1. Principal Business Activities

Organization and Business

MELA Sciences, Inc., a Delaware corporation (the “Company”), is a medical device company dedicated to designing and developing innovative software-driven technology for the early detection and prevention of skin cancer. The Company is focused on the commercialization of its flagship product, the MelaFind^® System, or MelaFind, as well as the further design and development of this technology. MelaFind is a non-invasive, point-of-care (in the doctor’s office) instrument to aid in the detection of melanoma. The system 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, “trained” by our proprietary database of melanomas and benign lesions. This result provides information to assist in the management of the patient’s disease, including information useful in the decision of whether to biopsy the lesion.

MelaFind’s components include:

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a hand-held imager, which employs high precision optics and multi-spectral illumination (multiple wavelengths of light);

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a proprietary database of pigmented skin lesions, believed to be the largest prospective database to date in the U.S.; and

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

In November 2011, the Company received a Pre-Market Approval, or PMA, from the U.S. Food and Drug Administration (“FDA”) for MelaFind, having already received Conformité Européenne (“CE”) Mark approval in September 2011. On March 7, 2012, the Company installed the first commercial MelaFind System. The Company initially marketed the MelaFind System primarily to aesthetic dermatologists through a lease program in which users paid an upfront placement fee and periodic fees for use. In 2013, because the launch objectives were not realized, the Company reviewed its marketing strategy. Revenues amounting to $536 and $278 in 2013 and 2012, respectively, did not meet expectations, and due to the nature of the lease agreements the Company continued to record high cost of sales. The Company implemented a significant cost reduction program in 2013 that affected all areas of its business, and which continued throughout 2014. As a result of this strategy review in 2013, the Company undertook several steps that it believes will significantly improve MelaFind’s commercial acceptance by: 1) changing its business model from solely a rental-based model to include a capital sales option; 2) refocusing its marketing efforts on medical dermatology, and particularly those dermatologists who treat patients at high risk for melanoma; and 3) beginning the process of obtaining a coverage determination from the Centers for Medicare & Medicaid Services (“CMS”), the federal agency that administers Medicare, in order to obtain reimbursement by Medicare and ultimately by private insurers for the use of MelaFind. During 2014 the Company made significant strides in each of these areas, although it anticipates that it will require a few years of continued effort before the success of this strategy can be assessed. The Company anticipates that the insurance reimbursement process could take several years to complete.

In July 2014, the Company announced that it took the first step in the process of obtaining insurance reimbursement for its Multi-Spectral Digital Skin Lesion Analysis (“MSDSLA”) procedure that is performed by dermatologists utilizing the MelaFind system as an aid in the detection of melanoma. The Company submitted an application for a CPT code, which is necessary for Medicare Part B reimbursement by the CMS. On March 9, 2015, the February 2015 CPT^® Editorial Summary of Panel Actions was posted to the website of the American Medical Association (the “AMA”). The CPT Editorial Panel accepted the addition of Category III codes 039XX1T and 039XX2T to report MSDSLA of atypical cutaneous lesions, which applies to the MelaFind System. Barring any further action by the Panel, the Company expects that these codes will be posted to the AMA CPT website by July 1, 2015 with an effective date of January 1, 2016 and will provide the basis for pursuing third party and CMS insurance coverage for MelaFind. The Company plans to commence efforts to obtain reimbursement from private insurers, which could take several years to complete.

Until the Company obtains insurance reimbursement from the CMS and private insurers, it expects that revenues will not be sufficient to cover operating and other expenses. The Company’s financial success will depend on a number of factors, primary among which is the ability to sell MelaFind systems, increase the penetration with dermatologists, encourage the usage of these systems, and control costs. Currently, the Company cannot determine when it will have sufficient revenues to cover continuing developmental costs, manufacturing, marketing and other operational expenses.