Our contract manufacturers are required to have current ISO 13485 certification status and manufacture our products in compliance with current Good Manufacturing Practices (“cGMP”) as set forth in the FDA QSR. The QSR requires a quality system for the design, manufacture, packaging, labeling, storage, installation and servicing of marketed devices, and includes extensive requirements with respect to quality management and organization, device design, equipment, purchase and handling of components, production and process controls, packaging and labeling controls, device evaluation, distribution, installation, complaint handling, servicing, and record keeping. The FDA enforces the QSR through periodic unannounced inspections that may include the manufacturing facilities of our subcontractors. We expect that our subcontractors’ manufacturing facilities will be subject to domestic and international regulatory inspection and review. If the FDA believes any of our contract manufacturers or regulated suppliers are not in compliance with these requirements, it can shut down the manufacturing operations of our contract manufacturers, require recall of our products, refuse to approve new marketing applications, institute legal proceedings to detain or seize products, enjoin future violations, or assess civil and criminal penalties against us or our officers or other employees. Any such action by the FDA would have a material adverse effect on our business. We cannot assure you that we will be able to comply with all applicable FDA regulations.

Non-FDA Government Regulation

The advertising of ourthe MelaFind^® product system is subject to both FDA and Federal Trade Commission regulations.regulations in the U.S. In addition, the sale and marketing of MelaFind^® is subject to a complex system of federal and state laws and regulations intended to deter, detect, and respond to fraud and abuse in the healthcare system. These laws and regulations restrict and may prohibit pricing, discounting, commissions and other commercial practices that may be typical outside of the healthcare business. In particular, anti-kickback and self-referral laws and regulations will limit our flexibility in crafting promotional programs and other financial arrangements in connection with the sale of our products and related services, especially with respect to physicians seeking reimbursement through Medicare or Medicaid. These federal laws include, by way of example, the following:

Sanctions for violating these federal laws include criminal and civil penalties that range from punitive sanctions, damage assessments, money penalties, and imprisonment, denial of Medicare and Medicaid payments, or exclusion from the Medicare and Medicaid programs, or both. These laws also impose an affirmative duty on those receiving Medicare or Medicaid funding to ensure that they do not employ or contract with persons excluded from the Medicare and other government programs.

Many states have adopted or are considering legislative proposals similar to the federal fraud and abuse laws, some of which extend beyond the Medicare and Medicaid programs to prohibit the payment or receipt of remuneration for the referral of patients and physician self-referrals regardless of whether the service was reimbursed by Medicare or Medicaid. Many states have also adopted or are considering legislative proposals to increase patient protections, such as limiting the use and disclosure of patient-specific health information. These state laws typically impose criminal and civil penalties similar to the federal laws.

In the ordinary course of their business, medical device manufacturers and suppliers have been and are subject regularly to inquiries, investigations and audits by federal and state agencies that oversee these laws and regulations. Federal and state legislation has increased funding for investigations and enforcement actions, which have increased dramatically over the past several years. This trend is expected to continue. Private enforcement of healthcare fraud also has increased, due in large part to amendments to the Civil False Claims Act in 1986 that were designed to encourage private persons to sue on behalf of the government. These whistleblower suits by private persons, known asqui tamrelaters, may be filed by almost anyone, including physicians and their employees and patients, our employees, and even competitors. The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), in addition to its privacy provisions, created a series of new healthcare-related crimes.

Environmental Regulation

Our research and development and clinical processes involve the handling of potentially harmful biological materials as well as hazardous materials. We and our investigators and vendors are subject to federal, state and local laws and regulations governing the use, handling, storage and disposal of hazardous and biological materials and we incur expenses relating to compliance with these laws and regulations. If violations of environmental, health and safety laws occur, we could be held liable for damages, penalties and costs of remedial actions. These expenses or this liability could have a significant negative impact on our financial condition. We may violate environmental, health and safety laws in the future as a result of human error, equipment failure or other causes. Environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations. We are subject to potentially conflicting and changing regulatory agendas of political, business and environmental groups. Changes to or restrictions on permitting requirements or processes, hazardous or biological material storage or handling might require an unplanned capital investment or relocation. Failure to comply with new or existing laws or regulations could harm our business, financial condition and results of operations.

International Regulation

The medical device regulatory process for international distribution is subject to government regulations that may vary by country from those having few or no regulations to those having pre-market controls and pre-market acceptance. In the EU, medical devices require CE Mark in order to be placed in the market. The CE Mark certifies that a product has met EU consumer safety, health and environmental requirements. CE marking requires meeting the conditions of the European Directive to which the medical device applies. The directives regulate the design, manufacture, clinical trials, labeling, and post-market surveillance reporting activities for medical devices.

The Company

We successfully achieved the ISO 13485 certification for the design and development of medical devices through itsour international registrar, BSI. In September 2011, after review and approval of the MelaFind^® technical file, the Companywe received CE Mark approval for MelaFind^® also through BSI.

Product Liability and Insurance

Our business exposes us to the risk of product liability claims that is inherent in the testing, manufacturing and marketing of medical devices, including those which may arise from the misuse or malfunction of, or design flaws in, our products. We may be subject to product liability claims if MelaFind^® causes, or merely appears to have caused, an injury. Claims may be made by patients, healthcare providers or others involved with MelaFind^®.MelaFind. We have both general liability insurance and product liability insurance for MelaFind,^®, which is and will be subject to deductibles and coverage limitations. We have also obtained clinical trial liability insurance in the U.S. and in certain European countries where required by statute or clinical site policy. Our future product liability insurance needs may not be available to us in amounts andor on acceptable terms, if at all, and, if available, the coverage may not be adequate to protect us against any future product liability claims. If we are unable to obtain insurance at an acceptable cost or on acceptable terms with adequate coverage or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which may harm our business.

Employees

As of December 31, 2013,2014, we had 4532 full-time and 52 part-time employees in the United States, of whom 154 were engaged in research and development, 1213 in productionoperations (including clinical, regulatory affairs, document control and quality assurance) and 2317 in marketing, sales and administrative activities.

Other

Other

We were incorporated in the State of New York in 1989 under the name Electro-Optical Sciences, Inc. and subsequently reincorporated under the laws of the State of Delaware in 1997. In April 2010, we changed our name to MELA Sciences, Inc. Our executive offices are located at 50 South Buckhout Street, Suite 1, Irvington, New York 10533. Our telephone number is (914) 591-3783 and our Internet address iswww.melasciences.com.

Our annual report on Form 10-K, quarterly reports on Forms 10-Q, current reports on Forms 8-K, and amendments to those reports are available, without charge, on our websitewww.melasciences.com as soon as reasonably practical after they are filed electronically with the Securities and Exchange Commission.Commission (the “SEC”). Copies are also available, without charge, from MELA Sciences, Inc., 50 South Buckhout Street, Suite 1, Irvington, New York, 10533, Attention: Secretary.

You should carefully consider the following risk factors, as well as the other information contained in this report. If any of the following risks actually occur, our business, financial condition and results of operations would likely suffer. In that case, the trading price of our common stock would likely decline.

Risks Relating to Our Business

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, development and development relating tocommercialization of the MelaFind^®. system. Our net loss for the year ended December 31, 20132014 was approximately $25.9$14.1 million and as of December 31, 2013,2014, we had an accumulated deficit of approximately $168.1$182.3 million. OurWe will continue to incur expenses will increase in connection with our continued commercialization and development activities related to MelaFind^®. Having commenced commercialization in March 2012, weMelaFind. We expect to incur additional medical, marketing and sales expenses, in the near future and to incurplus additional contract manufacturing and inventory expenses incosts over the futurenext several years which will require additional funding. Furthermore, having recently commenced a refocused marketing strategy focusing on key institutions, opinion leaders and dermatologists who treat many of the patients at high risk for melanoma, we expect to incur additional expenses continuing to transition our operations and implementing our refocused marketing strategy. As a result, we expect to continue to incur significant and increasing operating losses for the foreseeable future andWe cannot determine at this time when we will generate any significant revenues. Theserevenue. Our losses, among other things, have had and will continue to have an adverse effect on our stockholders^’stockholders’ equity.

Our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern.

The report of our independent auditors dated March 17, 201430, 2015, on our financial statements for the period ended December 31, 2013,2014, included an explanatory paragraph indicating that there is substantial doubt about our ability to continue as a going concern. Our auditors’ doubts are based on our inability to establish an ongoing source of revenue sufficient to cover our operating costs and recurring losses from operations. Our ability to continue as a going concern will be determined by our ability to generate sufficient cash flow to sustain our operations and/or raise additional capital in the form of debt or equity financing. Our financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

We may acquire other assets or businesses, or form collaborations or make investments in other companies or technologies that could harm our operating results, dilute our stockholders’ ownership, increase our debt or cause us to incur significant expense.

As part of our business strategy, we may pursue acquisitions of assets, including preclinical, clinical or commercial stage products or product candidates, or businesses, or strategic alliances and collaborations, to expand our existing technologies and operations. We may not identify or complete these transactions in a timely manner, on a cost-effective basis, or at all, and we may not realize the anticipated benefits of any such transaction, any of which could have a detrimental effect on our financial condition, results of operations and cash flows. We have no experience with acquiring other companies, products or product candidates, and limited experience with forming strategic alliances and collaborations. We may not be able to find suitable acquisition candidates, and if we make any acquisitions, we may not be able to integrate these acquisitions successfully into our existing business and we may incur additional debt or assume unknown or contingent liabilities in connection therewith. Integration of an acquired company or assets may also disrupt ongoing operations, require the hiring of additional personnel and the implementation of additional internal systems and infrastructure, especially the acquisition of commercial assets, and require management resources that would otherwise focus on developing our existing business. We may not be able to find suitable strategic alliances or collaboration partners or identify other investment opportunities, and we may experience losses related to any such investments.

To finance any acquisitions or collaborations, we may choose to issue debt or equity securities as consideration. Any such issuance of shares would dilute the ownership of our stockholders. If the price of our common stock is low or volatile, we may not be able to acquire other assets or companies or fund a transaction using our stock as consideration. Alternatively, it may be necessary for us to raise additional funds for acquisitions through public or private financings. Additional funds may not be available on terms that are favorable to us, or at all.

We may not be able to successfully integrate newly acquired businesses, joint ventures and other partnerships into our operations or achieve expected profitability from our acquisitions.

If we cannot successfully integrate acquisitions, joint ventures and other partnerships on a timely basis, we may be unable to generate sufficient revenue to offset acquisition costs, we may incur costs in excess of what we anticipate, and our expectations of future results of operations, including certain cost savings and synergies, may not be achieved. Acquisitions involve substantial risks, including:

In addition, if we finance acquisitions by issuing equity securities or securities convertible into equity securities, our existing stockholders’ interests would be diluted, which, in turn, could adversely impact the market price of our stock. Moreover, we could finance an acquisition with debt, resulting in higher leverage and interest costs.

We may be unable to continue commercialization and continue development of MelaFind^®enhancements or other products without additional funding.

As of December 31, 2013,2014, we had approximately $3.8$11.4 million in cash and cash equivalents and cash used in operations for the year ended December 31, 20132014 was approximately $19.4$17.7 million. Our total liabilities at December 31, 20132014 were approximately $5.8$7.8 million. We expect to incur significant losses for the foreseeable future and may not achieve operating profits or positive cash flows from operations. Furthermore, under the terms of our recently completed financing of our Series A Convertible Preferred Stock, we are prohibited from selling any shares of our common stock or securities convertible into shares of common stock until the later of July 31, 2014 or 2 months after the re-sale registration statement we are required to file in connection with this offering is declared effective by the SEC. The Company’sOur ability to fund its operations is not assured and will be impacted by market acceptance of MelaFind,^®, cost cutting measures that are in place currently or may be put into place in the future and our ability to raise capital. We anticipate that long-term we will need to raise additional funds to broaden the commercialization and awareness of MelaFind,^®, including implementing our refocused marketing strategy focusing on the key institutions, opinion leaders and dermatologists who

treat many of the patients at high risk for melanoma. The timing and amount of any additional funding the Companywe may require will be affected by the commercial success of itsour MelaFind^® product. The amount of funding we will need will depend on many factors, including:

There can be no assurances that we 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 we do obtain will be sufficient to meet the Company^’sour needs in the long term. Any additional funding that we 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 we are unable to achieve profitable operations and/or raise additional funds, we would need to further reduce current operations, and expansion plans would be cancelled or ultimately we may need to terminate operations. Failure to fund our operations will have a material adverse effect on our business and our stock price.

We may have to pay liquidated damages of $3.9 million to the investors in our recent financing of Series A Convertible Preferred Stock.

In February 2014, we sold an aggregate of 12,300 shares of our Series A Convertible Preferred Stock, par value $0.10 and a stated value of $1,000 per share (the “Series A Preferred Stock”), convertible into 14,642,857 shares of our common stock at an initial conversion price of $0.84, and warrants to purchase up to 13,297,297 shares of our common stock for aggregate gross proceeds of $12.3 million to three institutional investors (the “Purchasers”). In connection with this financing, we granted to the Purchasers resale registration rights with respect to the shares of common stock underlying the Series A Preferred Stock and the warrants pursuant to the terms of a Registration Rights Agreement. In addition to the registration rights, the Purchasers are entitled to receive liquidated damages upon the occurrence of a number of events relating to filing, getting effective and maintaining an effective registration statement covering the shares underlying the Series A Preferred Stock and the warrants, including the failure of the Company to file a resale registration statement by no later than February 25, 2014 and the failure of the Company to have such resale registration statement declared effective by the Securities and Exchange Commission by no later than March 7, 2014. The liquated damages will be payable upon the occurrence of each of those events and each monthly anniversary thereof until cured. The amount of liquated damages payable is equal to 10% of the aggregate purchase price paid by each Purchaser for the first two events (and/or the monthly anniversary of an event), 7.5% of the aggregate purchase price paid by each Purchaser for the third event (and/or the monthly anniversary of an event), 2.5% of the aggregate purchase price paid by each Purchaser for the fourth event (and/or the monthly anniversary of an event), and 1% of the aggregate purchase price paid by each Purchaser for the next two events (and/or the monthly anniversary of an event), in all up to a total of 32% of the aggregate purchase price paid by each Purchaser. The liquidated damages are prorated on a daily basis for each event until such event is cured. We have already paid liquidated damages to the Purchasers in the amount of $2.5 million and may have to pay additional $1.4 million liquidated damages to the Purchasers.

MelaFind^® may not be widely accepted by the dermatological community.

The success of MelaFind^® will depend upon the level of acceptance by dermatologists who perform skin examinations and treat patients who are at high risk for melanoma and that the evaluation information provided by MelaFind^® is medically useful and reliable. We will be subject to intense scrutiny before physicians will be comfortable incorporating MelaFind^® in their diagnostic approaches. We believe that recommendations by respected physicians will be essential for the development and successful marketing of MelaFind^®;MelaFind; however, there can be no assurance that a significant number of such recommendations will be obtained. To date, the medical community outside of our customer base has had little exposure to us and MelaFind^®.MelaFind. The medical community is often skeptical of new companies and new technologies, thus, we may be unable to gain access to potential customers in order to demonstrate the operation and effectiveness of MelaFind^®.MelaFind. Even if we gain access to potential customers, no assurance can be given that members of the dermatological medical community will perceive a need for or accept MelaFind^®.MelaFind. This challenge is not new to the diagnostic device industry as many devices suffer the same initial market reluctance, as integrating new diagnostic tools present a challenge of adaptionadoption that many physicians are not active in overcoming. As such, physicians who are trained to trust their clinical diagnostic accuracy may not see the need to add diagnostic tools to their already established clinical management process. Any of the foregoing factors, or other currently unforeseen factors, could limit or detract from market acceptance of MelaFind^® by the dermatological community. Insufficient market acceptance of MelaFind^® would have a material adverse effect on our business, financial condition and results of operations.

MelaFind^® may not achieve general market acceptance at a level that will make us profitable.

Our future growth and profitability will depend, in large part, on the success of our refocused marketing strategy to focus on the key dermatologists who treat many of the patients at high risk for melanoma and reaching out to key opinion leaders in the field, while continuing to provide clinical studies and evidence to support reimbursement for the use of MelaFind^® among physicians, government and third party payers, and regulators.

Physicians tend to be slow to change their diagnostic and medical treatment practices because of perceived liability risks arising from the use of new products and the uncertainty of third party reimbursement. Physicians may not begin to use MelaFind^® until there is long-term clinical evidence to convince them to alter their existing methods of diagnosing or evaluating clinically atypical lesions. We cannot predict the speed at which physicians may adopt the use of MelaFind^®.MelaFind.

The degree of market acceptance of MelaFind^®MelaFind® will depend on a number of factors, including:

If MelaFind^® does not achieve an adequate level of acceptance by patients, physicians, healthcare payers and regulators, we may not generate significant product revenue and we may not become profitable.

We are required to conduct a Post-Approval Study of MelaFind^®.MelaFind. If the results from this study are negative or we fail to meet the requirements of this condition of approval, we may not be able to maintain the approval of MelaFind^®.MelaFind.

As a condition of approval of our PMA, we must conduct a Post-Approval StudyPAS evaluating the sensitivity and false positive rate of physicians after using MelaFind^® to their performance if MelaFind^® was not available. Conducting this Post-Approval StudyPAS is costly and time consuming.

We are required to submit to the FDA progress reports on this study every six months during the first two years and annually thereafter. The first progress report was submitted to the FDA in February 2013 the second was submitted on August 8, 2013 and the third report was submitted onmost recent in February 8, 2014.2015. If the FDA has questions on the data provided in a progress report, or believes the data are incomplete or insufficient, the agency may request additional information, including through a deficiency letter. For example, on March 4, 2013 and October 17, 2013, we received a letter from the FDA sent a letter stating that the information in our August 2013 progress report with respect to the PAS was inadequate to allow the agency to complete its review and thereforereview. The FDA requested additional information, particularly with respect to the FDA asked for additional information. Westudy’s enrollment rate. In November 2013, we responded to the March 4, 2013FDA’s letter, on March 22, 2013outlining an updated enrollment plan as well as a new enrollment schedule, and in January 2014 the FDA approved both the enrollment plan and the October 17, 2013 letter on November 15, 2013. We placednew enrollment schedule. In February 2014, a protocol revision request was sent to the FDA in an attempt to add clarity for study on hold on September 9, 2013 to investigate enrollment issues and makeinvestigators. The protocol clarifications. An interactive review process was initiatedrevisions were approved by the FDA on January 2, 2014, requesting additional information beyond our October 17, 2013 response letter to22, 2014. The PAS is currently enrolling patients and is listed as “progress adequate” with the FDA. The FDA may seek the advice of advisory panels of outside experts when considering the initiation or progress of post-approval studies. If we have not met the study milestones or timeline specified in the study protocol, we must provide a rationale to the FDA in our progress reports. If a change in the study milestones or timeline could significantly affect the outcome of the Post-Approval Study, we will need to submit that revision for the agency^’sagency’s review and approval. We will need to update MelaFind^®’sMelaFind’s labeling with the results from this study, including any positive or negative results.

We may be unable to complete our Post-Approval Study if, for example, we institute a recall of MelaFind^® from the market. The FDA can terminate our study if we have not fulfilled or cannot fulfill the Post-Approval Study condition of approval; for example, if MelaFind^® is not being sold because the device technology is obsolete, study questions are no longer relevant, we withdraw the PMA, or the study cannot answer the Post-Approval Study question. If the FDA determines the study cannot be completed as designed or because of study data inadequacies, but the study objectives remain important, the FDA may terminate the original study and discuss establishing a new post-approval study commitment and schedule. In appropriate circumstances, the FDA may order additional post-market surveillance.

The FDA may initiate withdrawal of approval of the PMA if the agency concludes we have not met the Post-Approval Study condition of approval and have not provided a valid scientific justification for doing so. The FDA also may withdraw the approval of the PMA (1) based on negative results from the Post-Approval Study that indicate the device is unsafe or ineffective under the approved labeling or (2) if we fail to conduct the study in accordance with the FDA^’sFDA’s regulations, including those related to institutional review board and informed consent. If the PMA approval is withdrawn, we would be unable to continue marketing the device in the United States without violating the Federal Food, Drug, and Cosmetic Act. The sites involved in our Post-Approval Study and we as sponsor of the study can be inspected by the FDA at any time to assess compliance with the Post-Approval Study agreement, protocol adherence, human subject protection, and data integrity.

The FDA posts information about the status of post-approval studies on its website. These website postings could undermine the credibility of the Company or MelaFind^®, or have other collateral effects. For example, the agency will identify the study status as^“Progress Inadequate^” if the study progress is inconsistent with the protocol, such as if the study is not meeting the enrollment schedule, if the study is missing timepoint evaluations, if there are poor follow-up rates, or if not all the endpoints are evaluated. Because of rate of accrual issues, the FDA^’s October 17, 2013 letter informed us that our study status was revised on the FDA^’s website to^“Progress Inadequate.^” On January 13, 2014, while closing our interactive review process, the FDA approved a study restart of January 2014 and informed us that the “Progress Inadequate” status would not be revised until the study hold is removed. Due to weather related delays affecting our protocol review meeting with the FDA, the study was restarted February 25, 2014 following an interactive preliminary protocol review with the agency. Our next report is due to the FDA in August 2014.

MelaFind^® may not be commercially viable if we fail to obtain an adequate level of reimbursement by Medicare, Medicaid and other third party payers.

The availability of medical insurance coverage and reimbursement for newly approved medical devices is uncertain. In the U.S., physicians and other healthcare providers performing biopsies for clinically atypical skin lesions are generally reimbursed for all or part of the cost of the diagnosis and biopsy by Medicare, Medicaid, or other third party payers. Commercial success of MelaFind^® and our financial condition will depend on whether third-party coverage and reimbursement are available for services involving MelaFind^®.MelaFind.

In the U.S., Medicare, Medicaid, health maintenance organizations and other third-party payers are increasingly attempting to contain healthcare costs by limiting both the scope of coverage and the level of reimbursement of new medical devices, and as a result, they may not cover or provide adequate payment for the use of MelaFind^®.MelaFind. In order to obtain satisfactory reimbursement arrangements, we may have to agree to a fee or sales price lower than the fee or sales price we might otherwise charge. Even if Medicare and other third-party payers decide to cover procedures involving our product, we cannot be certain that the reimbursement levels will be adequate. Accordingly, unless government and other third-party payers provide adequate coverage and reimbursement for our products, some physicians may be discouraged from using them, and our sales would suffer.

Medicare reimburses for medical devices in a variety of ways, depending on where and how the device is used. However, Medicare only provides reimbursement if the Centers for Medicare & Medicaid Services, the federal agency that administers Medicare (“CMS”), determines that the device should be covered and that the use of the device is consistent with the coverage criteria. A coverage determination can be made at the local level by the Medicare administrative contractor, a private contractor that processes and pays claims on behalf of CMS for the geographic area where the services were rendered, or at the national level by CMS through a national coverage determination. There are statutory provisions intended to facilitate coverage determinations for new technologies. Coverage presupposes that the device has been cleared or approved by the FDA and further, that the coverage will be no broader than the approved intended uses of the device as approved or cleared by the FDA, but coverage can be narrower. A coverage determination may be so limited that relatively few patients will qualify for a covered use of the device. Should a very narrow coverage determination be made for MelaFind^®MelaFind®, it may undermine the commercial viability of MelaFind^®.MelaFind.

Germany is the only country in the world with a national skin screening program. Based on this program, public insurance (90% of the population) covers a visual examination only conducted by a General Practitioner or dermatologists — they do not yet cover imaging technologies/diagnostics devices. For coverage of imaging technologies/diagnostic devices, patients must be privately insured, have supplemental insurance or pay out-of-pocket. Private insurance (10% of the population) and/or supplemental insurance coverage reimbursement varies by policy, but ranges from $65 to $195 for imaging technologies. We cannot be certain that all private German insurers will reimburse usthe use of MelaFind or that the reimbursement we do obtain will be adequate for us to maintainsupport our business in Germany.

Obtaining a coverage determination by Medicare or Medicaid is a time-consuming, expensive and highly uncertain proposition.

Obtaining a coverage determination, whether local or national, is a time-consuming, expensive and highly uncertain proposition, especially for a new technology, and inconsistent local determinations are possible. On average, according to an industry report, Medicare coverage determinations for medical devices lag 15 months to five years or more behind FDA approval for that device. The Medicare statutory framework is also subject to administrative rulings, interpretations and discretion that affect the amount and timing of reimbursement made under Medicare. Medicaid coverage determinations and reimbursement levels are determined on a state by state basis, because Medicaid, unlike Medicare, is administered by the states under a state plan filed with the Secretary of the U.S. Department of Health and Human Services (“HHS”). Medicaid generally reimburses at lower levels than Medicare. Moreover, Medicaid programs and private insurers are frequently influenced by Medicare coverage determinations. The length of time it takes for us to obtain a coverage determination may affect the ability of MelaFind^®MelaFind® to become commercially viable.

Even if MelaFind^® is approved for reimbursement by Medicare, Medicaid and/or other third party payers, we anticipate there will be significant pressures on pricing.

We expect to experience pricing pressures in connection with the commercialization of MelaFind^® due to efforts by private and government-funded payers to reduce or limit the growth of healthcare costs, the increasing influence of health maintenance organizations, and additional legislative proposals to reduce or limit increases in public funding for healthcare services. Private payers, including managed care payers, increasingly are demanding discounted fee structures and the assumption by healthcare providers of all or a portion of the financial risk. Efforts to impose greater discounts and more stringent cost controls upon healthcare providers by private and public payers are expected to continue. Payers frequently review their coverage policies for existing and new diagnostic tools and can, sometimes without advance notice, deny or change their coverage policies. Significant limits on the scope of services covered or on reimbursement rates and fees on those services that are covered could have a material adverse effect on our ability to successfully commercialize MelaFind^® and therefore, on our liquidity, margins and our business, financial condition, and results of operations.

We depend on clinical investigators and clinical sites and other third parties to manage our clinical trials and to perform related data collection and analysis, and, as a result, we may face costs and delays that are outside of our control.

We have and will continue to rely on clinical investigators and clinical sites, some of which are private practices, and some of which are research, university or government affiliated, to enroll patients in any future clinical trials which we may conduct, as well as our FDA mandated post-approval studies. We have and will continue to rely on: pathologists and pathology laboratories; a contract research organization to assist in monitoring, collecting data, and ensuring FDA Good Clinical Practices (“GCP”) are observed at our sites; a consultant biostatistician; and other third parties to manage trials and to perform related data collection and analysis. However, we may not be able to control the amount and timing of resources that clinical sites and other third parties devote to our clinical trials or studies. Our agreements with clinical investigators and clinical sites for clinical testing generally place substantial responsibilities on these parties and, if these parties fail to perform as expected, our trials or studies could be delayed or terminated. If these clinical investigators, clinical sites or other third parties do not carry out their contractual duties or obligations or fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain are compromised due to their failure to adhere to our clinical

protocols or for other reasons, our clinical trials or studies may be extended, delayed or terminated, and we may be unable to complete our studies or obtain regulatory approval for any other products which may be developed from our core technology. If these clinical investigators and clinical sites fail to enroll a sufficient number of patients in our clinical trials or studies, or if the clinical sites fail to comply adequately with the clinical protocols, we will be unable to complete any such trials or studies, which could prevent us from obtaining regulatory approvals for the products being developed.

In addition to the foregoing, any future clinical trials may be delayed or halted for numerous other reasons, including, but not limited to, the following:

Technological breakthroughs in the diagnosis or treatment of melanoma could render MelaFind^® obsolete.

The precision optical imaging field is subject to rapid technological change and product innovation. MelaFind^® is based on our proprietary technology, but a number of companies and medical researchers are pursuing new technologies such as confocal microscopy, an approach for non-invasive visualization of skin structures at the cellular level; and confocal Raman Micro-Spectroscopy which uses a reflective laser to produce a molecular fingerprint of the underlying tissue to indicate the presence or absence of disease. Other imaging modalities being developed include molecular imaging, in which tagged antibodies search for cancer cell antigens.

Also being developed is an electrical impedance technology for melanoma detection. The method is based on a technology that uses the varying electrical properties of human tissue to categorize the cell structures and thereby detect malignancies. Furthermore, several additional light based imaging approaches have recently been identified, including:

The commercial development, market acceptance and reimbursement approval of any of these new technologies could result in a technological breakthrough in the diagnosis and/or treatment of melanoma, which could render MelaFind^® less accepted or obsolete.

We operate in a highly competitive market, we may face competition from large, well-established medical device manufacturers with significant resources, and we may not be able to compete effectively.

While several companies including Verisante, Scibase and Caliber Imaging and Diagnostic, Inc. (formerly Lucid, Inc.) have technologies that may be used to assist the dermatologist, none of these companies^’companies’ products have undergone the rigors of FDA PMA review and subsequent approval. We believe that otherOther products that enhance the visualization and analysis of potential melanomas have been approvedare in use or are under development by: Welch Allyn, Inc.; Heine Optotechnik; 3Gen, LLC; Derma Medical Systems, Inc.; MedX Health; Biomips Engineering, Michelson Diagnostics, Riester, ViseoMed, AG and others. In addition, several companies have developed various dermatological apps for use with an Apple iPhone. The broader market for precision optical imaging devices used for medical diagnosis is intensely competitive, subject to rapid change, and significantly affected by new product introductions and other market activities of industry participants. We will potentially be subject to competition from major optical imaging companies, such as: Raytheon Corporation, General Electric Co.; Siemens AG; Bayer AG; Olympus Corporation; Carl Zeiss AG Deutschland; and others, each of which manufactures and markets precision optical imaging products for the medical market, and could decide to develop or acquire a product to compete with MelaFind^®.MelaFind. These companies enjoy numerous competitive advantages, including:

As a result, we may not be able to compete effectively against these companies or their products.

If we are unable to successfully implement our refocused marketing strategy, our business may be harmed.

We have a limited sales organization, and have limited experience in the marketing and distribution of MelaFind^® or similar devices. To achieve commercial success for MelaFind,^®, we must provide data to those operating in the dermatological industry to support their use of MelaFind,^®, continue to conduct clinical studies, produce abstracts and publications and eventually achieve public and private insurance reimbursement for MelaFind^®.MelaFind. We believe that it is critically important to build brand and product awareness and confidence on the use and potential use of our product. We plan to focus on key thought leaders in key institutions to provide the market with up-to-date data on MelaFind^® and those dermatologists that treat high risk patients. We have established a small direct sales force to market MelaFind^® in the U.S. and Europe (initially in Germany), focused on introducing it to our intended market, including dermatologists who treat patients at high risk for melanoma and training their staffs in its use. We anticipate that we will need additional funds in order to fully implement our refocused marketing strategy.

We are dependent upon the capability of contract manufacturers to produce our units, which can be out of our control.

We have limited experience in manufacturing MelaFind^® for commercial distribution and are using a contract manufacturer to produce our units. When we enter into contracts for the third-party manufacture of our devices, the quality of the devices will depend on the skills and efforts of others, and we do not know whether these efforts will be successful. Manufacturers often encounter difficulties in scaling up production of new products, including problems involving product yields, controlling and anticipating product costs, quality control and assurance, component supply, and shortages of qualified personnel. We cannot assure you that the third-party contract manufacturers with whom we have developed or are developing relationships will have or sustain the ability to produce the quantities of MelaFind^® needed for development or commercial sales at prices that allow MelaFind^® to compete successfully in the market.

Our manufacturing operations for MelaFind^® are dependent upon third-party suppliers, making us vulnerable to supply problems and price fluctuations, which could harm our business.

For manufacturing MelaFind,^®, we rely on several vendors for critical components and materials such as: ON Semi, Carl Zeiss Jena GmbH (“Zeiss”), AB Electronics, AmeriCad and Canvys Electronics. Additionally, we are currently working with

ASKION Askion in Germany for the provision of the hand-held components and tested MelaFind^® systems. We are utilizing Nexcore Technology Inc., an FDA regulated and ISO certified contract manufacturer of medical devices in New Jersey, to provide the assembled MelaFind^® carts and tested MelaFind^® systems.

There can be no assurance that these third parties will meet their obligations. Each of these suppliers is a sole-source supplier. Our contract suppliers alsomay rely on sole-source suppliers to manufacture some of the components used in our products. Our manufacturers and suppliers may encounter problems during manufacturing due to a variety of reasons, including failure to procure their raw material on time, failure to follow specific protocols and procedures, failure to comply with applicable regulations, equipment malfunction and environmental factors, any of which could delay or impede their ability to meet our demand. Our reliance on these outside manufacturers and suppliers also subjects us to other risks that could harm our business, including:

We have entered into an agreement with ASKIONAskion to continue developmental engineering, production and testing of our hand-held component, and to also assemble and test the integrated finished MelaFind^® system, including the cart, for units to be sold within the European Union. Failure to maintain such an agreement with ASKIONAskion on mutually acceptable terms would require us to find other contract manufacturing facilities.

MelaFind^® is complex and may contain undetected design defects and errors, which could have a material adverse impact on our business, financial condition and results of operations.

MelaFind^® is complex and may contain undetected design defects and errors when first introduced, or errors that may be introduced when enhancements are released. Such defects and errors may occur despite our testing, and may not be discovered until after our devices have been shipped to and used by our customers. The existence of these defects and errors could result in costly repairs, returns of devices, diversion of development resources and damage to our reputation in the marketplace. In addition, when we contract with third-party manufacturers for the production of our products, these manufacturers may inadvertently produce devices that vary from devices we have produced in unpredictable ways that cause adverse consequences. Any of these conditions could have a material adverse impact on our business, financial condition and results of operations.

We are subject to the risks of international trade, including possible import/export restrictions and fluctuations in foreign currency exchange rates.

Many significant components of the MelaFind^® system are manufactured by foreign suppliers and we also market MelaFind^® internationally. We may be subject to various import duties applicable to materials manufactured in foreign countries and, in addition, may be affected by various other import and export restrictions, as well as other considerations or developments impacting upon international trade, including economic or political instability, shipping delays and product quotas. These international trade factors

may have an adverse impact on the cost of components and the prices we can charge for the MelaFind^® system. To the extent that transactions relating to the purchase of components and materials or the sale of products involve currencies other than U.S. dollars, our operating results will be affected by fluctuations in foreign currency exchange rates.

We will not be able to sell MelaFind^® unless its design verification and validation are maintained in accordance with current good manufacturing practices as set forth in the U.S. medical device Quality System Regulation (^“QSR^”(“QSR”) and ISO 13485 certification.

Prior to the installation of the first commercial MelaFind^® system in March of 2012, we completed all the steps necessary to verify and validate the design of the MelaFind^® system that were required to be performed prior to commercialization. If we are unable to maintain design verification and validation successfully, we will not be able to sell MelaFind,^®, and we will not be able to meet our plans for the full commercialization of MelaFind^®.MelaFind. Later discovery of previously unknown problems with MelaFind,^®, including manufacturing problems, or failure to comply with regulatory requirements such as the FDA QSR and ISO 13485, may result in restrictions on MelaFind^® or its manufacturing processes, withdrawal of MelaFind^® from the market, patient or physician notification, voluntary or mandatory recalls, fines, withdrawal of regulatory approvals, refusal to approve pending applications or supplements to approved applications, refusal to permit the import or export of our products, product seizures, injunctions or the imposition of civil or criminal penalties. Should any of these enforcement actions occur, our business, financial condition and results of operations could be materially and adversely affected.

If we or our suppliers fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems with MelaFind,^®, it could be subject to restrictions or withdrawal from the market.

Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data and promotional activities for such product, will be subject to continuous review and periodic inspections by the FDA and other regulatory bodies, including Germany^’s Federal Institute for Drugs and Medical Devices. In particular, we and our suppliers are required to comply with the QSR, ISO 13485 and other U.S. and European regulations which cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage, promotion, distribution, and shipping of MelaFind^®.MelaFind. We also will be subject to ongoing U.S. and foreign regulatory requirements, including required submissions of safety and other post-market information and reports and registration and listing requirements. Furthermore, our third-party contract manufacturers will be required to adhere to current cGMP requirements enforced by the FDA as part of QSR, or similar regulations required by regulatory agencies in other countries. The manufacturing facilities of our contract manufacturers must be in full compliance with cGMP requirements. The FDA enforces the QSR and other regulatory requirements through unannounced inspections.

If we are found to be deficient in cGMP or QSR (or any applicable foreign rules and regulations), we could be subject to regulatory action of a type described below, which could negatively affect our ability to successfully commercialize MelaFind^®.MelaFind. There can be no assurance that the future interpretations of legal requirements made by the FDA or other U.S. or foreign regulatory bodies with possible retroactive effect, or the adoption of new requirements or policies, will not adversely affect us. We may be slow to adapt, or may not be able to adapt, to these changes or new requirements. Failure by us or one of our suppliers to comply with statutes and regulations administered by the FDA, including those related to the detailed requirements associated with maintaining premarket application approvals, and other U.S. or foreign regulatory bodies, or failure to take adequate response to any observations, could result in, among other things, any of the following actions:

Ifprosecution.If any of these actions were to occur, it would harm our reputation and cause our product sales and profitability to suffer.

We are involved in a heavily regulated sector, and our ability to remain viable will depend on favorable government decisions at various points by various agencies.

Healthcare is heavily regulated by national and regional governments, both in the U.S. and other countries. The laws and regulations affecting healthcare change constantly, thereby increasing the uncertainty and risk associated with any healthcare related venture, including our business and MelaFind^®.MelaFind.

For example, from time to time, legislation is introduced in the U.S. Congress that could significantly change the statutory provisions governing the approval, manufacture and marketing of a medical device. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance, or interpretations changed, and what the impact of such changes, if any, may be.

The U.S. federal government regulates healthcare through various agencies, including but not limited to the following: (i) the FDA, which administers the Federal Food, Drug, and Cosmetic Act, as well as other relevant laws; (ii) CMS, which administers the Medicare and Medicaid programs; (iii) the Office of Inspector General (“OIG”) which enforces various laws aimed at curtailing fraudulent or abusive practices, including by way of example, the Anti-Kickback Law, the Physician Self-Referral Law, commonly referred to as the Stark Law, the Anti-Inducement Law, the Civil Money Penalty Law, and the laws that authorize the OIG to exclude healthcare providers and others from participating in federal healthcare programs; and (iv) the Office of Civil Rights, which administers the privacy aspects of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). Healthcare is also provided or regulated, as the case may be, by the Department of Defense through its TriCare program, the Public Health Service within HHS under the Public Health Service Act, the Department of Justice through the Federal False Claims Act and various criminal statutes, and state governments under Medicaid and other state sponsored or funded programs and their internal laws regulating all healthcare activities.

In addition to regulation by the FDA as a medical device manufacturer, we are subject to general healthcare industry regulations. The healthcare industry is subject to extensive international, federal, state and local laws and regulations relating to:

These laws and regulations are extremely complex and, in some cases, still evolving. In many instances, the industry does not have the benefit of significant regulatory or judicial interpretation of these laws and regulations. If our operations are found to be in violation of any of the international, federal, state or local laws and regulations that govern our activities, we may be subject to the applicable penalty associated with the violation, including civil and criminal penalties, damages, fines or curtailment of our operations. The risk of being found in violation of these laws and regulations is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any action against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management^’smanagement’s time and attention from the operation of our business.

Legislation relating to medical devices may have a material adverse effect on us.

On March 23, 2010, President Obama signed the

The Patient Protection and Affordable Care Act. The legislationAct imposes significant new excise taxes on medical device transactions. Under the legislation, the total cost to the medical device industry is estimated to be approximately $20 billion over ten years. In January 2013, a 2.3% excise tax on medical devices went into effect as a component of the Patient Protection and Affordable Care Act. This tax along with the others in the Act will result in a significant increase in the tax burden on our industry, which could have a material, negative impact on our results of operations and our cash flows. Other elements of this legislation such as comparative effectiveness research, an independent payment advisory board, payment system reforms including shared savings pilots and other provisions could meaningfully change the way healthcare is developed and delivered, and may materially impact numerous aspects of our business.

We must comply with complex statutes prohibiting fraud and abuse, and both we and physicians utilizing MelaFind^® could be subject to significant penalties for noncompliance.

There are extensive federal and state laws and regulations prohibiting fraud and abuse in the healthcare industry that can result in significant criminal and civil penalties. These federal laws include: the anti-kickback statute which prohibits certain business practices and relationships, including the payment or receipt of remuneration for the referral of patients whose care will be paid by Medicare or other federal healthcare programs; the physician self-referral prohibition, commonly referred to as the Stark Law; the anti-inducement law, which prohibits providers from offering anything to a Medicare or Medicaid beneficiary to induce that beneficiary to use items or services covered by either program; the Civil False Claims Act, which prohibits any person from knowingly presenting or causing to be presented false or fraudulent claims for payment by the federal government, including the Medicare and Medicaid programs and; the Civil Monetary Penalties Law, which authorizes HHS to impose civil penalties administratively for fraudulent or abusive acts. Sanctions for violating these federal laws include criminal and civil penalties that range from punitive sanctions, damage assessments, money penalties, imprisonment, denial of Medicare and Medicaid payments, or exclusion from the Medicare and Medicaid programs, or both. As federal and state budget pressures continue, federal and state administrative agencies may also continue to escalate investigation and enforcement efforts to root out waste and to control fraud and abuse in governmental healthcare programs. Private enforcement of healthcare fraud has also increased, due in large part to amendments to the Civil False Claims Act in 1986 that were designed to encourage private persons to sue on behalf of the government. A violation of any of these federal and state fraud and abuse laws and regulations could have a material adverse effect on our liquidity and financial condition. An investigation into the use of MelaFind^® by physicians may dissuade physicians from either purchasing or using MelaFind^® and could have a material adverse effect on our ability to successfully commercialize MelaFind^®.MelaFind.

The application of the privacy provisions of HIPAA is uncertain.

HIPAA, among other things, protects the privacy and security of individually identifiable health information by limiting its use and disclosure. HIPAA directly regulates “covered entities” (insurers, clearinghouses, and most healthcare providers) and indirectly regulates “business associates” with respect to the privacy of patients’ medical information. Certain entities that receive and process protected health information are required to adopt certain procedures to safeguard the security of that information. It is uncertain whether we would be deemed to be a covered entity under HIPAA, and it is unlikely that based on our current business model, we would be a business associate. Nevertheless, we may be contractually required to physically safeguard the integrity and security of the patient information that we or our physician customers receive, store, create or transmit. If we fail to adhere to our contractual commitments, then our physician customers may be subject to civil monetary penalties, and this could adversely affect our ability to market MelaFind^®.MelaFind. We also may be liable under state laws governing the privacy of health information.

We may become subject to claims of infringement or misappropriation of the intellectual property rights of others, which could prohibit us from shipping affected products, require us to obtain licenses from third parties or to develop non-infringing alternatives, and subject us to substantial monetary damages and injunctive relief. Our patents may also be subject to challenge on validity grounds, and our patent applications may be rejected.

Third parties could, in the future, assert infringement or misappropriation claims against us with respect to our current or future products. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. Therefore, we cannot be certain that we have not infringed the intellectual property rights of such third parties. Our potential competitors may assert that some aspect of MelaFind^® infringes their patents. There also may be existing patents of which we are unaware that one or more components of our MelaFind^® system may inadvertently infringe.

Any infringement or misappropriation claim could cause us to incur significant costs, could place significant strain on our financial resources, divert management^’smanagement’s attention from our business and harm our reputation. If the relevant patents were upheld as valid and enforceable and we were found to infringe, we could be prohibited from selling our product unless we could obtain licenses to use the technology covered by the patent or are able to design around the patent. We may be unable to obtain a license on terms acceptable to us, if at all, and we may not be able to redesign MelaFind^®MelaFind® to avoid infringement.

A court could order us to pay compensatory damages for such infringement, plus prejudgment interest and could, in addition, treble the compensatory damages and award attorney fees. These damages could be substantial and could harm our reputation, business, financial condition and operating results. A court also could enter orders that temporarily, preliminarily or permanently enjoin us and our customers from making, using, selling, offering to sell or importing MelaFind,^®, and/or could enter an order mandating that we undertake certain remedial activities. Depending on the nature of the relief ordered by the court, we could become liable for additional damages to third parties.

We rely on our patents, patent applications and other intellectual property rights to give us a competitive advantage. Whether a patent is valid, or whether a patent application should be granted, is a complex matter of science and law. Therefore we cannot be certain that, if challenged, our patents, patent applications and/or other intellectual property rights would be upheld. If one or more of those patents, patent applications and other intellectual property rights are invalidated, rejected or found unenforceable, those outcomes could reduce or eliminate any competitive advantage we might otherwise have had.

New product development in the medical device industry is both costly and labor intensive with very low success rates for successful commercialization; if we cannot successfully develop or obtain future products, our growth, beyond the growth related to MelaFind,^®, would be delayed.

The product development process is time-consuming, unpredictable and costly. There can be no assurance that we will be able to develop or acquire new products, successfully complete any related clinical trials, obtain the necessary regulatory clearances or approvals required from the FDA on a timely basis, or at all, manufacture our potential products in compliance with regulatory requirements or in commercial volumes, or that, even if approved and manufactured, such potential products will achieve market acceptance. In addition, changes in regulatory policy for product approval during the period of product development, and regulatory agency review of each submitted new application, may cause delays or rejections. It may be necessary for us to enter into licensing arrangements in order to market effectively any new products or new indications for existing products. There can be no assurance that we will be successful in entering into such licensing arrangements on terms favorable to us or at all. Failure to develop, obtain necessary regulatory clearances or approvals for, or successfully market potential new products could have a material adverse effect on our business, financial condition and results of operations.

We face the risk of product liability claims and may not be able to obtain or maintain adequate insurance.

Our business exposes us to the risk of product liability claims that is inherent in the testing, manufacturing and marketing of medical devices, including those which may arise from the misuse or malfunction of, or design flaws in, our products. We may be subject to product liability claims if MelaFind^® causes, or merely appears to have caused, an injury or if a patient alleges that MelaFind^® failed to provide appropriate evaluation information on a lesion where melanoma was subsequently found to be present. Claims may be made by patients, healthcare providers or others involved with MelaFind^®.MelaFind. Our coverage may not be adequate to protect us against any future product liability claims. If our insurance proves to be inadequate, we may not be protected against potential product liability claims and we will be exposed to significant liabilities which may harm our business. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could result in significant costs and significant harm to our business.

We may be subject to claims against us even if the apparent injury is due to the actions of others. For example, we rely on the expertise of dermatologists and other associated medical personnel to operate MelaFind^®.MelaFind. If these medical personnel are not properly trained or are negligent, we may be subjected to claims and ultimately liability. These liabilities could prevent or interfere with our product commercialization efforts. Defending a suit, regardless of merit, could be costly, could divert management attention and might result in adverse publicity, which could result in reduced acceptance of MelaFind^® in the market.

Insurance and surety companies have reassessed many aspects of their business and, as a result, may take actions that could negatively affect our business. These actions could include increasing insurance premiums, requiring higher self-insured retentions and deductibles, reducing limits, restricting coverage, imposing exclusions, and refusing to underwrite certain risks and classes of business. Any of these actions may adversely affect our ability to obtain appropriate insurance coverage at reasonable costs, which could have a material adverse effect on our business, financial condition and results of operations.

We may be adversely affected by a data center failure.

The success of MelaFind^® is dependent upon our ability to protect our data center against damage from fire, power loss, telecommunications failure, natural disaster, sabotage or a similar catastrophic event. Substantially all of our computer equipment and data operations are located in a single facility. Our prospective failure to maintain off-site copies of information contained in our MelaFind^® database, or our inability to use alternative sites in the event we experience a natural disaster, hardware or software malfunction or other interruption of our data center could adversely impact our business, financial condition and results of operations. While the Company doeswe do provide off-site back-up for itsour critical data, which we believe to be sufficient to meet our needs, there can be no assurance that our current plan can anticipate every possible eventuality.

We may incur significant non-operating, non-cash charges resulting from changes in the fair value of warrants.

In October 2013, we entered into a securities purchase agreement pursuant to which we issued Series A and Series B warrants to purchase up to 6.9 and 4.3 million shares of our common stock, respectively, and in January 2014, we entered into a securities purchase agreement pursuant to which we issued warrants to purchase up to 13.3 million shares of our common stock. The Series A warrants from October 2013 and all of the January 2014 warrants have been recorded at their respective relative fair values at the inception date of the respective agreement under which they were issued, and will be recorded at their respective fair values at each subsequent balance sheet date. Any change in value between reporting periods will be recorded as a non-operating, non-cash charge at each reporting date. The impact of these non-operating, non-cash charges could have an adverse effect on our financial results. The fair value of the warrants is tied in large part to our stock price. If our stock price increases between reporting periods, the warrants become more valuable. As such, there is no way to forecast what the non-operating, non-cash charges will be in the future or what the future impact will be on our financial statements.

We may be adversely affected by breaches of online security.

Our MelaFind^® lesion database does not contain any information that allows us to identify specific patients. However, we must identify certain data as belonging to or as derived from specific patients for regulatory, quality assurance and billing purposes. To the extent that our activities involve the storage and transmission of confidential information, security breaches could damage our reputation and expose us to a risk of loss, or to litigation and possible liability. Our business may be materially adversely affected if our security measures do not prevent security breaches. In addition, such information may be subject to HIPAA privacy and security regulations, the potential violation of which may trigger concerns by healthcare providers, which may adversely impact our business, financial condition and results of operations.

We are dependent upon telecommunications and the internet.

We use the internet to inform the public about the availability of our products and to market to and communicate with physicians who are potential or actual customers. Our success will therefore depend in part on the continued growth and use of the internet. If our ability to use the internet fails, it may materially adversely affect our business.

All of our operations are conducted at a single location. Any disruption at our facility could increase our expenses.

Substantially all of our operations are conducted at a single building in Irvington, New York. We take precautions to safeguard our facility, including insurance, health and safety protocols, contracted off-site engineering services, and storage of computer data. However, a natural disaster, such as a fire, flood or earthquake, could cause substantial delays in our operations or cause us to incur additional expenses. The insurance we maintain against fires, floods, earthquakes and other natural disasters may not be adequate to cover our losses in any particular case.

We may be liable for contamination or other harm caused by materials that we handle, and changes in environmental regulations could cause us to incur additional expense.

Our research and development and clinical processes do not generally involve the handling of potentially harmful biological materials or hazardous materials, but they may occasionally do so. We are subject to federal, state and local laws and regulations governing the use, handling, storage and disposal of hazardous and biological materials. If violations of environmental, health and safety laws occur, we could be held liable for damages, penalties and costs of remedial actions. These expenses or this liability could have a significant negative impact on our business, financial condition and results of operations. We may violate environmental, health and safety laws in the future as a result of human error, equipment failure or other causes. Environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations. Changes to or restrictions on permitting requirements or processes, hazardous or biological material storage or handling might require an unplanned capital investment or relocation. Failure to comply with new or existing laws or regulations could harm our business, financial condition and results of operations.

Our success will depend on our ability to attract and retain our personnel.

Our success will depend on our ability to retain our current senior management and to attract and retain qualified personnel in the future, including scientists, clinicians, engineers and other highly skilled personnel. We currently do not have a Chief Financial Officer and our Controller is serving as our principal financial officer on an interim basis until we hire a Chief Financial Officer. We are currently engaged in a search for a new Chief Financial Officer.

Competition for senior management personnel, as well as scientists, clinicians, engineers, and experienced sales and marketing individuals, is intense, and we may not be able to retain our personnel. The loss of the services of members of our senior management, scientists, clinicians or engineers could prevent the implementation and completion of our objectives, including the successful commercialization of MelaFind^®.MelaFind. The loss of a member of our senior management or our professional staff would require the remaining executive officers to divert immediate and substantial attention to seeking a replacement.

If we are able to generate sufficient revenues to fund our current operations, we plan to expand our operations and grow our research and development, product development, administrative and marketing operations. This expansion would be expected to place a significant strain on our management, and would require hiring a significant number of qualified personnel. Accordingly, recruiting and retaining such personnel in the future will be critical to our success. There is competition from other companies and research and academic institutions for qualified personnel in the areas of our activities. If we fail to identify, attract, retain and motivate these highly skilled personnel, we may be unable to continue our development and commercialization activities.

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

Our business may be adversely affected by factors in the United States and other countries, such as Germany and the other member states of the European Union, that are beyond our 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.

New regulations related to conflict minerals may adversely affect us.

The SEC recently adopted disclosure rules for companies that use conflict minerals in their products, with substantial supply chain verification requirements in the event that the materials come from, or could have come from, the Democratic Republic of the Congo or adjoining countries. These new rules and verification requirements, which will apply to our activities in calendar 2013, will impose additional costs on us and on our suppliers, and may limit the sources or increase the prices of materials used in our products. Further, if we are unable to certify that our products are conflict free, we may face challenges with our customers, which could place us at a competitive disadvantage, and our reputation may be harmed.

Risks Relating to our Common Stock

If we fail to maintain the adequacy of our internal controls, our ability to provide accurate financial statements could be impaired and any failure to maintain our internal controls could have an adverse effect on our stock price.

The Sarbanes-Oxley Act of 2002 (“SOX”), as well as rules implemented by the SEC, the Public Company Accounting Oversight Board and the NASDAQ Stock Market, have required changes in the corporate governance practices of public companies. Monitoring compliance with the existing rules and implementing changes required by these rules may increase our legal and financial compliance costs, divert management attention from operations and strategic opportunities, and make legal, accounting and administrative activities more time-consuming and costly. Since 2008, we have retained a consultant experienced in SOX that assists us in the process of monitoring and instituting changes to our internal procedures to satisfy the requirements of the SOX. We have evaluated our internal control systems in order to allow us to report on our internal controls, as required by Section 404 of the SOX. As a small company with limited capital and human resources, we may need to divert management^’smanagement’s time and attention away from our business in order to ensure continued compliance with these regulatory requirements. We may require new information technologies systems, the auditing of our internal controls, and compliance training for our directors, officers and personnel. Such efforts may entail a significant expense. If we fail to maintain the adequacy of our internal controls as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the SOX. Any failure to maintain the adequacy of our internal controls could have an adverse effect on timely and accurate financial reporting and the trading price of our common stock.

We have identified a material weakness in our internal control over financial reporting. If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential stockholders could lose confidence in our financial reporting, which would harm our business and the trading price of our stock.

During the preparation of our consolidated financial statements for the year ended December 31, 2014, we and our independent registered public accounting firm identified deficiencies in our internal control over financial reporting, as defined in the standards established by the Public Company Accounting Oversight Board. See “Report of Management on Internal Control over Financial Reporting.” Management determined the control deficiencies constitute a material weakness in our internal control over financial reporting.

Since December 31, 2014, as stated in “Report of Management on Internal Control over Financial Reporting,” management has taken steps to remediate the material weakness cited at December 31, 2014. We cannot assure you that the measures we have taken will be effective in mitigating or preventing significant deficiencies or material weaknesses in our internal control over financial reporting in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in additional material weaknesses or cause us to fail to meet our periodic reporting obligations. The existence of a material weakness could result in errors in our financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in the trading price of our stock.

An active trading market for our common stock may not be sustained if our common stock is delisted from Nasdaq.

On August 22, 2013, we received a notice from The

Nasdaq Stock Market that for the previous 30 consecutive business days, we were not in compliance with a Nasdaq rule forhas continued listing requirements that requires a listed company^’swe must satisfy in order for our common stock to maintain a minimum bid price of $1.00 per share. We were granted an automatic 180 grace period by Nasdaq in which to regain compliance. On February 19, 2014, we were notified by Nasdaq that the Company was eligible for an additional 180 day grace period and has until August 18, 2014 to regain compliance with Nasdasq’s minimum bid price requirement.remain listed on Nasdaq. If our common stock were to be de-listed from Nasdaq, selling our common stock could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and security analysts^’ coverage of us may be reduced. Furthermore, while we believe that our common stock would trade on the OTC Bulletin Board, we would lose various advantages attendant to listing on a national securities exchange, including but not limited to, eligibility to register the sale or resale of our shares on Form S-3 and the automatic exemption from registration under state securities laws for exchange listed securities, which could have a negative effect on our ability to raise funds.

If our common stock is delisted from The NASDAQ Capital Market, we may be subject to the risks relating to penny stocks.

If we fail to meet the applicable standards for continued listing, such as maintaining a minimum bid price of $1.00, our common stock may be delisted from the NASDAQ Capital Market. If our common stock were to be delisted from trading on The NASDAQ Capital Market and the trading price of the common stock were below $5.00 per share on the date the common stock were delisted, trading in our common stock would also be subject to the requirements of certain rules promulgated under the Securities Exchange Act of 1934. These rules require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a “penny stock” and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors, generally institutions. These additional requirements may discourage broker-dealers from effecting transactions in securities that are classified as penny stocks, which could severely limit the market price and liquidity of such securities and the ability of purchasers to sell such securities in the secondary market. A penny stock is defined generally by the Securities Exchange Commission as any non-exchange listed equity security that has a market price of less than $5.00 per share, subject to certain exceptions.

Our stock price may be volatile; meaning purchasers of our common stock could incur substantial losses.

Our stock price has been and is likely to continue to be volatile. 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:

A decline in the market price of our common stock could cause you to lose some or all of your investment, limit your ability to sell your shares of stock and may adversely impact our ability to attract and retain employees and raise capital. In addition, stockholders have, and may in the future, 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 may not be adequate.

Our charter documents and Delaware law may inhibit a takeover that stockholders consider favorable and could also limit the market price of our stock.

Provisions of our restated certificate of incorporation and bylaws and applicable provisions of Delaware law may make it more difficult for or prevent a third party from acquiring control of us without the approval of our board of directors. These provisions:

In addition, Section 203 of the Delaware General Corporation Law generally limits our ability to engage in any business combination with certain persons who own 15% or more of our outstanding voting stock or any of our associates or affiliates who at any time in the past three years have owned 15% or more of our outstanding voting stock.

These provisions may have the effect of entrenching our management team and may deprive you of the opportunity to sell your shares to potential acquirers at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock.

Risks Relating to Warrants Issued in the October 2013 and January 2014 Private Placement Transactions

We may incur significant non-operating, non-cash charges resulting from changes in the fair value of warrants.

In October 2013, we entered into a securities purchase agreement pursuant to which we issued Series A and Series B warrants to purchase up to 685,715 and 434,325 million shares of our common stock, respectively, and in January 2014, we entered into a securities purchase agreement pursuant to which we issued warrants to purchase up to 1,329,731 million shares of our common stock. The Series A warrants from October 2013 and all of the January 2014 warrants have been recorded at their respective relative fair values at the inception date of the respective agreement under which they were issued, and will be recorded at their respective fair values at each subsequent balance sheet date. Any change in value between reporting periods will be recorded as a non-operating, non-cash charge at each reporting date. The impact of these non-operating, non-cash charges could have an adverse effect on our financial results. The fair value of the warrants is tied in large part to our stock price. If our stock price increases between reporting periods, the warrants become more valuable. As such, there is no way to forecast what the non-operating, non-cash charges will be in the future or what the future impact will be on our financial statements.

Risks Relating to the July 2014 Private Placement Transaction

The Debentures contain covenants that could limit our financing options and liquidity position, which would limit our ability to grow our business.

The Debentures contain certain covenants and representations limiting our ability to incur additional indebtedness, other than specified permitted indebtedness, and from entering into or creating any liens on our assets, other than certain permitted liens. These restrictions may limit our ability to obtain additional financing, withstand downturns in our business or take advantage of business opportunities. Moreover, additional debt financing we may seek may contain terms that include more restrictive covenants, may require repayment on an accelerated schedule or may impose other obligations that limit our ability to grow our business, acquire needed assets, or take other actions we might otherwise consider appropriate or desirable.

Our failure to avoid events of default as defined in the Debentures could require us to redeem such Debentures at a premium.

The Debentures provide that, upon the occurrence of an “Event of Default,” the interest rate on the Debentures increases to 12%. Events of Default under the Debentures include, among other things: (1) suspension or removal from the NASDAQ Capital Market or other permissible trading market for specified time periods; (2) failure to pay principal, interest, late charges and other amounts due under the Debentures; (3) certain events of bankruptcy or insolvency of our company; and (4) failure to make payment with respect to any indebtedness in excess of $150,000 to any third party, or the occurrence of a default or event of default under certain agreements binding our company.

Our ability to avoid such Events of Default may be affected by changes in our business condition or results of our operations, or other events beyond our control. If we were to experience an Event of Default and the holders elected to have us redeem their Debentures, we may not have sufficient resources to do so, and we may have to seek additional debt or equity financing to cover the costs of redeeming the Debentures. Any additional debt or equity financing that we may need may not be available on terms favorable to us, or at all.

Not applicable.

We lease approximately 21,700 square feet of office, laboratory, and assembly space in a building with the street address of 50 South Buckhout Street, Suite 1, Irvington, New York 10533. The lease expires in December 2016. We believe that this facility is adequate to meet our current and reasonably foreseeable requirements. We believe that we will be able to obtain additional space, if required, on commercially reasonable terms. Manufacturing agreements with our contract manufacturers allow for the inclusion of charges for finished goods warehousing services as a component of their overhead charges.

Item 3.

Legal Proceedings

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.

Not applicableapplicable.

PART II

Market Information

Our common stock has been traded on the NASDAQ Capital Market since October 28, 2005, under theand since 2010 our ticker symbol has been MELA. Prior to such time,2005, there was no public market for our common stock. The following table sets forth the range of the high and low intraday prices for the period of January 1, 20122013 through December 31, 20132014 as reported by the NASDAQ Capital Market:

As of January 31, 2013,2015, there were approximately 16654 holders of record of our common stock. This number does not include the number of persons whose shares are in nominee or in “street name” accounts through brokers.

Dividend Policy

We have never declared or paid cash dividends on our common stock. We currently intend to retain our cash for the development of our business. We do not intend to pay cash dividends to our stockholders in the foreseeable future.

Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on then existing conditions, including our earnings, financial condition, results of operations, level of indebtedness, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant. Our board of directors’ ability to declare a dividend is also subject to limits imposed by Delaware law.

Securities Authorized For Issuance Under Equity Compensation Plans

Not applicable.

The following discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ from those anticipated in these forward-looking statements as a result of various factors, including those set forth above under the caption “Risk Factors”. You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements for the year ended December 31, 20132014 and the related notes appearing in Part II Item 8 of this report.

Overview

We are a medical device company dedicated to designing and developing innovative software-driven technology for the early detection and prevention of skin cancer. We are focused on the commercialization of our flagship product, the MelaFind^®,System, or MelaFind, as well as the further design and development of MelaFind^® and ourthis technology. MelaFind^® is a non-invasive, point-of-care (i.e. in the doctor’s office) instrument to aid in the detection of melanoma. MelaFind^®,The System features a hand-held component that emits light of multiple wavelengths of light to capture digital data from clinically atypical pigmented skin lesions. The data are then analyzed utilizing sophisticated classification algorithms, “trained” on‘trained’ by our proprietary database of melanomas and benign lesions. This thenresult provides information to assist in the management of the patient’s disease, including information useful in the decision on whether to biopsy the lesion.

In November 2011, the Companywe received written approvala PMA from the FDA for the MelaFind,^® PMA application and in September 2011 having already received CE Mark approval for MelaFind^®.in September 2011 in Europe. On March 7, 2012, the Companywe installed the first commercial MelaFind^® systems, System. We initially marketed the MelaFind System primarily to aesthetic dermatologists through a lease program in which users paid an upfront placement fee and proceeded with the commercialperiodic usage fees. In 2013, because our launch of MelaFind^®. We are currently conducting a Post-Approval Study (“PAS”) evaluating the sensitivity and false positive rate of physicians after using MelaFind^®objectives were not realized, we reviewed our marketing strategy. Revenues amounting to their performance if MelaFind^® was not available.

In 2012, the Company evolved from a research and development company to a commercial enterprise. The launch of MelaFind^® in 2012, and the subsequent commercialization activities following the launch did not meet our initial goals and objectives. Revenues were lower than forecasted and expenses continued to increase throughout 2012 and into 2013. Our cash used in operating activities for the year ended December 31, 2013 and December 31, 2012 totaled $19.4 million and $19.2 million, respectively and net revenues totaled $0.5 million and $0.3 million respectively.

In mid-2013,in 2013 and 2012, respectively, did not meet our expectations, and due to the nature of the lease agreements we continued to record high cost of sales. We implemented a significant cost reduction program was put in place. On November 11, 2013 that affected all areas of our business, and which continued throughout 2014. As a new CEO was brought on board and a newly refocused “Go-to-Market”result of our strategy focusing on key institutions, opinion leaders and dermatologists who treat many of the patients at high risk for melanoma was adopted. As part of this strategy,review in late December,2013, we undertook several steps that we believe will significantly improve MelaFind’s commercial acceptance: 1) we elected to change our business model from solely a rentalrental-based model to include a sale modelcapital sales option; 2) we refocused our marketing efforts on medical dermatology, and particularly those dermatologists who treat patients at high risk for the MelaFind^® device. We have reduced our costs, brought newmelanoma; and experienced talent to our management team and have reconsidered the approach to the commercialization of the MelaFind^® device. We have also begun3) we began 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 the MelaFind^® device. WeMelaFind. During 2014, we made progress in each of these areas, although we anticipate that it will require several years of continued effort before the success of this strategy can be assessed.

In July 2014, we announced that we took the first step in the process of obtaining insurance reimbursement for our 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. On March 9, 2015, the February 2015 CPT® Editorial Summary of Panel Actions was posted to the website of the AMA. The CPT Editorial Panel accepted the addition of Category III codes 039XX1T and 039XX2T to report MSDSLA of atypical cutaneous lesions. Barring any further action by the Panel, we expect 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. We plan to commence efforts to obtain reimbursement from private insurers, which could take upseveral years to two years. Once a coverage determination has been made,complete.

Until we planobtain insurance reimbursement from the CMS and private insurers, we expect that our revenues will not be sufficient to seek reimbursement by Medicaid, Medicarecover our anticipated operating and other third-party payers.

expenses. Our revenue for the foreseeable futurefinancial success will depend on a number of factors, primary among which is our ability to sell MelaFind systems, increase the successpenetration with dermatologists, encourage the usage of MelaFind^®,these systems, and may vary substantially from year-to-yearcontrol our costs. Currently, we cannot determine when we will have sufficient revenues to cover our continuing developmental costs, manufacturing, marketing and quarter-to-quarter. Our operating expenses may also vary substantially from year-to-year and quarter-to-quarter. 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.

We commenced operations in December 1989are continually evaluating potential enhancments to the capabilities of the MelaFind system. During the third quarter of 2014, we implemented changes to the system aimed at reducing manufacturing material costs, test labor and cycle time.

Our PAS is evaluating the sensitivity and false positive rate of physicians after using the MelaFind system with their performance if MelaFind was not available. The study is currently enrolling patients and we are targeting submission of the PAS report to the FDA by year-end 2018.

In February 2014, we sold for net proceeds of $11.4 million (i) an aggregate of 12,300 shares of Series A Convertible Preferred Stock (the “Series A Preferred Stock”), convertible into 1.5 million shares of common stock at a conversion price of $8.40, and (ii) warrants to purchase up to 1.3 million shares of common stock. In addition, as a New York corporationcondition of the financing, our directors purchased an aggregate of 20,271 shares of common stock, at a price of $7.40 per share, for aggregate gross proceeds of $150,000.

In connection with this financing, we also granted to the purchasers’ resale registration rights with respect to the shares of common stock underlying the Series A Preferred Stock and re-incorporatedthe warrants pursuant to the terms of a Registration Rights Agreement. The investors were entitled to receive liquidated damages upon the occurrence of a number of events relating to filing, effectiveness and maintaining an effective registration statement covering the shares underlying the Series A Preferred Stock and the warrants. We were unable to meet certain filing and effectiveness requirements and as a Delaware corporation in September 1997. Since our inception, we have generated significant losses. As of December 31, 2013, we had an accumulated deficit of approximately $168.1 million. We expect to continue to spend significant amounts on the commercialization of MelaFind^®.

Subsequent to year end, we raised approximately $11.5 million in net proceeds from the private placement of convertible preferred stock, common stock warrants and common stock. As of March 7, 2014, weresult paid a total of $2.5 million and may be required to pay an additional $1.4 million in liquidated damages to the investorsPurchasers in this private placement as a resultthe aggregate amount of approximately $3.4 million.

In July 2014, we raised additional net proceeds of approximately $13.8 million through the issuance of 4% senior secured convertible debentures due July 2019 (the “Debentures”) and 6.2 million warrants expiring five years from the date of issuance (the “July 2014 Series A warrants”). The Debentures are convertible at any time into an aggregate of approximately 5.8 million shares of our failurecommon stock at a price of $2.565 per share. Our obligations under the Debentures are secured by a first priority lien on all of our intellectual property. In connection with the transaction, we also exchanged 12,300 shares of Series B Preferred Stock, convertible at any time into an aggregate of approximately 4.8 million shares of common stock at a conversion price of $2.565 per share, for all of our outstanding Series A Preferred Stock that was issued in February 2014. We also issued warrants to file andpurchase common stock at an exercise price of $2.45 per share, with 4.8 million warrants expiring in eighteen months from the date of issuance (the “July 2014 Series B Warrants”). In September 2014, we amended the registration statement related to the Series A Preferred Stock to deregister those shares that would have declared effectivebeen issuable upon conversion of the Series A Preferred Stock. We entered into a Registration Rights Agreement with the investors pursuant to which we were obligated to file a registration statement to register the resale of the shares of common stock issuable upon conversion of the Series B Preferred Stock and Debentures and upon exercise of the warrants. The registration statement was declared effective in accordance with the time periods set forth in a registration rights agreement between us and the investors. We believe, even with cash and cash equivalents held at December 31, 2013, and cash raised subsequent to year end, that there is significant doubt about our ability to continue as a going concern. We continue to assess the effects of our previously announced cost reduction plan and are prepared to reduce various operational costs. Should the Company experience unforeseen expenses, or if anticipated revenues are not realized, the effect could have a further negative impact on management’s estimated operating results over the next twelve months. The timing and amount of any additional funding the Company may require will be affected by the commercial success of Melafind^®. The funding could be in the form of either additional equity or debt financing. 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 and activities relating to regulatory filings and manufacturing development efforts. We expense all of our research and development costs as they are incurred.October 2014.

Our research and development expenses incurred for the year ended December 31, 2013 were related primarily to the development of MelaFind^®. We expect to continue to incur certain additional research and development expenses relating to MelaFind^®. Additional research and development charges may be incurred for complementary technologies. These additional expenses could exceed our estimated amounts, possibly materially.

Selling, general and administrative expenses consist primarily of salaries and related human resources expenses, legal expenses, general corporate activities and costs associated with our efforts to expand our commercial infrastructure to market and sell MelaFind^®. At December 31, 2013, we had available income tax benefit from net operating loss carryforwards for federal income tax reporting purposes of approximately $87.0 million. The net operating loss carryforwards may be available to offset future taxable income expiring at various dates through the year 2032. The Company’s ability to utilize its net operating losses may be significantly limited due to future changes in the Company’s ownership as defined by federal income tax regulations.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S.United States. 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.

While our significant accounting policies are more fully described in Note 3 to our financial statements included in this annual report, we believe that the following accounting policies and significant judgments and estimates relating to revenue recognition, stock-based compensation charges, and fair value of warrants are most critical to aid you in fully understanding and evaluating our reported financial results.

Revenue Recognition

We consider 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. Our agreements with dermatologists regarding the MelaFind^® system combine the elements noted above with a future service obligation. Under our leased-based model, we placed the MelaFind systems with dermatologists for their exclusive use, but retained ownership of the MelaFind systems.

During 2013 and 2014, under the leased-based method, we generated revenue from usage based on the number of patient sessions and lesions examined, or a fixed monthly fee. Electronic record cards activate the MelaFind^® system, capture data and store the data for each patient visit.examined. Additionally, the Company chargeswe typically charged an initial installation fee for each MelaFind^® system which coverscovered training, delivery, initial supplies, maintenance and the right to use the MelaFind^®. system. In accordance with the accounting guidance regarding multiple-element arrangements, we allocateallocated total contract consideration to each element based upon the relative standalone selling prices of each element, and recognizerecognized the associated revenue for each element as delivery occursoccurred or over the related service period, generally expected to be two years. Revenues associated with undelivered elements arewere deferred until delivery occursoccurred or services are rendered. The significant judgments we make relatemade related to allocation of the contract consideration to each element whereby changes in the standalone selling price could impact the amount of revenue recognized in a specific period and estimates of uncollectible accounts receivables.

In Germany, the typical contract with dermatologists calls for an installation or fixed monthly fee and a per patient usage charge. Revenue generated from German contracts is recognized when earned.

In December 2013, the Company changed itswe amended our business model from solely a rental and usageleased-based model to include a capital sales option for the MelaFind system. Under this model, we recognize revenues for product sales when title and risk of loss transfers to customers, which is after installation and training, and when reliable estimates of sales allowances and warranties can be made and collectability is reasonably assured. We will regularly review the information related to these estimates and adjust the reserves accordingly.

Inventories

Inventories consist of finished products and raw materials that are stated at the lower of cost (first-in, first-out) or market value. We reserve for specific inventory items that are no longer being used in the devices and monitor this at each reporting date.

Throughout the year, we deferred repairs of certain of our MelaFind^® product.

Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets (generally three to five years). Costs incurred for maintenance and repairs are expensed as incurred and expenditures for major replacements and improvements are capitalized and depreciated over their estimated remaining useful lives.

Long-lived Assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate system units that the carrying amount of an asset may not be recoverable. An asset is consideredwe determined were unlikely to be impaired whensold during the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition exceeds its carrying amount. The amount of impairment loss, if any, is measured as the difference between the net book value of the asset and itsnext several periods. We estimated fair value.

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:

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 provided 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 under or overestimate 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 factsto restore our system units to sellable condition and circumstances knowncreated a repair reserve amounting to us and accrue for such costs in accordance with accounting principles generally accepted in the U.S. This is done as of each balance sheet date in our financial statements.$0.5 million at December 31, 2014.

Stock-Based Compensation

We record compensation expense associated with stock options, restricted stock awards and other forms of equity compensation in accordance with FASB ASC 718,Compensation-Stock Compensation. The fair value of an equity award is determined at the date of grant using the Black-Scholes Model and the fair value of the equity award is expensed over the service period. The most significant inputs used to value an equity award include current stock price, the amount the employee must pay to acquire the equity award, volatility rate, interest rate and estimated term. For equity awards that vest upon achieving a defined milestone, the underlying compensation charge is recorded when it is probable that the milestone will be achieved. It is then amortized over the estimated period to satisfy vesting requirements. The probability of vesting is updated at each reporting period and compensation is adjusted accordingly. The significant judgments relate to the assumptions used in the valuation model to determine

the fair value of the equity instrument including the volatility rate, term and interest rate. Any increases (decreases) in either of the volatility rate, the term or the interest rate would increase (decrease) the value of the equity instrument and the corresponding compensation expense recognized each period. Estimates of performance based awards vesting can also have a significant impact on recognized stock compensation as the likelihood of a performance based award vesting can change from period-to-period with changes in estimates included in current period operations.

Fair Value Measurements

We have adopted the provisions of FASB ASC Topic 820, “Fair“Fair Value Measurements and Disclosures” as of January 1, 2008Disclosures” for financial instruments. This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820 permits an entity to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period.

ASC 820 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability. Such inputs include quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs derived principally from or corroborated by observable market data by correlation or other means. Level 3 inputs are unobservable inputs for the asset or liability. Such inputs are used to measure fair value when observable inputs are not available.

Warrant Liability

We account for the 6,857,142685,715 common stock warrants issued in connection with the October 31, 2013 financing and the 1,329,731 common stock warrants issued in connection with the February 2014 financing in accordance with the guidance contained in ASC 815-40-15-7D, “Contracts“Contracts in Entity’s Own Equity”Equity” whereby under that provision they do not meet the criteria for equity treatment and must be recorded as a liability.liability because they have non-standard terms in relation to a fundamental transaction and require a net cash settlement upon a change in control. Accordingly, we classified the warrant instrument as a liability at its fair value and adjust the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised or expiration, and any change in fair value is recognized in the Company’sour statements of operations. The fair value of warrants issued by the Companyus in connection with the transaction has been estimated using a Black-Scholes valuation.an option pricing model. We also accounted for 693,20269,321 common stock warrants that were issued in connection with our debt financing during the year ended December 31, 2013, as a liability until we increased our authorized number of shares at the 2013 Annual Meeting of Stockholders and then reclassed itreclassified those warrants into equity. We recorded a change in fair value over that period of approximately $.09 million.

Recently Issued Accounting Standards

The

In August 2014, the Financial Accounting Standards Board (“FASB”) periodically issues new accounting standardsissued Accounting Standards Update “ASU” No. 2014-15 on “Presentation of Financial Statements Going Concern (Subtopic 205-40) – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. Currently, there is no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a continuing effortgoing concern or to improve standardsprovide related footnote disclosures. The amendments in this update provide that guidance. In doing so, the amendments are intended to reduce diversity in the timing and content of financial accountingfootnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and reporting. We have reviewedexpanding upon certain principles that are currently in U.S. auditing standards. Specifically, the recently issued pronouncementsamendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and concluded that there are no recently issued accounting pronouncementsother disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the Company has yetfinancial statements are issued (or available to adopt thatbe issued). The amendments in this update are expectedeffective for annual periods ending after December 15, 2016. Early adoption is permitted. We are currently evaluating the new guidance to determine the impact the adoption of this guidance will have a material effect on the Company’s financial position,our results of operations, cash flows or cash flows.financial condition.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. ASU 2014-09 is effective for public entities for annual reporting periods beginning after December 15, 2016 and interim periods within those periods. Early adoption is not permitted. Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. We are currently assessing the impact that adopting this new accounting guidance will have on our consolidated financial statements and footnote disclosures.

Year Ended December 31, 20132014 Compared towith Year Ended December 31, 20122013

Revenue

Revenue wasincreased $0.4 million, or 80%, to $0.9 million for the year ended December 31, 2014 compared with revenue of $0.5 million for the year ended December 31, 2013 as compared to revenue of $0.3 million for the year ended December 31, 2012, an increase of $0.2 million.2013. This increase is the result of an increase$0.5 million in Melafind system sales revenue under our capital sales model, partially offset by a decline in deferred placement fees and system usage. In general, underrevenue. Our first commercial sale occurred in the Company’s previous rental model with respect to placementsecond quarter of MelaFind^® systems, the Company2014. No new lease agreements were signed a user agreement with its customers that usually included an installation fee for the placement of the MelaFind^® system and provided for the billing of usage based on the number of patient sessions or lesions examined, or a fixed monthly rental fee. In addition, the user agreement provided for the sale of consumables needed to operate the system. Deferred revenue primarily reflects the timed recognition of the installation fee revenue over the term of the user agreement, which is generally two years.in 2014.

Cost of Revenue

Costs

Cost of revenue wereincreased $0.6 million, or 14%, to $4.9 million for the year ended December 31, 2014 compared with $4.3 million for the year ended December 31, 2013 as compared2013. This increase is primarily due to $2.0 million for the year ended December 31, 2012, an increase of $2.3 million. $1.1 million of inventory reserves resulting from improvements made in the design of the MelaFind sysem, our decision to defer repairs of certain of our MelaFind system units that we determined were unlikely to be sold during the next several periods, and an increase of $0.4 million in cost of MelaFind systems sold under our capital sale model. This was offset by approximately $0.6 million in reduced depreciation expense and $0.3 million in various other items.

Costs of revenue were primarily made up of direct costs associated with the placementmanufacture of the MelaFind^® system inunits sold during the doctor’s office, the cost of consumables delivered at installation, the cost of the electronic record cards,year, technical support costs and depreciation expense of the MelaFind^® system placed with the customer, which under the Company’s previous rental model with respect to placement of MelaFind^® systems remains the property of the Company.leased. Certain product quality and manufacturing overhead costs associated with supporting the contract manufacturers of MelaFind^® are allocated to costs of goods sold. The Company had not recorded any cost of revenue prior to the commercial launch of MelaFind^®.

Research and Development Expense

Research and development (“R&D”) expenses decreased 44%58% to approximately $1.6 million for the year ended December 31, 2014 compared with $3.8 million for the year ended December 31, 2013 as compared to $6.8 million for the year ended December 31, 2012.2013. The decrease is the result of resources being redeployed from R&D activities to supporting product revenue and the cost reduction plan initiated in August 2013, offset by reorganization costs.2013. Ongoing R&D efforts are forconcentrating on future product enhancements.

Selling, General and Administrative Expense

Selling, general and administrative (“SG&A”) expenses increased $1.3decreased $4.5 million, or 9%29%, to approximately $11.0 million for the year ended December 31, 2014 compared with $15.5 million for the year ended December 31, 2013 as compared to $14.2 million for the year ended December 31, 2012.2013. The increasedecrease is the result of increasessalary and headcount decreases, as well as a reduction in professional feesstock based compensation expense, decreases in connection with debtconsulting and equity financingstemporary help and an increase in severance expense due to the resignation of certain executive officers during the year ended December 31, 2013.further cost reduction initiatives.

Impairment of Long-lived Assets

During year ended December 31, 2013, our marketing focus shifted focus to large cancer centers and high risk patients, and we have takenrecorded an impairment charge of approximately $1.0 million against our MelaFind^® systems previously placed in locations that dodid not fit this profile. However, as these user agreements expire over the next 2 years, weWe anticipate that the affected systems will ultimately be redeployed in some capacity.redeployed.

Interest (Income)/Expense

Interest incomeexpense increased to $2.4 million for the year ended December 31, 2013 decreased to $.008 million from $.03 million for the comparable period of 2012. Interest income decreased primarily as a result of smaller cash balances during the period in 2013.

Interest expense increased2014 compared with $0.6 million for the year ended December 31, 2013. In 2014, interest expense related primarily to the issuance of our 4% Convertible Debentures in July and the subsequent conversion of approximately $1.6 million in Debentures in October 2014, and included $1.9 million in amortization of debt discount, $0.3 million in interest payments, and $0.2 million in amortization of deferred financing costs. The conversion of the Debentures resulted in approximately $1.2 million of accelerated interest expense included in the total. In 2013, interest expense was incurred by a $6 million senior debt financing we raised in March 2013 and prepaid in September 2013 (See Footnote 9 “Debt”).

Change in Fair Value of Warrant Liability

The change in fair value of our warrant liability is a benefit of $8.1 million for the year ended December 31, 2014, compared to a charge of $0.3 million for the year ended December 31, 2013. The change is primarily due to additional liability warrants being issued in the Company borrowing $6.0 millionFebruary 2014 financing, with the current benefit being directly related to the reduction in March of 2013 and subsequently prepayingour stock price for the loan in September of 2013 (see Write-off of Unamortized Loan Costs)period (See Note 10 “Recurring Fair Value Measurements”).

Write-off of Unamortized Loan Costs

On March 15, 2013, we executed loan documents with Hercules Technology Growth Capital Inc., a venture capital lender, whereby we borrowed $6.0 million (the “Loan”.) The Loan accrued interest at a rate of 10.45%. The term of the Loan was 42 months with interest payments only during the first 12 months. On September 10, 2013, we elected to prepay the Loan and paid Hercules approximately $6.4 million, including the $0.4 million fee discussed below, to settle all obligations to Hercules. Hercules agreed to waive the prepayment penalty of approximately $0.2 million.

Upon executing the loan documents on March 15, 2013 we became obligated to issue to the Lender a warrant to purchase shares of our common stock upon approval by our stockholders of a proposal to increase our number of authorized shares of common stock at our 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 our common stock during certain periods prior to the issuance of the warrant. Our 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 approximately $1.12 per share (“Warrant”). The Warrant expires on April 26, 2018.

For financial reporting purposes, the $6.0 million funded by the Lender on March 15, 2013 was allocated first to the fair value of our obligation to issue the warrant (“Warrant Obligation”) that totaled approximately $0.6 million and the balance was reduced further by the Lender’s 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 of the Warrant Obligation, which has significant unobservable inputs as defined in Accounting Standards Codification 820 “Fair Value Measures”. During the period from the loan inception date until the Warrant Obligation was fulfilled and the Warrant was issued, the Warrant Obligation was reflected as a long-

term liability at fair value. Changes in the fair value (“mark-to-market adjustments”) of the Warrant Obligation of approximately $.09 million are included in operating results. The fair value of the Warrant Obligation was determined using the Monte Carlo pricing model that used various assumptions that included: stock prices ranging from $1.16 to $1.18 per share, volatility of 77%, time to maturity of 5 years, exercise prices ranging from $1.15 to $1.16 and a risk free interest 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 an initial loan discount of approximately $.7 million. The terms of the Loan required us to pay the Lender a fee of $.4 million at the maturity of the Loan (referred to as “Fee”). The loan discount and the Fee were being amortized as additional interest expense over the life of the loan using the interest method. As discussed above, 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” (“ASC 815”) and therefore the Warrant Obligation was accounted for as a derivative reflected as a long-term liability until the Warrant was issued on April 26, 2013. The terms of the Warrant upon issuance no longer required derivative accounting under ASC 815 and therefore the fair value of the Warrant was classified within stockholders equity.

Asmillion.As the result of us electingour election to prepay the loan on September 10, 2013, the unamortized loan discount, fee and deferred financing costs were expensed resulting in a loss on early extinguishmentwrite-off of debtunamortized loan costs of approximately $1.0 million.million (see Note 9 “Debt”).

Change in Fair Value of Warrant Liability

On October 29, 2013, we entered into a securities purchase agreement with certain accredited investors in connection with a registered offering of 4,228,181 shares of the Company’s common stock, fully paid prefunded warrants (“Series B Warrants”) to purchase up to 4,343,247 shares of its common stock and additional warrants (“Series A Warrants”) to purchase up to 6,857,142 shares of its common stock for aggregate gross proceeds to the Company of $6.0 million. The Series A Warrants are exercisable beginning on May 1, 2014 at a price of $0.85 per share and expire on May 1, 2019. The Series B Warrants are exercisable immediately for no additional consideration. The offering closed on October 31, 2013.Registration Rights Liquidating Damages

The Series A Warrants have been recorded at fair value at the inception date of October 31, 2013, and at December 31, 2013, and will be recorded at their fair value at each subsequent balance sheet date. Any change in value between reporting periods is recorded as a non-operating, non-cash charge in the Statement of Operations. The change in fair value of the Series A warrant liability for the year ended December 31, 2013, was $.2 million.

The change in fair value of the Series A common stock warrants of $0.2 million combined with the change in fair value of the debt financing warrants provided for a total change in fair value of warrant liability at December 31, 2013 of approximately $0.3 million.

Other Income, net

In accordance with the terms of our DIFOTI sale and licensing agreement, KaVo will pay us an annual royalty based on the number of DIFOTI related systems sold per calendar year following their commercial re-launch. Other income for both of the years ended December 31, 2013 and 2012 is primarily the $.02 million royalty annual minimum.

Liquidity and Capital Resources

From inception, we have financed our operations primarily through the use of working capital from the sale of equity securities. As of December 31, 2013, we had $3.8 million in cash and cash equivalents as compared to $7.9 million at December 31, 2012. The $4.1 million decrease reflects $20.5 million of net cash provided by 2013 financing activities offset by $19.4 million of net cash used in operating activities and $5.2 million of net cash used in investing activities which was principally for the purchase of MelaFind^® systems. Our cash and cash equivalents at December 31, 2013 are liquid investments in cash with two commercial banks and money market accounts held in accounts that substantially exceed FDIC limits.

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. During the year ended December 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 with Cowen and Company, LLC, relating to the public offering of 6.1 million shares of the Company’s common stock, at a price to the public of $1.30 per share less underwriting discounts and commissions. The gross proceeds to the Company from the sale of the Common Stock totaled $7.9 million. After deducting the underwriters’ discounts and commissions and other estimated offering expenses payable by the Company, net proceeds were approximately $7.3 million. The Offering closed on February 15, 2013.

On March 15, 2013, the Company executed loan documents with Hercules Technology Growth Capital Inc., a venture capital lender, whereby the Company borrowed $6.0 million (“Loan”). The Loan accrued interest at a rate of 10.45%. The term of the Loan was 42 months with interest payments only during the first 12 months. On September 10, 2013, the Company elected to prepay the Loan and paid Hercules approximately $6.4 million, including the end of term fee of $0.4 million, to settle all obligations to Hercules. Hercules agreed to waive the prepayment penalty of $0.2 million. In connection with the Loan, Hercules, as additional consideration, received a five year warrant to purchase 693,202 shares of common stock at an exercise price of approximately $1.12 per share. The prepayment of the Loan had no impact on the Warrants issued to Hercules.

On October 29, 2013, the Company entered into a securities purchase agreement with certain funds managed by Sabby Management, LLC in connection with a registered offering of 4,228,181 shares of the Company’s common stock, fully paid prefunded warrants (“Series B Warrants”) to purchase up to 4,343,247 shares of its common stock and additional warrants (“Series A Warrants”) to purchase up to 6,857,142 shares of its common stock for aggregate gross proceeds to the Company of $6.0 million. The Series A Warrants are exercisable beginning on May 1, 2014 at a price of $0.85 per share and expire on May 1, 2019. The Series B Warrants are exercisable immediately for no additional consideration. The offering closed on October 31, 2013.

Subsequent to year end, on February 5, 2014 pursuant to a securities purchase agreement, dated as of January 31, 2014, with certain funds managed by Sabby Management, LLC (the Company’s largest beneficial shareholder) and Broadfin Capital, LLC (together, the “Purchasers”), the Company sold (i) an aggregate of 12,300 shares of Series A Convertible Preferred Stock, par value $0.10 and a stated value of $1,000 per share (the “Series A Preferred Stock”), convertible into 14,642,857 shares of common stock at an initial conversion price of $0.84, and (ii) warrants to purchase up to 13,297,297 shares of common stock for aggregate gross proceeds of $12.3 million. The warrants have an exercise price of $0.74 per share, are immediately exercisable and have a term of five years. The number of shares issuable upon conversion of the Series A Preferred Stock and exercise of the Warrants are adjustable in the event of stock splits, stock dividends, combinations of shares and similar transactions. In connection with the financing, Broadfin Capital, LLC has been granted the right to designate one director to our Board of Directors, so as long as it retains 30% of its investment in the Series A Preferred Stock (or the shares of common stock underlying the Series A Preferred Stock) or holds any warrants, and the Purchasers have been granted rights of participation in future offerings of our securities for one year. As a condition of the financing, our directors, pursuant to subscription agreements dated as of January 31, 2014, purchased an aggregate of 202,703 shares of common stock, at a price of $0.74 per share, for aggregate gross proceeds of $.15 million. These securities were sold pursuant to an exemption under Section 4(a)(2) of the Securities Act of 1933 for transactions of an issuer not involving a public offering.

In connection with this financing, the Company alsowe granted to the Purchasers resale registration rights with respect to the shares of common stock underlying the Series A Preferred Stock and the warrants pursuant to the terms of a Registration Rights Agreement. In additionPursuant to the registration rights,agreement, the Purchasers arewere entitled to receive liquidated damages upon the occurrence of each of a numberseries of events relating to filing, getting effective and maintaining an effective registration statement covering the shares underlying the Series A Preferred Stock and the warrants, including the failure of the Company to file a resale registration statement by no later than February 25, 2014 and the failure of the Company to have such resale registration statement declared effective by the Securities and Exchange Commission bySEC no later than March 7, 2014. The liquatedliquidated damages will bewere payable upon the occurrence of each of those events and each monthly anniversary thereof until cured. The amount of liquated damages payable is equal to 10% of the aggregate purchase price paid by each Purchaser for the first two events (and/or the monthly anniversary of an event), 7.5% of the aggregate purchase price paid by each Purchaser for the third event (and/or the monthly anniversary of an event), 2.5% of the aggregate purchase price paid by each Purchaser for the fourth event (and/or the monthly anniversary of an event), and 1% of the aggregate purchase price paid by each Purchaser for the next two events (and/or the monthly anniversary of an event), in allcured up to a total of 32% of the aggregate purchase price paid by each Purchaser. The liquidated damages arewere prorated on a daily basis for each event until such event iswas cured.

The terms of the Registration Rights Agreement required us to provide the Purchasers with a copy of the registration statement not less than 17 trading days prior to its filing with the SEC. Therefore, the Company was We were unable to file the initial re-sale registration statement by February 25, 2014 or becomehave it declared effective by March 7, 2014 and as a result paid liquidated damages to the Purchasers in the aggregate amount of $2.5$3.4 million.

Other Income

Other income for the year ended December 31, 2014 and 2013 was $0.2 million and may be required to pay additional damages$21,000, respectively, and represents royalty income we earn each quarter from Kavo Dental GmbH on the sale/licensing of $1.4 million.

Cash Flows from Operating Activities

Net cash used in operations was $19.4$17.7 million for the year ended December 31, 2013.2014. For the year ended December 31, 2012,2013, the net cash used in operations was $19.2$19.4 million. ForIn both periods, cash used in operations was attributable primarily to net losses after an adjustment for non-cash charges, principally related to non-cashthe change in fair value of warrant liability, inventory reserves, depreciation/amortization and share-based compensation, depreciation and other changes in operating assets and liabilities. AdditionallyNet cash used in 2013, non-cash itemsoperations for the period ended December 31, 2014 includes $3.4 million in liquidating damages that were also attributablepaid to a write-off of unamortized loan costs and impairment of long-lived assets.the purchasers in our February 2014 financing.

Cash Flows from Investing Activities

Net cash used in investing activities was $17,000 for the year ended December 31, 2014 and represents proceeds from the sale of fixed assets. Net cash used in investing activities was $5.2 million for the year ended December 31, 2013 principally relating to the purchase of fixed assets, which are primarily MelaFind^® systems. For the year ended December 31, 2012 net cash used by investing activities was $6.2 million, and also principally related to the purchase of fixed assets.

Cash Flows from Financing Activities

Net cash provided by financing activities for the year ended December 31, 2014, was $25.3 million representing net proceeds of $11.5 million from our February 2014 financing, and $13.8 million in net proceeds from the issuance of debentures issued in July 2014. Net cash provided by financing activities was $20.5 million for the year ended December 31, 2013, and reflects the net proceeds received from our public and private sales of common stock and proceeds from the exercise of common stock options. For

Liquidity and Capital Resources

From inception, we have financed our operations primarily through the year endeduse of working capital from the sale of debt and equity securities. As of December 31, 2012, the2014, we had $11.4 million in cash and cash equivalents compared with $3.8 million at December 31, 2013. The $7.6 million increase reflects $25.3 million of net cash flows provided by 2014 financing activities was $5.2offset by $17.7 million which reflectsof net cash used in operating activities. Our cash and cash equivalents at December 31, 2014 are liquid investments in cash with two commercial banks and money market accounts held in accounts that substantially exceed FDIC limits.

On February 5, 2014, pursuant to a securities purchase agreement dated as of January 31, 2014, we sold to the net proceeds received from our public offeringPurchasers (i) an aggregate of 12,300 shares of Series A Preferred Stock, par value $0.10 and a stated value of $1,000 per share, convertible into 1,464,287 shares of common stock at an initial conversion price of $8.40, and proceeds from the exercise(ii) warrants to purchase up to 1,329,731 shares of common stock options.for net proceeds of approximately $11.5 million. The warrants have an exercise price of $7.40 per share, are immediately exercisable and have a term of five years. These warrants have non-standard terms as they relate to a fundamental transaction and require a net-cash settlement upon a change in control and therefore are classified as a derivative liability and recorded at fair value on the inception date of February 5, 2014. They will be recorded at their respective fair value at each subsequent balance sheet date. Also, in connection with this financing, we were unable to file the initial re-sale registration statement by February 25, 2014 or have it declared effective by March 7, 2014 and therefore paid liquidated damages to the Purchasers in the aggregate amount of $3.4 million.

On July 21, 2014, we entered into a definitive Securities Purchase Agreement (the “Purchase Agreement”) with institutional investors (the “Investors”) providing for the issuance of Senior Secured Convertible Debentures in the aggregate principal amount of $15 million, due, subject to the terms therein, in July 2019 (the “Debentures”), and warrants (the “July 2014 Series A Warrants”) to purchase up to an aggregate of 6,198,832 shares of common stock at an exercise price of $2.45 per share expiring in July 2019. Proceeds from the Debentures are being used for general working capital purposes.

Additionally, in connection with the Purchase Agreement we exchanged with certain investors, 12,300 of Series A convertible preferred stock issued on February 5, 2014 for 12,300 shares of Series B convertible preferred stock, par value $0.10 and a stated value of $1,000 per share (the “Series B Preferred Stock”), and warrants (the “July 2014 Series B Warrants”) to purchase up to an aggregate of 4,795,321 shares of common stock at an exercise price of $2.45 per share expiring in January 2016. The offering closed on July 24, 2014.

We have experienced recurring losses and negative cash flow from operations. These recurring losses raise substantial doubt about our ability to continue as a going concern. We expect these conditions to continue for the foreseeable future. We have been and continue to be dependent on raising capital from the sale of securities in order to continue to operate and to meet our obligations in the ordinary course of business. We may need to raise funds in the future to support our sales and marketing of the MelaFind system, further advances in the MelaFind technology and to support clinical trials. The timing and amount of any additional funding we may seek will be affected by numerous factors, many of which are not under our control. There can be no assurance that additional financing will be available in the future at an acceptable cost, or at all.

Operating Capital and Capital Expenditure Requirements

We face certain risks and uncertainties whichthat are present in many emerging medical device companies. At December 31, 2013,2014, we had an accumulated deficit of $168.1$182.3 million. OurWe will continue to incur expenses will increase in connection with our continued commercialization and development activities related to MelaFind^®. Having commenced commercialization in March 2012, weMelaFind. We expect to incur additional medical,clinical, marketing and sales expenses in the near future and to incurplus additional contract manufacturing and inventory expenses incosts over the futurenext several years which will require additional funding. Furthermore, having recently commenced a refocused marketing strategy focusing on key institutions, opinion leaders and dermatologists who treat many of the patients at high risk for melanoma, we expect to incur additional expenses transitioning our operations and implementing our new refocused marketing strategy. As a result, we expect to continue to incur significant and increasing operating losses for the foreseeable future andWe cannot determine at this time when we will generate any significant revenues.

Subsequent to year end, we raised approximately $11.5 million in net proceeds from a private offering of our convertible preferred stock, common stock warrants and common stock. In the first quarter of 2014, we paid a total of $2.5 million in liquidated damages to the investors in this private placement as a result of our failure to file and have declared effective a registration statement in accordance with the time periods set forth in a registration rights agreement between us and the investors. We believe, even with cash and cash equivalents held at December 31, 2013, and cash raised subsequent to year end, that there is significant doubt about our ability to continue as a going concern. We continue to assess the effects of our previously announced cost reduction plan and are prepared to reduce various operational costs. Should the Company experience unforeseen expenses, or if anticipated revenues are not realized, the effect could have a further negative impact on management’s estimated operating results over the next twelve months.

If our existing cash is insufficient to satisfy our liquidity requirements, or if we develop additional products, we may seek to sell additional debt or equity or debt securities or obtain a credit facility, which will be even more difficult due to current tightness in the credit markets.securities. 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 wouldmay 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:

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

The Financial Accounting Standards Board (“FASB”) periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. We have reviewed the recently issued pronouncements and concluded that there are no recently issued accounting pronouncements that we have yet to adopt, which we would expect to have a material effect on our financial position, results of operations or cash flows.

Not applicable

Item 8.

Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

MELA Sciences, Inc.

We have audited the accompanying balance sheets of MELA Sciences, Inc. as of December 31, 20122014 and 2013, and the related statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2013.2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MELA Sciences, Inc., as of December 31, 20122014 and 2013, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2013,2014, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and has suffered recurring losses from operations that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.

/s/ EisnerAmper LLP

New York, New York

March 17, 2014