Organization and Basis of Presentation

3 Months Ended

Mar. 31, 2013

Organization and Basis of Presentation [Abstract]

ORGANIZATION AND BASIS OF PRESENTATION

1. ORGANIZATION AND BASIS OF PRESENTATION

MELA Sciences, Inc., a Delaware corporation (the “Company”), is 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, in order 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.

The components of the MelaFind ^® system include:

• a hand-held component, 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.

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 Europeenne (“CE”) Mark approval for MelaFind^®. On March 7, 2012, the Company installed the first commercial MelaFind^® systems, and proceeded with the first phase of the commercial launch of its breakthrough product for melanoma detection.

During the first quarter of 2013, the Company continued its controlled and deliberate commercial launch of MelaFind^® by entering into user agreements with dermatologist customers and installing MelaFind^® systems throughout the U.S. and Germany, while simultaneously commencing the second phase of the MelaFind^® commercial launch by focusing on system usage and patient mobilization among its current customers. As of March 31, 2013, user agreements with 138 customers were in place and 126 MelaFind^® systems were installed, with 12 installations pending scheduling and training of staff. Also during the quarter, the Company continued its Post-Approval Study 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 phase of the Melafind ^® device and 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 quarter ended March 31, 2013, the Company sold approximately 4.7 million shares under the ATM Program for gross and net proceeds of approximately $8.8 million and $8.5 million, respectively. 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.

On February 12, 2013 the Company entered into an underwriting agreement, relating to the public offering of 6,100,000 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 estimated offering expenses payable by the Company, net proceeds were approximately $7.3 million. The offering closed on February 15, 2013. 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 Securities and Exchange Commission (the “SEC”) on February 12, 2013, in connection with a takedown from the Company’s shelf registration statement on Form S-3 (File No. 333-167113) declared effective by the SEC on June 1, 2010. On February 11, 2013, a senior executive of the Company contractually agreed to not exercise 900,000 fully vested options until such time as the stockholders of the Company approve an increase in the number of authorized shares of the Company’s common stock or, if earlier, the Company’s written consent.

On March 15, 2013, the Company executed definitive loan documents finalizing a $10 million loan with a venture capital lender (“Lender”). Of the $10 million, $6 million was funded on March 15, 2013 and the Company will have the option to draw down the remaining $4 million through March 17, 2014, subject to the satisfaction of meeting certain sales and revenue targets. The loan matures 42 months from the initial closing and bears interest at a variable rate adjusted for changes in the prime rate but not less than 10.45% per year. For the period ended March 31, 2013 the rate was 10.45%. During the first 12 months the loan is outstanding, only interest will be paid to the Lender and after that the Company will make 30 equal payments of principal and interest until maturity. The loan is secured by a general lien against all of the Company’s assets, other than the Company’s intellectual property assets. In addition, the lender has a security interest in the proceeds of the sale of any of the Company’s intellectual property assets. The Company must also maintain various non-financial covenants including adhering to limits on incurring additional debt. In addition, the payment of dividends or distributions to stockholders is prohibited.

Upon executing the loan documents on March 15, 2013 the Company became obligated to issue to the Lender a warrant to purchase shares of the Company’s common stock upon approval by the Company’s stockholders of a proposal to increase the Company’s number of authorized shares of common stock at its 2013 Annual Meeting of Stockholders. The number of shares that could be acquired upon exercise of the warrant and the exercise price per share, were not fixed on March 15, 2013 but would be determined when the warrant was issued based on a defined formula using trading prices of the Company’s common stock during certain periods prior to the issuance of the warrant. The Company’s stockholders approved the increase in the number of authorized shares of common stock on April 25, 2013 and on April 26, 2013 the warrant was issued to the Lender. The terms of the warrant were fixed on the date of issuance whereby the Lender received a warrant to purchase 693,202 shares of common stock at an exercise price of $1.118 per share. The warrant expires on April 26, 2018.

For financial reporting purposes, the $6 million funded by the Lender on March 15, 2013 was allocated first to the fair value of the Company’s obligation to issue the warrant (“Warrant Obligation”) that totaled approximately $563 and the balance was reduced further by Lender costs and fees (“Costs”), resulting in an initial carrying value of the loan of approximately $5.3 million. The Company used a level 3 Fair value measurement to determine Fair value, which has significant unobservable inputs as defined in ASC 820. The value of the Warrant Obligation was determined using the Monte Carlo pricing model that used various assumptions that include; a stock price of $1.16 to $1.18 per share, volatility of 76.83%, time to maturity of 5 years, an exercise price of $1.15 to $1.16 and a riskless rate of return of .84%. Due to the nature of the Monte Carlo model, a 10% change in the underlying unobservable inputs would not have a significant impact on the Fair value.

The value of the Warrant Obligation combined with the Costs resulted in a loan discount of approximately $727. In addition, the Company is obligated to pay the Lender a fee of $425 at the maturity of the Loan (referred to as “Fee” or “Long-term interest payable”). The loan discount and the Fee are being amortized as additional interest expense over the life of the loan using the interest method. Prior to the terms of the warrant being fixed on April 26, 2013, the Warrant Obligation fell within the scope of Accounting Standards Codification 815 “Derivatives and Hedging” and therefore the Warrant Obligation is accounted for as a derivative reflected as a long-term liability at March 31, 2013 with changes in fair value included in operating results.

The aggregate future principal payments due under this $6 million loan are as follows:

Year ended December 31,
2013 (remaining nine months)	$	0
2014		1,450
2015		2,374
2016		2,176
	$	6,000

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 March 31, 2013 the Company had approximately $21.6 million in cash and cash equivalents. Management believes that this cash balance and anticipated revenues will be sufficient to fund the Company’s anticipated level of operations for at least the next twelve months. Should the Company experience unforeseen expenses, or if anticipated revenues are not realized, the effect could negatively impact management’s estimated operating results over the next twelve months. In addition, the Company anticipates that long-term it will spend substantial funds to broaden the commercialization of MelaFind ^®, including further development of a direct sales force and expansion of the Company’s contract manufacturing capacity. The timing and amount of any additional funding the Company may require will be affected by the commercial success of its MelaFind^® product. The funding could be in the form of either additional equity or debt financing, to the extent permitted under the loan agreement with Lender, or in exchange for product rights in all or certain geographies, for example. 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 needs in the long term. Any additional funding that the Company may obtain in the future could be dilutive to common stockholders and could provide new investors with rights and preferences senior to common stockholders. In the event that the Company is unable to raise additional funds, the Company has the ability and intent to reduce certain discretionary expenditures.

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 Securities and Exchange Commission (“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 in the United States (“GAAP”) 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, 2012.

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.