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MELA Sciences, Inc. (NASDAQ:MELA)

Q4 2013 Earnings Conference Call

March 17, 2014 4:30 p.m. ET

Executives

Toni Trigiani - Investor Relations

Rosemary Crane - President & CEO

Mary Phelan - Controller

Analysts

Josh Jennings - Cowen

Jared Cohen - J.M. Cohen & Company

Operator

Good day, ladies and gentlemen, and thank you for standing by. And welcome to the MELA Sciences Fourth Quarter and 2013 Year End Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions) As a reminder, today's conference maybe recorded.

Now, it's my pleasure to turn the floor over to Toni Trigiani. Ma'am, the floor is yours.

Toni Trigiani

Thank you, and good day. Let's begin with the Safe Harbor language. This presentation includes 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, anticipates, plan, intend, believes, assumes, predicts, and variations of such words or similar expressions that predict or indicate future events or trends or that do not relate to 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, as well as more specific risks and uncertainties facing the company, such as those set forth in its reports on Forms 10-Q and 10-K filed with the U.S. Securities and Exchange Commission, the SEC.

Factors that might cause such a difference include whether MelaFind achieves market acceptance or becomes commercially viable. Given the uncertainties affecting companies in the medical device industry, any or all these forward-looking statements may prove to be incorrect. Therefore, you should not rely on any such factors or forward-looking statements. The company urges you to carefully review and consider the disclosures found in its filings with the SEC, which are available at www.sec.gov and www.melasciences.com.

With us today is Rose Crane, President and CEO of MELA Sciences and Mary Phelan, Controller of the company.

Now, I will turn the call over to Rose.

Rosemary Crane

Thanks, Toni. Good afternoon and thank you for joining us on today's call. I've been with the company since November 2013.

Today, I would like to provide a review of the 2013 fourth quarter and year end financial. Then I will provide an overview of recent activities and some thoughts on where we see the company going. At the end, I will be more than happy to take questions.

So, I spent much of the last four months interacting with a number of dermatologists, especially those who treat patients at high risk from melanoma. I have also found in speaking with people over the same months that almost everyone has been touched directly or indirectly by melanoma. The work we are doing here at MELA Sciences is still very important to the lives of so many.

Since this is our first call, let me give you a little bit of background in me. I've been in the healthcare industry for 32 years, with Bristol-Myers Squibb for about 20 of those years, including serving as the U.S. President of the Primary Care Division. I then joined Johnson & Johnson in 2002 to head the worldwide McNeil Company, which many of you know as Tylenol and Motrin. In 2008, I joined Epocrates, a healthcare technology firm to serve as CEO where I took the company public. Over the years, I have launched a number of new products, also built product pipelines and have managed many different types of businesses.

So, let's begin. At the close of the fourth quarter, we saw net revenues increased by 14.75% from the same quarter period last year. For the full year, we reported net revenue of $536,000 compared to $278,000 for 2012. That's an increase of nearly 93%.

The cost of revenue for the fourth quarter was $914,000 compared to the same period last year of $971,000, a reduction of nearly 6%. For the full year 2013, it was $4.3 million compared to 2 million for 2012.

So now, let's take a look at our operating expenses. Total operating expenses for the fourth quarter were 3.64 million compared to 5.24 million for the same period last year. For 2013, total operating expenses were 20.33 million versus 20.96 million in 2012.

The net loss for the fourth quarter was 4.6 million or $0.09 per share compared to 6.1 million or $0.19 per share for the fourth quarter 2012. For 2013, the net loss is 25.9 million or $0.60 per share versus 22.7 million or $0.74 per share for the same period in 2012.

So now, let's take a look at what transpired since the third quarter, the last time we reported. On October 31, 2013 we closed our registered direct offering that resulted in net proceeds of approximately $5.5 million, pursuant to which it issued common stock and pre-funded warrants. Additional warrants to purchase up to 6.9 million shares of common stock were also issued, which could result in proceeds of up to $5.8 million.

Now, in February of this year we completed a private placement with Sabby Management and Broadfin Capital, which resulted in net proceeds of 11.4 million prior to management participation. We issued non-redeemable preferred stock convertible into approximately 14.6 million shares of common stock.

Additionally, warrants were issued to purchase up to approximately 13.3 million shares at $0.74 per share. The board of directors also participated for $150,000 and restricted common stock priced at $0.74 per share. I personally invested $50,000 of the $150,000. I really believe as the CEO you need to put your money where your mouth is, so I invested.

This investment leaves us with a stronger balance sheet than we've had recently. We're beginning the refocus of MELA Sciences with cash in the bank and no debt.

Now, it's time to focus where we are on the business. So let's talk about the business and how we plan on changing that gain. First, we have seen a number of changes in both management and the board of directors. I would like to welcome Jeffrey O'Donnell to the board and to his new role as Chairman. Jeff is the Management Director of BioStar Ventures, a venture capital firm that specializes in early stage medical devices. He brings extensive experience with private and public company, and specifically in medical dermatology as past President and CEO of PhotoMedex, Inc.

At this time, I would really like to thank Bob Coradini for his hardworking commitment as both Interim CEO and Chairman. And I'm pleased that he will continue to serve on our board. Bob was instrumental in raising the need of funding in the fourth quarter.

I am also pleased to welcome Sam Navarro to the board. Sam is the founder of Gravitas Healthcare. Their focus is exclusively on advising and planning strategic mergers and acquisitions of emerging medical device company. He has also had a long and successful career with Cowen & Company and Needham & Company.

So now, let's talk about MelaFind, an optical imager that's not designed for definitive melanoma diagnosis, but rather to provide additional data to doctors that can be used in determining whether or not to perform a biopsy. We conducted the largest perspective study on melanoma with positive results that no other companies have done to-date. With MelaFind, we created the largest database of over 10,000 pigmented skin lesions.

This has allowed us using proprietary algorithms to analyze each lesion and provide a score. Now, these scores help dermatologists decide to biopsy or not to biopsy difficult and ambiguous lesion.

We truly believe there is great value in how this database can be utilized to improve clinical position, and we intent to do that as we move forward. Does it sound clinical, does it sound medical? Of course it does, because it is. And so, we are redirecting the efforts of this business to the medical dermatologists, and key institutions that are in the business of treating patients at high risk from melanoma.

As you heard in the third quarter call, our new strategy was to introduce MelaFind, the key opinion leaders at the leading hospitals and teaching institutions in the U.S. This is such a vital part of our strategy. In this day, the KOL leads the charge in melanoma. We are working with many of them and hope to expand that universe. It's a top-down approach, it's really very simple.

We've also recently placed clinical trial units in some of the key institutions where the world leaders treat high risk patients. Also, since November of 2013, we have presented nine posters and abstracts, the key dermatology conferences around the country and in Germany. And we've had units in Germany for some time now and continue to focus on expansion there. It's an important market for us.

Notwithstanding that in 2014 our R&D expenses declined. Our engineers will continue to explore the many nuances of our technology, and are pursuing new avenues of advancement in that technology. We are redirecting the sales force to present MelaFind as a medical device, an imaging and analysis tool is capable of helping dermatologists reach better clinical decision for their patient, as well as gather new and important information that will serve the patient and the doctor better.

We continue to focus on key meetings. We are the top thought leaders in dermatology together. As a matter of fact, next week, I'll be attending the AAD, which is the American Academy of Dermatology annual meeting. We will be having our fourth clinically advisory session presenting two posters and we will spend a full day training our sales group on the new strategy. So, what if we get into all the right places and every medical derm uses MelaFind? Well, it's only good if we can make the economic work, and we are changing that too.

So at first, we are implementing a new business model where dermatologists will be able to purchase MelaFind. This is what they are used to doing with medical equipment. This is what they are telling us they want to do. And for MELA Sciences rather than spreading the revenue over the term of the rental, we will now be able to immediately recognize a large percent of the revenue at the time of sale. It's important that we get the book to sales in revenue if they are happening just as it is important to give our customers what they want.

Second, we are working diligently to secure CPT codes for insurance reimbursement purposes. For those of you who don't know the acronym CPT, it stands for Current Procedural Terminology. This is just simply the code that doctors use to bill charges. Once secured, we plan to then work with insurance companies in hope of obtaining coverage for these charges.

Currently, lesions and moles are examined by the naked eye. And if the physician can't be certain if melanoma exists or not, alternate biopsy is taken, but not always. In this we have room for error. What if the one lesion you don't biopsy is the one with melanoma? With MelaFind, physicians have never before available, data that will help them make more informed decision. And that's really great for the patient and it's good for the healthcare system. This is a compelling argument for reimbursement and in the end a win-win for everyone.

We have engaged specialists to help us through this process. It's tedious for medical devices and it can take nearly two years and sometimes more. We are determined to see this process through. We can't be certain it will happen, but we will keep you informed.

So, not unlike many companies that are in the early stages of commercialization, the ramp up hasn't been established. We've started the process of redefining and refocusing the company's strategy to one that I truly believe positions us to better maximize the value of MelaFind technology.

Although we have not yet figured out everything, we are confident in our new go-to-market strategy, our pricing model and product enhancements based on the power of our data and the analytics. We have only been in the market with our new business model for less than three months. So, I do not see a pattern emerging at that would forward their guidance to you. However, I can tell you the reception has been positive and encouraging. And I hope I can provide something soon.

So, in closing, I'm so excited about the technology we have and the certain advancements that I know we can achieve in the ongoing study of helping to detect melanoma early.

More importantly, we are making great strive in what's been an otherwise virtually ignored area of cancer when it comes to optical imaging and data analysis. The statistics show just how deadly this disease is if it's not caught early, and how high the survival rate is if it is caught early. MelaFind is the only imaging and analysis tool that has found a way to assist dermatologists in detecting melanoma at its most curable phase.

So, I really thank you for your patience and your time today. I'm happy to take questions at this time.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from the line of Josh Jennings, Cowen and Company. Please go ahead. Your line is open.

Josh Jennings - Cowen

Hi, Rose. Thanks for taking the question, and thanks for the download.

Rosemary Crane

Hey, Josh.

Josh Jennings - Cowen

I know you stated in your prepared remarks you are not able to give much on your go-to-market strategy, it's still very early days. But I was wondering if you can give some anecdotal data points or color to how -- since you have been in the seat in these early days, how academic centers in KOLs are receiving this pitch. I don't know if you think of any hard data points or maybe something anecdotal.

Rosemary Crane

Yeah. I've spent a lot of time up in Boston, New York, spent a lot of time with guys down in Texas, Hawaii. Yes, there are dermatologists there. The thing that I see happening, Josh, is there are some really good strong users out there using MelaFind, [the docs] (ph). And they are really figuring out how best to use with the high risk patients, how many lesions that they really look at. They are getting very comfortable with the out-of-pocket they charge for patients.

So, what we are doing with that data is kind of exchanging it between physicians. What I am seeing and Bob has been out there a lot too, and I think he saw this. What we are seeing is doctors are having comfortable conversations with each other. And then, when we go to the AAD, if you were to attend for the first time there is a fair amount of presentations on MelaFind, doctor asking slides, they are getting a chance to really play with it. So it's so very soft, Josh. But that's what I can tell you.

Josh Jennings - Cowen

Sure. And that's helpful. And then just maybe outside of the AAD as we have worked our way through 2014 at other conferences, are there any other datasets that could be presented to the clinical community?

And then secondarily, how do you approach these conferences from a marketing perspective? Are there events you are hosting? And then, how do you expect to garner business at AAD and other dermatology conferences this year? Thanks a lot.

Rosemary Crane

Yes, great question, Josh. So, actually we are going to be publishing a couple of articles and peer-reviewed journals. I can't reveal it. I just thought. But it will be out soon.

What we try to do really is continue to work with the physicians or the thought leaders and opinion leaders. And so, at AAD, as I said, we'll have our fourth clinical advisory session, that is the* fourth in the time since I've been here. And so, what we do is it's a closed session, but we will invite physicians who we think are thought leaders and ask them, show them our data, show them some new data, and ask them to interact with each other. It's typical. I've done this my entire life, throughout the pharmaceutical. But it's typical. They get a chance to really put issues on the table, talk about them.

So, we're really trying to have a clinical advisory session every major meeting; that's the big goal. And we're trying to get as many posters and abstracts as possible. And we are trying to get our -- really what's happening now is the opinion leaders are asking for our slides putting session. So, that's a big change.

From a marketing approach, what I would say, Josh, is we're still spending time on the clinical side. So, if you are to come by our booth, what you will see at AAD is the new user clinical or new user interface. It's going to be on display, and so physicians will always be able to play with the unit and interact with the rep. We really try to focus on kind of what's best for the physician. So, it's a pretty standard approach for every meeting.

Operator

Okay, thank you, sir. (Operator Instructions) And it looks like our next one question will come from Jared Cohen with J.M. Cohen & Company. Please go ahead. Your line is open.

Jared Cohen - J.M. Cohen & Company

Yes, just a few questions, because I know in one of your press releases, you've mentioned opening up in terms of marketing the MelaFind to beyond just medical dermatologist, to pathologists and to surgeons. And I was wondering about doing that because I know the device has always been limited in terms of its use in terms of only to …

Rosemary Crane

Dermatologists …

Jared Cohen - J.M. Cohen & Company

Well, dermatologists, but to biopsy to what lesions that haven't been biopsied yet?

Rosemary Crane

Right. So, as far, we are limited to dermatologists and ambiguous lesions. What we are looking at, and what I’ve talked about is really doing nothing more than separating our optical scanner from our analysis. And once you do that, you are able to file a 510(k). I've given no dates. I’ve just presented a view of the world.

Okay, let's step a little back. So, the reason we want to go here is to kind of pull the environment together, right? The dermatologists does the biopsy, he sends it to pathologist. If it is a melanoma, it then goes -- let me be very clear, reconstructive plastic surgeon. So is the deal with tumors, with melanoma.

Then it goes to the reconstructive surgeon, especially if it's on your face or place that they are worried about the appearance. So, we've had a number of pathologists who actually approach us. Bob talked about this in the third quarter call, where the pathologists basically are looking -- they can use the optical scanner to look at the lesion and see whether disorganization reverses the organization. And that's basically what our optical scanner does.

And it basically allows them to be more efficient, to figure out where to cut. That is all in process, as I said, we're exploring it, we have a number of key pathologists looking at, we are going to enter into some clinical trials with them, so that we have data. I think it's important to put data. They are not just a 510(k).

So, we have a long road ahead of us, but we are finding that there is a lot of interest. And again, the reconstructive surgeon works closely with the pathologists. So, and again we've had a lot of interest from those physicians, because it allows them to image the margin. It basically allows them to figure out what the margin guidance is. But we've yet to do the clinical trials, and we have to do that. So, hope that helps you, Jared.

Jared Cohen - J.M. Cohen & Company

Okay. And just a follow-up question in terms of pricing because I -- just turning from one or two dermatologists or are we skeptical, I mean, their main point of view is just a -- they are setting their ways, so it just comes down to pricing versus the biopsy, even though this is cheaper to use than doing a initial biopsy because what a biopsy cost worth initially $600 and if we have to *do a surgery beyond that, that's a few thousand dollars*. Is that correct?

Rosemary Crane

Right. Yes, it's about *correct. It differs in regions of the country.

Jared Cohen - J.M. Cohen & Company

Right. Versus doing the MelaFind depending on how much they want to charge themselves.

Rosemary Crane

That's correct. It is one of the issues out there. The issue is MelaFind is the patient has to pay out of pocket.

Jared Cohen - J.M. Cohen & Company

Pocket.

Rosemary Crane

Right, that's the issue.

Jared Cohen - J.M. Cohen & Company

All right.

Rosemary Crane

So, they -- he or she is reimbursed for the biopsy, but not for MelaFind. And this is where I'm saying that we are hearing physicians and if you go to any other conferences, you will hear them talk about what they charge patients for MelaFind out of pocket.

And I would tell you it depends in what region of the country they are in, and what the economic per the patient basis. If you talk to a doctor in upper east side of New York city, he charges a fair amount out of pocket for MelaFind because his patient -- it's all part of the economics in that area. If you go down to Tennessee, it's much different.

So, this is what's happening. Most doctors are trying to figure out what's the right cost and what the patient can afford. But remember, these high risk patients, it's not just any patient that walks in and we've really positioned it for high risk patients. These women and guys could be in six times a year, four times a year, three times a year; many of them have had 10 to 20 biopsies already.

So, if you can spare a biopsy or if you can be sure that they're not walking with melanoma, in the end economics makes sense for the patient at risk, but the doctors figuring that out.

Jared Cohen - J.M. Cohen & Company

Okay. All right, thank you.

Rosemary Crane

Thanks, Jared.

Operator

Thank you, sir. (Operator Instructions) And presently, at this time I am currently showing no additional phone questions in the queue.

Rosemary Crane

Okay, thanks.

Operator

You're welcome. I will like to turn the program back over for any additional or closing remarks.

Rosemary Crane

Now, I really like to thank everybody for joining us. And I look forward to talking to you more in the future. Thanks again, everyone.

Operator

Thank you, ladies. And thank you ladies and gentlemen. This does conclude today's call. Thank you for your participation, and have a wonderful day. Attendees, you may log off at this time.

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