UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 29, 2001
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: 1-11064
BRITESMILE, INC.
(Exact name of business issuer as specified in its charter)
UTAH 87-0410364
-------------------------------------- -----------------------------------
(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
490 North Wiget Lane
Walnut Creek, California 94598
------------------------------------------ ------------------------------
(Address of principal executive offices) (Zip Code)
(925) 941-6260
---------------
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 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.
X yes no
--- -----
The Company had 36,196,961 shares of common stock outstanding at October 12,
2001.
1
BRITESMILE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 29, 2001 and
December 30, 2000....................................................3
Condensed Consolidated Statements of Operations for the 13 weeks and
39 weeks ended September 29, 2001 and September 30, 2000.............5
Condensed Consolidated Statements of Cash Flows for the 39 weeks
ended September 29, 2001 and September 30, 2000, respectively........6
Notes to Condensed Consolidated Financial Statements.................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................9
PART II. OTHER INFORMATION
Item 2. Changes in Securities...............................................15
Item 6. Exhibits and Reports on Form 8-K....................................15
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRITESMILE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
($ in thousands, except share data)
September 29, 2001 December 30, 2000
----------------------- ---------------------
(Unaudited) (Note 1)
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 14,009 $ 5,701
Cash, restricted as to use....................................... 843 843
Trade accounts receivable, net of allowance for doubtful accounts of
$616 and $163, respectively................................... 6,368 3,130
Inventories...................................................... 2,583 2,365
Prepaid expenses and other....................................... 1,154 883
Notes receivable-current portion................................. 335 335
----------------------- ---------------------
Total current assets................................. 25,292 13,257
----------------------- ---------------------
PROPERTY AND EQUIPMENT, net...................................... 21,302 14,848
NOTE RECEIVABLE, less current portion................................ 140 391
OTHER ASSETS......................................................... 2,049 1,635
----------------------- ---------------------
TOTAL ASSETS............................................................... $ 48,783 $30,131
======================= =====================
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated balance sheets.
3
BRITESMILE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
($ in thousands, except share data)
September 29, 2001 December 30, 2000
----------------------- ---------------------
(Unaudited) (Note 1)
CURRENT LIABILITIES:
Accounts payable................................................. $ 6,148 $ 8,429
Accrued expenses ................................................ 2,434 3,538
Note payable, net of discount.................................... 150 4,747
Accrual for store closures....................................... 439 778
Capital lease obligation-current portion......................... 447 181
----------------------- ---------------------
Total current liabilities.............................. 9,618 17,673
----------------------- ---------------------
Note payable......................................................... 1,990 -
Subordinated convertible debenture, net of discount.................. 724 709
Capital lease obligations, less current portion...................... 2,933 1,018
Other long-term liabilities.......................................... 476 436
----------------------- ---------------------
Total long-term liabilities...................... 6,123 2,163
----------------------- ---------------------
Total liabilities...................................... 15,741 19,836
----------------------- ---------------------
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value; 50,000,000 shares authorized;
36,196,961 and 28,816,515 shares issued and outstanding, respectively
36 29
Additional paid-in capital....................................... 136,366 99,568
Accumulated deficit.............................................. (103,360) (89,302)
----------------------- ---------------------
Total shareholders' equity ............................ 33,042 10,295
----------------------- ---------------------
Total liabilities and shareholders' equity........................... $ 48,783 $ 30,131
======================= =====================
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated balance sheets.
4
BRITESMILE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
($ in thousands except share data)
13 Weeks Ended 13 Weeks 39 Weeks Ended 39 Weeks Ended
September 29, Ended September 29, September 30,
2001 September 2001 2000
30, 2000
----------------- -------------- ---------------- ----------------
REVENUES:
Center whitening fees, net................... $ 3,182 $ 3,253 $ 11,385 $ 7,444
Associated Center whitening fees, net........ 8,010 1,515 19,755 4,628
Product sales................................ 1,509 411 3,602 779
----------------- -------------- ---------------- ----------------
Total revenues, net....................... 12,701 5,179 34,742 12,851
----------------- -------------- ---------------- ----------------
OPERATING COSTS AND EXPENSES:
Operating and occupancy costs................ 4,376 3,574 12,452 8,334
Selling, general and administrative expenses. 11,675 9,550 31,353 25,508
Research and development expenses............ 334 557 921 1,412
Depreciation and amortization................ 1,059 1,243 3,439 2,937
----------------- -------------- ---------------- ----------------
Total operating costs and expenses........ 17,444 14,924 48,165 38,191
----------------- -------------- ---------------- ----------------
Loss from operations................... (4,743) (9,745) (13,423) (25,340)
----------------- -------------- ---------------- ----------------
OTHER INCOME (EXPENSE), net:
Interest expense............................. (186) (388) (823) (388)
Interest income.............................. 139 80 245 343
----------------- -------------- ---------------- ----------------
Total other income (expense), net......... (47) (308) (578) (45)
----------------- -------------- ---------------- ----------------
Loss before income tax provision....... (4,790) (10,053) (14,001) (25,385)
INCOME TAX PROVISION............................. - - 57 10
----------------- -------------- ---------------- ----------------
Net loss .............................. $ (4,790) $ (10,053)$ (14,058)$ (25,395)
================= ============== ================ ================
BASIC AND DILUTED NET LOSS PER SHARE............. $ (0.13) $ (0.42)$ (0.43)$ (1.06)
================= ============== ================ ================
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED...... 35,873,103 23,920,694 32,663,705 23,926,334
================= ============== ================ ================
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statements of operations.
5
BRITESMILE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
($ in thousands, except share data)
39 Weeks Ended 39 Weeks Ended
September 29, 2001 September 30, 2000
--------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................ $ (14,058) $ (25,395)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ................................ 3,439 2,937
Cost for issuance of stock and stock options.................. 72 471
Changes in assets and liabilities.................................. (7,167) (5,497)
---------------------- -----------------------
Net cash used in operating activities................ (17,714) (27,484)
---------------------- -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from assets held for sale, net.............................. - 798
Purchase of property and equipment................................... (7,518) (10,812)
---------------------- -----------------------
Net cash used in investing activities................ (7,518) (10,014)
---------------------- -----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on borrowing...................................... (213) (866)
Payments on line of credit........................................... - (843)
Proceeds from debt financing ........................................ 2,500 20,000
Proceeds from common stock offering.................................. 26,622 19,816
Proceeds from exercise of stock options ............................. 4,631 1,462
---------------------- -----------------------
Net cash provided by financing activities............ 33,540 39,569
---------------------- -----------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS..............................
8,308 2,071
CASH AND CASH EQUIVALENTS AT BEGINNING
OF THE PERIOD...................................................... 5,701 2,878
---------------------- -----------------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD......................... $ 14,009 $ 4,949
====================== =======================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................................. $ 142 $ 7
====================== =======================
Cash paid for income taxes......................................... $ 57 $ 35
====================== =======================
Equipment acquired under capital lease............................. $ 2,419 -
====================== =======================
Options granted for consulting services............................ $ 325 -
====================== =======================
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statements of cash flows.
6
BRITESMILE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 29, 2001
1. Description of Business and Nature of Operations
BriteSmile, Inc., a Utah corporation (the "Company" or "BriteSmile"), and its
affiliates develop, produce, license and sell advanced teeth whitening products,
services and technology. Unless specified to the contrary herein, references to
BriteSmile refer to the Company and its subsidiaries on a consolidated basis.
The Company's operations include the development of technologically advanced
teeth whitening processes that are distributed in professional salon settings
known as BriteSmile Professional Teeth Whitening Centers ("Centers"). The
Company also offers its products and technologies through arrangements with
existing independent dental offices known as BriteSmile Professional Teeth
Whitening Associated Centers ("Associated Centers").
BriteSmile offers consumers a new, simple and safe way to return their teeth to
their optimal natural whiteness in a one and one-half hour visit to a Center or
Associated Center.
Centers are located in major metropolitan areas nationwide and offer clients a
salon-like environment dedicated solely to the business of teeth whitening.
Centers are staffed by licensed dentists and trained dental assistants.
Alternatively, consumers can visit an Associated Center, where a local dentist
administers the BriteSmile procedure in the dentist's established office.
The Company developed its current teeth whitening technology (the "BriteSmile
Light Activated Teeth Whitening System," "BS2000" or "LATW") and began
distribution in 1999. In November 1999 the Company introduced its new BriteSmile
3000 LATW keycard system (the "BS3000") to Associated Centers. The BS3000, a
mobile version of the BS2000, can be installed quickly and provides improved
flexibility and mobility in dental offices. In May 2001, the Company introduced
its more versatile mobile device, the BS3000PB, which is the device currently
shipped to Associated Centers.
The BS2000, BS3000, and BS3000PB teeth whitening devices utilize a light
technology. The unique delivery arm of these devices permits blue green light to
reach all 16 front teeth simultaneously, whitening the teeth by activating
BriteSmile's wavelength-specific gel during three consecutive twenty-minute
sessions.
In February 1999, the LATW was introduced in the Company's first Center in
Walnut Creek, California. In March 1999, the Company opened its first Associated
Center in Louisville, Kentucky. As of September 29, 2001, the Company had 14
Centers and 3,241 Associated Centers in operation.
The Company is not engaged in the practice of dentistry. Each licensed dentist
who operates a Center or Associated Center maintains full control over dental
matters, including the supervision of dental auxiliaries and the administration
of the LATW procedure.
The Company operates in one reportable segment. The Company's chief operating
decision maker has determined the operating segment based upon how the business
is managed and operated. Geographical segments are not material as of September
29, 2001.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions in
Form 10-Q and Article 10 of Regulations S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the 13 weeks and 39 weeks ended September 29, 2001 are not
necessarily indicative of the results that may be expected for the remainder of
the fiscal year ending December 29, 2001. The balance sheet at December 30, 2000
has been derived from the audited financial statements at that date but does not
include all of the information and footnotes required by accounting principles
7
BRITESMILE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
generally accepted in the United States for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
Nine-Month Transition Period ended December 30, 2000.
2. Loss Per Common Share
The Company computes loss per common share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." In accordance with
FAS 128, basic net loss per share is calculated as net loss divided by the
weighted-average number of common shares outstanding, less shares subject to
repurchase. Diluted net loss per share is computed by dividing net loss by the
weighted-average number of common shares outstanding and dilutive common stock
equivalents outstanding during the period. Common equivalent shares from stock
options and warrants (using the treasury stock method) and convertible notes
payable have been excluded from the calculation of net loss per share as their
effect is anti-dilutive.
3. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consist primarily of dental supplies, retail products and component
parts for the manufacturing of teeth whitening systems.
4. Reclassifications
Certain reclassifications have been made in the prior period's condensed
consolidated financial statements to conform with the current period
presentation.
5. Bank Line of Credit
The Company's revolving credit line agreement with the Bank of Hawaii expired on
May 25, 2001. The Company is currently in the process of negotiating a new line
of credit.
6. Long Term Debt
As of September 29, 2001, $800,000 of an original aggregate of $20 million of
convertible promissory notes first issued in August 2000 remain outstanding, at
an adjusted conversion price of $5.00 per share.
On December 5, 2000, the Company sold to LCO Investments Limited ("LCO") in a
private placement a Convertible Promissory Note (the "December 2000 Note") in
the aggregate principal amount of $5,000,000. LCO is the Company's largest
shareholder. The December 2000 Note was convertible into shares of Common Stock
of the Company at a conversion price of $5.00 per share. In conjunction with the
issuance of the December 2000 Note, warrants to purchase 250,000 shares of
Common Stock were issued at an exercise price of $5.00 per share. The warrants
have a contractual life of 5 years. The fair value of the warrants issued of
$253,000 was recorded as a discount of the December 2000 Note and was being
amortized over the life of the note to interest expense. At September 29, 2001
the warrants remain outstanding. Interest accrued at the annual rate of 7.52%
and was due and payable along with the principal balance on December 5, 2001. On
April 10, 2001, LCO elected to convert the December 2000 Note, together with
accrued interest totaling $132,644, into 1,026,529 shares of restricted common
stock. As a result of the conversion, the remaining discount of $253,000 was
recognized as interest expense on the date of the conversion.
On March 1, 2001, the Company borrowed $2,500,000 from Excimer Vision Leasing
L.P. ("EVL") for general working capital. The loan matures on May 10, 2006 and
is not prepayable. Payments under the loan consist of "fixed payments" of
interest, "variable payments" of principal and a "final payment" of principal.
An initial fixed payment of $10,416.60 was paid on April 1, 2001. Additional
monthly payments of $12,500 are due during the loan period. Variable payments
are twenty-five dollars for each LATW procedure performed at the Company's 14
8
current Centers. For the thirty-nine weeks ended September 29, 2001 variable
payments totaled $490,000. The final payment, due at maturity, will be the
amount by which the aggregate of variable payments paid during the term of the
loan is less than the original $2.5 million principal amount of the loan.
7. Private Placement
On April 30, 2001, the Company completed a private offering (the "Offering") of
its restricted common stock, par value $0.001 per share. The Offering involved
sales of a total of 5,371,428 shares of restricted common stock (the "Shares")
to 17 accredited investors and their affiliated funds (the "Investors"). None of
the Investors were affiliated with the Company before the completion of the
Offering. The Company sold the Shares for $5.25 per share, yielding gross
proceeds to the Company of $28,199,997.
In connection with the Offering, the Company engaged Stonegate Securities, Inc.,
of Dallas, Texas (the "Placement Agent") to act as placement agent for the
Offering. For its services, the Company agreed to pay the Placement Agent five
percent of the gross proceeds of the Offering, or $1,410,000, and issue to the
Placement Agent warrants to purchase a total of 537,143 shares of restricted
common stock for a per share purchase price of $5.25. The warrants have a five
year term. The fees paid to the Placement Agent and the fair value of the
warrants of $704,000 were netted against the Offering proceeds.
In connection with the Offering, the Company filed with the Securities and
Exchange Commission (the "SEC") a registration statement covering the Shares and
the common stock underlying the warrants issued to the Placement Agent. The SEC
declared the registration statement effective on June 11, 2001.
PART II - OTHER INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. Such forward-looking statements may be deemed to include
information that is not historical. The statements contained in this Report that
are not purely historical are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act. These statements relate to the Company's expectations,
hopes, beliefs, anticipations, commitments, intentions and strategies regarding
the future. They may be identified by the use of words or phrases such as
"believes," "expects," "anticipates," "should," "plans," "estimates," and
"potential," among others. Forward-looking statements include, but are not
limited to, statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations regarding the Company's financial
performance, revenue and expense levels in the future and the sufficiency of its
existing assets to fund future operations and capital spending needs. Actual
results could differ materially from the anticipated results or other
expectations expressed in such forward-looking statements. The Company believes
that many of the risks set forth here and in the Company's 10-K Annual Reports
filed with the SEC are part of doing business in the industry in which the
Company operates and competes and will likely be present in all periods
reported. The forward-looking statements contained in this Report are made as of
the date of this Report and the Company assumes no obligation to update them or
to update the reasons why actual results could differ from those projected in
such forward-looking statements. Among others, risks and uncertainties that may
affect the business, financial condition, performance, development, and results
of operations of the Company include:
o Government regulation of the Company's products and teeth whitening
procedures, including: (i) current restrictions or controls on the
practice of dentistry by general business corporations, and (ii)
future, unknown enactments or interpretations of current regulations
which could, in the future, affect the Company's operational structure
and relationships with licensed dentists;
o Failure of the Company to generate, sustain or manage growth, including
failure to develop new products and expand Associated Center locations
and revenues;
o The loss of product market share to competitors and/or development of
new or superior technologies by competitors;
o Ongoing operating losses associated with the development, marketing and
implementation of new, light-activated teeth whitening technologies;
9
o Failure of the Company to secure additional financing to complete its
aggressive plan for the rollout of a broad base of Associated Centers;
o Unproven market for the Company's new whitening products, whitening
process, and "Whitening Center" and "Associated Center" concepts, in
light of competition from traditional take-home whitening products and
bleaching tray methods;
o Failure to develop marketing strategies and delivery methods to
penetrate non-U.S. markets; and
o Lack of product diversity.
Overview
Operating and occupancy costs is composed primarily of three main groups: 1) the
cost of goods for both the Center and Associated Center whitening procedure kits
and retail products; 2) the financing costs for the devices in the Associated
Centers; and 3) the operating and occupancy costs for the Company Centers.
Selling, general and administrative expenses are composed of expenses associated
with all corporate and administrative functions that support existing operations
and provide an infrastructure to support future growth, including management and
staff salaries, employee benefits, travel, information systems, operating costs
of the Call Center, training, field support and marketing and advertising.
Expenses of recruiting and training sales, market support and training staff are
also included as general and administrative expenses.
The following discussion should be read in conjunction with the Financial
Statements and the Notes thereto included in Part I, Item 1 of this Quarterly
Report on Form 10-Q and in the Company's Annual Report on Form 10-K for the
transition period ended December 30, 2000.
As of September 29, 2001, the Company has 14 BriteSmile Centers. The following
table sets forth certain information relating to the status of the Associated
Centers as of September 29, 2001:
Associated Centers
Roll-out Status
As of September 29, 2001
Grand
Associated Centers AC's Int'l Total
------------------------------------------ ---------------------------
------------------------------------------ ---------------------------
Total Under Contract(1).... 3,304 459 3,763
------------------------------------------ ---------------------------
------------------------------------------ ---------------------------
Active - In Business....... 2,760 459 3,219
------------------------------------------ ---------------------------
(1)Represents all Associated Centers in operation, plus Associated Centers for
which a contract has been received but where the dentist who will operate the
Associated Center is either awaiting training or shipment of the BS3000 PB
device.
The following table sets forth unaudited operating results for the thirteen week
period and thirty-nine week period ended September 29, 2001 and September 30,
2000, as a percentage of sales in each of these periods. This data has been
derived from the unaudited financial statements.
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks ended Weeks ended Weeks ended Weeks ended
Sept. 29, Sept.30, Sept.29, Sept.30,
2001 2000 2001 2000
--------- -------- -------- --------
Income Statement Data:
Revenues:
Center whitening fees, net 25.0% 62.8% 32.7% 58.7%
Associated Center whitening fees, net 63.1% 29.3% 56.9% 35.3%
10
Product sales 11.9% 7.9% 10.4% 6.0%
------ ------ ------ ------
Total revenues, net 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Operating Costs and Expenses:
Operating and occupancy costs 34.5% 69.0% 35.8% 137.9%
Selling, general and administrative
expenses 91.9% 184.4% 90.2% 125.8%
Research and development expenses 2.6% 10.8% 2.7% 10.9%
Depreciation and amortization 8.3% 24.0% 9.9% 22.6%
------ ------ ------ ------
Total operating costs and expenses 137.3% 288.2% 138.6% 297.2%
------ ------ ------ ------
Loss from operations -37.3% -188.2% -38.6% -197.2%
------ ------ ------ -------
Interest income (expense), net -0.4% -5.9% -1.7% -0.1%
------ ------ ------ ------
Loss before income tax provision -37.7% -194.1% -40.3% -197.3%
Provision for income taxes 0.0% 0.0% 0.2% 0.3%
------ ------ ------ ------
Net Loss -37.7% -194.1% -40.5% -197.6%
================= =================
The following are explanations of significant period-to-period changes for the
13 weeks ended September 29, 2001 and September 30, 2000:
Revenues
Total Revenues, net. Total revenues, net increased by $7.5 million, or 145.2%,
to $12.7 million for the 13 weeks ended September 29, 2001, from $5.2 million
for the 13 weeks ended September 30, 2000.
Center Whitening Fees, net. Center whitening fees, net decreased slightly by
$70,000, or 2.0%, to $3.2 million for the 13 weeks ended September 29, 2001,
from $3.2 million for the 13 weeks ended September 30, 2000. This decrease was
primarily due to the closure of three underperforming Centers in the first
quarter of 2001 that were open in the third quarter of 2000. The number of
procedures performed in the Centers decreased 6.3% to 7,116 procedures in the
third quarter of 2001 compared to 7,591 procedures in the same quarter of 2000,
primarily as a result of the closure of three Centers.
Associated Center Whitening Fees, net. Associated Center whitening fees, net
increased by $6.5 million, or 428.6%, to $8.0 million for the 13 weeks ended
September 29, 2001, from $1.5 million for the 13 weeks ended September 30, 2000.
This increase was primarily due to the operation of 3,219 Associated Centers at
the end of the 13 weeks ended September 29, 2001 compared to 884 Associated
Centers that were in operation at the end of the 13 weeks ended September 30,
2000. Of the 3,219 Associated Centers in operation at September 29, 2001, 459
were international locations. The number of procedures performed in the
Associated Centers increased 348.2% to 37,040 procedures in the third quarter of
2001 compared to 8,265 procedures in the same quarter of 2000.
During the 13 weeks ended September 29, 2001, the Company opened 976 new
Associated Centers. At September 29, 2001, there were Associated Centers in the
process of being placed into operation. Due to training and shipping
requirements, there is presently approximately 45 days of lead-time between the
signing of an Associated Center agreement and the first paid procedures at that
Associated Center.
Although the Company does not believe that its business follows seasonal trends,
it has recognized that at various times during the months of July and August and
again during December and January, a substantial number of Associated Center
locations (both domestic and international) shut down their practices for
vacation. As a result, the frequency of key card purchases by Associated Centers
during these months declines as well.
The Company continues to execute its strategic plan of expanding distribution
into the professional dental practice channel through its Associated Centers.
Additionally, the Company anticipates opening additional Associated Centers in
domestic and international locations over the next twelve months. As a result,
Associated Center whitening fees are expected to increase during the next twelve
months. There can be no guarantee that the Company will be successful in
executing its business plan.
11
Product Sales. Product sales increased by $1.1 million, or 267.3% to $1.5
million for the 13 weeks ended September 29, 2001 from $411,000 for the 13 weeks
ended September 30, 2000. Product sales represent the Company's toothpaste,
mouthwash, whitening gum and the Sonicare toothbrush products sold at Centers
and Associated Centers. Product sales are expected to increase during the next
twelve months as a result of the introduction of additional oral care products
to be sold at Centers, Associated Centers, and through the Company's E-Commerce
website.
Operating Costs and Expenses
Operating and Occupancy Costs. Operating and occupancy costs decreased as a
percentage of revenues to 34.5% for the thirteen weeks ended September 29, 2001,
compared to 69.0% in the thirteen weeks ended September 30, 2000. This decrease
as a percentage of sales is a reflection of the lower fixed cost structure of
the Associated Center sales channel.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased as a percentage of sales to 91.9% for the
third quarter of 2001 compared to 184.4% in the corresponding period in 2000.
This decrease was primarily due to improved leveraging of marketing and
advertising expenditures across a greater number of Associated Center markets.
The increase of $2.1 million in total selling, general and administrative
expenses to $11.7 million for the third quarter of 2001 from $9.6 million in the
third quarter of 2000 was primarily attributable to increased expenses to
support the Company's expansion, including: (i) salaries and benefits and (ii)
sales, training, marketing and advertising activities. As a result of catching
up on the backlog of new customers which required higher than originally
expected field personnel costs, at the start of the fourth quarter of 2001 the
Company has been able to streamline its field personnel which will result in
lower costs in the future, as well as reductions in corporate overhead expenses.
During the weeks following the September 11, 2001 terrorist attacks, the Company
saw an immediate drop in revenue, with the New York area being hardest hit
within the BriteSmile network of Associated Centers and the Company's own Center
in New York. As a result, the Company assessed the variables in the business
that could be controlled and immediately responded to the volatility in sales.
The Company took steps to reduce overall expenses by $6.5 million (annualized)
against the August/September 2001 run rate.
Research and Development Expenses. Research and development expenses decreased
as a percentage of sales to 2.6% for the third quarter of 2001 compared to 10.8%
in the corresponding period in 2000. The $334,000 expense incurred in the third
quarter of 2001 was primarily related to research studies to expand the
Company's leadership position in the teeth-whitening industry.
Depreciation and Amortization. Depreciation and amortization decreased as a
percentage of sales to 8.3% for the third quarter of 2001 compared to 24.0% in
the corresponding period in 2000. This percentage decrease is primarily due to
the increase in both Center and Associated Center sales. The decrease of
$184,000 in depreciation and amortization expense to $1.1 million for the third
quarter of 2001 is the result of lower depreciation due to the closing of three
Centers, offset by a greater number of BS3000 and BS3000PB systems in the
Associated Centers.
Interest Expense,net. Interest expense, net decreased to $47,000 for the third
quarter of 2001 compared to interest expense, net of $308,000 in the
corresponding quarter of 2000. Interest expense decreased as a result of less
debt outstanding in the third quarter of 2001 versus the same quarter of 2000.
Net Loss. The net loss decreased $5.3 million to $4.8 million for the third
quarter of 2001 compared to a net loss of $10.1 million in the corresponding
quarter of 2000. This represents a 52.4% improvement due to a combination of the
factors described above. Net loss per share for the third quarter of 2001 was
($0.13) versus ($0.42) reported for the third quarter of 2000, which represents
a 69.0% improvement over the third quarter of 2000.
The following are explanations of significant period-to-period changes for the
39 weeks ended September 29, 2001 and September 30, 2000:
Revenues
Total Revenues, net. Total revenues, net increased by $21.8 million, or 168.1%,
to $34.8 million for the 39 weeks ended September 29, 2001, from $13.0 million
for the 39 weeks ended September 30, 2000.
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Center Whitening Fees, net. Center whitening fees, net increased by $4.0
million, or 52.9%, to $11.4 million for the 39 weeks ended September 29, 2001,
from $7.4 million for the 39 weeks ended September 30, 2000. This increase was
primarily due to a 31.2% increase in comparable Center sales for the first three
quarters of 2001.
Associated Center Whitening Fees, net. Associated Center whitening fees, net
increased by $15.2 million, or 332.1%, to $19.8 million for the 39 weeks ended
September 29, 2001, from $4.6 million for the 39 weeks ended September 30, 2000.
This increase was primarily due to the operation of 3,219 Associated Centers at
the end of the 39 weeks ended September 29, 2001 compared to 884 Associated
Centers that were in operation at the end of the 39 weeks ended September 30,
2000. Of the 3,219 Associated Centers in operation at September 29, 2001, 459
were international locations. The number of procedures performed in the
Associated Centers increased 266.4% to 88,860 procedures during the thirty-nine
weeks ended September 30, 2001 compared to 24,249 procedures during the
thirty-nine weeks ended September 30, 2000.
Although the Company does not believe that its business follows seasonal trends,
it has recognized that at various times during the months of July and August and
again during December and January, a substantial number of Associated Center
locations (both domestic and international) shut down their practices for
vacation. As a result, the frequency of key card purchases by Associated Centers
during these months declines as well.
Product Sales. Product sales increased by $2.8 million, or 362.2% to $3.6
million for the 39 weeks ended September 29, 2001 from $779,000 for the 39 weeks
ended September 30, 2000. Product sales represent the Company's toothpaste,
mouthwash, whitening gum and Sonicare toothbrush products sold at Centers and
Associated Centers. Product sales are expected to increase during the next
twelve months as a result of the introduction of additional oral care products
to be sold at Centers, Associated Centers, and through the Company's E-Commerce
website.
Operating Costs and Expenses
Operating and Occupancy Costs. Operating and occupancy costs decreased as a
percentage of revenues to 35.8% for the 39 weeks ended September 29, 2001
compared to 137.9% for the 39 weeks ended September 30, 2000. Similar to the
second quarter of 2001, this decrease as a percentage of sales is a reflection
of the significant increase in both Center and Associated Center sales combined
with decreases in product costs as a percentage of sales as a result of improved
purchasing along with the lower fixed cost structure of the Associated Center
sales channel. Additionally, operating costs includes $2.0 million of lease
financing expenses for the 39 weeks ended September 29, 2001 versus zero lease
financing expenses in the same period of 2000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased as a percentage of sales to 90.2% for the 39
weeks ended September 29, 2001 compared to 125.8% for the 39 weeks ended
September 30, 2000. This decrease was primarily due to improved leveraging of
marketing and advertising expenditures across a greater number of Associated
Center markets. The increase of $5.8 million in total selling, general and
administrative expenses to $31.3 million for the thirty-nine weeks ended
September 29, 2001 from $25.5 million in the twenty-six weeks ended July 1, 2000
was primarily attributable to the increase in the Company's infrastructure as it
prepared for aggressive expansion of its number of Associated Centers. This
included salaries and benefits, and marketing and advertising activities, to
support the Company's expansion.
Research and Development Expenses. Research and development expenses decreased
as a percentage of sales to 2.7% for the 39 weeks ended September 29, 2001
compared to 10.9% for the 39 weeks ended September 30, 2000. Actual dollars
spent on research and development decreased $491,000 between the two periods.
For the first three quarters of 2001, the Company incurred expenses primarily
related to 1) American Dental Association (ADA) comparative, safety, and
efficacy studies, 2) studies performed by Loma Linda University for the young
adult market and 3) other research studies to expand the Company's leadership
position in the teeth-whitening industry.
Depreciation and Amortization. Depreciation and amortization decreased as a
percentage of sales to 9.9% for the 39 weeks ended September 29, 2001 compared
to 22.6% during the 39 weeks ended September 30, 2000. This percentage decrease
is primarily due to the increase in both Center and Associated Center sales. The
increase of $502,000 in depreciation and amortization expense is primarily the
result of a greater number of BS3000 and BS3000PB systems in the Associated
Centers.
Interest Expense,net. Interest expense, net increased to $578,000 for the 39
weeks ended September 29, 2001 compared to interest expense, net of $45,000 in
the 39 weeks ended September 30, 2000. Interest expense in 2001 primarily
represents the acceleration of interest expense for the December 2000 Note in
the amount of $253,000, along with other debt incurred by the Company and the
amortization of the fair market value of the warrants issued with that debt (see
Note 5) and interest expense on the capital leases.
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Net Loss. The net loss decreased $11.4 million to $14.0 million for the 39 weeks
ended September 29, 2001 compared to a net loss of $25.4 million in the 39 weeks
ended September 30, 2000. This represents a 44.9% improvement due to a
combination of the factors described above. Net loss per share for the
thirty-nine weeks ended September 29, 2001 was ($0.43) versus ($1.06) reported
for the thirty-nine weeks ended September 30, 2000, which represents a 59.4%
improvement.
Liquidity and Capital Resources
General
The Company's principal sources of liquidity have been issuances of convertible
debt, common stock and common stock equivalents. At September 29, 2001, the
Company had $14.0 million of cash and cash equivalents. The Company expects to
sign contracts for additional Associated Centers during the next twelve months.
This expansion is contingent upon several factors, including available cash
resources and acceptance by consumers and Associated Center dentists of the
Company's LATW services. The Company expects that operating losses will continue
through the fiscal year ending December 29, 2001, and that its principal uses of
cash will be to provide working capital, to finance capital expenditures, and to
satisfy other general corporate expenses. In particular, the Company plans to
use its cash to finance its marketing strategy and the continued rollout of
Associated Centers.
Cash flow used in operations was reduced by $9.8 million to $17.7 million for
the 39 weeks ended September 29, 2001 from $27.5 million used in operating
activities during the 39 weeks ended September 30, 2000, primarily due to the
decrease in the net loss recognized and the net effect of timing differences in
the collection and disbursement of working capital components.
Net cash provided by financing activities was $33.5 million for the thirty-nine
weeks ended September 29, 2001, as compared to $39.6 million for the same period
in 2000. In March 2001, the Company engaged the services of Stonegate
Securities, Inc. to assist the Company in raising capital through a private
placement. On April 30, 2001, the Company completed a private placement of its
common stock in the aggregate amount of $28.2 million to 17 investors and their
affiliated funds. The offering consisted of the sale of 5,371,428 shares of the
Company's restricted common stock at an offering price of $5.25 per share,
resulting in gross proceeds to the Company of $28,199,997. In addition, the
Company received $4.6 million in cash from the issuance of common stock upon the
exercise of stock options during the first nine months of 2001 compared to $1.5
million received from the issuance of common stock upon the exercise of stock
options during the same period in 2000.
Capital expenditures were $7.5 million for the thirty-nine weeks ended September
29, 2001, compared to $10.8 million for the same period in 2000. The capital
expenditures in the first three quarters of 2001 were primarily related to the
development and purchase of BS3000 and BS3000PB systems for the international
Associated Centers, expansion of the Company's call center, and final payments
for the build-out of the New York Center. New devices were also funded through
the use of $2.4 million from the EVL lease line.
While management believes that the Company can continue its current operating
strategy without additional funding, cash flows are difficult to forecast
accurately. Therefore, there can be no assurance that additional capital will
not be required, or that it will be available on terms that are acceptable to
the Company. Additionally, there can be no assurance that the Company's business
will generate cash flows at or above current levels. Accordingly, the Company
may choose to defer capital expenditure plans.
Inflation
Most of the Company's products are purchased in finished form and packaged by
the supplier or at the Company's headquarters. The Company anticipates usual
inflationary increases in the price of its products and does not intend to pass
these increases along to its customers, primarily as a result of other operating
efficiencies gained through changing the sourcing of certain of its products. In
general, the Company does not believe that inflation has had a material effect
on its results of operations in recent years. However, there can be no assurance
that the Company's business will not be affected by inflation in the future.
Seasonality
Although the Company does not believe that its business follows seasonal trends,
it has recognized that at various times during the months of July and August and
again during December and January, a substantial number of Associated Center
locations (both domestic and international) shut down their practices for
vacation. As a result, the frequency of key card purchases by Associated Centers
14
during these months declines as well. Additionally, the Company's Centers have
recognized some seasonality during the same months because of customer
vacations.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
Option Grants
During the period of July 1, 2001 to September 29, 2001, the Company granted
non-qualified stock options to key employees under its 1997 Stock Option and
Incentive Plan covering an aggregate of 96,000 shares of the Company's common
stock, at exercise prices ranging from $5.55 to $14.00 per share. The options
vest over a period of time following their respective dates of grant. The
Company claimed exemption from registration under the Securities Act of 1933
(the "Securities Act") for these grants in that the Company believes such grants
were not "sales" within the meaning of the Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
None filed with this report.
(B) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the period for which this report is
filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BRITESMILE, INC.
/s/ John L. Reed November 2, 2001
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John L. Reed Date
Chief Executive Officer
/s/ Peter P. Hausback November 2, 2001
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Peter P. Hausback Date
Chief Financial Officer