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MELA Sciences, Inc. Message Board

  • e11ndofwar e11ndofwar Nov 15, 2012 10:40 AM Flag

    One possible solution

    It does look like the company will need additional capital to fund further equipment acquisitions. One solution that would avoid further dillution would be to enter into a vendor leasing arrangement with a company like G.E. Capital. In such an arrangment, G.E. Capital buys the equipment from Mela and places it on say a two or three year operating lease with the Dermatologist. Ongoing Card requirements are provided from Mela directly to the Derm. In effect, G.E. Capital is funding the equipment acquistion costs. The major downside to such an arrangement is who markets the equipment in the secondary market upon lease expiration. I have had experience in this arena and while such arrangments can be complex, they are frequently used by companies who are in similiar circumstances to Mela.
    regards endo

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    • Its called a $1 buyback. GE buys the unit from MELA and leases it to whomever for whatever term [1-5 years] the client wants/can afford and at the end of the lease the client has the option of buying the unit for $1 or returning it. Its standard financing and has been done for years, I used $1, it could be any amount up to a fair market residual, as an example. Remember MELA recoups its money on delivery with profit.

    • fish_discover_water_last fish_discover_water_last Nov 15, 2012 1:34 PM Flag

      A couple of thoughts on this. ISRG and others have used this method with significant success. The 3rd party leasing is primarily between the practice or hospital and the leasing agent. Under normal circumstances there is no reason that the leasing agent would have any significant leverage over MELA.Leasing equipment to a hospital is fairly low risk because hospitals don't usually disappear under cover of darkness in the middle of the night. This is less true of a dermatology practice and so the risk would be somewhat greater.

      In the case of ISRG, I believe they had a deal with the leasing company to buy back the system after the lease term. In the past these systems could be refurbished and resold and thus had residual value. More recently ISRG has pretty much stopped doing that because by the time the systems come off lease the new versions have so many new features that the residual value of the older model is negligible. Not sure how this has been handled but it doesn't seem to have hurt ISRG's leasing at all.

      Aside from the moderately higher risk of leasing to a dermatology practice vs a hospital there is one other thing that complicates the use of 3rd party leasing for MelaFind and that is that MELA is intending to retain ownership of the systems. Given this fact, If someone finances the placements for MELA they could potentially end up with significant leverage, but all that will come down to whether there are multiple companies willing to do it. It is still likely that once MELA has established a track record of demand that they can come up with some kind of financing facility to cover inventory. In any case, I doubt that a year from now they will be funding the placements out of their own cash flow.

    • Endo, FIsh has brought this up in the manner of MELA finding funding for the equipment. My question would be one of leverage over MELA? A partnership for MELA would be clearly an advantage however, they need to be careful in who they partner up with.

    • Endo, I agree that's possible. Mela is providing very favorable terms to Derms to get these machines to market. That is a complication but it could be handled if Mela shared in some of the leasing costs with the Derms in order to access this source of capital.

      • 1 Reply to aequitas45
      • fish_discover_water_last fish_discover_water_last Nov 17, 2012 5:21 AM Flag

        As I mentioned MELA's desire to retain ownership may complicate the use of traditional leasing arrangements, even if they were willing to subsidize the lease payments. MELA wants to retain ownership because it gives them leverage and control over the use of their system and technology. This can be important, particularly in the beginning phases of brand building. They want to be able to force upgrades in the future IF NECESSARY or desirable.

        Haven't looked at them in ages but back in the heyday of snail mail, Pitney Bowes exercised evil empire like control over their monopoly on postal meters by retaining ownership of all hardware. Another example of this was prominently featured in a documentary called "Who Killed The Electric Car?" about GM's introduction of their all electric EV1 car in the 1990s. GM did not allow purchase, only lease through their financing arm. Due to this fact they were able to control what technology was out there under their brand name. Without getting into the controversy of why they did it, this arrangement gave them such complete control that they were able to go so far as to forcibly reclaim the vehicles from avid customers and destroy all but a handful of them.

        Not that MELA would want to do this, but if they came up with an upgrade that was much cheaper for them to maintain, they would be able to insist that derm practices upgrade. ISRG does the same thing through incentives which allows them to retire older versions much more quickly and avoid the cost of supporting older versions.

    • samhasson Nov 15, 2012 10:58 AM Flag

      Endo, in relation to how to finance the devices, I would think MelaFind has board members who not only know this, but have access to the GEs of the world in case that is the road they want to travel.

      Sentiment: Hold

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