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Recent Filings: Nov 1998 (Qtrly Rpt) | Apr 1999 (Annual Rpt) | Aug 1999 (Qtrly Rpt)
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Investor Research Center
August 20, 1999
BIOLASE TECHNOLOGY INC (BLTI)
Quarterly Report (SEC form 10-Q)
Management's Discussion and Analysis of Financial Condition and Results of Operations.
Qualifying Statement With Respect To Forward-Looking Information:
The United States Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. Such forward-looking statements are based upon the current expectations of the Company and speak only as of the date made. These forward-looking statements involve risks, uncertainties and other factors. The factors discussed below under "Forward- Looking Statements" and elsewhere in this Quarterly Report on Form 10-Q are among those factors that in some cases have affected the Company's historic results and could cause actual results in the future to differ significantly from the results anticipated in forward-looking statements made in this Quarterly Report on Form 10-Q, in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made by authorized officers of the Company. When used in this Quarterly Report on Form 10-Q, the words "estimate," "project," "anticipate," "expect," "intend," "believe," "hope," "may" and similar expressions, as well as "will," "shall" and other indications of future tense, are intended to identify forward-looking statements.
The following discussion should be read in conjunction with the consolidated condensed financial statements and notes thereto.
Results of Operations - Three-month period ended June 30, 1999 as compared to the three-month period ended June 30, 1998:
Sales for the three months ended June 30, 1999 were $1,406,255 compared to $236, 087 for the same period in 1998, an increase of $1,170,168. The increase in sales reported for the second quarter of 1999 compared to the same period in 1998 was due principally to increases in sales of the Company's Millennium(TM) HydroKinetic laser system. While sales of the Company's laser-based systems in the second quarter of 1999 exceeded those reported in the same period of 1998, such sales were lower than anticipated and less than those of the first quarter of 1999 due principally to problems associated with certain supplier component changes
and deficiencies. These supplier related component changes and deficiencies required the Company to redesign certain subassemblies to accommodate available components. Certain residual effects of the supplier deficiencies are expected to carry into the first part of the third quarter of 1999; however, such supplier deficiencies are expected to be fully resolved during such quarter with 1999 third quarter sales expected to surpass those reported during the second quarter of 1999.
During the second quarter of 1999, the Company announced an exclusive distribution agreement with a home-consumer product distributor to manufacture and market the Company's LazerSmile Tooth Whitening product under the name IGEA LazerWhite Tooth Whitening System. The agreement provides for a royalty to be paid to the Company and includes a minimum annual sales quota of 500,000 units. The Company has received certain prepaid royalties and anticipates recognition of such royalties as revenue to commence in the latter part of the third quarter of 1999.
Cost of sales as a percentage of sales improved to 60%, or $847,127, during the second quarter of 1999 compared to 111%, or $263,061, reported for the comparable period in 1998. The increase of $584,066 from the three months ended June 30, 1998 to the three months ended June 30, 1999 was due principally to the increased sales volume combined with increased indirect expenses reflecting the Company's present growth, partially offset by improved production efficiencies. The improvement in cost of sales as a percentage of sales during the second quarter of 1999 compared to the same period in 1998 was a result of higher sales, which also permitted fixed manufacturing costs to be spread over a higher volume of goods manufactured.
Gross profit increased $586,102 to $559,128 during the three months ended June 30, 1999 from the gross loss of $26,974 reported for the comparable period in 1998 due principally to the increase in sales and an improved absorption rate of fixed overhead costs. The gross profit improvement also reflects the inclusion in 1999 of cost-effective features designed into the Company's flagship product, the Millennium(TM).
Operating expenses increased $620,487 during the three months ended June 30, 1999 compared to the same period in 1998 reflecting increases in (i) sales and marketing expenses of $344,987, (ii) general and administrative expenses of $221,869, and (iii) engineering and development expense of $53,631. The net increase in sales and marketing expense was due principally to variable selling costs related to the increased sales level, an increase in the Company's sales infrastructure and the Company's increased participation at professional trade shows, both nationally and internationally. The $221,869 increase in general and administrative expense included a non-recurring expense of $110,462 associated with a severance agreement, of which, $93,731 was non-cash related, increases in the Company's staffing and related personnel expenses, and increases in various professional and administrative costs related to the Company's growth. The increase in engineering and development expense of $53,631 included a non- recurring, non-cash charge of $60,938 related to a consulting arrangement and increases in (i) employee related expenses associated with increased engineer staffing and (ii) engineering project expenses related to existing product redesigns and enhancements and development of new products. These increases to engineering and development expense were significantly offset by the absence in the second quarter of 1999 of clinical trial and regulatory expenses.
Interest income for the three months ended June 30, 1999 increased $4,864 compared to the same period in 1998, while interest expense increased $12,880 during the 1999 period as compared to 1998. The increase in interest expense was due principally to a higher average
outstanding balance under the Company's line of credit during the second quarter of 1999 compared to 1998, with slightly higher interest rates experienced in 1999 versus 1998.
The Company's net loss increased from $1,203,151, or $0.08 per share, for the three months ended June 30, 1998 to $1,245,552, or $0.07 per share, for the same period in 1999. The decrease in the per share loss from 1998 to 1999 is due to a 23% increase in the weighted average number of shares outstanding.
Results of Operations - Six-month period ended June 30, 1999 as compared to the six-month period ended June 30, 1998:
Sales during the first six months of 1999 were $3,192,238 compared to $498,617 for the same period in 1998, an increase of $2,693,621. The increase was due principally to increases in sales of the Company's Millennium(TM) HydroKinetic laser system.
Cost of sales as a percentage of sales improved to 58%, or $1,835,969, during the first half of 1999 compared to 101%, or $501,168, reported for the comparable period in 1998. The increase of $1,334,801 from the six months ended June 30, 1998 to the six months ended June 30, 1999 was due principally to increased sales volume combined with increased indirect expenses reflecting the Company's present growth, partially offset by improved production efficiencies. The improvement in cost of sales as a percentage of sales during the first half of 1999 compared to the same period in 1998 was a result of higher sales, which also permitted fixed manufacturing costs to be spread over a higher volume of goods manufactured.
Gross profit for the first half of 1999 increased to $1,356,269, or 42% of sales, from a gross loss of $2,551 reported for the same period in 1998. The increase is due principally to increased sales and an improved absorption rate of fixed overhead costs, as well as the inclusion in 1999 of cost-effective features designed into the Company's flagship product, the Millennium(TM).
Operating expenses for the first half of 1999 were $3,244,616 compared to $2,015,568 reported for the first half of 1998, an increase of $1,229,048. Sales and marketing expense increased $574,048 due principally to increased variable selling costs related to the higher sales level, an increase in the Company's sales infrastructure, increased participation at professional trade shows, both nationally and internationally, and increased costs in advertising of the Company's Millennium(TM) system. General and administrative expense increased $403,784 and included a non-recurring charge of $129,981, of which $93,731 was non-cash related, associated with a severance agreement. The other significant items associated with the increase to general and administrative expense were increases in staffing and related personnel expenses combined with increases in various professional and administrative costs related to the Company's growth. Research and development expense increased $251,216 and included a non- recurring, non-cash charge of $100,781 related to a consulting arrangement. Remaining significant components of the increase to engineering and development expense were increases in engineering project expenses related to existing product redesigns and enhancements and development of new products. These increases to engineering and development expense were significantly offset by the absence in the first half of 1999 of clinical trial and regulatory expenses incurred during the second quarter of 1998.
Interest income for the first half of 1999 was comparable to the same period in 1998 while interest expense increased $15,840 from that reported during the same period in 1998. The increase in interest expense was due principally to a higher average outstanding balance
under the Company's line of credit during the first half of 1999 compared to 1998, with slightly higher interest rates experienced in 1999 versus 1998.
The Company's net loss decreased to $1,915,408, or $0.11 per share, for the first half of 1999 compared to $2,032,262, or $0.15 per share, for the first half of 1998. The reduction in the per share loss for the first half of 1999 was enhanced by a 23% increase in weighted average shares outstanding.
Acquisition of Laser Skin Toner, Inc.
On July 2, 1998, the Company acquired substantially all of the assets of Laser Skin Toner, Inc., a development stage company ("LSTI"). The assets acquired related primarily to the proprietary in-process laser-based technology being developed by LSTI for non invasive laser treatment in the field of aesthetic skin rejuvenation, including all intellectual property rights consisting of patents, patent applications, a trademark application and certain know-how.
At the time of the acquisition, the intellectual property embodying this developmental effort represented substantially all of LSTI's assets, and the developmental efforts did not appear applicable to any alternative use. At the time of acquisition, the Company intended to proceed with those additional research and development efforts needed to bring the product to market and to fund the costs from working capital. In anticipation of and then in response to the
clearance it received in October 1998 from the FDA to market its Millennium(TM) tissue cutting system for dental hard tissue applications, the Company shortly after acquiring the LSTI technology decided to focus its limited resources on the marketing of its Millennium(TM) system, including a build-up of inventory and expansion of sales staff. The Company continued the clinical trials related to the LSTI technology, while other research and development efforts required to complete and commercialize the LSTI technology were largely deferred.
The Company has since determined that it is in the best interests of its stockholders to continue its focus on the marketing and further enhancement of products embodying its HydroKinetic(TM) technology, including its Millennium(TM) system, and not to further develop the LSTI technology.
The Company's efforts devoted to the LSTI technology since the date of acquisition have not provided a basis for the Company either to revise or to validate its estimates made at the time of acquisition regarding the time and resources required to complete the development of the LSTI technology.
Financial Condition
Cash and cash equivalents increased from $424,539 at December 31, 1998 to $1,750,527 at June 30, 1999 principally as a result of a private placement of Company common stock and stock purchase warrants in March 1999 that generated net proceeds of $2,748,000 and the sale of $251,485 of marketable securities. These increases in cash and cash equivalents were offset primarily by cash used in operating activities aggregating $1,283,707, capital expenditures of $38,886 and a net $363,100 reduction in the balance outstanding under a bank line of credit.
Marketable securities decreased $251,485 from December 31, 1998 to June 30, 1999 as a result of the sale of the securities, with the proceeds being placed in a money market account that is classified as a cash equivalent.
Accounts receivable increased $191,150 from the $563,236 reported at December 31, 1998 to $754,386 at June 30, 1999. The increase is due principally to orders shipped at the end of June 1999 for which payments were received in July 1999.
Inventories at June 30, 1999 were $1,552,227 compared to $1,930,117 at December 31, 1998, a decrease of $377,890. The decrease was due principally to the Company's use of higher levels of inventory. The Company believes that its business does not presently operate in a normalized cycle in which information regarding inventory turns would be meaningful but that such information will become meaningful once productions and deliveries of Millennium(TM) systems are normalized.
Prepaid expenses and other current assets at June 30, 1999 were $64,697 higher than those at December 31, 1998, reflecting increases in prepaid conventions related to future dental shows and prepaid expenses associated with relocation costs of certain employees.
Current liabilities decreased $182,771 from December 31, 1998 to June 30, 1999, due principally to net repayments made on a line of credit amounting to $363,100 and reductions in accounts payable of $106,238, offset principally by a $313,197 increase in accrued expenses. The increase in accrued expenses consists principally of increases in (i) employee related
expenses due to the Company's 1999 change in its payroll cycle and (ii) other accrued expenses associated with the Company's growth.
Capital expenditures during the first half of 1999 totaled $38,886 related primarilly to the purchase of personal computers to accommodate the increase in personnel at the Company. Patents, trademarks and licenses were comparable to those reported at December 31, 1998, less normal amortization for the first half of 1999.
Stockholders' equity increased $1,120,392 to $1,782,244 at June 30, 1999 from $661,852 at December 31, 1998 due principally to net proceeds of $2,748,000 received from a private placement in March, 1999, offset by the 1999 six-month loss of $1,915,408.
Liquidity and Capital Resources
The Company's business now focuses on and is expected to continue to focus on the manufacturing and marketing of its Er,Cr:YSGG HydroKinetic(TM) tissue cutting system, the Millennium(TM), initially for applications in the field of dentistry.
Financing the development of laser-based medical and dental devices and instruments and the operations of the Company has been achieved principally through the private placements of preferred and common stock and the exercise of stock options and warrants. During the three years ended December 31, 1998, the Company has raised approximately $8,713,000 of equity funds. During the first quarter of 1999, the Company raised an additional $2,748,000, after commission and expenses, in equity funds.
The Company's increased sales of its Millennium(TM) system for certain dental hard and soft tissue procedures in the United States should contribute to the Company's ability to generate working capital through higher sales volume and associated increased gross profits. However, management believes that the Company will require significant capital resources during 1999 to fund its present operations, to fund efforts directed towards further extensions and refinements of existing products, and to fund continuing research and development activities. Combined with the capital generated from the issuance and sale of securities, the Company expects to generate the necessary resources to continue with its 1999 business plan through the sales of its products. Should its current operations fall short of providing such resources, the Company would need to obtain the necessary capital resources through other sources such as debt or equity financing. No assurances can be given, however, that the Company will be able to achieve and sustain profitability or have other sources available to provide the capital resources necessary to continue its operations. If the Company were unable to obtain such financing, its ability to meet its obligations and to continue its operations would be adversely affected. The Company's financial statements have been prepared under the assumption of a going concern. The consolidated condensed financial statements do not give effect to any adjustments that might be necessary if the Company were unable to meet its obligations or continue operations.
At June 30, 1999, the Company had $1,341,925 outstanding under a revolving credit agreement with a bank. The revolving credit agreement provides for borrowings of up to $2,500,000 for the financing of inventory and is collateralized by substantially all of the Company's accounts receivable and inventories. The interest rate is fixed throughout the term of the credit agreement and is computed based upon LIBOR plus 0.5% at the time of any borrowings. The Company is required to reduce the outstanding loan balance by an amount equal to the cost of goods sold associated with sales of inventory upon collection of sales proceeds. The current revolving credit agreement expires on December 1, 1999, by which time
the Company hopes to negotiate a renewal of the present line with its present bank or establish a replacement line with another bank. The Company will be required to renew, pay off or refinance the existing line of credit by December 1, 1999. No assurances can be given that the Company will be able to renew or refinance the line of credit or that the terms on which it may be able to renew or refinance the line of credit will be as favorable as the terms of the existing line. If the Company is unable to renew or refinance and therefore required to repay the line of credit, the diversion of resources to that purpose may adversely affect the Company's operations and financial condition.
The Company is presently continuing its analysis of its computer software and hardware requirements. Included among the software to be purchased would be a new accounting system that, unlike the present system, would be Year 2000 compliant. The Company's present software and hardware is personal computer based and is unaltered from its original purchased state except for those upgrades offered by the suppliers of such software. The Company has received assurances from the suppliers of the software it employs, other than the accounting system software, that such software is Year 2000 compliant. The Company intends to obtain certification that any computer software and hardware purchased in 1999 is Year 2000 compliant. The Company does not believe that its insistence upon Year 2000 compliant hardware or software will materially increase the cost of any hardware or software acquired. Should the Company be unable to obtain Year 2000 compliant software or hardware, the worst case scenario would require the Company to transition to a manual financial reporting and information gathering system.
The Year 2000 problem arises out of the convention by which years have been represented in computer programs by a two digit number representing the final two digits in the year's designation and concern that time sensitive components could fail or provide erroneous output if they do not correctly recognize years beginning with 20 rather than 19.
The Company currently has limited information regarding the Year 2000 compliance status of its principal suppliers of goods and services and of its principal customers. The Company has initiated formal communications with all such suppliers and customers with respect to the status of such persons' computer systems in terms of Year 2000 compliance. If any principal customers lack systems that are Year 2000 compliant or programs that provide reasonable assurance that such systems will be Year 2000 compliant well before the end of 1999, the Company will attempt to establish communications channels with such customers that bypass the non-compliant computer systems. If any principal suppliers lack systems that are Year 2000 compliant or programs that provide reasonable assurance that such systems will be Year 2000 compliant well before the end of 1999, the Company will attempt to identify and establish relations with alternate suppliers who have Year 2000 compliant systems. There is a single source supplier of optic fiber for the Millennium(TM) which could not be easily replaced if it has non-compliant systems, and in the event such supplier had a non-compliant system, the Company would attempt to establish communications channels with such supplier that bypass the supplier's non- compliant computer system. There can be no assurance however that the Company would be successful in locating new suppliers and an inability to do so could create difficulties in the Company obtaining certain components used in its manufacturing process. The Company believes that the costs associated with monitoring Year 2000 compliance by suppliers and customers and dealing with any non-compliance will not be material. The failure of the Company or any of its principal suppliers and customers to become Year 2000 compliant in a timely manner and the failure to establish alternate communications channels could have a material adverse effect on the Company's business, financial condition, results of operations and cash flow.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not Applicable
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Recent Filings: Nov 1998 (Qtrly Rpt) | Apr 1999 (Annual Rpt) | Aug 1999 (Qtrly Rpt)
More filings for BLTI available from EDGAR Online
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