Paul Arndt - Managing Director, LifeSci Advisors Michael Stewart - President and Chief Executive Officer Christina Allgeier - Chief Financial Officer

Swayampakula Ramakanth - H.C. Wainwright Kevin Kotler - Broadfin Capital Jared Cohen - JM Cohen & Company

Good day, and welcome to the MELA Sciences Third Quarter 2015 Earnings. Today’s conference is being recorded. At this time, all participants are in a listen-only mode. [Operator Instructions] I would like to remind everyone that this conference is being recorded. I would now like to turn the conference over Paul Arndt, Managing Director of LifeSci Advisors. Please go ahead sir.

Thank you, Camille and good afternoon everyone. Before we begin, I 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, contemplates, 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. Mike, the call is yours.

Thanks, Paul. Good afternoon, everyone and welcome to MELA Sciences’ third quarter earnings conference call. There are slides that we will be referring to that can be accessed at melasciences.com. This report includes the first full quarter of results of our recent acquisition of the XTRAC and VTRAC businesses that were acquired on June 22. Our 10-Q for the third quarter will be filed on Monday, November 16. Joining me today on the call is Christina Allgeier, MELA’s new Chief Financial Officer. Christina had been Chief Accounting Officer for PhotoMedex prior to MELA’s acquisition of the XTRAC and VTRAC businesses and has now been appointed to the CFO position replacing Bob Cook who has resigned his officer positions. Bob will be staying along with the company in the transition role until mid-January 2016. We will continue to strengthen and add to the management team as required to build a solid foundation and execute on our vision. I will update you on the quarterly activities and Christina will review the financial results for the quarter, which were driven primarily by the XTRAC business with which Christina is quite familiar. The total revenues for the third quarter were $8.3 million. Gross margin was 63.4%. Cash on the balance sheet at the quarter end was $3.2 million and we had positive non-GAAP adjusted income. Christina will walk through the detail of the numbers and break them the recurring dermatology business as well as the equipment sales, which are primarily international. The number of XTRAC systems deployed in the United States as of September 30 increased to 698, up from 664 at the end of June. Referring to Slide 2 which includes historical data from PhotoMedex filings pre-acquisition, since the end of 2012 to the third quarter of 2015, the number of deployed systems has nearly doubled. And as you see on Slide 3, the associated revenues, inclusive of the periods prior to the acquisition, has more than tripled over the same timeframe. This growing is being driven by a direct-to-patient marketing campaign, including advertising through TV, radio, social media and digital and supported by a robust sales organization, including 34 direct sales associates, clinical resources and sales management personnel as well as in-house patient advocacy and reimbursement groups. The transition of these activities in the third quarter went very smoothly. While overall gross margin was 63.4%, the gross margin of the recurring XTRAC business, as shown on Slide 4, has continued to significantly increase over that same 2012 to 2015 timeframe increasing from 40% in 2012 to 67% in the third quarter 2015. The average revenue per laser a measure that we focused on has increased over this timeframe as well annualizing the third quarter 2015 recurring revenues now exceeds $42,000 per laser. What I would like to do now is walk you through the XTRAC laser, what drives its use by dermatologists and how we are structured to continue to grow the XTRAC business. Referring to Slide 5, the XTRAC is a UV light excimer laser system, cleared by the FDA for the treatment of four dermatological conditions: psoriasis, vitiligo, atopic dermatitis and leucoderma. Moving to Slide 6, psoriasis is the main driver and is a disease that affects 7.5 million Americans and about 125 people worldwide. It’s an autoimmune disease for which there is no cure and the XTRAC is a very effective treatment and is a covered benefit under virtually all health insurance plans. The mechanism of action of the XTRAC has the effective clearing of psoriasis and putting the disease into remission. The remission lasts for 3 to 6 months or longer as reported in clinical studies. And since there is no cure for psoriasis, the disease returns and the patient returns for additional series of treatments. The number of treatments varies based on the severity of the disease, has been shown in clinical trials to reach 75% improvement in pass – in 6 to 10 treatments, often treatments are not stopped at 75% clearance and the average number of treatments can be greater. Vitiligo is a disease that causes a pigment deficiency that affects approximately 2 million in the U.S. and approximately 1% to 2% of the world’s population. Vitiligo affects people of color more so than the Caucasian population. About half of insurance companies consider the treatment of vitiligo with the XTRAC, a covered benefit. More treatments are typically necessary depending on the severity of the disease. The XTRAC is also cleared to treat two additional conditions. Atopic dermatitis is a widespread disease affecting as much as 17% of the U.S. population. Coverage is very payer dependent, but appears to be increasing, especially in more severe cases. And leucoderma, which is the re-pigmenting of scars is considered a cosmetic procedure and therefore not subject to reimbursement. Reimbursement levels for XTRAC procedures have remained relatively constant over the last several years and while the actual reimbursement varies by insurer, the average CMS reimbursement rates are representative of the average rates applied. On Slide 7, the three CPT codes are shown with associated national average rates, which range from $156 to $238 per treatment based on body surface area covered. On Slide 8, the model that we employ with the XTRAC is fairly unique and is based on placing a machine in the dermatologist office and charging a per procedure fee. The laser is depreciated over a 5-year period and the per procedure fee creates a recurring revenue stream for the dermatologist and for the company. Since the laser costs are semi-fixed primarily consisting of depreciation and service costs, the impact of the growing revenue stream on gross margin is very positive. Moving to Slide 9, our sales and marketing approach is unique as well. In addition to expanding the base of dermatologist under our agreements, we also have a direct-to-patient marketing approach that consist of an ongoing advertising campaign that increases awareness and drives perspective patients to our call center or to contact us through the web. Our patient advocates provide information regarding the XTRAC as well as insurance information and recommend those patients to one of our now nearly 700 physician partners for evaluation, in most cases, actually booking the consultation appointment for the perspective patients. On Slide 10, the XTRAC revenues and the growth will continue to drive the profitability of the company. We expand through the development of the XTRAC program in our physician partner practices and we augment that with the direct-to-patient marketing campaign that creates awareness and identifies new potential XTRAC patients everyday in significant numbers. We believe all of these growth factors will lead to EBITDA growth. So, we feel we have made a good solid start with the absorption of the XTRAC and VTRAC businesses and are looking forward to continuing the transformation in the fourth quarter. On the legacy side, diagnostic side of the business we continue our efforts to reduce the expenses on the melanoma diagnostic product the MelaFind, the process of consolidating the operations side of the imaging business into the Irvington, New York and Horsham, Pennsylvania facilities is expected to be completed in the fourth quarter. At this time I would like to turn the discussion over to Christina Allgeier to address the third quarter financials. Christina?

Thanks Mike. Good afternoon everyone. As Mike has stated, revenues for the third quarter were $8.3 million. This is the first full quarter of activity for the acquired XTRAC and VTRAC businesses, which accounted for $8.2 million of those revenues. With the acquisitions, we have organized our business into there operating segments to better align the organization based on our structure, products and services offered, markets served and types of customers. They are as follows. The dermatology recurring procedure segment drives revenues from the XTRAC procedures performed with our 698 installed MELA lasers. The dermatology procedures equipment segment generates revenues from the sale of XTRAC and VTRAC units as well as from spare parts and service. These sales are mainly driven from our master distributor in the international market. The dermatology imaging segment generates revenues from the sale and usage from our MelaFind devices. On Slide 11, you will see the results of operations by each business segment. The dermatology recurring procedure segment had a gross profit margin of 66.9% and provided an allocated net profit of $805,000, while the dermatology procedures equipment segment had a gross profit margin of 48.9% and provided an allocated net profit of $454,000. The dermatology imaging segment had negative gross margin and an allocated net loss of $450,000. Net loss for the third quarter was $12.2 million including $3 million non-cash deemed dividend. The deemed dividend was a result of modification of the warrants held by major investors in the June financing. As approved at the stockholders meeting the exercise price on their previously issued warrants were reduced to $0.75. The deemed dividend was determined as a difference between the warrants fair value immediately before and immediately after that modification. As you can see on Slide 12, non-GAAP adjusted net income was a positive $389,000 for the third quarter. The non-GAAP adjusted net income was determined as EBITDA and other non-cash adjustments. As a result of our operations, includes significant non-cash charges, we believe that this presentation provides a better understanding of our current financial performance and is one of the important practices of the company moving forward. The other adjustments included stock-based compensation of $1 million and a change in the fair value of warrants’ liability of $1.3 million. As Mike presented earlier, the main financial driver of the business is the XTRAC business. The XTRAC’s recurring revenues have significantly grown over the last 3 years and we reiterate our guidance of continuing revenue growth in this segment in the mid to high-teens or an annual basis. We believe this growth will lead to a continued improvement in the EBITDA in 2016. With our cash balance at the end of the quarter of $3.2 million and the expected positive cash flows over the coming quarters, we believe that we have sufficient cash resources to fund and grow our operations for the foreseeable future. We expect to refinance the $10 million bridge loan that was issued at the time of the acquisition of the XTRAC and VTRAC businesses in the near-term. I will turn it back to you Mike.

Thank you, Christina. We had – as we stated in the press release, we had sequential recurring revenue growth of 5% in the third quarter. We have previously indicated guidance on the revenue side of recurring revenue growth in the mid to high-teens, for which this was right in line, along with positive EBITDA on 2016 and we reiterate that guidance. We look forward to providing more detail in the future as we continue to execute on our plans and vision and we are looking forward to an exciting 2016. With that, let me turn the floor over for questions. Operator, please open for questions.

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

Good afternoon Michael, how are you doing?

Hi, okay. I am doing great. How are you?

Alright. So I would like to understand what are the drivers that seem to be favorable that you are confident of your guidance that you are giving in terms of the growth?

So what we do to drive the business is, as I have stated we do two things. One, we expand the number of practices. We have been continuing to do that on a quarterly basis. We have 34 new placements within the quarter. So we are expanding the number of systems placed to driving the revenue. And then our marketing campaign, which really is consist of quite a few different aspects. It has the advertising campaign. We are advertising through television, radio, social media and digital and we monitor that on a weekly basis looking at what the results are in various geographic areas and we target certain geographic areas where we have a significant base of customers to be able to drive the growth. We get a result from that directly and then we get a result that we kind of refer to as a halo effect, which the awareness that’s going out in the marketplace gets the growth to be well beyond what we can directly attribute to the advertising campaign. But those are the main drivers. It’s the sales force operating, providing those services through the reimbursement group and we have patient advocates talking to the patients when they call us on the phone and then booking their appointments with the dermatologist. And we – we are very lately penetrated into the psoriasis market, with 7.5 million patients suffering from psoriasis another 2 million from suffering vitiligo, the opportunity we are just – even given the growth that we have had over the last 3 years is still significant going forward.

Okay. Thanks and thanks for that explanation. And then can you hear me, alright?

Look, yes. You are little bit late, but go ahead.

Okay. So if you start looking through the business segments, certainly the recurring procedures seems to have the highest gross margin, whereas the procedures of imaging, obviously are not as high, so is there anything that could you folks can do to improve that margin, if so what, how would you do it and what could be the timeframe for that?

Okay. I think I understood your question, but let me do it this way. So we are talking about gross margins and how they will improve over time. So it has improved over time as a result of the recurring revenue growing. And that happens because there is basically a semi-fixed component to the cost as we expand the number of units placed. Every unit that goes out gets depreciated over a 5-year period, that depreciation is a fixed amount going forward. The only other costs really are supporting that those lasers in the field as significant cost is the service or maintenance of those lasers. So as we grow the recurring revenue stream and increase the revenue per laser, which has been increasing sequentially, basically over the last 3 years, that has a positive impact on the gross margin and we will continue to do so. The other aspects of the business, the products business is as I said, primarily international and sold that’s the sale of products through distribution network. So as a result of it going through the distribution network, it therefore has lower gross margins. So I don’t see a significant increase happening in the gross margins on that part of the business, but that’s not the driving part of the business. The driving part is the recurring revenue.

Okay, thank you. That’s helpful.

Next question?

Our next question is from Kevin Kotler with Broadfin Capital.

Hey Mike.

Hey, Kevin.

So, I just want to make sure, it’s clear because the press release, I think might have been confusing. You talk about 5% recurring disposable revenue growth, that sequential growth year-over-year numbers more like 20% growth, which is in line with your mid-teens guidance that you gave last quarter?

That’s exactly right. Yes, I think we inadvertently left the word sequential out of the press release, we will reissue that, but the 5% was sequential growth within the quarter, which puts us right in line with our guidance that we had given previously and the continued guidance we are giving today.

Great. And the $42,000 recurring revenue per system or annualized revenue per system, that also seems up from our model is that up from last quarter as well?

It is. That’s taking the third quarter and annualizing it to get to the $42,000 per laser and that has increased by about the same level. So, we have been increasing the recurring revenue per laser right in line with the overall increases in revenue.

That’s great. And then did you give an update on the imaging system? What’s the latest, where we are? I know people have been concerned about the burn rate on the clinical trial for MelaFind?

Yes. So, I didn’t give a detailed description, because we are still working on it. We are – I did indicate that we are continuing to work on reducing the burn on that side of the business. We have – we did do a – in October, subsequent to the quarter end, we did a clinical trial, a reader study that we submitted to the FDA. We expect to get an answer from the FDA in the near-term sometime within this quarter is the expectation. Based on that outcome, I think we can get those costs very well in line. I had talked previously about being able to significantly cost reduce that product assuming that we can build the right market for it, which obviously in the U.S. is somewhat dependent on reimbursement, not for all customers, but for certain customers. So, I think we have an opportunity if we can get through the acceptance of that reader study with the FDA to try to mix that a salable product and something that can start to contribute. In the meantime, the burn rate has been reduced significantly and will actually be reduced even more from where we are today over the next quarter.

Right. But just to understand, if the FDA doesn’t go along and you have this post-market study, you are prepared to shut it down, did that won’t be a burn rate, is that fair?

Exactly right. I mean, if we don’t have the ability to effectively market that product, then we will have to make a decision and that decision point will come after this review by the FDA. And if necessary, we will make the decision to stop marketing that product, eliminate the ongoing cost of the post-approval study, and then look at the technology, which we are already doing to see if there is some other type of device that could make sense out of it, but the cost of continuing to operate that part of the business would basically be eliminated.

Got it. Okay. And did you – I mean, just in terms of XTRAC, are there anything in terms of R&D out 12 to 18 months that you are working on that could improve the profitability further of the technology?

There are. One of the costs of operating the XTRAC laser is that it uses xenon chloride gas and that gas is a fairly expensive component to the ongoing maintenance. We are implementing actually in this upcoming quarter some software changes that will help to reduce that cost. But more important than that in the longer term, we have a whole list of potential projects and actually certain projects that are already underway to enhance the product even more than it is today. Some of them are a little bit longer term, but we think we have some ideas that can take the cost of the product down by a significant portion without affecting the way it operates and we have started those projects.

Great. Well, thanks a lot. Great quarter.

Thank you, Kevin.

[Operator Instructions] And we will take our next question from Jared Cohen with JM Cohen & Company.

Yes, just one or two questions. First, now will the XTRAC business or the overall business, I know you said will be EBITDA positive, but will it also be free cash flow positive after interest expense once you do your refinancing?

It will. We expect that the cash that we are going to generate with the business will fund our operations going forward and we won’t be in a position to be raising cash in the foreseeable future.

Okay. I know you that with the MELA side of the business, I know you have talked about it, because I guess part of whether it’s a viable businesses with the part of it is also the codes, because have those codes been established or I know that’s part of it or not?

So, yes, there were Level 3 codes established that will become effective or usable in January 2016. The problem with Level 3 codes is that, that gives you – that gives the physician the ability to record the procedure in that code, but there is no reimbursement associated with it. So, it doesn’t solve the reimbursement side of the question. It gives us the ability to market the product with that code to probably integrated health systems, where the payer and the provider are the same person and reimbursement in the traditional sense is not applicable, but it doesn’t give us the ability to go to the everyday derm and get them to be paid on doing the procedure. That process of establishing that level of reimbursement is a long process that will take likely. If it makes sense to do, likely years before we can get that fully implemented. The thing that we can do if we have the clearance with the product through the FDA and we have a product that’s capable of being marketed is we can establish an international market with that product and from a U.S. market standpoint primarily be looking at the integrated health systems.

Okay. And lastly, because I saw you put out an 8-K on it, what beyond being with two directors? What beyond being directors? What type of consulting work are they going to be doing for you, because I saw that you put out something that they are going to be doing consulting work beyond just…

Good question. That’s – those two directors, Sam Navarro and Jeff O’Donnell were instrumental in the acquisition of the XTRAC and VTRAC business and worked tirelessly in helping to get that acquisition done. They are established in the dermatology market. They have their fingers on the pulse of other companies and product lines that are in the marketplace that might make sense at some point to be a part of MELA Sciences. And our objective here is to – we set the base of the business with the XTRAC business that’s cash flow positive and contributing and growing. And then, it’s our intention to add to that. So, they will be working with me in trying to build this business up in a very significant way over the coming quarters.

Okay. Alright, thank you very much.

Thank you.

That concludes today’s question-and-answer session. Mr. Stewart, at this time….

Sure. I appreciate the questions and I think they were very good questions. I would like to add just one thing that we are very pleased with the progress that’s been made in the short timeframe since the acquisition on June 22, we will be looking at re-branding the company to better reflect its products, its markets and it’s potential in the dermatology field in the near future. We thank you for your interest in the company and we look forward to our next call when we report the fourth quarter and the full year 2015 results. Thank you very much and good night.

Once again, that does conclude today’s call. We appreciate your participation.

Thank you.

Thank you. Have a good afternoon.