MELA Sciences Acquires XTRAC and VTRAC Businesses From PhotoMedex, Inc.

MELA Sciences, Inc. has signed and completed the purchase of the XTRAC and VTRAC Dermatology business from PhotoMedex, Inc. for $42.5 million in cash and the assumption of certain business-related liabilities. The purchase price includes all of the accounts receivable, inventory and fixed and intangible assets of the businesses. To fund the purchase price of the transaction, the Company has issued senior secured notes and convertible debentures equal to the transaction purchase price to certain investors. 

In 2014, the acquired businesses generated $30.6 million in revenues, representing year-over-year growth of 41% and a gross profit of 60.1%. As of March 31, 2015, there were 640 installed XTRAC systems in the United States, up from 527 at the end of March 2014. There are approximately 7.5 million people in the U.S. and up to 125 million people worldwide suffering from psoriasis, and 1% to 2% of the world's population have vitiligo. In 2014, over 300,000 XTRAC laser treatments were performed on approximately 19,000 patients in the United States.

Michael R. Stewart, President and CEO of MELA Sciences, stated, "This is a transformational event for MELA Sciences. As a result of this acquisition, MELA becomes a multi-product company with a single salesforce focused on meeting the needs of dermatologists for the diagnosis and treatment of serious dermatological conditions. The XTRAC laser in particular provides us with a recurring source of revenue that has been growing significantly over the past few years and is expected to generate sufficient cash flow to fund our ongoing operations beginning this year. This should enable us to continue our current commercialization efforts while growing the XTRAC and VTRAC businesses globally.

To finance the transaction, the Company entered into a securities purchase agreement with institutional investors in connection with a private placement of $42.5 million aggregate principal amount of senior secured notes and convertible debentures and warrants to purchase 3.0 million shares of common stock at an exercise price of $0.75 per share.

The Company sold $10.0 million principal amount of senior secured notes bearing interest at 9% per year, with a maturity date of the earlier of 30 days after the Company obtains stockholder approval of stock issuances under the debentures and the warrants or November 30, 2015. The Company also issued $32.5 million principal amount of senior secured convertible debentures that, subject to certain ownership limitations and stockholder approval conditions, will be convertible into approximately 43.3 million shares of common stock at an initial conversion price of $0.75 per share. The debentures bear interest at the rate of 2.25% per year, and, unless previously converted, will mature on the five-year anniversary of the date of issuance. The Company's obligations under the notes and debentures are secured by a first priority lien on all of the Company's assets. Under the terms of  the debentures and the warrants, the issuances of shares of the common stock upon conversion of the debentures and upon exercise of the warrants are subject to stockholder approval of such issuances and an amendment to the Company's certificate of incorporation to increase the Company's authorized shares of common stock. Upon receipt of stockholder approval, the Company has also agreed to reprice outstanding warrants held by certain investors to reduce the exercise price to $0.75 per share.

The notes, convertible debentures and warrants described above have not been registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration with the SEC or an applicable exemption from such registration requirements. The securities were offered only to accredited investors. Pursuant to a registration rights agreement with the investors, the Company has agreed to file one or more registration statements with the SEC covering the resale of the shares of common stock issuable upon conversion of or in connection with the convertible debentures and upon exercise of the warrants.