Paul Arndt - MD, LifeSci Advisors Michael Stewart - President and CEO Bob Cook - Chief Financial Officer Christina Allgeier - COO

Swayampakula Ramakanth - H.C. Wainwright Joe Cohen - JM Cohen & Company

Good day, and welcome to the MELA Sciences Second Quarter Conference Update Call. Today's conference is being recorded. At this time, all participants are in a listen-only mode. Following the presentation we'll conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I would like to remind everyone that this conference is being recorded. I would now like to turn the conference over to Mr. Paul Arndt, Managing Director of LifeSci Advisors. Please go ahead sir.

Thank you, Jessica. Before we begin, we would like to remind you that management’s comments today may include forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. These statements include, but are not limited to our plans, objectives, expectations and intentions and other statements that contain words such as expects, contemplate, anticipate, plan, intend, believes, assumes, predicts, and variations of such words or similar expressions that predict or indicate further events or trends but do not relate to this historical matter. These statements are based on our current beliefs or expectations and are inherently subject to significant known and unknown uncertainties and changes in circumstances, many of which are beyond our control. There can be no assurance that our beliefs or expectations will be achieved. Actual results may differ materially from our beliefs or expectations due to financial, economic, business, competitive, market, regulatory and political factors or conditions affecting the company and the medical device industry in general. Given the uncertainties affecting companies in the medical device industry, any or all of the company’s forward-looking statements may prove to be incorrect. Therefore, you should not rely on any such factors or forward-looking statements. In addition, more specific risks and uncertainties facing the company are set forth in the company’s reports on Forms 10-Q and 10-K filed with the SEC. MELA Sciences urges you to carefully review and consider the disclosures found in its SEC filings, which are available at www.sec.gov and www.melasciences.com. I will now turn the call over to MELA Sciences’ President and Chief Executive Officer Michael Stewart.

Thanks Paul and good afternoon everyone. With me today is Bob Cook, the CFO for the company and Christina Allgeier, the Chief Accounting Officer. This is the first report that includes the results of our recent acquisition of the XTRAC and VTRAC businesses that were acquired on June 22nd and therefore since this was an asset acquisition only eight days of the operations of those businesses are included in the second quarter results. The results do set the opening balance sheet for the business and Bob Cook will run through the important numbers to know a little later in this call. Our 10-Q for the second quarter will be filed tomorrow morning. I'd like to give you a brief update on the transitions and the business. First in regard to the XTRAC and VTRAC platform on the therapeutic side of the business, the revenues reported include only eight days as I said of activity for the acquired business with total revenues from those businesses of 553,721. The fourth quarter results had renowned the businesses from the beginning of the second quarter showed total XTRAC and VTRAC business revenues of 7,745,967. This number breaks down into 6,678,000 in recurring high margin XTRAC revenues, 544,000 in international XTRAC and VTRAC sales in the quarter and 523,285 in parts and maintenance revenues. Importantly average recurring revenue per account for the recurring XTRAC revenues in the domestic market for the second quarter was $10,206 compared to $9,898 up 3.1% from the same quarter of 2014. Recurring revenues grew 24% in the quarter ahead of the expectations that I have set in the conference call announcing the acquisition for the full year growth targets. That is annual recurring revenue growth in the mid to high-teens, this guidance remains unchanged. The number of XTRAC systems deployed in the U.S. at June 30 was 664 this is up from 554 at the end of the second quarter 2014. 24 systems replaced in the second quarter of 2015. We’re looking forward to including the full quarter’s actual results in the third quarter financials which will begin to show the transformation aspects of the acquisition that was made. The transitions required of the acquisition we consolidate all of the back office operations is progressing well and according to plan. The salesforces have been integrated and all sales activities are now under the same leadership. Our U.S. sales organization consists of 32 individuals of which, 24 are sales managers. Importantly we have kept essentially all of the team that we wanted. Additional major assets that were acquired in the transaction were a call center operation and reimbursement assistance group both tied to our domestic XTRAC operations and housed in our Carlsbad California facility. These operations continue to execute our patient efficacy program and refer patients to our physician partners. These operations are highly valued by our customers and will continue to play a significant part of our patient focus and customer focus marketing activities. On the legacy diagnostic side of the business, the efforts to continue to reduce the expenses on the melanoma product MelaFind are progressing well and the organization will be reduced to the go forward level by the end of August. The team will have been reduced from approximately 35 employees when I joined in December 2014 to o less than 10 by the end of the integration process. Total headcount for the combined company at that time should be approximately 105. We’re consolidating the operation side of our imaging business into the Irvington, New York and Horsham, Pennsylvania facilities and reducing our dependence on outside vendors. We are in the process of installing a repair operation in the Horsham office as well. These activities and continuing cost reduction activities were begun in the second quarter as a result of the acquisition and are expected to be completed in the third quarter. On the product side a new cost reduced version of the MelaFind system is in development and expected to be completed in the first half of 2016. With this new design it is expected that international markets can be approached through distribution partners. Domestically the company is continuing its efforts to establishing reimbursement for the MelaFind, a process that is expected to take several years to complete. In relation to these activities the company has re-assessed its MelaFind inventory position and the impact of these decisions are included in the second quarter results and Bob will go through those as well. So at this time I’d like to turn the mic over to Bob Cook to address the financials and the impact of the acquisition accounting. Bob?

Thanks Mike. The acquisition of the XTRAC and VTRAC businesses closed on June 22nd. So from a financial statement perspective we incorporated the assets of the business on our balance sheet as of that date. The $42.5 million purchase price was preliminarily allocated among current assets, property, plant and equipment and intangibles. We have initially recorded goodwill of $8 million. We began recognizing the results of operations from the business as of June 23rd and therefore for the second quarter of 2015 we include only eight days of revenues and expenses. Second quarter 2015 revenues totaled approximately $0.6 million compared with 0.2 million recorded in the second quarter 2014. 0.5 million of the second quarter revenues are attributable to the revenues from the XTRAC and VTRAC. With the inclusion of only eight days of operations after the closing of the acquisition most of the second quarter expenses were generated by old MELA. During the second quarter we wrote-off a substantial portion of the MelaFind system inventory in anticipation of launching a new and improved version next year. The amount we wrote-off was approximately $5.7 million and resulted in a charge to cost of goods sold of $4.8 million in the quarter. We also recorded an impairment charge of almost $1 million related to units in the field as we concluded that these units would not provide a financial return to us through the balance of the lease periods. These charges will significantly reduce our MelaFind cost of goods going forward and position us to recognize the full benefits of the new version once it is ready to be commercialized. We are maintaining a small stock of the current version for sale until the new version is ready for rollout. Our engineering and product and development and our selling and marketing expenses both declined compared with the second quarter and the first half of 2014 even with the inclusion of some XTRAC and VTRAC expenses and while general and administrative expense increased slightly in the second quarter 2015 versus 2014 that is attributable to transaction related expenses of 0.5 million that we incurred in closing the acquisition. In this year’s second quarter we recorded interest expense of 0.8 million of $0.25 million was in cash. Interest expense in the quarter related primarily to the 4% senior convertible debentures issued in July 2014 and which includes amortization of the related debt discount and deferred third financing fees. We also recorded other income of $2 million representing the change in fair value by one liability which is inversely driven by changes in the stock price. The XTRAC acquisition was funded by debt. Totaling $42.5 million and consisted of 32.5 million of convertible debentures and 10 million of senior notes both of which are secured with the company's assets. In accounting for the convertible debentures, we determined that a beneficial conversion feature was created in an amount of $27.3 million and recorded this at the discount to the debentures that will be amortized over the life of the financing. The 10 million in senior notes were issued with warrants to purchase 3 million shares of the company's common stock. These warrants were fair value to 2.9 million and booked as a liability was an offset to the note as a debt discount. This discount would be represented would be recognized over the life of the notes which is approximately five months. As a result of these factors the net loss for the quarter was approximately $7.8 million or $0.97 per share compared with the net income of 0.6 million or $0.12 per share in the same period of 2014. At June 30 we had cash and cash equivalents of approximately $5.6 million compared with 11.4 million at the end of last year. Going forward we are anticipating that the revenues from the XTRAC and VTRAC products will beginning in the third quarter of 2015 support our normal operating activities. We expect to refinance the $10 million of notes with long-term debt prior to their maturity and beyond that we are not anticipating any additional financing at this time. We expect that our future stake and its operations will include significant amounts of non-cash charges including depreciation and amortization of certain assets, stock compensation and charges related to the treatment of our debt warrants. These charges will negatively impact our ability to report a profit in future quarters and will also disguise to some extent the company's cash flow being generated by its products. For this reason we are adopting certain non-GAAP measurements that we would use in future quarters to measure cash flow from operations and to demonstrate our ability to generate cash from the business. We have outlined in today's press release and in the 10-Q we will file tomorrow the methodology we will use going forward to measure the company's cash flow generated each quarter. I'll now hand the call back to Mike for his closing remarks.

Thanks Bob. So that the transformation to the company has begun, I am very excited about the prospects of the company and I think operator now will be a good time to open up for questions.

Thank you. [Operator Instructions] We will now take our first question from Swayampakula Ramakanth from H.C. Wainwright.

So on MelaFind how should we think about this new unit or the new version of the unit coming out that and can you help us understand a little bit more about this charge that you have taken does that mean that you are not going to promote anymore of the old MELA till the new MELA comes on board?

Sure, so. No we will continue to market the existing MelaFind products but we have excess from what we currently need so we reserve the inventory associated with that existing design. The benefits of the new design and really the existing design had a cost basis that just made the sale of that product prohibited. There wasn’t enough margin in the product to be able to sell through distribution, really made it difficult to create a market that would create a profitable venture with that product so we've looked at the design of the product and cost reduced it significantly to the point where we believe we can get it to the level where we can work through a distribution channel network that's already in place on the XTRAC side of the business to start to be able to take advantage of some of the international markets that are out there with a sufficient margin to make it viable. So the design will be different, some of the components and these components have nothing to do with the actual way that the MelaFind works, that stays intact. All we’re doing is facing the stat, the computer, the monitor and basically value engineering that to the point where we can get the cost to a reasonable level. We expect that we will have that new product it will have to go through the approval process, but not an approval process like the original MelaFind way this is just manufacturing changes to the product. So we are excited about getting that product ultimately available in 2016 and then being able to build while we’re getting reimbursement in the U.S. market being able to take advantage of the existing distribution network internationally that we’re associated with.

So if you have this new version completed by first half of 2016 as we say in the press release, how long -- and I just now said that the approval process is not as onerous as the first version had what is management’s idea of timeline, in terms of getting it into the market?

So the expectations of the approval process through the FDA that it is a 60 to 90 day process. So I think we will have it in the market in 2016.

And the CPT Code just basically doesn’t have anything to do with what version of MelaFind you’re going to be placing in the market, correct?

No, no it doesn’t. The CPT Code is specific to the diagnostic procedure of image guided diagnostic, so multi-spectral imaging. The product itself doesn’t affect that.

I just wanted to double check it, and I feel that’s one of the cases. So on the XTRAC and VTRAC business part of it you’re keeping all the commercial infrastructure around the XTRAC, VTRAC as it was in the hands of PhotoMedex, is that right?

Yes, that’s right. So the salesforce is intact, the clinical support in the field is intact, the really important assets to that business which include the call center operations and the advertise that handle the patients calling in from the advertising campaign that goes on and then the reimbursement group that communicated to the patients what their insurance coverage is and make sure that they are covered under their policy. Those are real key assets to the business and I think they’re extremely highly valued by the customer base. So all of that is intact and will remain intact.

So you reported that in the second quarter the revenues came in much higher than what was anticipated but however for the year you still maintained the same growth rate as what you said few weeks ago. Why are you trying to be conservative or is there something that we don’t understand, or is there something that’s making you want to be conservative?

There is two different ways that I describe this, one of the things that you have to be aware of is that when I talk about the annual growth rate, lot of times I’m talking about the recurring revenue stream because that’s the high margin revenue stream that’s the domestic placement of the XTRAC systems that drives a per procedure fee, that growth rate sometimes exceeds the overall growth rate of the revenues because the remaining revenues are capital sales or parts and maintenance revenues that don’t drive the same level of margin and revenue growth rate. So I am comfortable in the guidance that I’ve stated right after we did the acquisition and continue to state today is that overall revenues on an annual basis should be mid to high-teens but within that the recurring revenue may grow greater than that does that make sense?

One last question on MelaFind I apologize for moving back to MelaFind, in terms of across -- I mean how much if you can give a quantitative number that’s fine, but qualitatively what kind of improved gross margin are we talking about?

So the gross margin on the product really historically hasn’t existed because the cost to get the MelaFind in the field versus the revenue stream has been realizing has really been negative. So with this new design what we’ll be able to create we’ll be able to reduce the cost by something in the neighborhood of 75%, seems like a big number. But it’s already -- I already know that can happen and we are in the process of doing it, some of the costs that we originally incurred with the MelaFind product were in my view extremely high and unnecessary and caused the product to be very difficult to ship to move around to all of those issues that existed with the current product will go away the new product will be smaller, it will be able to be shipped very easily through UPS or FedEx type of delivery anywhere around the world that’s a very expensive operation today with the way the design of the MelaFind system is it is a very nice looking design it is just not very practical so I think we can keep it looking very nice but make it much more practical and significantly reduce the cost base of that product.

[Operator Instructions] We will take our next question from Joe Cohen with JM Cohen & Company.

My questions have been answered. Thank you.

[Operator Instructions] I'd like to turn the conference back to Mike Stewart for any additional or closing remarks.

Sure. Thank you very much for the questions and for listening to the call. I think this is an exciting at MELA Sciences the significant assets that we have acquired at recurring revenues stream, large and capable sales and marketing organization including the patient adequacy call center and reimbursement group, manufacturing capabilities all combined to create what we believe is a platform for continued growth. We thank you for your participation in the call and look forward to addressing you again with our third quarter results.

This does conclude today's conference. Thank you for your participation.