Form 10-Q

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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 x No ¨

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):

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 x No ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of April 26, 2012: 30,332,217 shares of the Registrant’s common stock were outstanding.

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, ‘trained’ on our proprietary database of melanomas and benign lesions, to provide information to assist in the management of the patient’s disease, including information useful in the decision of whether to biopsy the lesion.

During March 2012, the Company placed the first commercial MelaFind^® systems in the U.S. and Germany, and intends to continue with a controlled launch of MelaFind^® in selected U.S. and European markets.

In August 2011, the Company received the International Organization for Standardization (“ISO”) 13485 certification of the Company’s comprehensive management system for the design and manufacture of medical devices. In September 2011, the Company received Conformite Europeenne (“CE”) Mark approval for MelaFind^®. With CE Mark approval, the Company has the ability to market MelaFind^® to dermatologists across the European Union and in certain other countries.

The Company received written approval from the FDA for the MelaFind^® PMA application on November 1, 2011. As a condition of PMA approval, the Company committed to conduct a Post Approval Study (“PAS”) evaluating the sensitivity of physicians in diagnosing melanomas and high-grade lesions and the false positive rate after using MelaFind^®.

Prior to the commercial launch of MelaFind^® in the first quarter of 2012, the Company had not generated any revenues from MelaFind^®.

The Company anticipates that it will continue to incur net losses for the foreseeable future in the commercialization of the Melafind^® device and the further development of Melafind^® and the Company’s technology. From inception, the Company has financed operations primarily through the sale of convertible preferred stock and subsequently sold common stock as part of an initial public offering in October 2005, private placements in November 2006 and August 2007, registered direct offerings which closed in August 2008 and July 2009, underwritten public offerings in July 2010 and December 2011, and the committed equity financing facility (“CEFF”) with Kingsbridge Capital Limited in the second half of 2009 and first quarter of 2010.

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, 2012, the Company’s total of cash and cash equivalents was approximately $22.3 million. Management believes that this cash balance will be sufficient to fund the Company’s anticipated level of operations for at least the next twelve months. However, the Company will need substantial funds to broaden the commercial expansion of MelaFind^®, including development of a direct sales force and expansion of the Company’s contract manufacturing capacity. 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. 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, 2011.

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.

The Company considers revenue to be earned when all of the following criteria are met: persuasive evidence a sales arrangement exists; delivery has occurred or services have been rendered; the price is fixed or determinable; and collectability is reasonably assured. The Company’s agreements with dermatologists regarding the MelaFind^® system combines the elements noted above with a future service obligation. While the Company is required to place the MelaFind^® system with dermatologists for their exclusive use, ownership of the MelaFind^® system remains with the Company. The Company generates revenue primarily from the sale of single-use electronic patient record cards. These cards activate the MelaFind^® system, capture data and store the data for each patient visit. Additionally, in general the Company charges an initial installation fee for each MelaFind^® system which covers training, delivery and supplies. In accordance with the accounting guidance regarding multiple-element arrangements, the Company defers revenue for the undelivered service element based upon the relative standalone selling prices, and recognizes the associated revenue over the related service period, generally expected to be two years.

Inventories are stated at the lower of cost (first-in, first-out) or market value. Inventory costs include solely material purchases as the Company does not manufacture products.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.

In June, 2011, the FASB issued Accounting Standard Update No 2011-05 “Presentation of Comprehensive Income” (ASU 2011-05). Under ASU 2011-05, an entity has the option to present the total of comprehensive income either in a single continuous statement of comprehensive income or in two separate but continuous statements of income and comprehensive income. The option of presentation of the components of other comprehensive income as part of the statement of change in the stockholders’ equity has been eliminated. This update was applied retrospectively and was effective for the Company for fiscal year beginning January 1, 2012. For the year ended December 31, 2011 and as of March 31, 2012, comprehensive loss was equal to net loss as the Company had no comprehensive income to report in either period.

Basic net loss per common share excludes dilution for potentially dilutive securities and is computed by dividing loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per common share 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:

The Company has one stock-based compensation plan, the 2005 Stock Incentive Plan (“2005 Plan”), under which the Board of Directors may currently 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 one other stock-based compensation plan 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 market value of the stock on the date of the grant. Options granted under the 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.

The compensation expense recognized in the Statement of Operations in the first quarter of 2012 and 2011 for stock options amounted to $348 (of which $146 relates to performance milestones) and $171 (of which $15 relates to performance milestones), respectively. Cash received from options and warrants exercised under all share-based payment arrangements for the three months ended March 31, 2012 was $33. There were not any options or warrants exercised during the three months ended March 31, 2011.

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

The expected life of the options is based on the expected time to full-vesting, forfeiture and exercise. The expected volatility assumptions were determined based upon the historical volatility of the Company’s daily closing stock price. 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.

At March 31, 2012, stock options to purchase 2,079,306 shares of common stock at exercise prices ranging from $1.00 to $11.11 per share are outstanding and exercisable at various dates through 2022.

During the three months ended March 31, 2012, the weighted average fair value of options granted, estimated as of the grant date using the Black-Scholes option valuation model, was $2.62. For the three month period ended March 31, 2011, the weighted average fair value of options granted was $2.59. For the three months ended March 31, 2012 the total intrinsic value of options exercised was $74. During the three months ended March 31, 2011 no options were exercised.

The status of the Company’s stock option plans at March 31, 2012 is summarized in the following:

As of March 31, 2012, of the total 2,079,306 options outstanding, 516,200 have not vested. Of this total unvested amount, 166,475 options will vest upon the attainment of certain milestones, and the balance will vest over the requisite service period. The weighted average vesting period for the non-milestone, non-vested awards not yet recognized is 1.7 years.

As of March 31, 2012, of the $910 of total unrecognized compensation cost related to unvested options to be recognized, $517 is to be recognized over a period to be determined by performance-based milestones, and $393 is to be recognized over the requisite service period through 2016.

As of March 31, 2012, there were 1,578,639 shares available for future grants under the Company’s 2005 Plan.

The Company is obligated under a non-cancelable operating lease for office, lab, and manufacturing space expiring December 2016. The lease is subject to escalations for increases in operating expenses. The approximate aggregate minimum future payments due under this lease are as follows:

Rental payments are recognized as rent expense on a straight-line basis over the term of the lease. In April 2012, the Company entered into an agreement, effective May 1, 2012, to amend the existing lease for laboratory, assembly and office space which runs through December 2016. This amendment increases the previously leased space by 1,700 square feet at an annual rental of $22.

ASKION GmbH (“ASKION”), located in Gera Germany, which specializes in precision optics, is an integral member of the MelaFind^® manufacturing and development team. ASKION produced the MelaFind^® hand-held devices used in our pivotal clinical trials. In January of 2012, the Company entered into an expanded manufacturing agreement with ASKION to continue developmental engineering, production and testing of our hand-held device, and to assemble and test the integrated finished MelaFind^® system, including the cart, for units to be sold within the European Union.

The Company, primarily through ASKION, engages Carl Zeiss Jena GmbH (“Zeiss”) to build the lenses and assemblies, as well as provide certain technical consulting, for the MelaFind^® units used in the Company’s pivotal clinical trials and the commercial units currently being manufactured. This work is expected to continue on commercial MelaFind^® units beyond 2012.

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 2012.

and Martin Slove and Linda Slove, Individually and on Behalf of All Others Similarly Situated v. MELA Sciences, Inc., Joseph V. Gulfo, Richard I. Steinhart, and Breaux Castleman, No. 1:11 cv-00429-JFM. These three securities class actions were consolidated into one action on February 15, 2011, entitled In re MELA Sciences, Inc. Securities Litigation, No. 10-Civ-8774-JFM (“securities class action”). The securities class action plaintiffs assert violations of the Securities Exchange Act of 1934, alleging, among other things, that defendants made misstatements and omissions regarding the Company’s product, MelaFind^®, and its prospects for FDA approval, on behalf of stockholders who purchased the Company’s common stock during the period from February 13, 2009 through November 16, 2010, and seek unspecified damages. On May 2, 2011, the securities class action plaintiffs filed their amended consolidated complaint, alleging similar claims to their prior complaints. On July 29, 2011, defendants filed a motion to dismiss the consolidated amended complaint in its entirety. Plaintiff’s opposition to the motion to dismiss was filed on September 23, 2011. In light of the Company’s receipt of the Approvable Letter from the FDA for the MelaFind^® PMA Application on September 22, 2011, the parties filed a stipulation on October 19, 2011 in which plaintiff stated its intention to file a motion seeking leave to amend its complaint. Defendants withdrew the outstanding motion to dismiss the current Amended Complaint without prejudice to renew it at a later date. On November 18, 2011, plaintiffs filed their motion for leave to amend the consolidated amended complaint. On December 18, 2011, defendants filed an opposition to plaintiff’s motion for leave to amend the consolidated amended complaint. On February 8, 2012, plaintiffs filed their reply to defendants’ opposition to the motion. On March 16, 2012, plaintiffs filed a revised proposed second amended complaint. On, March 30, 2012, defendants filed a surreply in further opposition to the motion. On April 16, 2012, plaintiffs filed a surreply in further support of the motion.

The Company believes that it has meritorious defenses and intends to vigorously defend against the securities class action; however, as with any litigation, we cannot predict with any degree of certainty the eventual outcome of this litigation. An adverse outcome could have a material adverse effect on our business and our business could be materially harmed.

From time to time, we may be a party to certain legal proceedings, incidental to the normal course of our business. These may include controversies relating to contract claims and employment related matters, some of which claims may be material in which case we will make separate disclosure as required.

In May 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 25, 2012 subject to various conditions for individual sales, including dollar, timing, and trading volume limitations, a minimum market per share price, and other contractual and regulatory requirements.

There is no assurance that the Company will satisfy all the various conditions for individual sales enabling it to use all 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. The issuance of this warrant was deemed to be a cost of the offering.

The Company did not sell any stock to Kingsbridge Capital Limited under the CEFF in the three months ended March 31, 2012 and March 31, 2011, respectively. As of March 31, 2012, 1,095,315 shares of common stock remain available for sale under the CEFF, exclusive of the 200,000 outstanding warrants held by Kingsbridge. Legal, accounting, and other costs associated with this agreement approximating $62 have been deferred and will be charged to equity as a reduction of future proceeds from the CEFF or operations should management decide to abandon the CEFF which is set to expire in May of 2012.

In May 2010, 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 $75 million. The registration statement was declared effective by the SEC on June 1, 2010. On June 30, 2010, the Company entered into an underwriting agreement, relating to the public offering of 2,200,000 shares of the Company’s common stock, at a price to the public of $7.50 per share less underwriting discounts and commissions. The common stock was offered and sold pursuant to the Company’s Prospectus dated June 1, 2010 and the Company’s Prospectus Supplement filed with the SEC on June 30, 2010, in connection with a takedown from the Company’s effective shelf registration statement. The gross proceeds to the Company from the sale of the common stock totaled $16.5 million. After deducting the underwriters’ discounts and commissions and other offering expenses, net proceeds were approximately $15.2 million. This offering closed on July 6, 2010.

On December 15, 2011, the Company entered into an underwriting agreement, relating to the public offering of 5,000,000 shares of the Company’s common stock, at a price to the public of $3.25 per share less underwriting discounts and commissions. 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 December 16, 2011, in connection with a takedown from the Company’s effective shelf registration statement. The gross proceeds to the Company from the sale of the common stock totaled approximately $16.3 million. After deducting the underwriters’ discounts and commissions and other offering expenses payable by the Company, net proceeds were approximately $15 million. This offering closed on December 21, 2011. Approximately $42.2 million remains available under the Company’s 2010 shelf registration statement as of March 31, 2012.

As of March 31, 2012, the Company had 45,000,000 shares of $0.001 par value common stock authorized and 30,332,217 shares issued and outstanding; and had 10,000,000 shares of $0.10 par value preferred stock authorized with no preferred shares issued and outstanding.

In connection with the Company’s private placement in August 2007, the Company issued warrants to purchase up to 500,041 shares of the Company’s common stock. At March 31, 2012, 346,781 of the 2007 warrants were outstanding. The 2007 outstanding warrants are exercisable at a price of $8.00 per share and if not exercised will expire in August of 2012.

In addition, in connection with the May 7, 2009 CEFF with Kingsbridge Capital, the Company issued a 5-year warrant to Kingsbridge to purchase up to 200,000 shares of the Company’s common stock at an exercise price of $11.35 per share. These 200,000 warrants are outstanding at March 31, 2012.

No warrants were exercised during the three months ended March 31, 2012 and March 31, 2011, respectively.

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

In June 2003, the Company entered into a consulting agreement with Breaux Castleman, former member and the former Chairman of the Company’s Board of Directors, for consulting services related to the FDA approval of MelaFind^® PMA application and the Company’s business and financial strategy. Under this agreement, Mr. Castleman received compensation for each month of services rendered. The Company made payments pursuant to this consulting agreement of $6 in the three month period ended March 31, 2011. This consulting agreement was terminated in December 2011 at the time of Mr. Castleman’s resignation from the Company’s Board of Directors.

In January 2007, Dr. Wagner, Ph.D., a former member of the Company’s Board of Directors, entered into an amended and restated consulting contract with the Company for consulting services related to the Company’s operations. 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 paid consulting costs pursuant to this agreement of $7.5 in each of the three month periods ended March 31, 2012 and March 31, 2011. Dr. Wagner resigned from the Company’s Board of Directors in December 2011, with his consulting contract remaining in effect.

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 to run through September 2012, and may be terminated by either party with 30 days notice. Under the terms of the agreement, Ms. Egger is entitled to receive a consulting fee of $1.6 per day. The Company did not pay Ms. Egger for consulting in the three month period ended March 31, 2012 and paid $22 in the three month period ended March 31, 2011. Ms. Egger was appointed to the Company’s Board of Directors as of June 10, 2009.

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 three months ended March 31, 2012 and March 31, 2011, the Company earned $5 as the pro-rated portion of the minimum royalty as KaVo has not re-launched the product as of March 31, 2012.

In April 2012, the Company entered into an agreement, effective May 1, 2012, to amend the existing lease for laboratory, assembly and office space which runs through December 2016. This amendment increases the previously leased space by 1,700 square feet at an annual rental of $22.

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, 2011.

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 whether MelaFind^® achieves market acceptance, as well as those discussed below under the heading “Risk Factors,” and 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.

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

We commenced operations in December 1989 as a New York corporation, re-incorporated as a Delaware corporation in September 1997, and changed our name from Electro-Optical Sciences, Inc. to MELA Sciences, Inc. on April 30, 2010. Since our inception, we have generated significant losses. As of March 31, 2012, we had an accumulated deficit of approximately $125.3 million. We expect to continue to spend significant amounts on the commercialization and further development of MelaFind^® and the development of our technology.

In August 2011, the Company received the International Organization for Standardization (“ISO”) 13485 certification of the Company’s comprehensive management system for the design and manufacture of medical devices. In September 2011 the Company received Conformite Europeenne (“CE”) Mark approval for MelaFind^®. With CE Mark approval, the Company has the ability to market MelaFind^® to dermatologists across the European Union and in certain other countries.

Prior to the commercial launch of MelaFind^® in the first quarter of 2012, the Company had not generated any revenues from MelaFind^®.

The Company anticipates that it will continue to incur net losses for the foreseeable future in the commercialization of the Melafind^® device and the further development of Melafind^® and the Company’s technology. 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.

The Company did not sell any stock to Kingsbridge Capital Limited under the CEFF in the three months ended March 31, 2012 and March 31, 2011, respectively. As of March 31, 2012, 1,095,315 shares of common stock remain available for sale under the CEFF, exclusive of the 200,000 outstanding warrants held by Kingsbridge. Legal, accounting, and other costs associated with this agreement approximating $62 have been deferred and this remaining balance will be charged to equity as a reduction of future proceeds from the CEFF or operations should management decide to abandon the CEFF which is set to expire in May of 2012.

Most of our expenditures prior to commercialization in March 2012 had been for research and development activities and general and administrative expenses. Research and development expenses represented costs incurred for product development, clinical trials, activities related to regulatory filings, and manufacturing development efforts. Subsequent to the commercial launch of MelaFind^®, certain costs previously classified as research and development expenses are now classified as cost of sales or general expenses.

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 March 31, 2012, the Company’s total of cash and cash equivalents was approximately $22.3 million. The Company will require additional funds to achieve significant commercialization of MelaFind^®. However, 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. In the event that the Company is unable to raise additional funds, the Company has the ability and intent to reduce certain discretionary expenditures.

Our cash and cash equivalents at March 31, 2012 are liquid investments in money market accounts and deposits with commercial banks, which are held in amounts that substantially exceed FDIC limits.

Net cash used in operations was $5,317 for the three months ended March 31, 2012. For the corresponding period in 2011, net cash used in operations was $4,472. 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, the acquisition of MelaFind^® consumables inventory and other changes in operating assets and liabilities.

For the three months ended March 31, 2012, there was $408 net cash used in our investing activities, for the purchase of $82 in fixed assets and $326 in components to be used by our contract manufacturers in the production of MelaFind^® systems. For the corresponding period in 2011, $8 net cash was used in our investing activities, principally for the purchase of fixed assets.

For the three months ended March 31, 2012, there was $29 provided by our financing activities representing the net of additional costs from our 2011 public offering and the proceeds from the exercise of stock options. For the three months ended March 31, 2011, no net cash was provided by our financing activities.

We face certain risks and uncertainties, which are present in many emerging medical device companies. At March 31, 2012, we had an accumulated deficit of approximately $125.3 million. We anticipate that we will continue to incur net losses for the foreseeable future as we proceed with the MelaFind^® commercialization process and expand our corporate infrastructure. We do not expect to generate significant product revenue until after we successfully commercialize MelaFind^®. However, we will need substantial funds to broaden the commercial expansion of MelaFind^® , including development of a direct sales force and expansion of our contract manufacturing capacity. The timing and amount of any additional funding the Company may require to broaden the commercial expansion of Melafind^® will be affected by the commercial success of the product. The funding could be in the form of either additional equity or debt financing. We believe that our current cash and cash equivalents and the interest we earn on these balances will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months. However, if our existing cash is insufficient to satisfy our liquidity requirements, or if we develop additional products, we may seek to sell additional equity or debt securities or obtain a credit facility, which will be even more difficult due to the lack of available capital as a result of the recent global economic crisis. If additional funds are raised through the issuance of debt securities, these securities would have rights senior to those associated with our common stock and could contain covenants that would restrict our operations. Any additional financing may not be available in amounts or on terms acceptable to us, or at all. If we are unable to obtain this additional financing, we may be required to reduce the scope of, delay or eliminate some or all of planned product research development and commercialization activities, which could harm our business.

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

The following table summarizes our outstanding contractual obligations as of March 31, 2012, and the effect those obligations are expected to have on our liquidity and cash flows in future periods:

Our long-term obligations represent a non-cancelable operating lease for our laboratory, assembly, and office space. The lease on approximately 20,000 square feet of space expires in December 2016. In April 2012, the Company entered into an agreement, effective May 1, 2012, to amend the existing lease for laboratory, assembly and office space which runs through December 2016. This amendment increases the previously leased space by 1,700 square feet at an annual rental of $22.

In the first quarter of 2012, the Company supported MelaFind^® pre-launch studies conducted by selected dermatologists in the U.S. and Germany. Enhancements to MelaFind^® were effected based on information gathered in these pre-launch studies. The first commercial MelaFind^® systems were placed in the U.S. and Germany during March 2012, and the applicable sales and cost of sales were recorded for the first time. For the first two months of 2012 the Company continued to record all transactions as an R&D company, as it had in 2011. Subsequent to the commercial launch of MelaFind^®, certain costs previously classified as research and development expenses are now classified as cost of sales or general expenses. Sales and marketing efforts were increased in the first quarter of 2012 leading up to and subsequent to the commercial launch of MelaFind^®.

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

Revenue of $11 and deferred revenue of $17 were recorded in the three months ended March 31, 2012 as the Company commenced its controlled commercial launch of the MelaFind^® product during March 2012. Prior to the launch of MelaFind^®, the Company had not recorded any product revenue or deferred revenue since the discontinuance of our Difoti product in 2005. In general, the Company signs a user agreement with its customers that includes a fee for the placement of the MelaFind^® system and for the sale of its electronic patient record cards and consumables which are needed to operate the system. The Company is addressing unique aspects of the European marketplace through variations of the user agreement. Deferred revenue reflects the timed recognition of the placement fee revenue over the term of the user agreement, which is generally 2 years.

Costs of $130 were recorded as associated with the realization of MelaFind^® revenue and deferred revenue during the three months ended March 31, 2012. These costs were made up of direct costs associated with the placement of the MelaFind^® system in the doctor’s office, the cost of consumables sold, the cost of the system access cards, and depreciation costs of the MelaFind^® system placed with the customer which remains the property of the Company. Certain manufacturing overhead costs associated with supporting the contract manufacturers of MelaFind^® along with technical support and quality costs are also recorded to cost of goods sold.

Research and development (“R&D”) expenses experienced an overall decrease of $141 or 5% in the three months ended March 31, 2012 below the comparable period a year earlier. This decrease was principally the decrease in R&D labor and materials at Askion in Germany of $446 and the reclassification of certain post-launch expenses to general and administrative (“G&A”) offset by an increase of $384 in expenses related to clinical studies initiated in Germany prior to launch.

General and administrative expenses experienced an overall increase of $824 or 34% for the three months ended March 31, 2012 above the comparable period a year earlier. Within G&A, marketing costs represented $279 of the increase as compensation costs increased by $139 with the expansion of our sales force, expenses for consulting in Germany increased by $80 and expenses related to the American Academy of Dermatology conference increased by $42.

Other year-to-year increases in general and administrative costs for the three months ended March 31, 2012 include computer supplies and maintenance costs of $74, investor relations of $49, $43 in recruiting expenses and the classification as G&A of approximately $368 medical affairs and regulatory expense which would have been classified as R&D if incurred prior to launch.

Interest income for the three months ended March 31, 2012 decreased to $13 from $21 in the comparable period of 2011. Interest income decreased as a result of the deterioration of interest rates and smaller cash balances during the period in 2012.

Other income for the three months ended March 31, 2012 was the $5 royalty minimum we earn each quarter from Kavo on the sale/licensing of our DEFOTI product.

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 generally accepted accounting principles (“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.

The Company considers revenue to be earned when all of the following criteria are met: persuasive evidence a sales arrangement exists; delivery has occurred or services have been rendered; the price is fixed or determinable; and collectability is reasonably assured. The Company’s agreements with dermatologists regarding the MelaFind^® system combines the elements noted above with a future service obligation. While the Company is required to place the MelaFind^® system with dermatologists for their exclusive use, ownership of the MelaFind^® system remains with the Company. The Company generates revenue primarily from the sale of single-use electronic patient record cards. These cards activate the MelaFind^® system, capture data and store the data for each patient visit. Additionally, the Company generally charges an initial installation fee for each MelaFind^® system which covers training, delivery and supplies. In accordance with the accounting guidance regarding multiple-element arrangements, the Company defers revenue for the undelivered service element based upon the relative standalone selling prices, and recognizes the associated revenue over the related service period, generally expected to be two years.

We account for non-employee stock-based awards in which goods or services are the consideration received for the equity instruments issued based on the fair value of the equity instruments issued in accordance with FASB ASC 505-50, “Equity Based Payments to Non-Employees.”

We record compensation expense associated with stock options and other forms of equity compensation in accordance with FASB ASC 718, Compensation-Stock Compensation, 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, over the period estimated to satisfy the performance condition. The probability of vesting is updated at each reporting period and compensation is adjusted prospectively.

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:

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 U.S. GAAP. This is done as of each balance sheet date in our financial statements.

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.

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.

Based on their evaluation as of March 31, 2012, 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 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.

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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.

On November 19, 2010, a purported securities class action complaint was filed in the U.S. District Court for the Southern District of New York, naming as defendants the Company and certain of its officers and directors, entitled Randall J. Pederson, Individually and on Behalf of All Others Similarly Situated v. MELA Sciences, Inc., Joseph V. Gulfo, Richard I. Steinhart, and Breaux Castleman, No. 7:10-cv-08774-JFM. Two similar complaints were also filed, one on December 2, 2010 and the other on January 20, 2011, in the same District Court, entitled Amy Steigman, Individually and on Behalf of All Others Similarly Situated v. MELA Sciences, Inc., Joseph V. Gulfo, Richard I. Steinhart, and Breaux Castleman, No. 7:10-cv-09024-JFM; and Martin Slove and Linda Slove, Individually and on Behalf of All Others Similarly Situated v. MELA Sciences, Inc., Joseph V. Gulfo, Richard I. Steinhart, and Breaux Castleman, No. 1:11-cv-00429-JFM. These three securities class actions were consolidated into one action on February 15, 2011, entitled In re MELA Sciences, Inc. Securities Litigation, No. 10-Civ-8774-JFM (“securities class action”). The securities class action plaintiffs assert violations of the Securities Exchange Act of 1934, alleging, among other things, that defendants made misstatements and omissions regarding the Company’s product, MelaFind^®, and its prospects for FDA approval, on behalf of stockholders who purchased the Company’s common stock during the period from February 13, 2009 through November 16, 2010, and seek unspecified damages. On May 2, 2011, the securities class action plaintiffs filed their amended consolidated complaint, alleging similar claims to their prior complaints. On July 29, 2011, defendants filed a motion to dismiss the consolidated amended complaint in its entirety. Plaintiff’s opposition to the motion to dismiss was filed on September 23, 2011. In light of the Company’s receipt of the Approvable Letter from the FDA for the MelaFind^® PMA Application on September 22, 2011, the parties filed a stipulation on October 19, 2011 in which plaintiff stated its intention to file a motion seeking leave to amend its complaint. Defendants withdrew the outstanding motion to dismiss the current Amended Complaint without prejudice to renew it at a later date. On November 18, 2011, plaintiffs filed their motion for leave to amend the consolidated amended complaint. On December 18, 2011, defendants filed an opposition to plaintiff’s motion for leave to amend the consolidated amended complaint. On February 8, 2012, plaintiffs filed their reply to defendants’ opposition to the motion. On March 16, 2012, plaintiffs filed a revised proposed second amended complaint. On March 30, 2012, defendants filed a surreply in further opposition to the motion. On April 16, 2012, plaintiffs filed a surreply in further support of the motion.

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, 2011. In addition, the following risk factors have materially changed during the three months ended March 31, 2012:

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

Since 1999, we have primarily financed our operations 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 months ended March 31, 2012 was approximately $5.8 million, and as of March 31, 2012, we had an accumulated deficit of approximately $125.3 million. Our research and development expenses may increase in connection with our continued commercialization and development activities related to MelaFind^®. Having commenced commercialization in March 2012, we expect to incur significant sales, marketing, contract manufacturing and inventory build-up expenses which will require additional funding. 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 continue commercialization and continue development of MelaFind^® enhancements or other products without additional funding and we will not be able to achieve significant commercialization without additional funding.

As of March 31, 2012 we had approximately $22.3 million in cash and cash equivalents. Our operations have consumed substantial amounts of cash for each of the last ten years and we expect that our cash used by operations will increase significantly in each of the next several years. We currently believe that our available cash and cash equivalents will be sufficient to fund our anticipated levels of operations for at least the next twelve months. However, we will need substantial funds to broaden the commercial expansion of MelaFind^®, including development of a direct sales force and expansion of our contract manufacturing capacity. We also expect to continue to spend funds on research and development and product enhancements. Our business or operations may change in a manner that would consume available resources more rapidly than we anticipate. The amount of funding we will need will depend on many factors, including:

Additional financing may not be available to us when we need it, or it may not be available on favorable terms. 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 also may have to reduce marketing, customer support and other resources devoted to our products. 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, or that may require us to grant a security interest in our assets. 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.

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.


MELA SCIENCES, INC.

By:		/s/ Richard I. Steinhart
		Richard I. Steinhart
		Senior Vice President and Chief Financial Officer (Principal Accounting and Financial Officer)


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

50 South Buckhout Street, Suite 1 Irvington, New York		10533
(Address of Principal Executive offices)		(Zip Code)


	Page
PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

Condensed Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011		2

Condensed Statements of Operations (unaudited) for the three month periods ended March 31, 2012 and 2011		3

Condensed Statements of Cash Flows (unaudited) for the three month periods ended March 31, 2012 and 2011		4

Notes to Condensed Financial Statements (unaudited)		5

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk		20

ITEM 4. Controls and Procedures		20

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings		21

ITEM 1A. Risk Factors		22

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds		23

ITEM 3. Defaults Upon Senior Securities		23

ITEM 4. Mine Safety Disclosures		23

ITEM 5. Other Information		23

ITEM 6. Exhibits		24

SIGNATURES		25

EXHIBIT INDEX


	March 31, 2012			December 31, 2011
	(unaudited)			*
ASSETS
Current Assets:
Cash and cash equivalents	$	22,301,266		$	27,996,871
Accounts receivable		12,078			—
Inventory		400,363			—
Prepaid expenses and other current assets		816,206			1,061,550

Total Current Assets		23,529,913			29,058,421
Property and equipment, net		2,411,815			1,626,791
Patents and trademarks, net		56,233			59,208
Deferred financing costs		62,391			62,391
Other assets		64,484			586,498

Total Assets	$	26,124,836		$	31,393,309

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable (includes related parties of $49,750 and $36,027 as of March 31, 2012 and December 31, 2011, respectively)	$	940,117		$	670,950
Accrued expenses		551,978			745,754
Deferred placement revenue		17,250			—
Other current liabilities		44,880			30,993

Total Current Liabilities		1,554,225			1,447,697

Long Term Liabilities:
Deferred rent		139,605			138,216

Total Long Term Liabilities		139,605			138,216

Total Liabilities		1,693,830			1,585,913

COMMITMENTS, CONTINGENCIES and LITIGATION (Note 8)
Stockholders’ Equity
Preferred stock — $.10 par value; authorized 10,000,000 shares; issued and outstanding: none
Common stock — $.001 par value; authorized 45,000,000 shares; issued and outstanding 30,332,217 shares at March 31, 2012 and 30,307,538 at December 31, 2011		30,332			30,308
Additional paid-in capital		149,681,035			149,304,424
Accumulated deficit		(125,280,361	)		(119,527,336	)

Stockholders’ Equity		24,431,006			29,807,396

Total Liabilities and Stockholders’ Equity	$	26,124,836		$	31,393,309


	Three months ended March 31,
	2012			2011
Revenue	$	11,250		$	—
Cost of revenue		130,410			—

Gross profit		(119,160	)		—
Operating expenses:
Research and development		2,434,758			2,576,128
General and administrative		3,217,491			2,393,120

Operating loss		(5,771,409	)		(4,969,248	)
Interest income		13,384			20,531
Other income, net		5,000			6,648

Net loss	$	(5,753,025	)	$	(4,942,069	)

Basic and diluted net loss per common share	$	(0.19	)	$	(0.20	)

Basic and diluted weighted average number of common shares outstanding		30,313,905			25,262,538

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company


	March 31,
	2012		2011
Common stock options		2,079,306		2,142,879
Warrants		546,781		546,781

Total		2,626,087		2,689,660


	For the Three Months Ended March 31, 2012	For the Three Months Ended March 31, 2011
Expected life	6.5 years	6.5 years
Expected volatility	79.68%	76.32%
Risk-free interest rate	1.40-1.51%	2.72-2.92%
Dividend yield	0%	0%


	Number of Shares			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term in Years		Aggregate Intrinsic Value
Outstanding at December 31, 2011		2,057,104		$	4.35		6.6
Granted		140,000			3.72		—
Exercised		(53,123	)		3.17		—
Forfeited or expired		(64,675	)		7.06		—

Outstanding at March 31, 2012		2,079,306		$	4.25		6.8	$	1,587

Vested and exercisable at March 31, 2012		1,563,106		$	4.05		6.3	$	1,263


Range of Exercise Prices	Number Outstanding		Options Outstanding Weighted- Average Remaining Contractual Life		Weighted Average Exercise Price		Options Exercisable
							Number Exercisable		Weighted- Average Exercise Price



$.01-$1.00		43,329		0.8 years	$	1.00		43,329	$	1.00
$1.01-$4.50		1,633,002		7.3 years	$	3.60		1,343,652	$	3.65
$4.51-$11.11		402,975		5.3 years	$	7.24		176,125	$	7.84

$.01-$11.11		2,079,306		6.8 years	$	4.25		1,563,106	$	4.05


Year ended December 31,
2012 Remaining nine months		322
2013		461
2014		478
2015		478
2016		478

	$	2,217


	Issued 2007		Issued 2009		Total
Outstanding at December 31, 2011		346,781		200,000		546,781

Outstanding at March 31, 2012		346,781		200,000		546,781


	Total		Less than 1 year		1-3 years		4-5 years
Operating leases	$	2,217	$	437	$	943	$	837


Exhibit Number		Exhibit Title

10.1#		Production Agreement, dated as of January 6, 2012, by and between MELA Sciences, Inc and Askion GmbH.*

10.2#		Service Agreement, dated March 21, 2012, by and between MELA Sciences, Inc. and QUINTILES Commercial Germany GmbH.

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.

101.1#		Interactive Data File

#		Filed herewith

*		Portions of this exhibit have been omitted pursuant to a request for confidential treatment.


Exhibit No.		Description

10.1		Production Agreement, dated as of January 6, 2012, by and between MELA Sciences, Inc and Askion GmbH.*

10.2		Service Agreement, dated March 21, 2012, by and between MELA Sciences, Inc. and QUINTILES Commercial Germany GmbH.

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.

101.1		Interactive Data File

*		Portions of this exhibit have been omitted pursuant to a request for confidential treatment.