================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q/A
(Amendment No. 1)
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 000-19627
BIOLASE TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 87-0442441
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
981 Calle Amanecer
San Clemente, California 92673
(Address of Principal Executive Offices, Including Zip Code)
(949) 361-1200
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Number of shares outstanding of the registrant's common stock, $0.001
par value, as of April 22, 2002: 20,027,948.
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BIOLASE TECHNOLOGY, INC.
AMENDMENT NO. 1 TO QUARTERLY REPORT ON FORM 10-Q/A
For the Quarter Ended March 31, 2002
INDEX*
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001 (Restated).... 4
Consolidated Statements of Operations for the three months ended March 31, 2002
and March 31, 2001 (Restated)........................................................ 5
Consolidated Statement of Stockholders' Equity (Restated)............................ 6
Consolidated Statements of Cash Flows for the three months ended March 31, 2002
and March 31, 2001 (Restated)........................................................ 7
Notes to Consolidated Financial Statements........................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................................................... 24
Signatures ..................................................................................... 25
----------
* This Form 10-Q/A amends only items identified in the Index, and no other
information included in the Company's Quarterly Report on Form 10-Q is amended
hereby.
2
INTRODUCTORY NOTE
As reported in the press release in the report of BioLase Technology,
Inc. (the "Company") on Form 8-K filed August 14, 2003, the Company decided to
seek guidance from the Securities and Exchange Commission ("SEC") regarding the
accounting effect of certain language in the Company's purchase order forms. To
protect the Company's right to payment, the forms stated that title to goods
transferred to the customer upon receipt of full payment. Legally, this language
only provided the Company a lien to secure payment.
One of the revenue recognition criteria of Staff Accounting Bulletin No.
101 ("SAB 101"), Revenue Recognition in Financial Statements, requires the
transfer of title and the risks and rewards of ownership to the customer.
Historically, the Company recognized revenue when it received a purchase order,
goods were shipped and the other criteria for revenue recognition were met. As
reported in the press release in the Company's report on Form 8-K filed
August 29, 2003, the Company is amending previously filed financial statements
for all periods subsequent to the effective date of SAB 101 to recognize revenue
with respect to domestic customers upon receipt of full payment. It was
determined that under an interpretation of SAB 101 the language in the Company's
purchase order regarding title prevents revenue from being recognized until full
payment is received. In addition, the Company is amending its previously filed
financial statements to recognize revenue with respect to direct European
customers upon installation, which is when the customer is obligated to pay,
and not at the time of shipment.
The purpose of this Amendment No. 1 on Form 10-Q/A is to restate the
Company's consolidated financial statements as of March 31, 2002 and December
31, 2001, and the three months ended March 31, 2002 and 2001.
The Company is filing amended Quarterly Reports on Form 10-Q/A to
restate the Company's financial statements for the periods ended March 31, 2002
through March 31, 2003. The Company is also filing its Quarterly Report on Form
10-Q for the period ended June 30, 2003, which was delayed while the Company
sought SEC guidance on the revenue recognition issue. The Company will also file
an amendment to its Current Report on Form 8-K/A relating to its acquisition of
the American Dental Laser product line of American Medical Technologies, which
was initially filed on June 4, 2003, and subsequently amended on June 23, 2003
and August 1, 2003.
The Company did not amend its annual reports on Form 10-K for years
prior to 2002 because financial statements for 2001 and 2000 are contained in
the amended Form 10-K/A. Similarly, the Company did not amend its Quarterly
Reports on Form 10-Q for the quarterly periods in 2001 because financial
statements for those periods are contained in the Forms 10-Q/A the Company is
filing for 2002. You should not rely on the financial statements and other
financial information contained in the Company's Forms 10-K and 10-Q for periods
prior to 2002. You should also not rely on any financial statements or financial
information relating to the periods being restated contained in the Company's
Forms 8-K that were filed before the amended Form 10-K/A.
This Form 10-Q/A only reflects the effects of the restatement and does not
otherwise reflect events occurring after the filing of the original Quarterly
Report on Form 10-Q or otherwise modify or update those disclosures.
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BIOLASE TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
MARCH 31, DECEMBER 31,
2002 2001
------------- ------------
(Restated - Note 2)
ASSETS
Current assets:
Cash and cash equivalents $ 2,469,000 $ 2,670,000
Accounts receivable, less allowance of $100,000 and $108,000 in
2002 and 2001, respectively 2,428,000 2,182,000
Inventories, net of reserves of $228,000 and $232,000 in 2002
and 2001, respectively 2,232,000 1,887,000
Deferred charges on product shipped 837,000 605,000
Prepaid expenses and other current assets 259,000 260,000
------------- ------------
Total current assets 8,225,000 7,604,000
Property, plant and equipment, net 1,431,000 392,000
Patents and trademarks, net 85,000 91,000
Other assets 247,000 166,000
------------- ------------
Total assets $ 9,988,000 $ 8,253,000
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 1,792,000 $ 1,792,000
Accounts payable 1,740,000 1,656,000
Accrued liabilities 1,855,000 1,976,000
Customer deposits 87,000 290,000
Deferred revenue on product shipped 1,758,000 1,626,000
Deferred gain on sale of building, current portion 63,000 63,000
Current portion of long-term debt 300,000 -
------------- ------------
Total current liabilities 7,595,000 7,403,000
Deferred gain on sale of building 189,000 205,000
Long term debt 700,000 -
------------- ------------
Total liabilities 8,484,000 7,608,000
------------- ------------
Stockholders' equity:
Preferred stock, par value $0.001, 1,000,000 shares authorized,
no shares issued and outstanding - -
Common stock, par value $0.001, 50,000,000 shares authorized,
issued and outstanding 20,018,000 in 2002 and 19,734,000
in 2001 20,000 20,000
Additional paid-in capital 49,185,000 48,462,000
Accumulated other comprehensive income 4,000 -
Accumulated deficit (47,705,000) (47,837,000)
------------- ------------
Total stockholders' equity 1,504,000 645,000
------------- ------------
Total liabilities and stockholders' equity $ 9,988,000 $ 8,253,000
============= ============
See accompanying notes to consolidated financial statements.
4
ITEM 1. FINANCIAL STATEMENTS (continued).
BIOLASE TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTHS ENDED
MARCH 31,
----------------------------
2002 2001
------------ ------------
(Restated - Note 2)
Net sales $ 5,011,000 $ 2,643,000
Cost of sales 1,898,000 1,196,000
------------ ------------
Gross profit 3,113,000 1,447,000
------------ ------------
Other income 16,000 -
------------ ------------
Operating expenses:
Sales and marketing 2,074,000 1,641,000
General and administrative 474,000 474,000
Engineering and development 419,000 360,000
------------ ------------
Total operating expenses 2,967,000 2,475,000
------------ ------------
Income (loss) from operations 162,000 (1,028,000)
Interest income 3,000 6,000
Interest expense (33,000) (76,000)
------------ ------------
Net income (loss) $ 132,000 $ (1,098,000)
============ ============
Net earnings (loss) per share -
Basic $ 0.01 $ (0.06)
============ ============
Diluted $ 0.01 $ (0.06)
============ ============
Shares used in computing net income (loss) per
share -
Basic 19,791,000 19,430,000
============ ============
Diluted 21,404,000 19,430,000
============ ============
See accompanying notes to consolidated financial statements.
5
ITEM 1. FINANCIAL STATEMENTS (continued).
BIOLASE TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
ACCUMULATED
COMMON STOCK AND OTHER TOTAL
PREFERRED STOCK ADDITIONAL PAID-IN CAPITAL COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT INCOME DEFICIT EQUITY
------- ------ ---------- -------------- ------------- ------------- -------------
Balances at December 31, 2001
(Restated - Note 2) - $ - 19,734,000 $ 48,482,000 $ - $ (47,837,000) $ 645,000
Exercise of stock options - - 119,000 310,000 - - 310,000
Exercise of warrants - - 165,000 413,000 - - 413,000
Comprehensive income (loss):
Net income (Restated - Note 2) - - - - - 132,000 132,000
Foreign currency translation
Adjustment - - - - 4,000 - 4,000
------- ------ ---------- -------------- ------------- ------------- -------------
Total comprehensive income
(Restated - Note 2) - - - - 4,000 132,000 136,000
------- ------ ---------- -------------- ------------- ------------- -------------
Balances at March 31, 2002
(Restated - Note 2) - $ - 20,018,000 $ 49,205,000 $ 4,000 $ (47,705,000) $ 1,504,000
======= ====== ========== ============== ============= ============= =============
See accompanying notes to consolidated financial statements.
6
ITEM 1. FINANCIAL STATEMENTS (continued).
BIOLASE TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2002 2001
----------- --------------
(Restated - Note 2)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 132,000 $ (1,098,000)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 40,000 59,000
Gain on disposal of assets (16,000) -
Provision (benefit) for bad debts (4,000) 96,000
Provision for inventory excess and obsolescence (4,000) 5,000
Changes in assets and liabilities:
Accounts receivable (242,000) (334,000)
Inventory (341,000) 269,000
Deferred charges on product shipped (232,000) (212,000)
Prepaid expenses and other assets (81,000) (7,000)
Accounts payable and accrued expenses (37,000) 1,000
Deferred revenue on product 132,000 441,000
Customer deposits (203,000) 15,000
----------- --------------
Net cash used in operating activities (856,000) (765,000)
----------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (72,000) (12,000)
Proceeds from the sale of property, plant and equipment - 2,261,000
----------- --------------
Net cash (used in) provided by investing activities (72,000) 2,249,000
----------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on mortgage note payable - (1,195,000)
Proceeds from exercise of stock options and warrants 723,000 243,000
----------- --------------
Net cash provided by (used in) financing activities 723,000 (952,000)
----------- --------------
Effect of exchange rate changes on cash 4,000 -
----------- --------------
(Decrease) increase in cash and cash equivalents (201,000) 532,000
Cash and cash equivalents at beginning of period 2,670,000 2,002,000
----------- --------------
Cash and cash equivalents at end of period 2,469,000 2,534,000
=========== ==============
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid during the period for interest $ 13,000 $ 61,000
=========== ==============
Cash paid during the period for taxes $ 2,000 $ -
=========== ==============
NONCASH FINANCING ACTIVITIES:
Debt incurred in connection with acquisition of
production facility $ 1,000,000 $ -
----------- --------------
$ 1,000,000 $ -
=========== ==============
See accompanying notes to consolidated financial statements.
7
BIOLASE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have
been prepared on a basis consistent with the restated December 31, 2001 audited
consolidated financial statements and include all material adjustments,
consisting of normal recurring adjustments, necessary to fairly present the
information set forth therein. These unaudited interim consolidated financial
statements do not include all the footnotes, presentations and disclosures
normally required by generally accepted accounting principles for complete
financial statements. These financial statements should be read in conjunction
with the restated audited consolidated financial statements for the year ended
December 31, 2001 and notes thereto included in our Annual Report on Form 10-K/A
for the year ended December 31, 2002, as amended by Amendment No.1 filed with
the Securities and Exchange Commission ("SEC") on September 16, 2003.
The consolidated financial statements include the accounts of BioLase
Technology, Inc. and its two wholly-owned subsidiaries: Societe Endo Technic,
which is inactive and which we intend to dissolve, and BIOLASE Europe GmbH
("BIOLASE Europe"), a foreign subsidiary incorporated in Germany in December
2001. We have eliminated all material intercompany transactions and balances in
the accompanying financial statements. As of March 31, 2002, $1.1 million of net
assets were located outside of the United States, in BIOLASE Europe.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Due to the inherent uncertainty involved in making
estimates, actual results reported in future periods may be based on amounts
that differ materially from those estimates.
The results of operations for the three months ended March 31, 2002 are
not necessarily indicative of the results to be expected for the full fiscal
year.
NOTE 2 - RESTATEMENT OF FINANCIAL STATEMENTS
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in
Financial Statements, requires the transfer of title and the risks and rewards
of ownership to the customer prior to the recognition of revenue. We originally
prepared our financial statements on the basis that this transfer of title
occurred upon shipment. Subsequent to the issuance of our consolidated financial
statements as of and for the year ended December 31, 2002, it was determined,
with respect to sales to domestic customers, that title transferred upon receipt
of full payment, due to a clause in our purchase orders. As a result, we
have restated our consolidated financial statements as of March 31, 2002 and
December 31, 2001 and the three months ended March 31, 2002 and 2001 to defer
revenue upon shipment and to recognize it upon receipt of full payment for our
domestic customers. It was also determined that revenue recognition for products
shipped directly to customers in Europe, which we commenced in 2002, is
appropriate at the time of installation, which is when the customer is obligated
to pay, and not at the time of shipment as recognized in the previously filed
financial statements. In conjunction with these revisions, we have deferred the
revenue, the related cost of inventory and related sales commissions.
As a result of the restatement, our net revenue for the three months
ended March 31, 2002 decreased by $219,000, our gross profit decreased by $8,000
and our net income increased by $13,000 ($0.00 per fully diluted share). For the
three months ended March 31, 2001, our net revenue decreased by $440,000 our
gross profit decreased by $282,000 and our net loss increased by $326,000 ($0.02
per fully diluted share).
8
BIOLASE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The statements of operations have been restated as follows:
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2002 MARCH 31, 2001
-------------------------- --------------------------
AS REPORTED RESTATED AS REPORTED RESTATED
------------ ----------- ----------- ------------
Net sales................................. $ 5,230,000 $ 5,011,000 $ 3,083,000 $ 2,643,000
Cost of sales............................. 2,109,000 1,898,000 1,354,000 1,196,000
Operating expenses........................ 2,988,000 2,967,000 2,431,000 2,475,000
Income from operations.................... 133,000 162,000 (702,000) (1,028,000)
Net income................................ $ 119,000 $ 132,000 $ (772,000) $ (1,098,000)
Net income per share:
Basic.................................. $ 0.01 $ 0.01 $ (0.04) $ (0.06)
Diluted................................ $ 0.01 $ 0.01 $ (0.04) $ (0.06)
The balance sheets have been restated as follows:
MARCH 31, 2002 DECEMBER 31, 2001
-------------------------- --------------------------
AS REPORTED RESTATED AS REPORTED RESTATED
------------ ----------- ----------- ------------
Working capital........................... $ 1,551,000 $ 630,000 $ 1,135,000 $ 201,000
Total assets.............................. 9,151,000 9,988,000 7,561,000 8,253,000
Stockholders' equity...................... 2,425,000 1,504,000 1,579,000 645,000
NOTE 3 - SUPPLEMENTARY BALANCE SHEET INFORMATION
DECEMBER 31,
MARCH 31, 2002 2001
-------------- ------------
INVENTORIES
Materials $ 990,000 $ 1,020,000
Work-in-process 760,000 656,000
Finished goods 482,000 211,000
-------------- ------------
Inventories $ 2,232,000 $ 1,887,000
============== ============
DECEMBER 31,
MARCH 31, 2002 2001
-------------- ------------
PROPERTY, PLANT AND EQUIPMENT, NET
Building $ 1,000,000 $ -
Leasehold improvements 57,000 54,000
Equipment and computers 508,000 448,000
Furniture and fixtures 212,000 202,000
-------------- ------------
Total 1,777,000 704,000
Less accumulated depreciation (346,000) (312,000)
-------------- ------------
Property, plant and equipment, net $ 1,431,000 $ 392,000
============== ============
DECEMBER 31,
MARCH 31, 2002 2001
-------------- ------------
PATENTS AND TRADEMARKS, NET
Patents $ 112,000 $ 112,000
Trademarks 69,000 69,000
-------------- ------------
Total 181,000 181,000
Less accumulated amortization (96,000) (90,000)
-------------- ------------
Patents and trademarks, net $ 85,000 $ 91,000
============== ============
9
BIOLASE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
DECEMBER 31,
MARCH 31, 2002 2001
-------------- ------------
ACCRUED LIABILITIES
Payroll and benefits $ 648,000 $ 652,000
Warranty expense 506,000 561,000
Other 701,000 763,000
-------------- ------------
Accrued liabilities $ 1,855,000 $ 1,976,000
============== ============
NOTE 4 - ACCOUNTS RECEIVABLE
At March 31, 2002 our allowance for uncollectible accounts was $100,000,
principally as a reserve for accounts receivable on sales to a foreign
distributor. This amount reflects a reduction of $95,000 from our allowance at
December 31, 2001 due to previously unanticipated payments received from that
distributor.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
In January 2002, our wholly owned subsidiary, BIOLASE Europe, purchased
a production facility in Germany with ten employees. The stated purchase price
is $1,000,000. We are required to pay the first installment of the purchase
price by May 31, 2002. The amount of the first installment will be determined by
us, but must be between $300,000 and $500,000. Thereafter, we must pay $500,000
by April 1, 2003 and the balance of the purchase price, if any, must be paid by
December 1, 2003. We are currently negotiating with a third party for that party
to pay all or a portion of the first installment in exchange for certain rights
that we would grant to the third party. In the event we do not reach an
agreement with this third party, then both the purchase price and the initial
installment will be reduced by $150,000.
NOTE 6 - LINE OF CREDIT
At March 31, 2002, we had approximately $1,792,000 outstanding under a
revolving credit agreement with a bank. The agreement provides for borrowings up
to $2,500,000 for financing inventories and is collateralized by substantially
all accounts receivable and inventories. The interest rate is based upon LIBOR
plus 0.5% at the time of any borrowings. At March 31, 2002, the interest rate on
the outstanding balance was 2.4%. The effective interest rate for the quarter
ended March 31, 2002, including the amortization of the fair value of warrants
in connection with issuing our line of credit was 5.91%. The revolving credit
agreement expires on January 31, 2003. The maximum available under the line will
decrease to $1,800,000 on May 1, 2002.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
In March 2001, we entered into a sale-leaseback transaction in which we
sold and leased back our manufacturing facility. The result of the sale was a
$316,000 gain, which has been deferred and is being amortized over the five-year
lease term. The related lease is being accounted for as an operating lease.
We also lease certain office equipment under operating lease
arrangements. Future minimum rental commitments under operating leases as of
March 31, 2002 for each of the periods ending December 31 are as follows:
Remainder of 2002 $ 199,000
2003 270,000
2004 261,000
2005 249,000
2006 61,000
--------------
Total $ 1,040,000
==============
NOTE 8 - EARNINGS PER SHARE
We compute basic earnings (loss) per share by dividing the net income
(loss) attributable to common stockholders by the weighted average number of
shares outstanding. We compute diluted earnings per share by dividing net income
by the weighted average number of shares outstanding including potentially
dilutive securities
10
BIOLASE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
such as stock options and warrants. Potential common shares totaling 78,000 were
not included in the diluted earnings per share amounts for the three months
ended March 31, 2002 as their effect would have been anti-dilutive.
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
------------ --------------
Net income (loss) $ 132,000 $ (1,098,000)
============ ==============
Weighted average shares outstanding - basic 19,791,000 19,430,000
Dilutive effect of stock options and warrants 1,613,000 -
------------ --------------
Weighted average shares outstanding - diluted 21,404,000 19,430,000
============ ==============
NOTE 9 - DERIVATIVE FINANCIAL INSTRUMENTS
At January 1, 2001, we adopted Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
(FAS 133) as amended by Statement of Financial Accounting Standards No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an amendment of FAS 133. The adoption of FAS 133 did not have a material impact
on our consolidated financial position or results of operations. Our derivative
financial instruments under FAS 133 are discussed below.
All derivatives are recorded in our consolidated balance sheet at fair
value. The estimated fair value of derivative financial instruments represents
the amount required to enter into similar offsetting contracts with similar
remaining maturities based on quoted market prices. Our foreign exchange forward
contracts are not designated as hedges. Changes in the fair value of these
derivatives are recorded in current earnings.
The notional amount of forward exchange contracts is the amount of
foreign currency bought or sold at maturity. Notional amounts are indicative of
the extent of our involvement in the various types and uses of derivative
financial instruments and are not a measure of our exposure to credit or market
risks through its use of derivatives.
Credit exposure for derivative financial instruments is limited to the
amounts, if any, by which the counterparties obligations under the contracts
exceed the obligations of us to the counterparties. Potential credit losses are
minimized through careful evaluation of counterparty credit standing, selection
of counterparties from a limited group of high-quality institutions and other
contract provisions.
At March 31, 2002, derivative financial instruments comprise of foreign
exchange forward contracts with notional amounts of $702,000 and estimated fair
value of $5,000.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING INFORMATION
This Report contains forward-looking statements, which include, but are
not limited to, statements concerning the need for additional capital, our
ability to renegotiate our line of credit and to continue to achieve
profitability, the market acceptance of our products, the competitive nature of
and anticipated growth in our markets, and our projected revenues, expenses,
gross profit and net income. These forward-looking statements are based on our
current expectations, estimates and projections about our industry, and reflect
management's beliefs and certain assumptions made by us based upon information
available to us at the time of this Report. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," "may," "will"
and variations of these words or similar expressions are intended to identify
forward-looking statements. These forward-looking statements are not guarantees
of future performance and are subject to risks, uncertainties and assumptions
that are difficult to predict, including those set forth under the heading "Risk
Factors" below. Therefore, our actual results could differ materially and
adversely from those expressed in any forward-looking statements as a result of
various factors. We undertake no obligation to revise or update publicly any
forward-looking statements for any reason.
You should read the following discussion and analysis in conjunction
with the Consolidated Financial Statements and related Notes thereto contained
elsewhere in this Report before deciding to invest in our company or to maintain
or increase your investment. The information contained in this Report is not a
complete description of our business or the risks associated with an investment
in our common stock. We urge you to carefully review and consider the various
disclosures made by us in this Report and in our other reports filed with the
Securities and Exchange Commission ("SEC"), including our Amended Annual Report
on Form 10-K/A for the year ended December 31, 2002, and our subsequent reports
on Forms 10-Q and other filings with the SEC that discuss our business in
greater detail.
RESTATEMENT OF FINANCIAL STATEMENTS
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in
Financial Statements, requires the transfer of title and the risks and rewards
of ownership to the customer prior to the recognition of revenue. We originally
prepared our financial statements on the basis that this transfer of title
occurred upon shipment. Subsequent to the issuance of our consolidated financial
statements as of and for the year ended December 31, 2002, it was determined,
with respect to sales to domestic customers, that title transferred upon receipt
of full payment, due to a clause in our purchase orders. As a result, we
have restated our consolidated financial statements as of March 31, 2002 and
December 31, 2001 and the three months ended March 31, 2002 and 2001 to defer
revenue upon shipment and to recognize it upon receipt of full payment for our
domestic customers. It was also determined that revenue recognition for products
shipped directly to customers in Europe, which we commenced in 2002, is
appropriate at the time of installation, which is when the customer is obligated
to pay, and not at the time of shipment as recognized in the previously filed
financial statements. In conjunction with these revisions, we have deferred the
revenue, the related cost of inventory and related sales commissions.
As a result of the restatement, our net revenue for the three months
ended March 31, 2002 decreased by $219,000, our gross profit decreased by $8,000
and our net income increased by $14,000 ($0.00 per fully diluted share). For the
three months ended March 31, 2001, our net revenue decreased by $440,000 our
gross profit decreased by $282,000 and our net loss increased by $326,000 ($0.02
per fully diluted share).
12
The statements of operations have been restated as follows:
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2002 MARCH 31, 2001
------------------------- --------------------------
AS REPORTED RESTATED AS REPORTED RESTATED
----------- ----------- ----------- ------------
Net sales................................. $ 5,230,000 $ 5,011,000 $ 3,083,000 $ 2,643,000
Cost of sales............................. 2,109,000 1,898,000 1,354,000 1,196,000
Operating expenses........................ 2,988,000 2,967,000 2,431,000 2,475,000
Income from operations.................... 133,000 162,000 (702,000) (1,028,000)
Net income................................ $ 119,000 $ 132,000 $ (772,000) $ (1,098,000)
Net income per share:
Basic.................................. $ 0.01 $ 0.01 $ (0.04) $ (0.06)
Diluted................................ $ 0.01 $ 0.01 $ (0.04) $ (0.06)
The balance sheets have been restated as follows:
MARCH 31, 2002 DECEMBER 31, 2001
------------------------- --------------------------
AS REPORTED RESTATED AS REPORTED RESTATED
----------- ----------- ----------- ------------
Working capital........................... $ 1,551,000 $ 630,000 $ 1,135,000 $ 201,000
Total assets.............................. 9,151,000 9,988,000 7,561,000 8,253,000
Stockholders' equity...................... 2,425,000 1,504,000 1,579,000 645,000
OVERVIEW
BioLase Technology, Inc. is a medical technology company that designs,
develops, manufactures and markets advanced dental, cosmetic and surgical
products. We currently market two primary products. The Waterlase(TM) system,
utilizing our patented Hydrokinetic(R) technology of combining water and laser
energy, is a device which can be applied to the treatment of both hard and soft
dental tissues. The LaserSmile(TM) system incorporates a diode semiconductor
laser for a broad range of soft tissue and cosmetic procedures.
In January 2002, we received from the United States Food and Drug
Administration ("FDA") clearance for the application of our Hydrokinetic
technology to perform complete root canal therapy (EndoLase(TM)). In February
2002, we received FDA clearance for the use of Hydrokinetic technology to cut
oral bone tissue (OsseoLase(TM)). We believe these clearances substantially
broaden the application of our technology within the dental market.
We have patents and have received clearances from the FDA for
applications in markets other than dentistry, such as dermatology. However, our
current business plan is focused on the dental market because of the significant
market potential and our leading position in that market.
In January we acquired a production facility in Germany to strengthen
our international sales plan in Europe and neighboring regions. This transaction
significantly increased our overall manufacturing capacity and provided us with
an improved ability to service European sales.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses for
each period.
The following represents a summary of our critical accounting policies,
defined as those policies that we believe are: (i) the most important to the
portrayal of our financial condition and results of operations, and (ii) that
13
require our most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effects of matters that are inherently
uncertain.
Revenue Recognition. We recognize revenue in accordance with SEC Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, or SAB
101, as amended by SAB 101A and 101B. SAB 101 requires that four basic criteria
must be met before revenue can be recognized:
. persuasive evidence of an arrangement exists;
. delivery has occurred and title and the risks and rewards of
ownership have been transferred to our customer or services have
been rendered;
. the price is fixed and determinable; and
. collectibility is reasonably assured.
Assuming that all of the above criteria have been met, we record revenue
for domestic sales when we receive payment in full, due to a clause in our
purchase order that states title transfers upon payment in full; we record
revenue for international direct sales when the product is installed, which is
when the customer is obligated to pay and we record revenue for sales to
distributors upon delivery.
Valuation of Accounts Receivable. We maintain an allowance for
uncollectible accounts receivable to estimate the risk of extending credit to
customers. The allowance is estimated based on customer compliance with credit
terms, the financial condition of the customer and collection history where
applicable. Additional allowances could be required if the financial condition
of our customers were to be impaired beyond our estimates.
Valuation of Inventory. Inventory is valued at the lower of cost
(estimated using the first-in, first-out method) or market. We periodically
evaluate the carrying value of inventories and maintain an allowance for
obsolescence to adjust the carrying value as necessary to the lower of cost or
market. The allowance is based on physical and technical functionality as well
as other factors affecting the recoverability of the asset through future sales.
Unfavorable changes in estimates of obsolete inventory would result in an
increase in the allowance and a decrease in gross profit.
Valuation of Long-Lived Assets. Property, plant and equipment,
intangible and certain other long-lived assets are amortized over their useful
lives. Useful lives are based on our estimate of the period that the assets will
generate revenue or otherwise productively support our business goals.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable through future business operations. In our estimate, no provision
for impairment is currently required on any of our long-lived assets.
Warranty Cost. Products sold directly to end-users are covered by a
warranty against defects in material and workmanship for a period of one year.
Products sold internationally to distributors are covered by a warranty on parts
for up to fourteen months with additional coverage on certain components for up
to two years. We accrue a warranty reserve to estimate the risk of incurring
costs to provide warranty services. The accrual is based on our historical
experience and our expectation of future conditions. An increase in warranty
claims or in the costs associated with servicing those claims would result in an
increase in the accrual and a decrease in gross profit.
Litigation and Other Contingencies. We regularly evaluate our exposure
to threatened or pending litigation and other business contingencies. Because of
the uncertainties related to the amount of loss from litigation and other
business contingencies, the recording of losses relating to such exposures
requires significant judgment about the potential range of outcomes. As
additional information about current or future litigation or other contingencies
becomes available, we will assess whether such information warrants the
recording of additional expense relating to contingencies. To be recorded as
expense, a loss contingency must be both probable and measurable. If a loss
contingency is material but is not both probable and estimable, we will disclose
it in notes to the financial statements.
14
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data
expressed as a percentage of net sales:
THREE MONTHS ENDED
MARCH 31,
(Restated - Note 2)
-------------------
2002 2001
-------- --------
Net sales 100.0% 100.0%
Cost of sales 37.9 45.2
-------- --------
Gross profit 62.1 54.8
Other income 0.3 -
Operating expenses:
Sales and marketing 41.4 62.1
General and administrative 9.4 18.0
Engineering and development 8.4 13.6
-------- --------
Total operating expenses 59.2 93.7
-------- --------
Income (loss) from operations 3.2 (38.9)
Non-operating income (loss) (0.6) (2.7)
-------- --------
Net income (loss) 2.6% (41.6)%
======== ========
During the first fiscal quarter of 2002, demand for our products
continued to increase when compared to the same period in previous years. Net
sales for the three months ended March 31, 2002 were $5.0 million, an increase
of $2.4 million or 90%, as compared with net sales of $2.6 million for the
three months ended March 31, 2001. The growth was attributable to strong
domestic increase in unit volume of both our Waterlase and LaserSmile systems.
The addition of the cosmetic tooth whitening application in the third quarter of
last year was a key factor in the increase of LaserSmile sales. International
sales were not a factor in sales growth for the quarter. Sales of consumables
increased to 4% of total sales this quarter compared to 2% in the first quarter
of 2001. Consistent with the seasonality we have experienced in prior years,
sales for the first quarter were lower than the preceding fourth quarter despite
the overall increasing trend in sales.
Gross profit for the three months ended March 31, 2002 increased 115% to
$3.1 million as a result of the increase in sales and consequent greater
absorption of fixed manufacturing costs. Gross margin for the quarter was 62%
compared to 55% for the quarter ended March 31, 2001. Increased manufacturing
efficiencies contributed to the increase in gross margin, offset partially by
start-up costs for our German facility and the addition of resources to
manufacturing in anticipation of greater production.
Other Income. The gain on sale of assets of for the three months ended
March 31, 2002 increased $16,000 primarily related to two transactions. In 2000,
we purchased our San Clemente manufacturing facility and offices in order to
avoid moving our operations. In 2001, we sold the facility and leased it back
for a five-year term with an additional five year option, resulting in a gain of
$316,000. We are recognizing that gain for accounting purposes over the term of
the lease.
Operating expenses were 59% of net sales for the three months ended
March 31, 2002, compared to 94% for the first quarter of 2001. The decrease in
operating expenses as a percentage of sales was due to the gain in sales
relative to the change in costs required to support the increased level of
operations. In terms of absolute dollars, operating expenses for the three
months ended March 31, 2002 increased $0.5 million or 20% to $3.0 million.
Increases relate primarily to higher sales and marketing costs.
Sales and marketing expenses increased 26% to $2.1 million at March 31,
2002 compared to $1.6 million for the quarter ended March 31, 2001. Primary
reasons for the increase are labor increases due to growth in the size of the
sales force, commission expense on a higher level of sales and an increase in
the scope of our nationwide seminar marketing program for 2002.
General and administrative expenses remained constant with the prior
year quarter. However, there were increases due principally to higher labor
expense and consulting fees plus start-up expenses related to our German
15
subsidiary, increase in insurance rates and the cost of infrastructure needed to
support the growth of the business, which were offset by a reduction in the
allowance for doubtful accounts.
Engineering and development expenses increased $59,000 or 16% to
$419,000 for the first quarter of 2002 compared to $360,000 for the first
quarter of 2001. Increased expenses primarily related to materials and
consulting fees on new product development.
Net interest expense decreased from $70,000 in the first quarter of 2001
to $30,000 in the first quarter of 2002 as a result of the payoff of the
mortgage note payable on our manufacturing facility in 2001.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, we had $630,000 in working capital. Our principal
source of liquidity at March 31, 2002 consists of our cash balance of $2.5
million. For the quarter, significant sources of cash were from the exercise of
stock options and warrants of $723,000. These sources of cash were offset by
increases in accounts receivable and inventory of $583,000 and other working
capital items totaling $405,000.
Accounts receivable, net, increased to $2.4 million at March 31, 2002
from $2.2 million at December 31, 2001. The increase was due to the higher sales
volume experienced in the first quarter for which the receivable will be
collected in the second quarter of 2002. We believe that the allowance for
doubtful accounts at March 31, 2002 of $100,000 is adequate to provide for
anticipated losses on uncollectible amounts.
Inventories, net, increased to $2.2 million at March 31, 2002 from $1.9
million at December 31, 2001. The increase was due to increased production
necessary to meet expected 2002 demand.
Our business continues to focus on the manufacturing and marketing of
laser-based technologies the Waterlase(TM) and the LaserSmile(TM) laser systems.
Financing the development of our products and our operations has been achieved
principally through the private placements of common stock and the exercise of
stock options and warrants, though we have experienced significant increased
sales over the last two years.
In January 2002, our wholly owned subsidiary, BIOLASE Europe, purchased
a production facility in Germany with ten employees for $1,000,000. We are
required to pay the first installment of the purchase price by May 31, 2002. The
amount of the first installment will be determined by us, but must be between
$300,000 and $500,000. Thereafter, we must pay $500,000 by April 1, 2003 and the
balance of the purchase price, if any, must be paid by December 1, 2003. We are
currently negotiating with a third party for that party to pay all or a portion
of the first installment in exchange for certain rights that we would grant to
the third party. In the event we do not reach an agreement with this third
party, then both the purchase price and the initial installment will be reduced
by $150,000.
The German facility, which is ISO 9001 certified, consists of two
buildings equipped for laser production. This facility will substantially
increase our production capacity. BIOLASE Europe also has a highly qualified
technical staff experienced in laser principles and design, delivery systems,
optics, technical service and field support. BIOLASE Europe will manufacture our
products in Germany, provide direct support for our expanding international
dealer network and contribute to our ongoing research and development of new
products.
We have no other material commitments for capital expenditures as of
March 31, 2002.
At March 31, 2002, we had $1.8 million outstanding under a revolving
credit agreement with a bank. The revolving credit agreement provides for
borrowings of up to $2.5 million for the financing of inventory and is
collateralized by substantially all of our accounts receivable and inventories.
The interest rate is computed based upon LIBOR plus 0.5%. The balance at
December 31, 2001 was $1.8 million and during the quarter, there were no draws
or repayments. We do not intend to make any further borrowings under this line
of credit in the immediate future. In May 2002, the maximum borrowings available
under this line of credit will be reduced to $1.8 million. The current revolving
credit agreement expires on January 31, 2003, at which point we will be required
either to pay any remaining balance of the credit facility or refinance the
credit facility.
Our liquidity and cash requirements fluctuate based on the timing and
extent of a number of factors. For instance, during periods of sales growth, net
changes in assets and liabilities will tend to represent a use of cash
16
because we will incur costs and expend cash in advance of receiving cash from
our customers. We believe that our current cash balances plus cash to be
generated from operations will be adequate to meet our debt service
requirements, capital expenditures and sustain our operations through the end of
fiscal 2002. In addition, during 2002, we expect that additional warrants
expiring in 2002 will be exercised, generating up to an additional $1.7 million
from external sources. Should we require further capital resources in 2002, we
would most likely address such requirement through a combination of product
sales, sales of equity securities through private placements, and/or debt
financing. If such additional debt or equity is needed, no assurances can be
given that we would be able to obtain such additional capital resources. If
unexpected events occur requiring us to obtain additional capital and we are
unable to do so, we then might attempt to preserve our available resources by
deferring the creation or satisfaction of various commitments, deferring the
introduction of various products or entry into various markets, or otherwise
scaling back our operations. If we were unable to raise such additional capital
or defer certain costs as described above, such inability would have an adverse
effect on our financial position, results of operations and cash flows.
17
RISK FACTORS
Before investing in our company or deciding to maintain or increase your
investment, you should carefully consider the risks described below, in addition
to the other information contained in this report and in our other filings with
the SEC. The risks and uncertainties described below are not the only ones
facing our company. Additional risks and uncertainties not presently known to us
or that we currently deem immaterial may also affect our business operations. If
any of these risks actually occur, our business, financial condition or results
of operations could be seriously harmed. In that event, the market price for our
common stock could decline and you may lose all or part of your investment.
We May Not Be Able to Continue or Increase Our Net Income in the Future,
Which May Cause the Trading Price of Our Common Stock to Decline.
We may not be able to continue to achieve net income. Prior to the third
quarter of 2001, we had not reached the break-even point as we transitioned from
our research and development phase and began commercializing our technology.
Even if we continue to achieve net income, we may not be able to increase net
income on a quarterly or annual basis in the future. Our ability to achieve
sustained or increased net income is, in turn, dependent on many of the other
risk factors identified in this report below. If we are unable to continue or
increase our net income in the future, we may not be able to successfully
operate our business and our stock price may decline.
We May Not Be Able to Secure Additional Financing to Meet Our Future
Capital Needs.
Our line of credit expires on January 31, 2003. If we are unable to
renew our line of credit at that time on acceptable terms, or at all, and we are
required to repay the line of credit, absent sufficient cash flow from
operations or the sale of securities, the diversion of resources for that
purpose will adversely affect our operations and financial condition and our
ability to achieve future growth in our net sales. In addition, during 2002 and
2003 all of our long-term debt will become due and payable. Unless we can
generate sufficient cash flow from sustained profitability, we will continue to
be dependent on the availability of external financing to meet our operating and
capital needs, including the repayment of current debt obligations. We may not
be able to secure additional debt or equity financing on terms acceptable to us,
or at all, at the time when we need such funding. If we do raise funds by
issuing additional equity or convertible debt securities, the ownership
percentages of existing stockholders would be reduced, and the securities that
we issue may have rights, preferences or privileges senior to those of the
holders of our common stock. If we raise additional funds by issuing debt, we
may be subject to limitations on our operations, including limitations on the
payment of dividends. Our inability to raise additional funds on a timely basis
will make it difficult for us to achieve our business plan and will have a
material adverse effect on our business, financial condition and results of
operations.
Our Quarterly Revenues and Operating Results May Fluctuate in Future
Periods and We May Fail to Meet Expectations, Which May Cause The Price of
Our Common Stock to Decline.
Our quarterly revenues and operating results have fluctuated and are
likely to continue to vary from quarter to quarter due to a number of factors,
many of which are not within our control. If quarterly revenues or operating
results fall below the expectations of investors or securities analysts, the
price of our common stock could decline substantially. Factors that might cause
quarterly fluctuations in our revenues and operating results include the factors
described in the subheadings below as well as:
. The evolving and varying demand for dental and medical lasers;
. Our ability to develop, introduce, market and gain market acceptance of
new products and product enhancements in a timely manner;
. Our ability to control costs;
. The size, timing, rescheduling or cancellation of significant customer
orders;
. The introduction of new products by competitors;
. The availability and reliability of components used to manufacture our
products;
. Changes in our pricing policies or those of our suppliers and
competitors, as well as increased price competition in general;
18
. The mix of our domestic and international sales, and the risks and
uncertainties associated with our international business;
. Costs associated with any future acquisitions of technologies and
businesses; and
. General global economic and political conditions, including
international conflicts and acts of terrorism.
In addition, a significant amount of our sales in any quarter may
consist of sales through a single distributor. As a result, the timing of orders
by this distributor may impact our quarter-to-quarter results. The loss of or a
substantial reduction in orders from this distributor could seriously harm our
business, financial condition and results of operations. Due to all of the
factors listed above and the other risks discussed in this report, you should
not rely on quarter-to-quarter comparisons of our operating results as an
indication of our future performance.
Our Business Depends on the Acceptance of Our Products, and It Is Uncertain
Whether the Market Will Broadly Accept Our Products.
Our future success will depend on our ability to demonstrate to dentists
and physicians the potential cost and performance advantages of our laser
systems over traditional methods of treatment and, to a lesser extent, over
competitive laser systems. Our products represent relatively new technologies in
the dental market, and have not yet achieved widespread market acceptance.
Factors that may inhibit mass adoption of laser technologies by dentists and
physicians include the cost of the products, concerns about the safety, efficacy
and reliability of lasers and the ability to obtain reimbursement of laser
procedures under health plans. Current economic pressure may make dentists and
physicians reluctant to purchase substantial capital equipment or invest in new
technologies. The failure of medical lasers to achieve broad market acceptance
would have an adverse effect on our business, financial condition and results of
operations. We cannot assure you that we will have sufficient resources to
continue to successfully market our products to achieve broad market acceptance.
We Depend on a Limited Number of Suppliers, and If We Cannot Secure
Alternate Suppliers, Our Business May Be Harmed.
We purchase certain raw materials and components included in our
products from a limited group of qualified suppliers, and we do not have
long-term supply contracts with any of our key suppliers. Our growth and ability
to meet customer demand depends in part on our ability to obtain timely
deliveries of materials and components from our suppliers. Certain components of
our products are currently available only from a single source or limited
sources. Although we believe that alternate sources of supply are available for
most of our single-sourced materials and components, a change in a single or
limited source supplier, or an inability to find an alternate supplier, could
create manufacturing delays, disrupt sales and cash flow, and harm our
reputation, any of which could adversely affect our business, financial
condition and results of operations.
If We Are Unable to Protect Our Intellectual Property Rights, Our
Competitive Position Could Be Harmed or We Could Be Required to Incur
Expenses to Enforce Our Rights.
Our success will depend, in part, on our ability to obtain patent
protection for our products and technology, to preserve our trade secrets and to
operate without infringing the intellectual property of others. We rely on
patents to establish and maintain proprietary rights in our technology and
products. However, we cannot assure you that we will be able to obtain any
further patents, that any of our proprietary rights will not be challenged,
invalidated or circumvented, or that any such rights will provide a sustainable
competitive advantage. Competitors may claim that we have infringed their
current or future intellectual property rights. We may not prevail in any future
intellectual property infringement litigation given the complex technical issues
and inherent uncertainties in litigation. Any claims, with or without merit,
could be time-consuming and distracting to management, result in costly
litigation, cause product shipment delays, or require us to enter into royalty
or licensing agreements. Additionally, in the event an intellectual property
claim against us is successful, we might not be able to obtain a license on
acceptable terms or license a substitute technology or redesign our products to
avoid infringement. Any of the foregoing adverse events could seriously harm our
business, financial condition and results of operations.
19
We Have Significant International Sales and Are Subject to Risks Associated
with Operating in International Markets.
In the past few years, international sales have comprised a significant
portion of our net sales. Our international sales declined in the prior year,
and political and economic conditions outside the United States could make it
difficult for us to increase our international sales or to operate abroad. In
addition, in February of this year we made a significant investment in a
production facility in Germany to manufacture and service devices to be sold in
Europe.
In the future, we intend to continue to pursue and expand our
international business activities. International operations, including our
production facility in Germany, are subject to many inherent risks, including:
. Political, social and economic instability and increased security
concerns;
. Fluctuations in currency exchange rates;
. Exposure to different legal standards;
. Reduced protection for our intellectual property in some countries;
. Burdens of complying with a variety of foreign laws;
. Import and export license requirements and restrictions of the
United States and each other country in which we operate;
. Trade restrictions;
. The imposition of governmental controls;
. Unexpected changes in regulatory or certification requirements;
. Changes in tariffs;
. Difficulties in staffing and managing international operations;
. Longer collection periods and difficulties in collecting receivables
from foreign entities; and
. Potentially adverse tax consequences.
We believe that international sales will continue to represent a
significant portion of our net sales, and that continued growth and
profitability may require further expansion of our international operations. A
substantial percentage of our international sales are denominated in the local
currency. As a result, an increase in the relative value of the dollar could
make our products more expensive and potentially less price competitive in
international markets. Other than a forward contract to offset the risk related
to the amounts payable for the German production facility, we do not currently
engage in any transactions as a hedge against risks of loss due to foreign
currency fluctuations. Any of these factors may adversely affect our future
international sales and, consequently, affect our business, financial condition
and operating results.
If We Are Not Successful In Generating Revenue From Our German Production
Facility, Our Business And Financial Condition May Be Materially Adversely
Affected.
In January 2002, we committed to invest a significant amount of our
available cash in purchasing a German production facility with ten employees and
various contracts held by the facility. The production facility is a new
operation and we will face significant challenges in integrating it with our
existing business and operations, including but not limited to the following:
. entering into service agreements for devices sold in Europe;
. retraining existing employees in our operations, and hiring
additional employees for the facility;
. integrating the facility's operations with our existing operations;
and
. generating German facility revenue and achieving profitability.
The German facility has a very limited operating history upon which to
assess whether it will be able to meet all of the challenges required to
successfully operate and generate revenue. If we are not able to develop a
successful operation with revenue and profits at the German facility, we will
not receive the anticipated benefits of our investment in the German facility
and our business, financial condition and results of operations would be
materially and adversely affected.
20
Product Liability Claims Against Us Could Be Costly and Could Harm Our
Reputation.
The sale of dental and medical products involves the inherent risk of
product liability claims against us. While we currently maintain product
liability insurance coverage in an amount that we believe is adequate for our
level of sales, this insurance is expensive, is subject to various coverage
exclusions and may not be obtainable in the future on terms acceptable to us, or
at all. We do not know whether claims against us, if any, with respect to our
products will be successfully defended or whether our insurance will be
sufficient to cover liabilities resulting from such claims.
Rapid Changes in Technology Could Harm the Demand for Our Products or
Result in Significant Additional Costs.
The markets in which our laser products compete are subject to rapid
technological change, evolving industry standards, changes in the regulatory
environment, frequent new device and pharmaceutical introductions and evolving
dental and surgical techniques. These changes could render our products
noncompetitive or obsolete. The success of our existing and future products is
dependent on the differentiation of our products from those of our competitors,
the timely introduction of new products and the perceived benefit to the
customer in terms of patient service and return on investment. The process of
developing new medical devices is inherently complex and requires regulatory
approvals or clearances that can be expensive, time-consuming and uncertain. We
have in the past experienced delays in product development. We cannot assure you
that we will successfully identify new product opportunities, be financially or
otherwise capable of the research and development to bring new products to
market in a timely manner or that product and technologies developed by others
will not render our products obsolete.
We May Not Be Able to Compete Successfully Against Our Current and Future
Competitors.
Our products compete with those of a number of foreign and domestic
companies, including those companies that market traditional dental products
such as dental drills, as well as other companies that market laser technologies
in the dental and medical markets that we address. Some of our competitors have
greater financial, technical, marketing or other resources than us. This may
allow them to respond more quickly to new or emerging technologies and to devote
greater resources to the development and introduction of enhanced products than
we can. In addition, the rapid technological changes occurring in the healthcare
industry are expected to lead to the entry of new competitors, especially as
dental and medical lasers gain increasing market acceptance. Our ability to
anticipate technological changes and to introduce enhanced products on a timely
basis will be a significant factor in our ability to grow and remain
competitive. New competitors or technology changes in laser products and methods
could cause commoditization of such products, require price discounting or
otherwise adversely affect our gross margins.
Changes in Government Regulation or the Inability to Obtain Necessary
Government Approvals Could Harm Our Business.
Our products are subject to extensive government regulation, both in the
United States and other countries. To clinically test, manufacture and market
products for human diagnostic and therapeutic use, we must comply with
regulations and safety standards set by the U.S. Food and Drug Administration
and comparable state and foreign agencies. Generally, products must meet
regulatory standards as safe and effective for their intended use prior to being
marketed for human applications. The clearance process is expensive,
time-consuming and uncertain. The failure to receive requisite approvals for the
use of our products or processes, or significant delays in obtaining such
approvals, could prevent us from developing, manufacturing and marketing
products and services necessary for us to remain competitive.
If Our Customers Cannot Obtain Third Party Reimbursement for Their Use of
Our Products, They May Be Less Inclined to Purchase Our Products.
Our products are generally purchased by dental or medical professionals
who then bill various third party payors, such as government programs or private
insurance plans, for the procedures conducted using these products. In the
United States third party payors review and frequently challenge the prices
charged for medical services. In many foreign countries, the prices are
predetermined through government regulation. Payors may deny coverage and
reimbursement if they determine that the procedure was not medically necessary
(for example, cosmetic) or that the device used in the procedure was
investigational. We believe that most of the procedures being performed with our
21
current products generally have been reimbursed, with the exception of cosmetic
applications such as tooth whitening. The inability to obtain reimbursement for
services using our products could deter dentists and physicians from purchasing
or using our products. We cannot predict the effect of future healthcare reforms
or changes in financing for health and dental plans. Any such changes could have
an adverse effect on the ability of a dental or medical professional to generate
a return on investment using our current or future products. Such changes would
act as disincentives for capital investments by dental and medical professionals
and could have an adverse effect on our business, financial condition and
results of operations.
The Failure to Attract and Retain Key Personnel Could Adversely Affect Our
Business.
Our future success depends in part on the continued service of certain
key personnel, including Jeffrey W. Jones, our Chief Executive Officer, Edson J.
Rood, our Chief Financial Officer, Ioana Rizoiu, our Vice President of Clinical
Research, and Keith Bateman, our Vice President of Global Sales. We do not have
employment agreements with any of our key employees, other than with Mr. Jones,
whose employment agreement was renewed in January 2002 for an additional
two-year term.
Our success will also depend in large part on our ability to continue to
attract, retain and motivate qualified engineering and other highly skilled
technical personnel. Competition for employees, particularly development
engineers, is intense. We may not be able to continue to attract and retain
sufficient numbers of such highly skilled employees. Our inability to attract
and retain additional key employees or the loss of one or more of our current
key employees could adversely affect our business, financial condition and
results of operations.
Potential Future Acquisitions Could Have Unintended Negative Consequences
Which Could Harm Our Business and Cause Our Stock Price to Decline.
We may consider pursuing acquisitions of businesses, products or
technologies in the future as a part of our growth strategy. Acquisitions could
require significant capital infusions and could involve many risks, including
but not limited to the following:
. We may encounter difficulties in assimilating and integrating the
operations, products and workforce of the acquired companies;
. Acquisitions may materially and adversely affect our results of
operations because they may require large one-time charges or could
result in increased debt or contingent liabilities, adverse tax
consequences, substantial depreciation or deferred compensation
charges, or the amortization of amounts related to deferred
compensation, goodwill and other intangible assets;
. Acquisitions may be dilutive to our existing stockholders;
. Acquisitions may disrupt our ongoing business and distract our
management; and
. Key personnel of the acquired company may decide not to work for us.
We cannot assure you that we will be able to identify or consummate any
future acquisitions on acceptable terms, or at all. In the event we do pursue
any acquisitions, it is possible that we may not realize the anticipated
benefits from such acquisitions.
Our Common Stock Price Has Been Volatile, Which Could Result in Substantial
Losses for Individual Stockholders.
Our common stock is currently traded on the Nasdaq Small Cap Market and
has only limited daily trading volume. The trading price of our common stock has
been and may continue to be volatile. The market for technology companies, in
particular, has, from time to time, experienced extreme volatility that often
has been unrelated to the operating performance of particular companies. These
broad market and industry fluctuations may significantly affect the trading
price of our common stock, regardless of our actual operating performance. For
example, the closing per share sale price of our common stock fluctuated from
$7.00 to $1.03 over the course of 2001 despite steady improvement in our
financial performance. On August 9, 2001, the closing sale price of our common
stock declined 12% from $5.87 per share on volume of approximately 900,000
shares, absent any news about or announcements by us. The trading price of our
common stock could be affected by a number of factors, including, but not
limited to, changes in expectations of our future performance, changes in
estimates by securities analysts (or failure to meet such estimates), quarterly
fluctuations in our revenue and financial results and a variety of risk
22
factors, including the ones described elsewhere in this report. Periods of
volatility in the market price of a company's securities sometimes result in
securities class action litigation. If this were to happen to us, such
litigation would be expensive and would divert management's attention. In
addition, with only a limited public market for our stock, it would be difficult
to sell a significant amount of our stock, which could cause a significant
decline in the trading price of our stock. If our stock price drops below $1.00
per share for an extended period of time or we are otherwise unable to satisfy
the continued listing requirements of the Nasdaq Small Cap Market, our shares
could be delisted from the Nasdaq Small Cap Market and the marketability,
liquidity and price of our common stock would be adversely affected.
We are exposed to Risks Associated with the Recent Worldwide Economic
Slowdown and Related Uncertainties.
Concerns about decreased consumer confidence, reduced corporate profits
and capital spending, and recent international conflicts and terrorist and
military activity have resulted in a downturn in economic conditions, both
domestically and internationally. These unfavorable economic conditions could
ultimately cause a slowdown in customer orders, an increase in the number of
cancellations and the rescheduling of backlog, if any. In addition, recent
political and social turmoil related to international conflicts and terrorist
acts may put further pressure on economic conditions in the U.S. and worldwide.
Unstable political, social and economic conditions make it difficult for our
customers, our suppliers and us to accurately forecast and plan future business
activities. If such conditions continue or worsen, our business, financial
condition and results of operations could be materially and adversely affected.
Future Sales of Our Common Stock Could Affect the Stock Price.
If our stockholders sell substantial amounts of our common stock,
including shares issued on the exercise of options and warrants, in the public
market, the market price of our common stock could fall. These sales also might
make it more difficult for us to sell equity or equity-related securities in the
future at a time and price that we deem appropriate. As of March 31, 2002, we
had 20,018,000 shares of common stock outstanding. All of these shares, other
than shares held by affiliates, are freely tradable.
We Have Adopted Anti-Takeover Defenses That Could Delay or Prevent an
Acquisition of Our Company and May Affect the Price of Our Common Stock.
Certain provisions of our certificate of incorporation and stockholder
rights plan could make it difficult for a third party to acquire us, even though
an acquisition might be beneficial to our stockholders. These provisions could
limit the price that investors might be willing to pay in the future for shares
of our common stock.
Our certificate of incorporation authorizes the issuance of up to
1,000,000 shares of "blank check" preferred stock, which will have terms as may
be determined from time to time by our Board of Directors. Accordingly, our
Board of Directors may, without obtaining stockholder approval, issue preferred
stock with terms, which could have preference over and adversely affect the
rights of the holders of common stock. This issuance may make it more difficult
for a third party to acquire a majority of our outstanding voting stock. We are
also subject to the Delaware anti-takeover laws, which may prevent, delay or
impede a merger or takeover of our company, and we have not opted out of the
provisions of such laws through either our certificate of incorporation or our
bylaws.
In December 1998, we adopted a stockholder rights plan pursuant to which
one preferred stock purchase right is distributed to our stockholders for each
share of our common stock held by them. In the event that a third party acquires
15% or more of our outstanding common stock, the holders of these rights will be
able to purchase the underlying junior participating preferred stock as a way to
discourage, delay or prevent a change in control of our company. The mere
existence of a stockholder rights plan often delays or makes a merger, tender
offer or proxy contest more difficult. The existence of these features could
prevent others from seeking to acquire shares of our common stock in
transactions at premium prices.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
3.1 Restated Certificate of Incorporation, as Amended.
Incorporated by reference to the Registrant's Annual Report on
Form 10-K filed on April 14, 1994
3.2 Amended and Restated Bylaws. Incorporated by reference to the
Registrant's Quarterly Report on Form 10-QSB filed on
September 15, 1995.
10.1+ Employment Offer Letter dated January 8, 1999 from Jeffrey W.
Jones, the Registrant's CEO, to Keith G. Bateman, the
Registrant's Vice President, Global Sales. (1)
10.2 Employment Agreement dated January 1, 2002 between the
Registrant and Jeffrey W. Jones. (1)
10.3+ Asset Purchase Agreement, dated January 29, 2002, between
Asclepion-Meditec AG and the Registrant's subsidiary, BIOLASE
Europe GmbH. (1)
10.4 Agreement for the Purchase of a Built-Up Property, dated
January 29, 2002, between Asclepion-Meditec AG and the
Registrant's subsidiary, BIOLASE Europe GmbH. (1)
10.5+ Agreement, dated January 29, 2002, between Asclepion-Meditec
AG and the Registrant's subsidiary, BIOLASE Europe GmbH. (1)
31.1 Certification of Jeffrey W. Jones Pursuant to Rule 13a-14(a)
and Rule 15d-14(a), promulgated under the Securities Exchange Act of
1934, as amended. (2)
31.2 Certification of Edson J. Rood Pursuant to Rule 13a-14(a) and
Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934,
as amended. (2)
32.1 Certification of Jeffrey W. Jones Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (2)
32.2 Certification of Edson J. Rood Pursuant to 18 U.S.C. Section
1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (2)
----------
+ Confidential treatment has been requested for certain confidential
portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934. In accordance with Rule 24b-2, these confidential portions have
been omitted from this exhibit and filed separately with the SEC.
(1) Previously filed with the original Quarterly Report on Form 10-Q for
the period ended March 31, 2002.
(2) Filed herewith.
(b) REPORTS ON FORM 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Dated: September 16, 2003 BIOLASE TECHNOLOGY, INC.,
(Registrant)
By: /s/ Edson J. Rood
---------------------------
Edson J. Rood
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
25