and also looking to expand our target market to include pathologists. We believe that the ability to send images and metrics to pathologists along with the tissue samples, would help improve their results with greater efficiency. As we continue to re-think our overall strategy, we are also looking to transform the Company from a technology oriented company to more of an information exchange company, with a focus on optically gathering data that can improve dermatologists' results, enable better patient care, improve efficiency and reduce costs. The scope and the speed of implementing these new strategies will depend on our financial resources, our human resources and ultimately acceptance in the marketplace.

In November 2011, the Company received written approval from the U.S. Food and Drug Administration ("FDA") for the MelaFind® Pre-Market Approval ("PMA") application and in September 2011 received Conformite Europeene ("CE") Mark approval for MelaFind®. The Company is continuing the controlled and deliberate commercial launch of MelaFind®, with a recent shift in emphasis that concentrates on large cancer centers and high risk patients, throughout the United States and Germany. Also during the quarter, the Company continued its Post-Approval Study ("PAS") evaluating the sensitivity of physicians in diagnosing melanomas and high-grade lesions and the false positive rate after using MelaFind®. The Company anticipates that it will continue to incur net losses for the foreseeable future as it proceeds through the commercial launch of the MelaFind® device and the PAS.

On October 17, 2013, the FDA sent us a letter stating that the information in our August 8, 2013 progress report with respect to the PAS was inadequate to allow the agency to complete its review and therefore the FDA asked for additional information. Because of rate of accrual issues, the FDA's letter informed us that our study status was revised on the FDA's website to "Progress Inadequate." The letter requests a response within 30 days. We are currently working to address these issues in a timely response.

Our rate of placement varies from month to month and may or may not bear any relation to the number of potential customers we may have at any one time. Our placement rate to date has not been at the level initially estimated, due to a number of factors, including the time it takes to properly train doctors and staff for correct usage, our limited marketing to date, and general awareness as to the potential benefits of MelaFind®. From time-to-time, we have experienced customers who have returned the MelaFind® system. We can give no assurances that customer returns will not increase or that all our customers will continue to use the MelaFind® system in the future. Our revenues are dependent on the amount of usage generated from our installed systems, which is out of our control as usage (i.e. the number of patients used on and the amount of lesions per patient) ultimately will be determined between the doctor and the individual patients. The financial success of the Company will depend on a number of factors, primary among which is our ability to place MelaFind® systems, increase the penetration with dermatologists, encourage the usage of these systems, and control our costs. Currently, we cannot determine when we will have sufficient revenues to cover our continuing developmental costs, manufacturing, marketing and other operational expenses.


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On June 17, 2013 we announced that Dr. Joseph Gulfo resigned as the Company's Chairman, President and Chief Executive Officer effective June 15, 2013. Succeeding Dr. Gulfo as the Company's Interim Chief Executive Officer is Mr. Robert C. Coradini, a member of our Board of Directors. On November 6, 2013, we announced that Rose Crane will, effective November 11, 2013, become President and Chief Executive Officer of the Company and be appointed to the Company's Board of Directors. We also announced that at such time Interim Chief Executive Officer, Robert Coradini, will assume the Chairman's role and thereafter is planned to provide ongoing active consulting while current Chairman, David Stone, will resume his director's role on the Board.

Liquidity and Capital Resources

Since our inception, we have generated significant losses. As of September 30, 2013, we had an accumulated deficit of approximately $163 million. We expect to continue to spend significant amounts on the commercialization and further development of MelaFind® and the development of our technology. The Company anticipates that it will continue to incur net losses for the foreseeable future as the commercial launch of the MelaFind® continues and as we conduct the Post-Approval Study.

In June 2012, the Company entered into a sales agreement with Cowen and Company, LLC, to sell shares of the Company's common stock through an "at-the-market" equity offering program (the "ATM Program"), which was terminated on February 15, 2013 in conjunction with the public offering described below. During the term of the ATM Program, the Company sold a total of approximately 6.6 million shares for aggregate gross and net proceeds of approximately $14.4 million and $13.8 million, respectively, including the sale during the quarter ended March 31, 2013 of approximately 4.7 million shares for aggregate gross and net proceeds of approximately $8.8 million and $8.5 million respectively.

During February 2013 the Company entered into an underwriting agreement, relating to the public offering of 6.1 million shares of the Company's common stock, at a price to the public of $1.30 per share less underwriting discounts and commissions. The gross proceeds to the Company from the sale of the common stock totaled $7.9 million. After deducting the underwriters' discounts and commissions and other offering expenses payable by the Company, net proceeds were approximately $7.3 million. The common stock was offered and sold pursuant to the Company's Prospectus dated June 1, 2010 and the Company's Prospectus Supplement filed with the SEC on February 12, 2013, in connection with a takedown from the Company's then current shelf registration statement.

On March 15, 2013, the Company executed loan documents with Hercules Technology Growth Capital Inc., a venture capital lender, whereby the Company borrowed $6 million ("Loan"). The Loan accrued interest at a rate of 10.45%. The term of the Loan was 42 months with interest payments only during the first 12 months. On September 10, 2013, the Company elected to prepay the Loan and paid Hercules approximately $6.4 million, including the end of term fee of $425,000, to settle all obligations to Hercules. Hercules agreed to waive the prepayment penalty that was defined in the loan documents. In connection with the Loan, Hercules, as additional consideration, received a five year warrant to purchase 693,202 shares of common stock at an exercise price of approximately $1.12 per share. The prepayment of the Loan had no impact on the Warrants issued to Hercules.

On October 29, 2013, the Company entered into a securities purchase agreement with certain accredited investors in connection with a $6.0 million registered offering of 4,228,181 shares of the Company's common stock, fully paid prefunded warrants ("Series B Warrants") to purchase up to 4,343,247 shares of its common stock and additional warrants ("Series A Warrants") to purchase up to 6,857,142 shares of its common stock. The Series A Warrants are exercisable beginning on May 1, 2014 at a price of $0.85 per share and expire on May 1, 2019. The Series B Warrants are exercisable immediately for no additional consideration. These securities were offered and sold pursuant to the Company's Prospectus dated October 25, 2013 and the Company's Prospectus Supplement filed with the Securities and Exchange Commission (the "SEC") on October 30, 2013, in connection with a takedown from the Company's shelf registration statement on Form S-3 (File No.333-189118) post-effectively declared effective by the SEC on October 25, 2013. The offering closed on October 31, 2013. The approximately $5.5 million in net proceeds from the offering will be used to continue the commercial launch of MelaFind® in the U.S. and the European Union, for continued research and development activities and for general corporate purposes including working capital.

The Company has experienced recurring losses and negative cash flow from operations and management expects these conditions to continue for the foreseeable future. As the result of these factors, the Company has been and continues to be dependent on raising capital from the sale of securities in order to continue to operate and to meet its obligations in the ordinary course of business. Management recently put in place a cost reduction program that included staff reductions, the elimination or deferral of all nonessential projects and activities and the scaling back or discontinuance of general corporate activities (referred to as "Cost Reduction Plan") to preserve liquidity. In addition, as discussed above, in October 2013 the Company raised net proceeds of approximately $5.5 million from the sale of common stock and warrants to strengthen the Company's financial position.


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Since the beginning of the year, we have continued to incur net losses. These net losses and the $6.4 million payment to Hercules made in September have had a significant negative impact on our working capital and financial position and may impact our future ability to meet our obligations in the ordinary course of business. As a result, management believes that, even with cash and cash equivalents held at September 30, 2013, together with the net proceeds from the October 2013 offering and estimated revenue, there is significant doubt about our ability to continue as a going concern. We continue to assess the effects of our previously announced cost reduction plan and are prepared to reduce various operational costs. Although we have no specific arrangements or plans, we will need additional capital during the next 12 months, which may take the form of equity or debt, on either a loan or convertible basis. However, under the terms of the securities purchase agreement entered into in connection with our October 2013 offering, we are prohibited from issuing (or entering into any agreement to issue) any equity securities in connection with a financing until January 31, 2014.

In addition, the Company anticipates that long-term it will need to raise substantial funds to broaden the commercialization of MelaFind®, including further development of a direct sales force and expansion of the Company's operations. The timing and amount of any additional funding the Company may require will be affected by numerous factors many of which are not in the control of the Company including the market acceptance of MelaFind®. Examples of potential funding sources could be in the form of either the issuance of equity or debt securities or in exchange for product rights in all or certain geographies.

There can be no assurances that the Company will be able to raise additional financing in the future. Additional funds may not become available on acceptable terms, and there can be no assurance that any additional funding that the Company does obtain will be sufficient to meet the Company's financing needs. Any additional funding that the Company may obtain in the future could be dilutive to common stockholders, could provide new investors with rights and preferences senior to common stockholders and may provide for restrictive covenants that could limit the Company's ability to take certain actions. Most of our expenditures prior to the launch of Melafind® in March 2012 had been for research and development activities and general and administrative expenses. Research and development expenses represented costs incurred for product development, clinical trials, activities related to regulatory filings, and prototype development costs. Subsequent to the commercial launch of MelaFind®, certain costs and resources previously associated with research and development activities were redeployed to support commercial operations and are now classified as cost of revenues or selling, general and administrative expenses. Unless we are able to generate sufficient revenues or are able to raise additional capital near-term, operations would need to be either scaled back to maintain only vital activities or discontinued.

Summary of Cash Flow Activities

Our cash and cash equivalents at September 30, 2013 are liquid investments in money market accounts and deposits with commercial banks, which are held in amounts that substantially exceed FDIC limits.

Cash Flows from Operating Activities

Net cash used in operations was approximately $15.5 million for the nine months ended September 30, 2013. For the corresponding period in 2012, net cash used in operations was approximately $14.2 million. In both periods, cash used in operations was attributable to net losses after an adjustment for non-cash charges, principally related to depreciation/amortization and share-based compensation, and other changes in operating assets and liabilities.

Cash Flows from Investing Activities

For the nine months ended September 30, 2013 and 2012, there was approximately $4.9 million and $3.7 million respectively of net cash used in our investing activities for the purchase of fixed assets, which consist mainly of MelaFind® systems.

Cash Flows from Financing Activities

For the nine months ended September 30, 2013, there was $15.1 million provided by our financing activities representing the net proceeds from our ATM public offering, the net proceeds from our public offering consummated in February 2013, net proceeds from and repayment of borrowings and the proceeds from the exercise of stock options. On September 10, 2013, the Company elected to prepay its loan, and paid the lender approximately $6.4 million, including a $425,000 end of term fee. For the nine months ended September 30, 2012 there was $3.1 million of cash provided by the net proceeds from our public offering initiated in June 2012, our financing activities representing the net of additional costs from our December 2011 public offering and the proceeds from the exercise of stock options.

Because of the numerous risks and uncertainties associated with the development and commercialization of medical devices such as MelaFind® and operating our Company, we are unable to estimate the exact amounts of future capital outlays and operating expenditures. Our future funding requirements will depend on many factors, including, but not limited to:

• the cost of commercialization activities, including product marketing and building a direct sales force;

• the amount of direct payments we are able to obtain from physicians utilizing MelaFind®;

• the costs of maintaining regulatory approval;


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• reimbursement amounts for the use of MelaFind® that physicians are able to obtain from Medicare and third party payers;

• the success of our research and development efforts in product development and enhancement, and meeting competitive services and technologies;

• the schedule, costs, and results of our clinical trials and studies, including the Post-Approval Study;

• the costs of maintaining or potentially building our inventory and other manufacturing expenses;

• our ability to establish and maintain any collaborative, licensing or other arrangements, and the terms and timing of any such arrangements;

• the costs involved in defending any patent infringement actions or other litigation claims brought against us by third parties;

• the costs of filing, prosecuting, defending and enforcing any patent claims or other rights: and

• the cost to service and maintain the MelaFind® systems installed

Contractual Obligations

The following table summarizes our outstanding contractual obligations as of
September 30, 2013, and the effect those obligations are expected to have on our
liquidity and cash flows in future periods:



                                            Less than
                               Total          1 year       1-3 years      3-4 years
         Operating leases   $ 1,549,000     $  474,000     $  956,000     $  119,000

Our long-term operating lease obligations represent a non-cancelable operating lease for our laboratory, assembly, and office space. The lease on approximately 21,700 square feet of space expires in December 2016.

Results of Operations

For the three and nine months ended September 30, 2013, the Company continued the commercial launch of MelaFind® in the U.S. and Germany which had commenced in March 2012. For the first two months of 2012 the Company had no revenue from commercial operations and all operating activities were dedicated to research and development and preparing to launch MelaFind®. Subsequent to the commercial launch of MelaFind® in March 2012, certain costs previously classified as research and development expenses were redeployed to support commercial operations and are now classified as cost of revenue or selling, general and administrative expenses. Sales and marketing efforts in the first nine months of 2013 are significantly higher compared to the same period in 2012 as the Company has refocused its efforts away from research and development of MelaFind® to the commercial launch of MelaFind® .

Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012

Revenue

Revenue increased to approximately $108,000 in the three months ended September 30, 2013 compared to approximately $69,000 in the three months ended September 30, 2012. The increase of approximately $39,000 is the direct result of an increase in the system usage. In general, the Company signs a user agreement with its customers that includes an installation fee for the placement of the MelaFind® system and provides for the billing of usage based on the number of patient sessions or lesions examined, or a fixed monthly rental fee. In addition, the user agreement provides for the sale of consumables needed to operate the system. Deferred revenue primarily reflects the timed recognition of the installation fee revenue over the term of the user agreement, which is generally two years.

Cost of Revenue

Costs of revenue increased to approximately $1,977,000 in the three months ended September 30, 2013 compared to approximately $569,000 in the three months ended September 30, 2012. Cost of revenue is made up of direct costs associated with the placement of the MelaFind® system in the doctor's office, the cost of consumables, technical support costs and depreciation expense of the MelaFind® system placed with the customer, which remains the property of the Company. Certain product quality and manufacturing overhead costs associated with supporting the contract manufacturers of MelaFind® are allocated to cost of revenue. During the launch of MelaFind® we have experienced certain start-up costs associated with logistics, training and ensuring customer satisfaction that have had a negative impact on cost of revenue. With the Company's marketing shifting to focus on large cancer centers and high risk patients, we have taken an impairment charge of approximately $1 million against our MelaFind® systems previously placed in locations that do not fit this profile.


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Research and Development Expense

Research and development ("R&D") expenses decreased to approximately $857,000 in the three months ended September 30, 2013 compared to approximately $1,399,000 in the three months ended September 30, 2012. The decrease of approximately $542,000 is the result of resources being redeployed from R&D activities to supporting product revenue and the Cost Reduction Plan initiated in August 2013, offset by reorganization costs. Ongoing R&D efforts are for product enhancements and post-approval clinical and regulatory matters.

Selling, General and Administrative Expense

Selling, general and administrative expenses ("SG&A") increased to approximately $3,481,000 in the three months ended September 30, 2013 from approximately $3,469,000 in the three months ended September 30, 2012. The increase of approximately $11,000 is the result of increases in the field sales force and reorganization costs being offset by the Cost Reduction Plan initiated in August 2013.

Interest Income

Interest income decreased to approximately $3,000 for the three months ended September 30, 2013 from approximately $6,000 in the three months ended September 30, 2012. The decrease is primarily the result of smaller cash balances available to invest during 2013.

Interest Expense

Interest expense for the three months ended September 30, 2013 represents the interest expense on the loan entered into in March 2013 and paid in full on September 10, 2013. There was no interest expense in the same period a year earlier.

Other Income

Other income for the three month periods ended September 30, 2013 and 2012 was the approximately $5,000 minimum royalty we earn each quarter from Kavo Dental GmbH ("Kavo") on the sale/licensing of our DIFOTI product.

Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

Revenue

Revenue increased to approximately $396,000 in the nine months ended September 30, 2013 compared to approximately $156,000 in the nine months ended September 30, 2012. The increase of approximately $240,000 is the direct result of an increase in the number of MelaFind® units installed and system usage. During the nine months ended September 30, 2013, there was the recognition of a reserve of approximately $61,000 to reflect allowances provided to our customers. In general, the Company signs a user agreement with its customers that includes an installation fee for the placement of the MelaFind® system and provides for the billing of usage based on the number of patient sessions or lesions examined, or a fixed monthly rental fee. In addition, the user agreement provides for the sale of consumables needed to operate the system. Deferred revenue primarily reflects the timed recognition of the installation fee revenue over the term of the user agreement, which is generally two years.

Cost of Revenue

Cost of revenue increased to approximately $4,438,000 in the nine months ended September 30, 2013 compared to approximately $1,071,000 in the nine months ended September 30, 2012. Cost of revenue is made up of direct costs associated with the placement of the MelaFind® system in the doctor's office, the cost of consumables, technical support costs and depreciation expense of the MelaFind® system placed with the customer, which remains the property of the Company. Certain product quality and manufacturing overhead costs associated with supporting the contract manufacturers of MelaFind® are allocated to cost of revenue. During the launch of MelaFind® we have experienced certain start-up costs associated with logistics, training and ensuring customer satisfaction that have had a negative impact on cost of revenue. During the nine months ended September 30, 2013, we recognized a charge of $325,000 for inventory obsolescence resulting from recent system enhancements that eliminated the need to use certain accessories. With the Company's marketing shifting to focus on large cancer centers and high risk patients, we have taken an impairment charge of approximately $1 million against our MelaFind® systems previously placed in locations that do not fit this profile.

Research and Development Expense

Research and development ("R&D") expenses decreased to approximately $3,242,000 in the nine months ended September 30, 2013 compared to approximately $5,507,000 in the nine months ended September 30, 2012. The decrease of approximately $2,265,000 is the result of resources being redeployed from R&D activities to . . .

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