STRATA Skin Sciences, Inc. - Quarter Report: 2009 June (Form 10-Q)

FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2009


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000 — 51481

ELECTRO-OPTICAL SCIENCES, INC.

(Exact name of Registrant as specified in its charter)


Delaware (State or Other Jurisdiction of Incorporation or Organization)		13-3986004 (I.R.S. Employer Identification No.)

3 West Main Street, Suite 201 Irvington, New York (Address of Principal Executive offices)		10533 (Zip Code)

Registrant’s Telephone Number, including area code:
(914) 591-3783

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of July 22, 2009, 20,086,122 shares of the Registrant’s common stock were outstanding.

Electro-Optical Sciences, Inc.
Table of Contents


	Page
PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

Condensed Balance Sheets as of June 30, 2009 (unaudited) and December 31, 2008		2

Condensed Statements of Operations (unaudited) for the three and six month periods ended June 30, 2009 and 2008		3

Condensed Statements of Cash Flows (unaudited) for the six month periods ended June 30, 2009 and 2008		4

Notes to Condensed Financial Statements (unaudited)		5

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk		22

ITEM 4. Controls and Procedures		22

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings		23

ITEM 1A. Risk Factors		23

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds		25

ITEM 3. Defaults Upon Senior Securities		26

ITEM 4. Submission of Matters to a Vote of Security Holders		26

ITEM 5. Other Information		27

ITEM 6. Exhibits		28

SIGNATURES		29

EXHIBIT INDEX		30

EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-31.1
EX-31.2
EX-32.1

ELECTRO-OPTICAL SCIENCES, INC.
CONDENSED BALANCE SHEETS


	June 30,			December 31,
	2009			2008
	(unaudited)			*
ASSETS
Current Assets:
Cash and cash equivalents	$	7,746,799		$	15,069,939
Marketable securities		—			390,512
Prepaid expenses and other current assets		303,741			375,612

Total Current Assets		8,050,540			15,836,063
Property and equipment, net		577,676			643,383
Patents and trademarks, net		88,958			94,908
Deferred offering costs		199,523			—
Other assets		46,339			45,276

Total Assets	$	8,963,036		$	16,619,630


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable (includes related parties of $7,500 as of June 30, 2009 and $17,500 as of December 31, 2008)	$	422,245		$	634,394
Accrued expenses		891,308			832,228
Deferred income		—			36,085
Other current liabilities		20,791			27,466

Total Current Liabilities		1,334,344			1,530,173


COMMITMENTS AND CONTINGENCIES (Note 9)

Stockholders’ Equity
Preferred stock — $.10 par value; authorized 10,000,000 shares; issued and outstanding: none
Common stock — $.001 par value; authorized 30,000,000 shares; issued and outstanding 17,686,122 shares at June 30, 2009 and 17,634,498 at December 31, 2008		17,686			17,634
Additional paid-in capital		76,202,952			75,845,953
Accumulated other comprehensive loss		—			(6,868	)
Accumulated deficit		(68,591,946	)		(60,767,262	)

Stockholders’ Equity		7,628,692			15,089,457

Total Liabilities and Stockholders’ Equity	$	8,963,036		$	16,619,630


*		Derived from the audited balance sheet as of December 31, 2008

See accompanying notes to the financial statements

ELECTRO-OPTICAL SCIENCES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)


	Three months ended June 30,						Six months ended June 30,
	2009			2008			2009			2008
Operating expenses:
Research and development	$	2,300,602		$	3,623,990		$	4,835,016		$	6,669,083
General and administrative		1,571,812			1,474,679			3,098,552			2,914,474

Operating loss		(3,872,414	)		(5,098,669	)		(7,933,568	)		(9,583,557	)
Interest income		9,285			92,626			34,768			274,598
Other income		28,031			54,772			74,116			80,858

Net loss:	$	(3,835,098	)	$	(4,951,271	)	$	(7,824,684	)	$	(9,228,101	)

Basic and diluted net loss per common share	$	(0.22	)	$	(0.32	)	$	(0.44	)	$	(0.60	)


Basic and diluted weighted average number of common shares outstanding		17,656,686			15,407,137			17,646,067			15,404,510

See accompanying notes to the financial statements

ELECTRO-OPTICAL SCIENCES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)


	Six Months Ended June 30,
	2009			2008
Cash flows from operating activities:
Net loss	$	(7,824,684	)	$	(9,228,101	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		163,338			144,309
Non-cash compensation		225,844			179,575
Amortization of discount on marketable securities		—			882
Changes in operating assets and liabilities:
Increase in other assets		(1,063	)		—
Decrease in prepaid expenses and other current assets		71,871			259,320
(Decrease) increase in accounts payable and accrued expenses		(153,069	)		676,551
Decrease in deferred income		(36,085	)		(49,708	)
(Decrease) increase in other current liabilities		(6,675	)		3,131

Net cash used in operating activities		(7,560,523	)		(8,014,041	)

Cash flows from investing activities:
Purchases of property and equipment		(91,681	)		(278,133	)
Sale of marketable securities		397,380			833,904

Net cash provided by investing activities		305,699			555,771

Cash flows from financing activities:
Proceeds from exercise of stock options		30,707			14,070
Proceeds from exercise of stock warrants		100,500			10,586
Costs related to Committed Equity Financing Facility		(199,523	)		—

Net cash (used in) provided by financing activities		(68,316	)		24,656

Net decrease in cash and cash equivalents		(7,323,140	)		(7,433,614	)
Cash and cash equivalents at beginning of period		15,069,939			19,196,589

Cash and cash equivalents at end of period	$	7,746,799		$	11,762,975


Supplemental Schedule of Non-cash Investing and Financing Activities
Unrealized gain on marketable securities	$	6,868		$	8,735

See accompanying notes to the financial statements

ELECTRO-OPTICAL SCIENCES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(In thousands, except for share and per share data)
(unaudited)

1. ORGANIZATION AND BASIS OF PRESENTATION

Electro-Optical Sciences, Inc., a Delaware corporation (“EOS” or the “Company”) is a medical device company focused on the design, development and commercialization of a non-invasive, point-of-care instrument to assist in the early diagnosis of melanoma. Our flagship product, MelaFind^®, features a hand-held imaging device that emits light of multiple wavelengths to capture images of suspicious pigmented skin lesions and extract data. The data are then analyzed utilizing image processing classification algorithms, ‘trained’ on our proprietary database of melanomas and benign lesions, to provide information to assist in the management of the patient, including information useful in the decision of whether to biopsy the lesion.

The components of the MelaFind^® system include:

•		a hand-held imaging device, which employs high precision optics and multi-spectral illumination (multiple colors of light including near infra-red);

•		a proprietary database of pigmented skin lesions, which we believe to be the largest in the U.S.; and

•		lesion classifiers, which are sophisticated mathematical algorithms that extract lesion feature information and classify lesions.

On June 3, 2009, the Company submitted the MelaFind^® premarket approval, or PMA, application to the U.S. Food and Drug Administration (“FDA”), which the FDA has previously indicated will receive expedited review. Expedited review means that upon filing the PMA application, the FDA will conduct a team review, prioritize the application, and allocate sufficient resources toward a 180 day review period. While the expedited review could shorten the MelaFind^® FDA approval process, the Company can provide no assurances that this will be the case. If and when obtaining approval from the FDA, the Company plans to launch MelaFind^® commercially in the United States.

To date the Company has not generated any revenues from MelaFind^®.

The Company anticipates that it will continue to incur net losses for the foreseeable future in the development and commercialization of the Melafind^® device. From inception, the Company financed operations primarily through the sale of convertible preferred stock and subsequently sold common stock as part of an initial public offering (“IPO”) on October 28, 2005, two private placements: (one that closed in November 2006 and a second that closed in August 2007) and a registered direct offering which closed August 8, 2008.

On May 7, 2009, the Company entered into a committed equity financing facility (“CEFF”), with Kingsbridge Capital Limited, pursuant to which Kingsbridge committed to purchase, from time to time at the Company’s sole discretion, up to the lesser of $45 million or 3,327,000 shares of the Company’s common stock, subject to various conditions for individual sales, including dollar, timing, and trading volume limitations, a minimum market per share price, and various other contractual and regulatory requirements. There is no assurance that the Company will satisfy all the various conditions for one or more individual sales enabling it to use all or any portion of the CEFF. In connection with this CEFF, the Company issued a 5 year warrant, exercisable as of November 7, 2009, to Kingsbridge to purchase up to 200,000 shares of the Company’s common stock at an exercise price of $11.35 per share, with a Black Scholes Fair Value of $678 (refer to Note 10 for further details). A registration statement on Form S-3 was declared effective on May 22, 2009, on which 3,527,000 shares of common stock were registered for resale if and when acquired by Kingsbridge under the CEFF and its warrant.

The Company faces certain risks and uncertainties which are present in many emerging medical device companies regarding future profitability, ability to obtain future capital, protection of patents and intellectual property rights, competition, rapid technological change, government regulations, changing health care marketplace, recruiting and retaining key personnel, and reliance on third party manufacturing organizations.

As of June 30, 2009, the Company’s total of cash, cash equivalents and marketable securities was $7.7 million. On July 22, 2009 the Company closed a registered direct offering with aggregate net proceeds to the Company of approximately $13.7 million. (Also see note 14.) The Company will require additional funds to fully commercialize MelaFind^®. There can be no assurances that the Company will be able to raise financing as needed from time to time, whether under the Kingsbridge Capital Limited CEFF or by other types of securities offerings. Funds that become available may not be 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 needs in the long term.

The unaudited condensed financial statements included herein have been prepared from the books and records of the Company pursuant to the rules and regulations of the SEC for reporting on Form 10-Q. The information and note disclosures normally included in complete financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States have been condensed or omitted pursuant to such rules and regulations. The interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

The Company’s management is responsible for the financial statements included in this document. The Company’s interim financial statements are unaudited. Interim results may not be indicative of the results that may be expected for the year. However, the Company believes all adjustments considered necessary for a fair presentation of these interim financial statements have been included and are of a normal and recurring nature.

2. MARKETABLE SECURITIES

The Company’s marketable securities consist of corporate debt securities with a weighted average maturity not in excess of twelve months. The Company classifies its marketable securities as available-for-sale, as defined by Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Available-for-sale securities are carried at fair value, with unrealized gains and losses reported as a component of stockholders’ equity in accumulated other comprehensive loss. Interest income, realized gains and losses, and declines in value of securities judged to be other-than-temporary are included in the Company’s statement of operations. As of June 30, 2009, the Company did not hold any marketable securities.

The Company evaluates declines in the fair value of its investments in available-for-sale marketable securities to determine if these declines are other-than-temporary. When a decline in value is determined to be other-than-temporary, an impairment charge would be recorded and a new cost basis in the investment would be established.

3. COMPREHENSIVE LOSS

Comprehensive loss includes net loss and unrealized gains and losses on available-for-sale marketable securities. Cumulative unrealized gains and losses on available-for-sale marketable securities are reflected as accumulated other comprehensive loss in stockholders’ equity on the Company’s balance sheet. As of June 30, 2009, the Company did not hold any marketable securities.

For the three months ended June 30, 2009, comprehensive loss was $3,830 which includes a net loss of $3,835 and an unrealized gain on available-for-sale marketable securities of $5. For the three months ended June 30, 2008, comprehensive loss was $4,939, which includes a net loss of $4,951 and an unrealized gain on available-for-sale marketable securities of $12.

For the six months ended June 30, 2009, comprehensive loss was $7,818 which includes a net loss of $7,825, and an unrealized gain on available-for-sale marketable securities of $7. For the six months ended June 30, 2008, comprehensive loss was $9,219, which includes a net loss of $9,228 and an unrealized gain on available-for-sale marketable securities of $9.

4. USE OF ESTIMATES

The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions by management that affect reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to stock based compensation arrangements and accrued expenses. Actual results could differ from these estimates.

5. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In May 2009, FASB issued SFAS No. 165, “Subsequent Events”. This new standard establishes a new financial statement disclosure requirement to disclose the date events that occur after the balance sheet date but, before the report is issued or available to be issued. This requirement is effective for statements issued for interim and annual periods ending after June 15, 2009 (See Note 14). Prior to issuance of this statement, the primary guidance on subsequent events was in the auditing standards. The adoption of SFAS did not have any impact on the Company.

On April 1, 2009, the FASB issued FASB Staff Position (FSP) FAS 141(R) -1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies. This FSP provides additional guidance and disclosure requirements regarding the recognition and measurement of contingent assets acquired and contingent liabilities assumed in a business combination where the fair value of the contingent assets and liabilities cannot be determined as of the acquisition date. This FSP is effective for acquisitions occurring after January 1, 2009. The adoption of this FSP did not have any impact on the Company, and its future impact will be dependent upon the specific terms of future business combinations, if any.

In June 2008, the FASB issued Staff Position EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1”), which is effective for financial statements issued for fiscal years beginning after December 15, 2008. FSP EITF 03-6-1 clarifies that share-based payment awards that entitle holders to receive non-forfeitable dividends before they vest will be considered participating securities and included in the basic earning per share calculation. The adoption of FSP EITF 03-6-1 did not have any effect on the Company’s financial statements.

In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS No. 142, “Goodwill and Other Intangible Assets”. This guidance for determining the useful life of a recognized intangible asset applies prospectively to intangible assets acquired individually or with a group of other assets in either an asset acquisition or business combination. FSP FAS 142-3 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008, earlier adoption is prohibited. The adoption of FSP FAS 142-3 did not have any effect on the Company’s financial statements.

In March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). This new standard enhances disclosure requirements for derivative instruments in order to provide users of financial statements with an enhanced understanding of (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is to be

applied prospectively for the first annual reporting period beginning on or after November 15, 2008. The Company believes that the adoption of SFAS 161 will not have a material impact on the Company’s financial statement disclosures since the Company does not have any derivative instruments.

In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements—an amendment of ARB No. 51. This Statement amends ARB 51 to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. In addition to the amendments to ARB 51, this Statement amends FASB Statement No. 128, Earnings per Share; so that earnings-per-share data will continue to be calculated the same way those data were calculated before this Statement was issued. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The adoption of this pronouncement did not have any impact on the Company’s financial statements.

6. RECENT ACCOUNTING PRONOUNCEMENTS

On June 29, 2009, the FASB issued FASB Statement No. 168, the “FASB Accounting Standards Codification^TM” and the Hierarchy of Generally Accepted Accounting Principles. This statement establishes the FASB Accounting Standards Codification^TM (Codification) to become the source of authoritative U.S. generally accepted accounting principles (U.S. GAAP) recognized by the FASB to be applied by nongovernmental entities. Statement 168 and the Codification are effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company believes that the adoption of Statement 168 will not have any significant impact on the Company’s financial statement disclosures.

7. NET LOSS PER COMMON SHARE

Net loss per common share is presented in accordance with the provisions of SFAS No. 128, “Earnings Per Share” (“EPS”). Basic EPS excludes dilution for potentially dilutive securities and is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to dilutive options, warrants and other potential common shares outstanding during the period. Diluted net loss per common share is equal to the basic net loss per common share since all potentially dilutive securities are anti-dilutive for each of the periods presented. Potential common stock equivalents excluded consist of stock options and warrants which are summarized as follows:


	June 30,
	2009		2008
Common stock options		2,007,473		1,901,660
Warrants		1,307,669		1,124,544

Total		3,315,142		3,026,204

8. STOCK-BASED COMPENSATION

The Company has one stock-based compensation plan which allows the Board of Directors to grant incentives to employees, consultants, directors, officers and collaborating scientists in the form of incentive stock options, nonqualified stock options and restricted stock awards. The Company also has two other stock-based compensation plans pursuant to which stock options are outstanding but no new grants may be made.

Stock awards under the Company’s stock option plans have been granted at prices which are no less than the closing price of the stock on the date of the grant. Options granted under the 2005 Stock Incentive Plan (2005 Plan), are generally time-based or performance-based and vesting varies accordingly. Options under this plan expire in up to a maximum of ten years from the date of grant. Since the Company adopted the 2005 Plan, awards may not be granted under the Company’s previous stock option plans.

The compensation expense recognized in the Statement of Operations in the second quarter of 2009 and 2008 for stock options amounted to $107 (of which $4 relates to performance milestones) and $68 (of which $20 relates to performance milestones), respectively. For the six months ended June 30, 2009 and 2008, compensation expense for stock options amounted to $226 (of which $13 relates to performance milestones) and $180 (of which $53 relates to performance milestones), respectively. Cash received from options and warrants exercised under all share-based payment arrangements for the three months ended June 30, 2009 and 2008 were $129 and $25, respectively, and for the six month periods ended June 30, 2009 and 2008, $131 and $25, respectively.

The fair value of each option award granted after the adoption of SFAS 123R is estimated on the date of grant using the Black-Scholes option valuation model and assumptions as noted in the following table:


	For the Six Months			For the Six Months
	Ended June 30, 2009			Ended June 30, 2008
Expected life	5 years			5 years
Expected volatility		60	%		60	%
Risk-free interest rate		1.69-2.54	%		2.95-3.72	%
Dividend yield		0	%		0	%

The expected life of the options is based on the observed and expected time to post-vesting, forfeiture and exercise. Groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected volatility is calculated on closing price volatility based on daily closing prices from the Company’s IPO to June 30, 2009, which approximates implied volatility from other publicly-traded stock that was established at the time of our IPO. The risk-free interest rate is based on the continuous rates provided by the U.S. Treasury with a term equal to the expected life of the option. The expected dividend yield is zero as the Company has never paid dividends and does not currently anticipate paying any in the foreseeable future.

On October 10, 2008, a formula-based option, issued in 2004 to Dr. Gulfo, President and CEO, from the Company’s 2003 Stock Incentive Plan for 743,283 shares, at an exercise price of $0.46, was cancelled. On October 10, 2008, Dr. Gulfo was granted ten year stock options for an aggregate of 900,000 shares of the Company’s common stock at an exercise price of $3.75 a share (the closing price on the grant date); of which 520,000 shares were from the 2005 Plan approved for issuance by the Compensation Committee of the Board of Directors subject to stockholder approval. That approval was given at the Company’s Annual Meeting of Stockholders held May 22, 2009, when the stockholders approved an amendment to the 2005 Plan increasing the aggregate number of shares of common stock available under the plan by 1,500,000.

At June 30, 2009, stock options to purchase 2,007,473 shares of common stock at exercise prices ranging from $0.46 to $8.32 per share were outstanding and exercisable at various dates through 2018.

During the three and six months ended June 30, 2009, the weighted average fair value of options granted, estimated as of the grant date using the Black-Scholes option valuation model, was $3.58 and $3.20, respectively. For the three and six month periods ended June 30, 2008, the weighted average fair value of options granted was $4.04 and $2.63, respectively.

For the three and six months ended June 30, 2009, the total intrinsic value of options exercised was $215 and $235, respectively. For the three and six months ended June 30, 2008, the total intrinsic value of options exercised was $118.

The status of the Company’s stock option plans at June 30, 2009 is summarized in the following:


						Weighted
				Weighted		Average
				Average		Remaining
				Exercise		Contractual		Aggregate
	Number of			Price per		Term in		Intrinsic
	Shares			Share		Years		Value
Outstanding at December 31, 2008		2,069,080		$	4.39		5.8
Granted		28,000			3.20		4.8
Exercised		(36,107	)		0.85		—
Forfeited or expired		(53,500	)		4.35		—

Outstanding at June 30, 2009		2,007,473		$	4.48		5.4	$	6,644

Vested and exercisable at June 30, 2009		833,285		$	4.52		3.6	$	2,726


			Options Outstanding
			Weighted-			Options Exercisable
			Average	Weighted				Weighted-
			Remaining	Average				Average
	Number		Contractual	Exercise		Number		Exercise
Range of Exercise Prices	Outstanding		Life	Price		Exercisable		Price
$.01-$.46		105,000	0.5 years	$	.46		80,000	$	.46
$.47-$1.00		78,471	2.8 years	$	1.00		78,471	$	1.00
$1.01-$8.32		1,824,002	5.8 years	$	4.86		674,814	$	5.41

$.01-$8.32		2,007,473	5.4 years	$	4.48		833,285	$	4.52

As of June 30, 2009, of the total 2,007,473 options outstanding, 1,174,188 have not vested. Of this total unvested amount, 872,163 will vest upon the attainment of certain milestones, and the balance will vest over the requisite service period.

As of June 30, 2009, of the $3,053 of total unrecognized compensation cost related to unvested options to be recognized, $2,593 is to be recognized over a period to be determined by performance-based milestones, and $460 is to be recognized through 2014 as determined by service-based milestones.

As of June 30, 2009, there were 1,393,151 shares available for future grants under the Company’s 2005 Plan.

9. COMMITMENTS AND CONTINGENCIES

The Company is party to a non-cancelable operating lease for office space expiring January 2011. The lease is subject to escalations for increases in operating expenses. A second lease for office and laboratory space that expired June 30, 2009 has been continued on a month-to-month basis.

On July 14, 2009, the Company entered into a new lease agreement for office and laboratory space. (See Note 14). The approximate aggregate minimum future payments under the existing leases and this new lease, which will be effective no later than January 1, 2010, are due as follows:


2009	2010		2011		2012		2013		2014-16

$169	$	356	$	384	$	412	$	441	$	1,329

In January 2006, the Company entered into an agreement with ASKION GmbH (“ASKION”) to produce and test commercial-grade MelaFind^{^®}hand-held imaging device systems. The Company expects to maintain a relationship, which has evolved into a month-to-month agreement, with ASKION and continue with production and development activities throughout 2009.

In August of 2006, the Company engaged Carl Zeiss Jena GmbH on usual commercial terms to build the lenses and assemblies, as well as provide certain technical consulting services for the MelaFind^{^®}units. The Company expects Carl Zeiss Jena GmbH to continue to supply lenses and assemblies through ASKION for commercialization units throughout 2009.

The Company has an employment agreement with its President and Chief Executive Officer, Dr. Gulfo, which provides for an annual base salary, stock options and discretionary performance bonuses. The agreement, which provides for automatic one-year renewal terms, currently runs through the end of 2009. Effective March 1, 2008, the Board of Directors increased Dr. Gulfo’s annual base salary to $280 and awarded him a bonus of $65. (See also Note 8)

The Company is not currently subject to any material legal proceedings, nor to management’s knowledge is any material legal proceeding threatened against the Company.

10. STOCKHOLDERS’ EQUITY

On October 31, 2006, the Company entered into securities purchase agreements and a registration rights agreement with certain accredited investors for the private placement of 2,312,384 shares of the Company’s common stock and warrants to purchase up to 346,857 shares of the Company’s common stock for aggregate gross proceeds of approximately $13.2 million and net proceeds of approximately $12.5 million. Pursuant to the securities purchase agreements, for a purchase price of $5.70 each investor received one share of the Company’s common stock and a warrant to purchase 0.15 of a share of the Company’s common stock. The warrants are five-year warrants with an exercise price of $6.70 per share.

On July 31, 2007, the Company entered into a securities purchase agreement and a registration rights agreement with certain accredited investors for the private placement of 2,000,178 shares of the Company’s common stock and warrants to purchase up to 500,041 shares of the Company’s common stock for aggregate gross proceeds of approximately $11.5 million and net proceeds of approximately $10.7 million. The private placement closed August 3, 2007. Pursuant to the securities purchase agreement, for a purchase price of $5.75 each investor received one share of the Company’s common stock and a warrant to purchase 0.25 of a share of common stock. The warrants are five-year warrants with an exercise price of $8.00 per share.

Both of these private placements were completed pursuant to an exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder.

Pursuant to the terms of the registration rights agreements, the Company filed resale registration statements covering the shares in both private placements, including the shares issuable upon exercise of the warrants, with the SEC. In the event that the Company fails to maintain the effectiveness of these registration statements for the periods described in the registration rights agreements, the holders would be entitled to certain monetary damages.

However, in no event is the Company obligated to make payments in excess of 10% of the aggregate purchase price of the common shares. The Company has concluded that it is unlikely that the Company would be required to remit any payments to its investors for failing to maintain its effectiveness. The Company’s resale registration statements on Forms S-3 were declared effective by the SEC (file #333-139056 and file #333-145740) on February 12, 2007 and September 11, 2007, respectively.

On June 26, 2008, the Company filed a Form S-3 shelf registration statement for an indeterminate number of shares of common stock, warrants to purchase shares of common stock and units consisting of a combination thereof having an aggregate initial offering price not to exceed $40 million, of which approximately $28.1 million remains as of June 30, 2009. The SEC declared the registration statement effective on July 7, 2008. Management utilized this shelf registration statement to raise additional equity capital by completing a registered direct offering of 2,088,451 shares of the Company’s common stock for aggregate gross proceeds of approximately $11.9 million ($11 million approximate net proceeds to the Company) at a per share offering price of $5.68. The offering closed August 8, 2008.

On May 7, 2009, the Company entered into a committed equity financing facility (“CEFF”), with Kingsbridge Capital Limited, pursuant to which Kingsbridge committed to purchase, from time to time at the Company’s sole discretion, up to the lesser of $45 million or 3,327,000 shares of the Company’s common stock prior to May 7, 2012, subject to various conditions for individual sales, including dollar, timing, and trading volume limitations, a minimum market per share price, and various other contractual and regulatory requirements. There is no assurance that the Company will satisfy all the various conditions for one or more individual sales enabling it to use all or any portion of the CEFF. In connection with this CEFF, the Company issued a 5 year warrant, exercisable as of November 7, 2009, to Kingsbridge to purchase up to 200,000 shares of our common stock at an exercise price of $11.35 per share. Legal, accounting, and other costs associated with this agreement approximating $200 have been deferred and will be charged to equity as a reduction of proceeds from the CEFF or operations should management decide to abandon the CEFF.

On July 16, 2009, the Company completed, pursuant to the Company’s shelf registration statement on form S-3, a registered direct offering of 2,400,000 shares of the Company’s common stock, with a select group of institutional investors. The aggregate gross proceeds from the offering was $15 million (net proceeds of approximately $13.7 million). The offering closed July 22, 2009 for a purchase price of $6.25 per share of the Company’s common stock (See Note 14).

As of June 30, 2009, the Company had 10,000,000 shares of $0.10 par value preferred stock authorized with no shares issued and outstanding.

11. WARRANTS

Warrants outstanding at June 30, 2009 include a 5-year warrant to purchase 75,000 shares of the Company’s common stock at an exercise price of $7.00 per share issued to one of the Company’s consultants in 2004, which expires in November of 2009. Also outstanding at June 30, 2009, are 5-year warrants to purchase an aggregate of 52,646 shares of the Company’s common stock at an exercise price of $4.52 per share, which expire in November of 2009. These 52,646 warrants were converted from Series C preferred stock warrants upon completion of the initial public offering (IPO).

In connection with the Company’s IPO which closed on November 2, 2005, the Company issued 150,000 warrants to the underwriters to purchase shares of the Company’s common stock at $6.25 per share, which became exercisable on October 28, 2006, and expire November of 2010. At June 30, 2009, 148,125 of these warrants remain outstanding.

Additionally, as previously discussed, in connection with the Company’s two private placement financings the following warrants have been granted and remain outstanding as of June 30, 2009:

		Financing that closed November 3, 2006: warrants to purchase up to 346,857 shares of the Company’s common stock were issued. At June 30, 2009, 331,857 of these warrants remain outstanding. These warrants are five-year warrants with an exercise price of $6.70 per share,

		Financing that closed August 3, 2007: warrants to purchase up to 500,041 shares of the Company’s common stock were issued. At June 30, 2009, 500,041 of these warrants remain outstanding. The warrants are five-year warrants with an exercise price of $8.00 per share.

In connection with the May 7, CEFF with Kingsbridge, the Company issued a 5 year warrant, exercisable as of November 7, 2009, to Kingsbridge to purchase up to 200,000 shares of our common stock at an exercise price of $11.35 per share, with a Black Scholes Fair Value of $678.

Cash received for warrants exercised during both the three and six months ended June 30, 2009 and 2008 was $101 and $11 respectively.

12. RELATED PARTY CONSULTING AGREEMENTS

The Company has in place the following consulting agreements with related parties:

Consulting Agreement with Breaux Castleman

In June 2003, the Company entered into a consulting agreement with Breaux Castleman, the Chairman of the Company’s Board of Directors, for consulting services related to the FDA approval of MelaFind^®, and the Company’s business and financial strategy. Under this agreement, Mr. Castleman receives compensation for each month of services rendered. The Company made payments, pursuant to this consulting agreement, of $6 in each of the three month periods ended June 30, 2009 and 2008 and $12 in each of the six month periods ended June 30, 2009 and 2008. This consulting agreement is terminable by either party by providing thirty days’ prior written notice.

Consulting Agreement with Marek Elbaum, Ph.D.

Effective as of May 31, 2005, the Company retained Marek Elbaum, Ph.D., the Company’s founder and former President and Chief Science and Technology Officer, as the Company’s Chief Scientist. In consideration of the services to be provided, the Company agreed to pay Dr. Elbaum a monthly fee of $15.

In May of 2007 and effective June 1, 2007, Dr. Elbaum and the Company entered into an amended agreement. Under the terms of the amended agreement, Dr. Elbaum was paid a monthly fee of $9 through January 2009 when the contract terminated.

Consulting Agreement with Robert Friedman, M.D.

The Company has retained the services of Robert Friedman, M.D. as a consultant, medical advisor to the Company’s Board of Directors, and in connection with the clinical testing of MelaFind^®. In consideration for these services, Dr. Friedman is being paid at a rate of $5 per day.

This consulting agreement continues to automatically renew for successive one-year terms unless either party terminates the agreement at least 30 days prior to its expiration. The Company made payments to Dr. Friedman totaling $22.5 for the three month period ending June 30, 2009, and $40 for the six month period ending June 30, 2009. The Company made payments to Dr. Friedman totaling $15 for the three month period ending June 30, 2008, and $27.5 for the six month period ending June 30, 2008.

Consulting Agreement with Gerald Wagner, Ph.D.

Effective April 1, 2006, the Company entered into an amended and restated consulting agreement with Gerald Wagner, Ph.D., a member of the Company’s Board of Directors and its former Acting Chief Operating Officer. Under this amended consulting agreement, the Company agreed to pay Dr. Wagner the annual amount of $180 payable monthly over the term of the agreement. In addition, in connection with his ongoing engagement as a consultant, Dr. Wagner received a stock option grant of 50,000 shares of the Company’s common stock which vested upon commencement of the pivotal trial for MelaFind^® in January 2007. In addition, on March 24, 2006, Dr Wagner received another stock option grant of 49,500 shares of the Company’s common stock which vested immediately.

With the start of the Company’s pivotal clinical trial in January 2007, Dr. Wagner transitioned out of his role as the Company’s acting Chief Operating Officer and entered into an amended and restated consulting contract with the Company. Under the terms of the amended contract, Dr. Wagner is paid a monthly retainer of $2.5 and will be paid $2.5 for each additional consulting day. This amended agreement will end at the option of Dr. Wagner or the Company at any time, by providing fifteen days’ prior written notice, or immediately upon the mutual agreement of the Company and Dr. Wagner. The Company incurred consulting costs pursuant to this agreement of $7.5 in the three month period and $15 in the six month period ended June 30, 2009. The Company incurred consulting costs pursuant to this agreement of $17.5 in the three month period and $25 in the six month period ended June 30, 2008.

Consulting Agreement with Anne Egger

In March 2009, the Company entered into a consulting agreement with Anne Egger for certain consulting services primarily focusing on physician advocacy. The agreement was for an initial term of three months and has subsequently been extended for another three month period, and may be terminated by either party with 30 day’s notice. Under the terms of the agreement, Ms. Egger is entitled to receive a consulting fee of $1.6 per day. Ms. Egger was appointed to the Company’s Board of Directors as of June 10, 2009. During both the three and six month periods ended June 30, 2009, Ms. Egger was paid $19 under this agreement.

13. OTHER INCOME

During March 2007, the Company entered into an agreement with L’Oreal to study and assess the feasibility of using EOS’ novel multi-spectral imaging technology for the evaluation and differentiation of pigmented skin lesions of cosmetic importance. EOS has granted L’Oreal an option to take an exclusive license to use EOS technology in the field covered by the research, on terms to be mutually agreed. The option was set to expire on the earlier to occur of six months after the completion of the Feasibility Plan, as defined in the agreement, or August 31, 2008. The Company and L’Oreal mutually agreed to extend the period of this option until June 30, 2009. On December 16, 2008, L’Oreal and the Company agreed on a second amendment to the agreement, for a new three month study. The laboratory and clinical research is being funded by L’Oreal. Pursuant to the agreement, L’Oreal is responsible for all costs and expenses incurred in connection with the feasibility program, and will reimburse EOS for expenses incurred by EOS with respect to the feasibility program. At March 31, 2009, the work to be carried out under the agreement was completed. During the three and six month periods ended June 30, 2009, the Company earned $0 and $34, respectively, from L’Oreal as other income under the feasibility program. During the three and six month periods ended June 30, 2008, the Company earned $42 and $52, respectively.

During April 2005, the Company discontinued all operations associated with its DIFOTI^{^®}product in order to focus its resources and attention on the development and commercialization of MelaFind^®. During December 2006, the Company entered into a sale and exclusive licensing agreement with KaVo Dental GmbH (“KaVo”), a leading dental equipment manufacturer, which provides for KaVo to further develop and commercialize DIFOTI^®. Beginning in July 2008, KaVo is required to pay to the Company a royalty stream based upon the worldwide aggregate net sales of the licensed product, as defined in the license agreement, or a set minimum. During the year ended December 31, 2008, the Company earned $10 as the pro rated portion of the minimum royalty. For the three and six month periods ended June 30, 2009, the Company accrued royalty income of $5 and $10, respectively.

14. SUBSEQUENT EVENTS

The following are subsequent events of the Company during the period of July 1, 2009 to July 24, 2009:

On July 14, 2009, the Company entered into a seven year lease agreement for 19,957 square feet of office and laboratory space in Irvington, NY replacing the 10,300 square feet of space currently occupied by the Company. The new lease will take effect no later than January 1, 2010. The Company will continue to occupy space under the building leases in effect as of June 2009 until the new space is ready for occupancy.

ITEM 2.

ELECTRO-OPTICAL SCIENCES, INC.
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, 2008.

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. 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.

Overview

We are a medical device company focused on the design and development of a non-invasive, point-of-care instrument to assist in the early diagnosis of melanoma. Our flagship product, MelaFind^®, features a hand-held imaging device that emits multiple wavelengths of light to capture images of suspicious pigmented skin lesions and extract data. We currently do not have any commercialized products or any significant source of revenue.

We commenced operations in December 1989 as a New York corporation and re-incorporated as a Delaware corporation in September 1997. Since our inception, we have generated significant losses. As of June 30, 2009, we had an accumulated deficit of $68.6 million. We expect to continue to spend significant amounts on the development of MelaFind^®.

Our revenue for the foreseeable future will depend on the approval and commercialization of MelaFind^® and may vary substantially from year to year and quarter to quarter. Our operating expenses may also vary substantially from year to year and quarter to quarter based on the timing of activities and approvals.

On February 13, 2009, the Company announced that a third-party, independent bio-statistician had provided positive top line results from the MelaFind^® pivotal clinical trial. This blinded study was conducted at seven clinical sites and included 1,831 pigmented skin lesions from 1,383 patients. On June 3, 2009, the Company submitted the MelaFind^® Pre-Market Approval Application to the FDA. If and upon obtaining approval from the FDA, the Company plans to launch MelaFind^® commercially in the United States.

We believe that period-to-period comparisons of our results of operations may not be meaningful and should not be relied on as indicative of our future performance.

Liquidity and Capital Resources

On June 26, 2008, the Company filed a Form S-3 shelf registration statement for an indeterminate number of shares of common stock, warrants to purchase shares of common stock and units consisting of a combination thereof having an aggregate initial offering price not to exceed $40 million. The SEC declared the registration statement effective on July 7, 2008. Management utilized this shelf registration statement to raise additional equity capital by completing a registered direct offering of 2,088,451 shares of the Company’s common stock for aggregate gross proceeds of approximately $11.9 million ($11 million approximate net proceeds to the Company) at a per share offering price of $5.68. The offering closed August 8, 2008.

On May 7, 2009, the Company entered into a committed equity financing facility (“CEFF”), with Kingsbridge Capital Limited, pursuant to which Kingsbridge committed to purchase, from time to time at the Company’s sole discretion, up to the lesser of $45 million or 3,327,000 shares of the Company’s common stock, subject to various conditions for individual sales, including dollar, timing, and trading volume limitations, a minimum market per share price, and various other contractual and regulatory requirements. There is no assurance that the Company will satisfy all the various conditions for one or more individual sales enabling it to use all or any portion of the CEFF. In connection with this CEFF, the Company issued a 5 year warrant, exercisable as of November 7, 2009, to Kingsbridge to purchase up to 200,000 shares of our common stock at an exercise price of $11.35 per share (refer to Note 10 for further details). A registration statement on Form S-3 was declared effective on May 22, 2009, on which 3,527,000 shares of common stock were registered for resale if and when acquired by Kingsbridge under the CEFF and its warrant.

Most of our expenditures to date have been for research and development activities and general and administrative expenses. Research and development expenses represent costs incurred for product development, clinical trials, activities related to regulatory filings, and manufacturing development efforts. We expense all of our research and development costs as they are incurred.

To date, we have not borrowed (other than by issuing convertible notes, all of which have been converted into equity) or financed our operations through equipment leases, financing loans or other debt instruments.

As of June 30, 2009, the Company’s total of cash, cash equivalents was $7.7 million. The proceeds from the July 2009 registered direct offering, combined with existing cash balances and the availability of the Kingsbridge CEFF, will allow the Company to fund anticipated levels of operations into 2011. The Company will require additional funds to fully commercialize MelaFind^®. There can be no assurances that the Company will be able to raise financing as needed from time to time, whether under the Kingsbridge Capital Limited CEFF or by other types of securities offerings. Funds that become available may not be 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 needs in the long term.

Our cash and cash equivalents at June 30, 2009 are liquid investments in money market accounts and deposits with a commercial bank, which are held in amounts that substantially exceed FDIC limits.

Cash Flows from Operating Activities (in thousands)

Net cash used in operations was $7,561, for the six months ended June 30, 2009. For the corresponding period in 2008, net cash used in operations was $8,014. In both periods, cash used in operations was attributable to net losses after an adjustment for non-cash charges related to depreciation/amortization and share-based compensation, and other changes in operating assets and liabilities.

Cash Flows from Investing Activities

For the six months ended June 30, 2009, there was $306 net cash provided by our investing activities, principally related to the redemption of marketable securities. For the corresponding period in 2008, net cash provided by our investing activities was $556 and was principally related to the redemption of marketable securities offset by the purchase of information technology and manufacturing related equipment in support of MelaFind^®.

Cash Flows from Financing Activities

For the six months ended June 30, 2009, net cash used in financing activities was $68. Cash received from the exercise of options and warrants of $131 was offset by $199 of deferred offering costs related to the May 7, 2009 CEFF transaction. For the six months ended June 30, 2008 net cash provided by financing activities was $25, representing the exercise of options and warrants

Operating Capital and Capital Expenditure Requirements

We face certain risks and uncertainties, which are present in many emerging medical device companies. At June 30, 2009, we had an accumulated deficit of $68.6 million. To date, we have not commercialized our principal product, MelaFind^®. We anticipate that we will continue to incur net losses for the foreseeable future as we pursue regulatory approvals for MelaFind^®, continue to develop the MelaFind^{^®}system, expand our corporate infrastructure, and prepare for the potential commercial launch of MelaFind^®. We do not expect to generate significant product revenue until we successfully obtain PMA approval for and begin selling MelaFind^®.

If additional funds are raised through the issuance of debt securities or preferred stock, these securities could have rights senior to those associated with our common stock and could contain covenants that would restrict our operations. If we are unable to obtain additional financing, we may be required to reduce the scope of, delay or eliminate some or all of planned product research and development and commercialization activities, which could harm our business.

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

•		The schedule, costs, and results of our clinical trials;

•		The success of our research and development efforts;

•		The costs and timing of regulatory approval;

•		Reimbursement amounts for the use of MelaFind^{^®}that we are able to obtain from Medicare and third party payers, or the amount of direct payments we are able to obtain from patients and/or physicians utilizing MelaFind^®;

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

•		The emergence of competing or complementary technological developments;

•		The costs of filing, prosecuting, defending and enforcing any patent claims and other rights, including litigation costs and the results of such litigation;

•		The costs involved in defending any patent infringement actions brought against us by third parties; and

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

Contractual Obligations (in thousands)

The Company is party to a non-cancelable operating lease for 2,800 and 2,500 square feet of office space expiring January 2011. The lease is subject to escalations for increases in operating expenses. A second lease for 5,000 square feet of office and laboratory space, that expired June 30, 2009, has been continued on a month-to-month basis.

On July 14, 2009, the Company entered into a new lease agreement for 19,957 square feet of office and laboratory space. (See Note 14). The following table summarizes our outstanding contractual obligations as of June 30, 2009, adjusted to give effect to the July 14, 2009 lease agreement.


			Less than						More than
	Total		1 year		1-3 years		4-5 years		5 years
Operating leases	$	3,091	$	346	$	768	$	876	$	1,101

Results of Operations (in thousands)

Through the first six months of 2009, the Company announced positive top line results from the pivotal clinical trial, submitted the MelaFind^® PMA to the FDA, continued the development of processes and equipment to allow for the efficient manufacturing of MelaFind^®, and focused on increasing corporate capabilities to meet the needs of product launch.

Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008

Research and Development Expense

Research and development expense overall decreased 37% for the three month period ended June 30, 2009 compared to the same period ended June 30, 2008. The R&D costs were refocused from clinical to regulatory principally attributable to:

•		clinical studies costs — in the second quarter of 2009 the pivotal trial study sites were shut down leaving only ongoing data acquisition sites. In the second quarter of 2008, all sites of the pivotal clinical trial data acquisition phase were fully engaged. Clinical studies costs decreased $998.

•		quality and regulatory costs — were increased in the second quarter of 2009 as we intensified activities resulting in our PMA submission, making extensive use of consultants to assist in this process. In the second quarter of 2008, we were not near the completion of the pivotal clinical trial process. Quality and regulatory costs increased $310 period to period.

•		development activities — in the second quarter of 2009, we experienced a significant decrease in design and process development costs for MelaFind^® as the product had become defined and finalized through the more extensive development efforts of 2008. Development costs decreased $622.

General and Administrative Expense

General and administrative expenses consist primarily of salaries and related expenses of general corporate activities, certain costs associated with our efforts to obtain PMA approval for MelaFind^{^®}and development of a commercial infrastructure to market and sell MelaFind^®.

General and Administrative expense for the three months ended June 30, 2009 increased 7% as compared to the same period ended June 30, 2008. This increase is reflective of an increase in reimbursement consulting, recruiting fees, and temporary help costs.

Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008

Research and Development Expense

Research and development expense overall decreased 28% for the six month period ended June 30, 2009 compared to the same period ended June 30, 2008. The R&D costs were refocused from clinical to regulatory principally attributable to:

•		clinical studies costs — in the first six months of 2009 we closed down the pivotal clinical trial study sites which, in the same period in 2008 were fully engaged. Clinical studies costs decreased $1,615 from the prior period.

•		quality and regulatory — the six month cost level was increased in 2009 as we intensified activities resulting in PMA submission, making extensive use of consultants to assist in this process. In the first six months of 2008, we were not near the completion of the pivotal clinical trial process. Quality and regulatory costs increased $653 over the prior period.

•		development activities — in the first six months of 2009, we experienced a significant decrease in design costs and process development for MelaFind^® as the product had become defined and finalized through the more extensive development efforts of 2008. Development costs decreased $856 from the prior period.

General and Administrative Expense

General and Administrative expense for the six months ended June 30, 2009 increased 6% as compared to the same period ended June 30, 2008. This increase is reflective of:

•		pre-marketing activities accelerated throughout the first six months of 2009 following announcement of positive top-line results from the pivotal clinical trial through submission of the MelaFind^{^®} PMA. There were limited pre-marketing efforts during the six month period ended June 30, 2008, while the data acquisition phase of the pivotal clinical trial continued. Pre-marketing expenses increased $78 over the prior period.

•		increased investor relations costs primarily associated with disclosure requirements and other activities involving investor notification, such as the release of top-line results from our pivotal clinical trial and the submission of our PMA. Investor relations expenses increased $51 over the prior period.

•		other administrative costs were higher in the six months of 2009 primarily due to the increased level of overall administrative activity as the Company moved towards PMA submission. Other administrative costs increased $55 from the prior period.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our judgments related to accounting estimates. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe that the following accounting policies and significant judgments and estimates relating to revenue recognition, stock-based compensation charges, and accrued expenses are most critical to aid you in fully understanding and evaluating our reported financial results.

Revenue Recognition

We currently do not have any commercialized products or any source of revenue.

Stock-Based Compensation

We record compensation expense associated with stock options and other forms of equity compensation in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”), as interpreted by SEC Staff Accounting Bulletins No. 107 and No.110. A compensation charge is recorded when it is probable that performance conditions will be satisfied. The probability of vesting is updated at each reporting period and compensation is adjusted via a cumulative catch-up adjustment or prospectively depending on the nature of the change.

We have also granted to certain employees stock options that vest with the attainment of development milestones not under the Company’s control. Upon the attainment of the relevant development milestones, there will be a significant compensation charge based on the fair value of such options on the date granted.

Options or warrants issued to non-employees for goods or services are recorded at fair value and accounted for in accordance with Emerging Issues Task Force Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services (“EITF 96-18”).

Accrued Expenses

As part of the process of preparing financial statements, we are required to estimate accrued expenses. This process involves identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for such service where we have not been invoiced or otherwise notified of the actual cost. Examples of estimated accrued expenses include:

	•		professional service fees;

	•		contract clinical service fees;

	•		fees paid to contract manufacturers in conjunction with the production of clinical components or materials; and

	•		fees paid to third party data collection organizations and investigators in conjunction with the clinical trials.

In connection with such service fees, our estimates are most affected by our projections of the timing of services provided relative to the actual level of services incurred by such service providers. The majority of our service providers invoice us monthly in arrears for services performed. In the event that we do not identify certain costs that have begun to be incurred or we are under or over our estimate of the level of services performed or the costs of such services, our actual expenses could differ from such estimates. The date on which certain services commence, the level of services performed on or before a given date, and the cost of such services are often subjective determinations. We make these judgments based upon the facts and circumstances known to us in accordance with GAAP. This is done as of each balance sheet date in our financial statements.

Off-Balance Sheet Arrangements

We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

Recently Adopted Accounting Pronouncements

In May 2009, FASB issued SFAS No. 165, “Subsequent Events” This new standard establishes a new financial statement disclosure requirement to disclose the date events that occur after the balance sheet date but, before the report is issued or available to be issued.. This requirement is effective for statements issued for interim and annual periods ending after June 15, 2009 (See Note 14). Prior to issuance of this statement, the primary guidance on subsequent events was in the auditing standards. The adoption of SFAS did not have any impact on the Company.

On April 1, 2009, the FASB issued FASB Staff Position (FSP) FAS 141(R) -1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies. This FSP provides additional guidance and disclosure requirements regarding the recognition and measurement of contingent assets acquired and contingent liabilities assumed in a business combination where the fair value of the contingent assets and liabilities cannot be determined as of the acquisition date. This FSP is effective for acquisitions occurring after January 1. 2009. The adoption of this FSP did not have any impact on the Company, and its future impact will be dependent upon the specific terms of future business combinations, if any.

Recent Accounting Pronouncements

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

Our exposure to market risk is confined to our cash, cash equivalents, and short-term investments. We invest in high-quality financial instruments, primarily money market funds, with the average effective duration of the portfolio within one year which we believe are subject to limited credit risk. We currently do not hedge interest rate exposure. Due to the short-term nature of our investments, we do not believe that we have any material exposure to interest rate risk arising from our investments. The Company is exposed to credit risks in the event of default by the financial institutions or issuers of investments in excess of FDIC insured limits. The Company performs periodic evaluations of the relative credit standing of these financial institutions and limits the amount of credit exposure with any institution.

ITEM 4.

Controls and Procedures

Evaluation of disclosure controls and procedures

Based on their evaluation as of June 30, 2009, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, were sufficiently effective to ensure that the information required to be disclosed by us in this Quarterly Report on Form 10-Q was recorded, processed,

summarized and reported within the time periods specified in the SEC’s rules and Form l0-Q, and that such information was accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Change in internal control over financial reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the effectiveness of controls

Our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Not Applicable.

Item 1A. Risk Factors

Our business and operations entail a variety of serious risks and uncertainties, including those described in Item 1A of our Form 10-K for the year ended December 31, 2008. In addition, the following risk factors have materially changed during the six months ended June 30, 2009:

We have incurred losses for a number of years, and anticipate that we will incur continued losses for the foreseeable future.

We began operations in December 1989. At that time, we provided research services, mostly to US government agencies, on classified projects. We have financed our operations since 1999 primarily through the sale of our equity securities and have devoted substantially all of our resources to research and development relating to MelaFind^®. Our net loss for the three and six months ended June 30, 2009 was approximately $3.8 million and $7.8 million, respectively, and as of June 30, 2009, we had an accumulated deficit of approximately $68.6 million. Our research and development expenses may increase in connection with our clinical trials and other development activities related to MelaFind^®. If we receive PMA approval for MelaFind^{^®}from the FDA, we expect to incur significant sales and marketing expenses, which will require additional funding, and manufacturing expenses. Additionally, our general and administrative expenses have also increased due to the additional operational and regulatory responsibilities applicable to public companies. As a result, we expect to continue to incur significant and increasing operating losses for the foreseeable future. These losses, among other things, have had and will continue to have an adverse effect on our stockholders’ equity.

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.

As of June 30, 2009, we had $7.7 million in cash and cash equivalents. On July 22, 2009, we closed a registered direct offering with aggregate gross proceeds of $15 million and net proceeds to the Company of approximately $13.7 million. Our operations have consumed substantial amounts of cash for each of the last eight years. The Company will require additional funds to pursue regulatory approvals and to achieve significant commercialization of MelaFind^®. There can be no assurances that the Company will be able to raise financing as needed from time to time, whether under the Kingsbridge Capital Limited CEFF or by other types of securities offerings.

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 needs in the long term. Any additional financing may be dilutive to stockholders, or may require us to grant a lender a security interest in our assets. The amount of funding we will need will depend on many factors, including:

	•		the schedule, costs, and results of our clinical trials;

	•		the success of our research and development efforts;

	•		the costs and timing of regulatory approval;

	•		reimbursement amounts for the use of MelaFind^® that we are able to obtain from Medicare and third-party payers, or the amount of direct payments we are able to obtain from patients and/or physicians utilizing MelaFind^®;

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

	•		the emergence of competing or complementary technological developments;

	•		the costs of filing, prosecuting, defending and enforcing any patent claims and other rights, including litigation costs and the results of such litigation;

	•		the costs involved in defending any patent infringement actions brought against us by third parties; and

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

If we are unable to obtain adequate financing on a timely basis, we may be required to significantly curtail or cease one or more of our development and marketing programs. We could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to some of our technologies, product candidates or products that we would otherwise pursue on our own. We also may have to reduce marketing, customer support and other resources devoted to our products. If we raise additional funds by issuing equity securities, our then-existing stockholders will experience ownership dilution, could experience declines in our share price and the terms of any new equity securities may have preferences over our common stock.

Our stock price is likely to be volatile, meaning purchasers of our common stock could incur substantial losses.

Our stock price is likely to be volatile. Between October 28, 2005 (the date of our initial public offering) and June 30, 2009, our stock price has ranged from $2.29 to $9.99 per share. The stock market in general and the market for medical technology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The following factors, in addition to other risk factors described in this section and general market and economic conditions, may have a significant impact on the market price of our common stock:

	•		results of our research and development efforts and our clinical trials;

	•		the timing of regulatory approval for our products;

	•		failure of any of our products, if approved, to achieve commercial success;

	•		the announcement of new products or product enhancements by us or our competitors;

	•		regulatory developments in the US and foreign countries;

	•		ability to manufacture our products to commercial standards;

	•		developments concerning our clinical collaborators, suppliers or marketing partners;

	•		changes in financial estimates or recommendations by securities analysts;

	•		public concern over our products;

	•		developments or disputes concerning patents or other intellectual property rights;

	•		product liability claims and litigation against us or our competitors;

	•		the departure of key personnel;

	•		the strength of our balance sheet;

	•		variations in our financial results or those of companies that are perceived to be similar to us;

	•		changes in the structure of and third-party reimbursement in the US and other countries;

	•		changes in accounting principles or practices;

	•		general economic, industry and market conditions; and

	•		future sales of our common stock.

A decline in the market price of our common stock could cause you to lose some or all of your investment and may adversely impact our ability to attract and retain employees and raise capital. In addition, stockholders may initiate securities class action lawsuits if the market price of our stock drops significantly. Whether or not meritorious, litigation brought against us could result in substantial costs and could divert the time and attention of our management. Our insurance to cover claims of this sort, if brought, may not be adequate, or in certain circumstances, not provide coverage.

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

The Company’s business may be adversely affected by factors in the United States and other countries that are beyond its control, such as disruptions in the financial markets or downturns in economic activity. The current world-wide economic conditions could have an adverse impact on the availability and cost of capital, interest rates, tax rates, or regulations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On May 7, 2009, the Company entered into a Committed Equity Financing Facility arrangement, or CEFF, with Kingsbridge Capital Limited (Kingsbridge) in which Kingsbridge has committed to purchase, subject to certain conditions and at the Company’s sole discretion, up to the lesser of $45 million or 3,327,000 shares of common stock, through May 7, 2012. Under the terms of the CEFF, the Company is not obligated to utilize any portion of the CEFF. The Company has access, at its discretion, to the funds through the sale of newly-issued restricted shares of the Company’s common stock.

The funds that can be raised under the CEFF over the three year term will depend on the Company satisfying for individual sales specified contractual limitations, conditions precedent and regulatory obligations. The Company may sell common stock to Kingsbridge under the CEFF at discounts ranging from 6 to 10 percent of the Volume Weighted Average Price (VWAP ); the discount depending on the VWAP of the Company’s common stock during the applicable pricing period. In connection with the CEFF, the Company issued a warrant to Kingsbridge to purchase 200,000 shares of the Company’s common stock at an exercise price of 150% of the 5-day average closing bid price at the subscription date. The warrant will become exercisable on November 7, 2009, the six-month anniversary of the date of the Purchase Agreement (May 7, 2009), and will remain exercisable, subject to certain exceptions, for a period of five years thereafter. Pursuant to the CEFF and as a condition to the stock issuance, the Company is obligated to have effective a registration statement with respect to the resale of shares issued pursuant to the CEFF and underlying the warrant. Legal fees of up to $75 and broker fees of $75 will be paid under this agreement. In addition, the Company must pay Kingsbridge $12.5 per quarter for each quarter a drawdown of at least 2% of the Company’s market capitalization is not completed.

The Company filed a resale registration statement with the Securities and Exchange Commission on Form S-3 to reserve up to approximately 3,527,000 of its authorized common shares to be available for purchase under this financing arrangement. The registration statement was declared effective by the SEC on May 22, 2009.

In issuing such warrant and entering into the committed equity financing facility with Kingsbridge, we relied upon Section 4(2) of the Securities Act of 1933, as amended, as a transaction by an issuer not involving any public offering and Regulation D of the Securities Act. In connection with such transaction, we made certain inquiries of Kingsbridge to establish that our sales of securities qualified for such exemption from the registration requirements under Section 4(2) of the Securities Act .

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders.

The 2009 Annual Meeting of Stockholders of the Company was held on May 22, 2009.

Our stockholders voted on proposals to elect directors, ratify the selection by the audit committee of our Board of Directors of Eisner LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2009, and approve an amendment to the Company’s 2005 Stock Incentive Plan increasing the aggregate number of shares available under the plan to 3,224,028.

All nominees for election to the Board as Directors were elected to serve until the 2010 Annual Meeting of Stockholders and until their respective successors are elected and qualified, or until such director’s earlier death, resignation or removal. The stockholders also ratified the selection of the independent registered public accounting firm by the audit committee of our Board of Directors, and voted to approve an amendment to our Stock Incentive Plan. The number of votes cast for, against or withheld and the number of abstentions with respect to each proposal is set forth below:


Proposal 1	Shares For		Shares Withheld
Election of Directors
Joseph V. Gulfo, MD		13,506,712		65,642
Breaux Castleman		12,621,292		951,062
Sidney Braginsky		13,491,577		80,777
Gorge C. Chryssis		13,503,255		69,099
Martin D. Cleary		13,495,254		77,100
Dan W. Lufkin		13,500,005		72,349
Gerald Wagner, Ph.D.		12,876,014		696,340

Proposal 2	Shares For		Shares Against		Shares Abstaining
Ratification of Eisner LLP		13,499,262		50,379		22,715
Proposal 3
Authorization of amendment to Stock Incentive Plan		6,330,093		709,335		37,975

Item 5. Other Information

(a) Not applicable

(b) Not applicable

Item 6. Exhibits


Exhibit
Number		Exhibit Title

31.1#		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended.

31.2#		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended.

32.1#		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

#		Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	ELECTRO-OPTICAL SCIENCES, INC.
	By:	/s/ Richard I. Steinhart
		Richard I. Steinhart
		Vice President and Chief Financial Officer (Principal Accounting and Financial Officer)

Date: July 24, 2009

EXHIBIT INDEX


Exhibit No.		Description

31.1		Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended.

31.2		Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended.

32.1		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.