UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 2
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended: June 28, 2003
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 incorporation (IRS employer identification no.)
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
--- -----
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Exchange Act Rule 12b-2)
Yes __ No X
--
The Company had 2,730,306 shares of common stock outstanding at July 30, 2003.
This amendment No. 2 to the Company's Quarterly Report on Form 10Q for the 13
and 26 weeks ended June 28, 2003, is filed for the purpose of correcting an
error in the financial statements as discussed in Note 7 to the Condensed
Consolidated Financial Statements. This amendment incorporates certain revisions
to disclosures, but is not intended to update information presented in this
quarterly report as originally filed, except where specifically noted.
BRITESMILE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 28, 2003 (As Restated)
and December 28, 2002............................................................................3
Condensed Consolidated Statements of Operations for the 13 and 26 weeks ended
June 28, 2003 (As Restated) and June 29, 2002....................................................5
Condensed Consolidated Statements of Cash Flows for the 26 weeks ended
June 28, 2003 (As Restated) and June 29, 2002, respectively......................................6
Notes to Condensed Consolidated Financial Statements.............................................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........12
Item 3. Qualitative and Quantitative disclosure about Market Risk.......................................19
Item 4. Controls and Procedures.........................................................................19
Item 5. Commitments and Contingencies..................................................................19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................................................20
Item 2. Changes in Securities...........................................................................21
Item 3. Default Upon Senior Securities...................................................................22
Item 4. Submission of Matters to a Vote of Security Holders..............................................22
Item 5. Other Information...............................................................................22
Item 6. Exhibits and Reports on Form 8-K................................................................24
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRITESMILE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
($ in thousands, except share data)
(Unaudited)
June 28, December 28,
2003 2002
(As Restated -
See Note 7)
--------------- ------------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,989 $ 3,527
Trade accounts receivable, net of allowance
for doubtful accounts of $497 and $506,
respectively 1,987 2,364
Inventories 1,930 2,502
Prepaid expenses and other 719 189
--------------- ------------------
Total current assets 6,625 8,582
--------------- ------------------
PROPERTY AND EQUIPMENT, net. 18,625 20,289
OTHER ASSETS 2,934 2,228
--------------- ------------------
TOTAL ASSETS $ 28,184 $ 31,099
=============== ==================
The accompanying notes to condensed consolidated
financial statements are an integral part of these
condensed consolidated financial statements.
3
BRITESMILE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
($ in thousands, except share data)
(Unaudited)
June 28, December 28,
2003 2002
(As Restated - See
Note 7)
------------------ -----------------
CURRENT LIABILITIES:
Accounts payable $ 5,398 $ 4,793
Accrued expenses 3,678 4,604
Deferred revenue 998 819
Note payable to related party 500 500
Subordinated convertible debenture, net of discount - 749
Accrued variable rent payable to EVL 3,293 2,150
Capital lease obligation with related party 701 701
------------------ -----------------
Total current liabilities 14,568 14,316
------------------ -----------------
Note payable to related party, less current portion & discount 1,161 1,083
Line of credit borrowings 4,713 4,714
Capital lease obligations with related party, less current portion 1,545 1,885
Convertible 2% debenture 3,500 3,500
Other long-term liabilities 1,698 1,802
------------------ -----------------
Total long-term liabilities 12,617 12,984
------------------ -----------------
Total liabilities 27,185 27,300
------------------ -----------------
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value; 50,000,000 shares authorized;
2,662,794 and 2,428,464 shares issued and outstanding,
respectively
37 36
Additional paid-in capital 141,587 139,418
Accumulated deficit (140,625) (135,655)
------------------ -----------------
Total shareholders' equity 999 3,799
------------------ -----------------
Total liabilities and shareholders' equity $ 28,184 $ 31,099
================== =================
The accompanying notes to condensed consolidated
financial statements are an integral part of these
condensed consolidated financial statements.
4
BRITESMILE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands except share data)
Unaudited
13 Weeks 13 Weeks 26 Weeks 26 Weeks
Ended Ended Ended Ended
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
(As Restated - (As Restated -
See Note 7) See Note 7)
---------------- ---------------- ---------------- ----------------
REVENUES:
Center whitening fees, net $ 4,217 $ 3,553 $ 7,369 $ 6,618
Associated Center whitening fees, net 5,644 6,265 10,550 11,466
Product sales 1,117 1,195 2,036 2,263
---------------- ---------------- ---------------- ----------------
Total revenues, net 10,978 11,013 19,955 20,347
---------------- ---------------- ---------------- ----------------
OPERATING COSTS AND EXPENSES:
Operating and occupancy costs 4,339 3,924 7,833 7,542
Selling, general and administrative
expenses 7,173 8,266 13,219 16,134
Research and development expenses 96 181 335 292
Depreciation and amortization 1,608 1,507 3,194 2,991
---------------- ---------------- ---------------- ----------------
Total operating costs and expenses 13,216 13,878 24,581 26,959
---------------- ---------------- ---------------- ----------------
Loss from operations (2,238) (2,865) (4,626) (6,612)
---------------- ---------------- ---------------- ----------------
Total interest expense (228) (103) (340) (470)
---------------- ---------------- ---------------- ----------------
Loss before income tax provision (2,466) (2,968) (4,966) (7,082)
INCOME TAX PROVISION 3 18 4 36
---------------- ---------------- ---------------- ----------------
Net loss $ (2,469) $ (2,986) $ (4,970) $ (7,118)
================ ================ ================ ================
BASIC AND DILUTED NET LOSS PER SHARE $ (1.00) $ (1.23) $ (2.03) $ (2.93)
================ ================ ================ ================
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED
2,464,493 2,427,910 2,446,156 2,426,360
================ ================ ================ ================
The accompanying notes to condensed consolidated financial
statements are an integral part of these condensed
consolidated financial statements.
5
BRITESMILE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
($ in thousands, except share data)
26 Weeks Ended 26 Weeks Ended
June 28, 2003 June 29, 2002
(As Restated -
See Note 7)
------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,970) $ (7,118)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,194 2,991
Increase in variable EVL deferred payments 1,143 -
Store closure accrual - (331)
Cost for issuance of stock warrants and stock options 82 405
Loss on disposal of assets 297 -
Interest on conversion of note payable 10 -
Changes in assets and liabilities (606) (253)
------------------- --------------------
Net cash used in operating activities (850) (4,306)
------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,829) (1,822)
------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) proceeds on line of credit (1) 728
Proceeds from debt financing 1,500 -
Proceeds from common stock offering - -
Principal payments on long-term debt (225) (229)
Payments on capital lease obligations (340) (259)
Proceeds from exercise of stock options 207 504
------------------- --------------------
Net cash provided by financing activities 1,141 744
------------------- --------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,538) (5,384)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF THE PERIOD 3,527 7,162
------------------- --------------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 1,989 $ 1,778
=================== ====================
The accompanying notes to condensed consolidated
financial statements are an integral part of these
condensed consolidated financial statements.
6
BRITESMILE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 28, 2003
1. Description of Business and Nature of Operations
BriteSmile, Inc., a Utah corporation ("BriteSmile" or the "Company"), and its
affiliates develop and sell advanced teeth whitening products, services and
technology. Unless specified to the contrary herein, references to BriteSmile or
to the Company 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"). As of June 28, 2003, the
Company had 14 Centers and there were 4,799 Associated Centers in operation.
2. Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America 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 26 weeks ended June 28, 2003
are not necessarily indicative of the results that may be expected for the
remainder of the fiscal year.
The accompanying condensed consolidated financial statements include the
accounts of the Company, its subsidiaries, and entities (specifically including
the Centers) in which the Company has a controlling interest. The Company
consolidates the operating results of the Centers as the Company has a
controlling financial interest in the Centers in accordance with the criteria of
EITF 97-2, "Application of FASB Statement No. 94 and APB Opinion #16 to
Physician Practice Management Entities ("PPM") and Certain Other Entities with
Contractual Management Arrangements." The agreements with the Centers are 30
year, non-terminable agreements that provide the Company a financial interest in
the PPM and exclusive authority over all decision making other than the
dispensing of dental services.
3. Stock Based Compensation
The Company uses the intrinsic value method to account for its stock based
compensation plans. Had compensation cost for the Company's stock-based
compensation plans been determined using fair value at the grant award dates
using the Black-Scholes option pricing valuation model, the Company's reported
net loss applicable to common shareholders and basic and diluted net loss per
share would have been increased to the pro forma amounts indicated below (in
thousands, except per share data):
26 Weeks Ended 26 Weeks Ended
June 28, 2003 June 29, 2002
----------------- -----------------
Net Loss as reported............... $ 4,970 $ 7,118
Add: Compensation expense reported
under APB25........................ $0 $0
Deduct: Compensation expense computed
using fair value method, net of tax...
$ 1,531 $ 1,698
----------------- -----------------
Pro forma net loss................. $ 6,501 $ 8,816
================= =================
Pro forma basic and diluted
net loss per share.............. $ (2.66) $ (3.63)
================= =================
7
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
52 weeks ended December 28, 2002.
4. Loss Per Common Share
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 and convertible notes payable have been excluded from the
calculation of net loss per share, as their effect is anti-dilutive.
5. Legal Matters
BriteSmile, Inc. v. Discus Dental, Inc. and Salim Nathoo, filed in the United
States District Court for the Northern District of California (the "Discus
Patent Litigation"). The Company filed an initial complaint against Discus
Dental, Inc. ("Discus"), Culver City, California, on July 8, 2002, asserting
claims of infringement of the Company's U.S. Patents No. 6,343,933 and U.S.
Patent No. 6,361,320. On February 28, 2003, the Company amended the Discus
Patent Litigation by adding Salim Nathoo ("Nathoo") as a defendant. The
complaint, as amended, further alleges misappropriation of the Company's trade
secrets, civil conspiracy, and unfair competition and business practices by
Discus and Nathoo; breach of contract and breach of fiduciary duty by Mr.
Nathoo, and tortious interference with contract by Discus. The complaint alleges
that Nathoo and Discus conspired to misappropriate BriteSmile's trade secrets in
violation of Nathoo's contractual obligations to the Company. The amended
lawsuit alleges that, as BriteSmile's Medical Director, Nathoo had and continues
to have, an obligation to keep BriteSmile's trade secrets confidential.
Beginning in 2001, Discus Dental and Nathoo entered into an agreement whereby
Discus Dental paid Nathoo at least $2.5 million over a less than two year period
for Nathoo's "consulting" services, which included paying Nathoo to share with
Discus certain of the Company's trade secrets. The lawsuit alleges further that
in December 2002, a third party informed BriteSmile of Nathoo's activities, and
that when confronted by BriteSmile, Nathoo admitted to receiving $2.5 million
from Discus. The Company seeks a permanent injunction against both Discus and
Nathoo to prevent further infringement of its patents and improper disclosure of
the Company's trade secrets, lost profits, treble damages and attorneys fees for
willful patent infringement, punitive damages, and other relief.
On March 25, 2003, Discus filed its Answer to the Amended Complaint and
Counterclaims. In its Answer, Discus denies any liability for BriteSmile's
claims. Discus also raises affirmative defenses, including claims that its
products and processes do not infringe BriteSmile's patents, and that
BriteSmile's patents are invalid and unenforceable. Discus asserts counterclaims
against BriteSmile, seeking (i) judicial declarations that BriteSmile's patents
are invalid, unenforceable, and have not been infringed, (ii) tortious
interference with prospective economic advantage and economic business
relations, and (iii) unfair competition. Discus also asks for declarations that
its products and processes do not violate BriteSmile's patents, that
BriteSmile's patents are unenforceable, that BriteSmile has no protectable trade
secrets, that BriteSmile's contracts with dentists which contain contractual
restrictions on the purchase and use of competitive systems are unenforceable
and should be enjoined, lost profits, treble damages and attorneys fees.
The Company has commenced discovery concerning the claims and defenses asserted
in the Discus Patent Litigation, and has responded to discovery requests from
Discus.
Salim Nathoo v. BriteSmile Leasing. On March 6, 2003, Nathoo filed a lawsuit
against BriteSmile Leasing, a subsidiary of the Company in the New Jersey state
court. In this action, Nathoo alleges that the Company breached its agreement to
pay Nathoo money, and that such failure should result in the reversion of
certain patent rights, which were previously assigned by Nathoo to the Company,
back to Nathoo. Nathoo also seeks the payment of profits derived from the patent
rights. The Company has filed an answer to the complaint, together with
counterclaims alleging the same causes of action as in the Company's California
litigation against Nathoo.
On May 21, 2003, the court ordered that the case be transferred to California.
On July 2, 2003, the case was consolidated with the Discus Patent Litigation in
California.
8
Smile Inc. Asia Pte. Ltd. v. BriteSmile. On April 23, 2002, Smile Inc. Asia Pte.
Ltd. ("Smile") sued the Company and BriteSmile Management, Inc., a wholly owned
subsidiary of the Company, in the Third Judicial District Court in Salt Lake
City, Utah. The Complaint alleges that BriteSmile Management breached its 1998
distributor agreement with Smile (exclusive as to Singapore and other
surrounding countries) by failing to fill orders placed and to perform other
obligations under the agreement. The Complaint also alleges that BriteSmile
Management and the Company fraudulently induced Smile to enter into the
distributor agreement, and includes claims for damages based on alleged unjust
enrichment, civil conspiracy, breach of the duty of good faith and fair dealing,
interference with contractual and economic relations, and fraudulent transfer.
On May 31, 2002, the Company and BriteSmile Management filed their answer and
counterclaim. The counterclaim alleges that Smile breached the distributor
agreement by, among other things, failing to operate using a licensed dentist in
good standing (the license of the principal of Smile, Dr. Tan, was revoked
during 1999) and using BriteSmile's names and marks in a fashion not permitted
by the distributor agreement.
The primary defense to Smile's claims is that the distributor agreement
expressly excludes "non-laser-aided teeth whitening products and processes" sold
by the Company. Accordingly, Smile has no rights to market and sell the
Company's current light activated in-office whitening products and cannot claim
damages for BriteSmile's marketing of its light activated system in the
exclusive territory described in the distributor agreement.
Discovery is proceeding; both parties have produced documents.
BriteSmile v. Discus Dental, filed in Contra Costa County Superior Court,
California. On May 31, 2002, the Company filed a complaint against Discus
Dental, Inc. in Contra Costa County Superior Court, California, alleging causes
of action for intentional interference with contractual relationship, negligent
interference with contractual relationship, violation of Unfair Business
Practice Act - Loss Leader, violation of Unfair Business Practice Act, trade
libel and injunctive relief. The complaint alleges that Discus Dental and other
defendants yet to be identified wrongfully interfered with the Company's
contractual relationships with its Associated Center dentists, in part by
writing letters with the purpose of inducing certain of the Company's Associated
Dentists to terminate their contracts with the Company and switch to Discus'
Zoom! system, and by making false and disparaging statements concerning the
Company's teeth whitening system. The Complaint seeks damages for loss of
business, punitive damages, injunctive relief, and costs of suit. On June 27,
2002, Discus filed a demurrer to the Company's complaint, challenging the legal
sufficiency of the complaint. On June 30, 2002, the court ruled that the Company
would be able to pursue its claims as alleged in the complaint except for the
second cause of action alleging negligent interference with contractual
relationship.
This case was stayed on March 11, 2003 and will remain stayed until a status
conference scheduled for September 2003.
Kalow & Springut v. BriteSmile et. al., filed in Supreme Court of the State of
New York, County of New York. In April 2003, the law firm of Kalow & Springut
("KS") filed a complaint against the Company, BriteSmile International, a
subsidiary of the Company, and A.M. Pilaro, the Company's Chairman. KS seeks to
recover alleged unpaid legal fees and expenses in the amount of $767,818.18.
Plaintiff also alleges that it was fraudulently induced to incur the legal fees
and expenses, and seeks to recover punitive damages of at least $5 million.
On June 13, 2003, BriteSmile answered the Complaint and asserted counterclaims
against KS for negligence, malpractice and breach of contract, including failure
to return Company files, and failure to inform the Company that Dr. Salim Nathoo
had been working for Discus Dental in violation of Dr. Nathoo's agreement with
the Company.
Discovery proceedings have commenced.
PracticeMasters, Inc. v. BriteSmile, Inc., filed in Superior Court in San Diego,
California. On May 21, 2003, PracticeMasters, Inc. ("PMI") filed a complaint
against the Company. PMI seeks compensatory damages in an unspecified amount for
BriteSmile's alleged breach of a Marketing Associate Agreement with PMI. PMI
alleges that BriteSmile failed to pay fees owed to PracticeMasters under the
agreement and that it failed to provide proper notice of termination of the
agreement. BriteSmile filed a demurrer and motion to strike on July 15, 2003. By
the demurrer, BriteSmile seeks dismissal of PMI' causes of action for breach of
fiduciary duty and constructive trust, which are the basis for its claim for
punitive damages. By the motion to strike, BriteSmile seeks to strike PMI's
claim for punitive damages. BriteSmile plans to file a cross-complaint against
PMI for breach of the Marketing Associate Agreement and fraudulent
misrepresentations and to seek compensatory damages arising from PracticeMasters
failure to set up viable accounts and from resulting damage to BriteSmile's
reputation.
No discovery has been taken.
In Management's opinion, based upon advice of counsel, the litigation matters
listed above in the aggregate will not have a material adverse effect on the
Company.
6. Subsequent Events
CAP America Trust Center Loan
On May 7, 2003, the Company and CAP America Trust entered into a Loan Agreement
("the Center Loan") for $2.5 million to be used for capital expenditures and
other specific revenue generating initiatives to be agreed and defined by
9
BriteSmile and CAP America Trust. The Company may make drawings on account of
the loan from time to time during the draw down period beginning on May 7, 2003
and ending on May 10, 2006. Up to $1,700,000 of loan proceeds may be used for
the specific revenue generating initiatives, and up to $800,000 for general
working capital. Interest is fixed at 6%, payable monthly, with CAP America
Trust having the right to reset the interest rate to 200bps over 1 year London
Interbank Offered Rate ("LIBOR") after giving the Company 30 days notice. A
variable fee payment based on the number of teeth whitening procedures performed
at the Centers will commence on May 11, 2006, and continue until May 10, 2011.
Variable fees will be payable 40 days after the end of the month in which the
procedures are performed, except for fees due for April/May 2011, which will
become payable on the maturity date. On July 26, 2003, the Company drew down
$370,626 under the Center Loan with CAP America Trust.
LCO Investments Limited ("LCO") is the Company's major shareholder. LCO is a
wholly owned subsidiary of the ERSE Trust. CAP Advisers Limited is a co-trustee
of the ERSE Trust. Mr. Anthony Pilaro, a director and Chairman of the Company,
is also Chairman of CAP Advisers Limited. CAP America Limited is a co-trustee of
CAP America Trust, the lender under the Center Loan described above. CAP America
Limited is owned and controlled by LCO.
Acquisition of Certain Human Oral Care Intellectual Property
Effective July 1, 2003, the Company and its wholly owned subsidiary, BriteSmile
Development, Inc. ("BDI"), entered into an Asset Purchase Agreement (the "APA")
with R. Eric Montgomery ("Montgomery") and certain entities owned and controlled
by him (collectively, the "REM Group"). Montgomery is a member of the board of
directors of the Company.
Pursuant to the APA, on July 23, 2003 BDI acquired certain United States and
foreign patents, patent applications, continuations, continuations-in-part,
trade secrets, technologies, know-how, trademarks and trade names relating to
human oral care ("HOC") for a purchase price of $5 million ($6 million under
certain contingencies), plus a 50% participation interest in third party
royalties and infringement recoveries relating to the HOC intellectual property
to be acquired from the REM Group. In addition, the REM Group conveyed certain
other HOC intellectual property, which is implicated by certain agreements
between the Company, the REM Group and a third party to a new entity,
Oraceutical Acquisition LLC, an entity owned and controlled by REM.
BDI agreed to the purchase price to the REM Group as follows:
(i) $750,000 on May 9, 2003 in connection with the delivery to BDI of a
license from the REM Group to certain patents for a static mixer
device used in teeth whitening;
(ii) $1,000,000 on July 23, 2003, in connection with the closing of the
APA;
(iii)66,667 shares of Common Stock of the Company (the "Payment Shares")
issued to Montgomery on July 25, 2003; and
(iv) for a period of up to 5 years, BDI will pay to Oraceutical Innovative
Properties, ("OIP"), a REM Group member, 5% of worldwide net revenues
of the Company for a whitening crayon or pen product currently
referred to as "BriteSmile to Go," and 1% of worldwide net revenues of
the Company or its affiliates for light activated teeth whitening or
other in-office or chair side whitening procedures, until the
aggregate of such payments, together with the initial cash payment of
$1,750,000 and the value of the Payment Shares (calculated at
$1,930,010) equals $5,000,000. BDI may be required to pay OIP an
additional $1 million pursuant to the foregoing formula if REM Group
fulfills certain contingencies, in which case the total purchase price
to the REM Group will be $6 million. The foregoing net revenue
payments will be paid in cash, or at the option of BDI, up to 50% of
any payment amount may be made in the form of Common Stock of the
Company (the "Net Revenue Payment Shares"). All Net Revenue Payment
Shares, if and when issued by the Company, will be issued at the then
current market price as quoted on Nasdaq, and the balance in cash. The
payments are due on a quarterly basis, 15 days after the close of the
Company's applicable fiscal quarter.
10
With respect to third party infringement and/or licensing activities, BDI will
pay the REM Group 50% of such recoveries after payment of legal fees incurred in
prosecution of third party claims, all patent prosecution and maintenance costs,
and certain other amounts.
Financing Arrangements for the APA
On April 29, 2003 the Company, BDI, LCO, and Montgomery entered into a letter
agreement pursuant to which LCO agreed to loan a total of $2,000,000 to BDI to
fund a portion of the purchase price contemplated by the APA. The letter
agreement was later terminated as to Montgomery.
LCO is the Company's major shareholder. LCO is a wholly owned subsidiary of the
ERSE Trust. CAP Advisers Limited is a co-trustee of the ERSE Trust. Mr. Pilaro,
a director and Chairman of the Board of the Company, is Chairman of CAP Advisers
Limited.
Pursuant to the letter agreement, LCO loaned $1,000,000 to BDI on May 9, 2003.
BDI delivered a promissory note to LCO, with interest and principal due on May
9, 2008. Interest accrues at 200 basis points above the 1 year LIBOR as quoted
by the Bank of Nova Scotia. The interest rate on the note is reset every thirty
days.
Also, pursuant to the letter agreement and related documents, LCO loaned to BDI
an additional $1,000,000 on similar terms on July 23, 2003, the closing date of
the APA.
In connection with the granting of the loans to BDI, LCO received warrants to
purchase 133,333 shares of Common Stock of the Company. All warrants granted to
LCO are exercisable at $15.00 per share and have a five year life. The
promissory notes issued to LCO by BDI were guaranteed by the Company. The shares
of Common Stock underlying the warrants granted to LCO are subject to certain
limited "piggyback" registration rights in the event of future registered public
offerings of Common Stock sold by the Company. On May 9, 2003, warrants to
purchase 66,666 shares were issued. The fair value of the warrants issued of
$704,378 was recorded as a discount of the note, and is being amortized over the
life of the note to interest expense and is reflected in results as of June 28,
2003. The additional $1,000,000 loaned on July 23, 2003 also carried warrants to
purchase 66,667 shares issued at an exercise price of $15.00 per share. The fair
value of the warrants issued on July 23, 2003 is $1,000,000, which will be
recorded in the third quarter 2003 as a discount of the note and will be
amortized over the life of the note to interest expense. The note has a
contractual life of five years.
7. Restatement
Subsequent to the issuance of the Company's condensed consolidated financial
statements for the fiscal quarter ended June 28, 2003, the Company identified
additional costs relating to the Company's cost of goods sold for the thirteen
weeks ended June 28, 2003 and inventory as of June 28, 2003. The error resulted
from improperly costing cost of goods sold. As a result, the Company is
restating its condensed consolidated financial statements as of June 28, 2003
from the amounts previously reported. A summary of the significant effects of
the restatement is as follows:
As of June 28, 2003
------------------------------------------ -------------------------------------------------------------------------------
As Previously Reported As Restated
------------------------------------------ --------------------------------------- ---------------------------------------
Inventory $ 2,226 $ 1,930
------------------------------------------ --------------------------------------- ---------------------------------------
Total Current Assets $ 6,921 $ 6,625
------------------------------------------ --------------------------------------- ---------------------------------------
Total Assets $ 28,480 $ 28,184
------------------------------------------ --------------------------------------- ---------------------------------------
Accumulated Deficit $ 140,329 $ 140,625
------------------------------------------ --------------------------------------- ---------------------------------------
Total Shareholder's Equity $ 1,295 $ 999
------------------------------------------ --------------------------------------- ---------------------------------------
11
------------------------- ------------------------------------------------ -----------------------------------------------
For the 13 weeks ended June 28, 2003 For the 26 weeks ended June 28, 2003
------------------------- ------------------------------------------------ -----------------------------------------------
As Previously Reported As Restated As Previously Reported As Restated
------------------------- ------------------------ ----------------------- ----------------------- -----------------------
Operating and occupancy $ 4,043 $ 4,339 $ 7,537 $ 7,833
costs
------------------------- ------------------------ ----------------------- ----------------------- -----------------------
Total operating costs $ 12,920 $ 13,216 $ 24,285 $ 24,581
and expenses
------------------------- ------------------------ ----------------------- ----------------------- -----------------------
Loss from operations $ (1,942) $ (2,238) $ (4,330) $ (4,626)
------------------------- ------------------------ ----------------------- ----------------------- -----------------------
Loss before income tax $ (2,170) $ (2,466) $ (4,670) $ (4,966)
provision
------------------------- ------------------------ ----------------------- ----------------------- -----------------------
Net loss $ (2,173) $ (2,469) $ (4,674) $ (4,970)
------------------------- ------------------------ ----------------------- ----------------------- -----------------------
Net loss per share - $ (0.88) $ (1.00) $ (1.91) $ (2.03)
basic and diluted
------------------------- ------------------------ ----------------------- ----------------------- -----------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As discussed in Note 7 to the condensed consolidated financial statements, the
Company has restated its financial statements for the 13 and 26 weeks ended June
28, 2003. This Management's Discussion and Analysis of Financial Condition and
Results Of Operations gives effect to this restatement.
Forward-looking Statements and Risk Factors
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contain 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 inherent to doing business in the industry in which the
Company operates, 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.
12
o Failure of the Company to generate, sustain or manage growth,
including failure to develop new products and expand Center and
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;
o Failure of the Company to secure additional financing to complete its
plan for the rollout of a broad base of Associated Centers and for the
introduction of additional retail whitening products;
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 and newly introduced in-office bleaching
methods;
o Failure to develop marketing strategies and delivery methods to
penetrate non-U.S. markets; and
o Lack of product diversity.
Critical Accounting Policies and Estimates
General
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's condensed 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 the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, the
Company evaluates its estimates, including those related to customer programs
and incentives, bad debts, inventories, income taxes, warranty obligations,
financing operations, restructuring, and contingencies and litigation. The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its condensed
consolidated financial statements.
Revenue Recognition
BriteSmile recognizes revenue related to retail products at the time such
products are shipped to customers.
BriteSmile recognizes revenue at Centers at the time a whitening procedure is
performed.
BriteSmile records deferred revenue at the time of sale of key cards and access
codes to Associated Centers. Revenue is subsequently recognized over the period
that the whitening procedures (which can be performed utilizing the key cards
and access codes) are performed, currently estimated at 22 days from the date of
shipment. A material change to the estimated time period over which the key
cards and access codes are used could have a significant impact on BriteSmile's
revenue in the period of change as well as future periods.
BriteSmile's policy is not to accept any return of key cards or access codes
during the course of the agreement with an Associated Center.
13
Bad Debt
BriteSmile maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. A
considerable amount of judgment is required in assessing the ultimate
realization of accounts receivable including the current credit-worthiness of
each customer. If the financial condition of BriteSmile's customers (dentists
who operate Associated Centers) were to deteriorate, resulting in an impairment
of their ability to make payments, additional allowances may be required.
Inventory
Inventories are stated at the lower of cost or market. BriteSmile writes down
its inventory for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of inventory and the estimated market value based
upon assumptions about future demand and market conditions, as well as for
damaged goods. If actual market conditions are less favorable than those
projected by management, additional inventory write-downs may be required.
Property and Equipment
BriteSmile evaluates its property, equipment and improvements for impairment
whenever indicators of impairment exist. An impairment charge of $293,000 was
recorded during the period related to the relocation of the Company's Houston
Center to a new strategic location.
Store Closures
BriteSmile recorded significant reserves in connection with store closures made
in prior years. These reserves include estimates pertaining to employee
separation costs and the settlements of contractual obligations, primarily
property leases. Although the Company does not anticipate significant changes,
the actual costs related to the closures may differ from these estimates. The
store closure reserve decreased $97,000 during the twenty-six weeks ended June
23, 2003 period due to lease payments.
Legal Contingencies
BriteSmile is currently a party to certain legal actions. Management does not
believe that current pending litigation will have a material adverse effect on
BriteSmile's condensed consolidated financial statement position taken as a
whole. This conclusion has been developed in consultation with outside counsel
handling BriteSmile's defenses in the matters. It is possible, however, that
future results of operations for any particular quarterly or annual period could
be materially affected by changes in management's assumptions and the
effectiveness of BriteSmile's strategies related to these legal actions.
BriteSmile recognizes the costs of legal services in the periods incurred.
Overview
Operating and occupancy costs are 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 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.
14
The following discussion should be read in conjunction with the Financial
Statements and the Notes thereto included in Item 1 of this Quarterly Report on
Form 10-Q/A Amendment no. 2 and in the Company's Annual Report on Form 10-K for
the fiscal year ended December 28, 2002.
The following table sets forth unaudited operating results for the thirteen week
periods and twenty-six week periods ended June 28, 2003 and June 29, 2002, as a
percentage of sales in each of these periods. This data has been derived from
the unaudited financial statements.
13 Weeks ended 13 Weeks ended 26 Weeks ended 26 Weeks ended
-------------- -------------- -------------- --------------
June 28, 2003 June 29, 2002 June 28, 2003 June 29, 2002
Income Statement Data:
Revenues:
Center whitening fees, net 38.4% 32.3% 36.9% 32.5%
Associated Center whitening fees,
net 51.4% 56.9% 52.9% 56.4%
Product sales 10.2% 10.8% 10.2% 11.1%
----- ----- ----- -----
Total revenues, net 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Operating Costs and Expenses:
Operating and occupancy costs 39.5% 35.6% 39.3% 37.1%
Selling, general and administrative
expenses 65.3% 75.1% 66.2% 79.3%
Research and development expenses 0.9% 1.6% 1.7% 1.4%
Depreciation and amortization 14.7% 13.7% 16.0% 14.7%
----- ----- ----- -----
Total operating costs and expenses 120.4% 126.0% 123.2% 132.5%
------ ------ ------ ------
Loss from operations -20.4% -26.0% -23.2% -32.5%
------ ------ ------ ------
Interest expense, net -2.1% -0.9% -1.7% -2.3%
----- ----- ----- -----
Loss before income tax provision -22.5% -26.9% -24.9% -34.8%
Provision for income taxes 0.0% 0.2% 0.0% 0.2%
---- ---- ---- ----
Net Loss -22.5% -27.1% -24.9% -35.0%
============== ============== ============== ==============
15
The following are explanations of significant period-to-period changes for the
13 weeks ended June 28, 2003 compared to June 29, 2002:
Revenues
Total Revenues, net. Total revenues decreased by $35,000, or 0.32%, and were
equivalent for the 13 weeks ended June 28, 2003, to the $11.0 million achieved
for the 13 weeks ended June 29, 2002.
Center Whitening Fees, net. Center whitening fees increased by $664,000, or
18.69%, to $4.2 million for the 13 weeks ended June 28, 2003, from $3.6 million
for the 13 weeks ended June 29, 2002. The number of procedures performed in the
Centers increased by 11.62% to 8,839 in the second quarter of 2003, compared to
7,919 in the same quarter of 2002.
Associated Center Whitening Fees. Associated Center whitening fees decreased by
$621,000, or 9.91%, to $5.6 million for the 13 weeks ended June 28, 2003, from
$6.3 million for the 13 weeks ended June 29, 2002. This decrease was due to the
sale of fewer procedures in the 13 weeks ended June 28, 2003 compared to the 13
weeks ended June 29, 2002. The number of procedures sold in the Associated
Centers decreased 3.45% to 34,565 procedures in the second quarter of 2003
compared to 35,800 procedures in the same quarter of 2002. Domestic Associated
Center whitening procedures were 25,125 in the 13 weeks ended June 28, 2003
compared to 27,970 in the same quarter of 2002. International Associated Center
whitening procedures were 9,440 in the 13 weeks ended June 28, 2003 compared to
7,830 in the same quarter of 2002.
Product Sales. Product sales decreased by $78,000 or 6.53% to $1.1 million for
the 13 weeks ended June 28, 2003, from $1.2 million for the 13 weeks ended June
29, 2002. Product sales represent the Company's toothpaste, mouthwash, whitening
gum, and the Sonicare toothbrush products sold at Centers and Associated
Centers. This decline in product sales (post-whitening maintenance products)
relates to fewer domestic whitening procedures performed for the 13 weeks ended
June 28, 2003 than in the same quarter of 2002.
Operating Costs and Expenses
Operating and Occupancy Costs. Operating and occupancy costs were $4.3 million
or 39.5% as a percentage of revenues for the thirteen weeks ended June 28, 2003,
compared to $3.9 million or 35.6% as a percentage of revenues in the thirteen
weeks ended June 29, 2002. This increase was primarily due to a $293,000
non-cash charge related to the relocation of the Company's Houston Spa to a new
strategic location in the Houston Galleria.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $7.2 million or 65.3% as a percentage of
revenue for the second quarter of 2003, compared to $8.3 million or 75.1% in the
corresponding period in 2002. The $1.1 million decrease is due to lower
advertising costs and reflects the Company's continued commitment to improve its
marketing efficiency. The Company expects that its cost containment efforts will
continue throughout fiscal 2003, although no guarantee of such can be given.
Research and Development Expenses. Research and development expenses decreased
to $96,000 or 0.9% as a percentage of revenue for the thirteen weeks ended June
28, 2003 compared to $181,000 or 1.6% as a percentage of revenue in the
corresponding period in 2002. The expense incurred in 2003 was primarily related
to consulting fees relating to product development, whereas the expenses in 2002
were a mixture of consulting and product efficacy studies.
Depreciation and Amortization. Depreciation and amortization increased to $1.6
million or 14.7% as a percentage of revenue for the second quarter of 2003
compared to $1.5 million or 13.7% as a percentage of revenue in the
corresponding period in 2002. The increase of $101,000 in depreciation and
amortization expense for the second quarter of 2003 is the result of a greater
number of light-activated whitening devices in operation as a result of the
increase in the number of active Associated Centers, along with conversions of
domestic units for use in International markets.
Interest Expense, net. Interest expense, net increased to $228,000 or 2.1% as a
percentage of revenue for the second quarter of 2003 compared to interest
expense, net of $103,000 or 0.9% as a percentage of revenue in the corresponding
quarter of 2002. Higher interest expense, due to increased level of borrowing in
connections with infrastructure improvements, account for the quarter over
quarter increase.
16
The following are explanations of significant period-to-period changes for the
26 weeks ended June 28, 2003 and June 29, 2002:
Revenues
Total Revenues. Total revenues decreased by $392,000, or 1.93%, to $20.0 million
for the 26 weeks ended June 28, 2003, from $20.3 million for the 26 weeks ended
June 29, 2002.
Center Whitening Fees. Center whitening fees increased by $751,000, or 11.35%,
to $7.4 million for the 26 weeks ended June 28, 2003, from $6.6 million for the
26 weeks ended June 29, 2002. The number of procedures performed in the Centers
increased by 5.53% to 15,586 for the 26 weeks ended June 28, 2003, compared to
14,769 for the same period of 2002.
Associated Center Whitening Fees. Associated Center whitening fees decreased by
$916,000, or 7.99%, to $10.6 million for the 26 weeks ended June 28, 2003, from
$11.5 million for the 26 weeks ended June 29, 2002. There were 4,799 Associated
Centers at the end of the 26 weeks ended June 28, 2003 compared to 4,404
Associated Centers that were in operation at the end of the 26 weeks ended June
29, 2002. The number of procedures sold in the Associated Centers decreased
6.35% to 62,805 procedures in the 26 weeks ended June 28, 2003 compared to
67,060 procedures in the same period of 2002. Domestic Associated Center
whitening procedures totaled 47,420 in the 26 weeks ended June 28, 2003 compared
to 54,665 in the same period of 2002. International Associated Center whitening
procedures were 15,385 in the 26 weeks ended June 28, 2003 compared to 12,395 in
the same period of 2002. While the Company continues to execute its strategy of
expanding distribution both domestically and internationally through the dental
practice channel (Associated Centers), the Company has taken efforts
domestically to terminate and replace dental practices that are not assisting
the Company in achieving its plans. As a result, the number of domestic
Associated Centers has decreased from 3,372 at June 29, 2002 to 3,158 at June
28, 2003.
Product Sales. Product sales decreased by $227,000 to $2.0 million for the 26
weeks ended June 28, 2003, from $2.3 million for the 26 weeks ended June 29,
2002. Product sales represent the Company's toothpaste, mouthwash, whitening
gum, and the Sonicare toothbrush products sold at Centers and Associated
Centers. This decline in product sales (post-whitening maintenance products)
relates to fewer domestic whitening procedures performed for the 26 weeks ended
June 28, 2003 than in the same period of 2002.
Operating Costs and Expenses
Operating and Occupancy Costs. Operating and occupancy costs were $7.8 million
or 39.3% as a percentage of revenues for the twenty-six weeks ended June 28,
2003, compared to $7.5 million or 37.1% as a percentage of revenue in the
twenty-six weeks ended June 29, 2002. Operating costs includes costs of goods
sold; lease financing costs for the Associated Centers, and the operating and
occupancy costs for the Centers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased significantly to $13.2 million or 66.2% as a
percentage of revenue for the twenty-six weeks ended June 28, 2003 compared to
$16.1 million or 79.3% as a percentage of revenue in the corresponding period in
2002. The $3.0 million decrease is due to lower advertising costs, reflecting
the Company's continued commitment to improve its marketing efficiency. The
Company expects that cost containment efforts will continue throughout fiscal
2003, although no guarantee of such can be given.
Research and Development Expenses. Research and development expenses of $335,000
were 1.7% as a percentage of revenue for the twenty-six weeks ended June 28,
2003 compared to $292,000 or 1.4% as a percentage of revenue in the
corresponding period in 2002. This expense is primarily due to development of
new products to expand our leadership position in the teeth-whitening industry.
Depreciation and Amortization. Depreciation and amortization increased to $3.2
million or 16.0% as a percentage of revenue for the twenty-six weeks ended June
28, 2003 compared to $3.0 million or 14.7% as a percentage of revenue in the
corresponding period in 2002. The increase of $203,000 in depreciation and
amortization expense to $3.2 million for the twenty-six weeks ended June 28,
2003 is the result of a greater number of light activated whitening devices in
operation internationally as a result of the increase in the number of active
Associated Centers.
17
Interest Expense, net. Interest expense, net decreased to $340,000 or 1.7% as a
percentage of revenue for the twenty-six weeks ended June 28, 2003 compared to
interest expense, net of $470,000 or 2.3% as a percentage of revenue in the
corresponding period of 2002.
Net Loss. The net loss decreased $2.1 million to $5.0 million for the twenty-six
weeks ended June 28, 2003 compared to a net loss of $7.1 million in the
corresponding period of 2002. This represents a 30.2% improvement due to a
combination of the factors described above. The net loss per share for the
twenty-six weeks ended June 28, 2003 was ($2.03) versus ($2.93) reported for the
same period of 2002.
Liquidity and Capital Resources
To date, the Company has yet to achieve profitability. The Company does not
expect to be profitable in 2003. The Company has implemented initiatives to
increase sales and decrease expenses to assure its viability for the next 12
months. The Company's principal sources of liquidity have been proceeds from
issuance of common stock and debt. At June 28, 2003, the Company had $2.0
million in cash and borrowing capacity under lines of credit totaling $4.3
million.
The Company obtained the following additional borrowing availability during
2003:
o $1.5 million increase, effective January 2003, in the Credit Agreements
with CAP Advisers. The increase is specifically for international
capital expenditures. On July 22, 2003, the Company drew down $635,253
under this credit facility.
o $2.5 million Center Loan with CAP America Trust. This credit facility
is for general working capital needs ($800,000) and capital
expenditures and specific revenue generating initiatives ($1.7
million). On July 26, 2003, the Company drew down $370,626 under the
Center Loan.
The Company believes that cash on hand along with available borrowing capacity
discussed above will be sufficient to sustain operations for the next twelve
months.
In addition to the line of credit facilities, the Company entered into a
financing agreement with LCO Investment Limited, as follows:
On April 29, 2003, the Company's principal shareholder, LCO Investments
Limited ("LCO") agreed to lend the Company's wholly-owned subsidiary,
BriteSmile Development, Inc. ("BDI") up to $2 million for the
acquisition of certain of the human oral care intellectual property of
R. Eric Montgomery, a director of the Company and his affiliates
(collectively, "REM").
Pursuant to this agreement, LCO loaned $1,000,000 to BDI on May 9,
2003. BDI delivered a promissory note to LCO, with interest and
principal due on May 9, 2008. Interest accrues at 200 basis points
above the LIBOR as quoted by the Bank of Nova Scotia. The interest rate
on the note is reset every thirty days at 200 basis points above then
current LIBOR.
Also pursuant to this agreement, LCO loaned to BDI an additional
$1,000,000 on similar terms on July 23, 2003, as part of the purchase
consideration to REM.
The promissory notes issued to LCO by BDI are not convertible by their
terms into shares of Company Common Stock. However, for its loans to
BDI, LCO received warrants to purchase 133,333 shares of Common Stock
of the Company. All warrants granted to LCO are exercisable at $15.00
per share. The warrants are exercisable for a period of 5 years and
remain outstanding and unexercised. The Company guaranteed the
promissory notes issued to LCO by BDI. The shares of Common Stock
underlying the warrants granted to LCO are subject to certain limited
"piggyback" registration rights in the event of future registered
public offerings of Common Stock sold by the Company.
In conjunction with the initial installment of $1,000,000 from LCO to
BDI on May 9, 2003, warrants to purchase 66,666 shares were issued. The
fair value of the 66,666 warrants issued of $704,378 was recorded in
18
the June 28, 2003 results as a discount of the note and is being
amortized over the life of the note to interest expense.
The fair value of the warrants issued on July 23, 2003 is $1,829,789,
which will be recorded in the third quarter of 2003 as a discount of
the note and will be amortized over the life of the note to interest
expense. The note has a contractual life of five years.
Cash flows used in operations decreased by $3.5 million to ($850,000) for the
twenty-six weeks ended June 28,2003 from ($4.3 million) during the second
quarter of 2002, primarily due to the decrease in the net loss and the deferral
of principal payment on debt.
Cash provided by financing activities were $1.1 million for the twenty-six weeks
ended June 28, 2003, compared to $744,000 for the same period in 2002. During
the second quarter of 2003, the Company received $1 million financing from LCO
for BDI in connection with its acquisition of human oral care intellectual
property.
Capital expenditures were $1.8 million for the twenty-six weeks ended June 28,
2003, compared to $1.8 million for the same period in 2002. In 2002, capital
expenditures related primarily to the purchase of light activated whitening
devices. For the twenty-six weeks ended June 28, 2003, capital expenditures
represented either the purchase of new light activated devices or the conversion
of old devices for use in the Company's international markets, and the launch of
new Company initiatives.
Inflation
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 Centers
(both domestic and international) shut down for vacation. As a result, the
frequency of key card purchases by Associated Centers during these months
declines as well. Additionally, the Company's Centers have recognized some
seasonality during the same months because of customer vacations.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
We believe there has been no material change in our exposure to Market Risk from
that discussed in our 2002 Annual Report on Form 10-K
ITEM 4. CONTROLS AND PROCEDURES
During the 13 week period ended September 27, 2003, the Company identified an
error in the recording of cost of sales. This error resulted in the Company
restating their financial statements for the 13-week period ended June 28, 2003.
The errors were the result of weaknesses in the Company's internal control
structure. Deloitte & Touche LLP has communicated to management and the Audit
Committee that those weaknesses are considered material weaknesses. Management
and the Audit Committee have identified certain changes that they feel are
necessary to strengthen the Company's accounting and reporting function,
including capabilities of its accounting personnel and adoption of more frequent
reviews and reconciliations of financial information.
Within 90 days prior to the date of this report, the Company's Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of the
Company's disclosure controls and procedures. Based on upon their evaluation and
as a result, in part, of the matters noted in the preceding paragraph, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that the Company's disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended),
are effective, with the following qualifications:
19
1. The error discussed above was just recently identified and corrected
and management has not had sufficient time to (i) fully assess their
remediation plan and (ii) to fully implement appropriate changes.
2. The inventory accounting systems require additional review and
enhancement to ensure that inventory costing is reasonable and
accurate, and applies costing principles that are consistent with U.S.
GAAP on a recurring basis.
3. Accounting policies and procedures must be formally documented.
4. Unusual and complex transactions require the involvement of accounting
personnel on a timely basis.
Since the date of their evaluation, there have been no significant changes to
the Company's internal controls or other factors that could significantly
affect these controls.
Management has directed that the foregoing corrective procedures and
accounting system enhancements be designed and fully implemented.
ITEM 5. Commitments and contingencies
See the discussion of certain legal proceedings pending against the Company
and/or its affiliates, set forth under Part II, Item 1 of this report and
incorporated herein by reference.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
BriteSmile, Inc. v. Discus Dental, Inc. and Salim Nathoo, filed in the United
States District Court for the Northern District of California (the "Discus
Patent Litigation"). The Company filed an initial complaint against Discus
Dental, Inc. ("Discus"), Culver City, California, on July 8, 2002, asserting
claims of infringement of the Company's U.S. Patents No. 6,343,933 and U.S.
Patent No. 6,361,320. On February 28, 2003, the Company amended the Discus
Patent Litigation by adding Salim Nathoo ("Nathoo") as a defendant. The
complaint, as amended, further alleges misappropriation of the Company's trade
secrets, civil conspiracy, and unfair competition and business practices by
Discus and Nathoo; breach of contract and breach of fiduciary duty by Mr.
Nathoo, and tortious interference with contract by Discus. The complaint alleges
that Nathoo and Discus conspired to misappropriate BriteSmile's trade secrets in
violation of Nathoo's contractual obligations to the Company. The amended
lawsuit alleges that, as BriteSmile's Medical Director, Nathoo had and continues
to have, an obligation to keep BriteSmile's trade secrets confidential.
Beginning in 2001, Discus Dental and Nathoo entered into an agreement whereby
Discus Dental paid Nathoo at least $2.5 million over a less than two year period
for Nathoo's "consulting" services, which included paying Nathoo to share with
Discus certain of the Company's trade secrets. The lawsuit alleges further that
in December 2002, a third party informed BriteSmile of Nathoo's activities, and
that when confronted by BriteSmile, Nathoo admitted to receiving $2.5 million
from Discus. The Company seeks a permanent injunction against both Discus and
Nathoo to prevent further infringement of its patents and improper disclosure of
the Company's trade secrets, lost profits, treble damages and attorneys fees for
willful patent infringement, punitive damages, and other relief.
On March 25, 2003, Discus filed its Answer to the Amended Complaint and
Counterclaims. In its Answer, Discus denies any liability for BriteSmile's
claims. Discus also raises affirmative defenses, including claims that its
products and processes do not infringe BriteSmile's patents, and that
BriteSmile's patents are invalid and unenforceable. Discus asserts counterclaims
against BriteSmile, seeking (i) judicial declarations that BriteSmile's patents
are invalid, unenforceable, and have not been infringed, (ii) tortious
interference with prospective economic advantage and economic business
relations, and (iii) unfair competition. Discus also asks for declarations that
its products and processes do not violate BriteSmile's patents, that
BriteSmile's patents are unenforceable, that BriteSmile has no protectable trade
secrets, that BriteSmile's contracts with dentists which contain contractual
restrictions on the purchase and use of competitive systems are unenforceable
and should be enjoined, lost profits, treble damages and attorneys fees.
The Company has commenced discovery concerning the claims and defenses asserted
in the Discus Patent Litigation, and has responded to discovery requests from
Discus.
20
Salim Nathoo v. BriteSmile Leasing. On March 6, 2003, Nathoo filed a lawsuit
against BriteSmile Leasing, a subsidiary of the Company in the New Jersey state
court. In this action, Nathoo alleges that the Company breached its agreement to
pay Nathoo money, and that such failure should result in the reversion of
certain patent rights, which were previously assigned by Nathoo to the Company,
back to Nathoo. Nathoo also seeks the payment of profits derived from the patent
rights. The Company has filed an answer to the complaint, together with
counterclaims alleging the same causes of action as in the Company's California
litigation against Nathoo.
On May 21, 2003, the court ordered that the case be transferred to California.
On July 2, 2003, the case was consolidated with the Discus Patent Litigation in
California.
Smile Inc. Asia Pte. Ltd. v. BriteSmile. On April 23, 2002, Smile Inc. Asia Pte.
Ltd. ("Smile") sued the Company and BriteSmile Management, Inc., a wholly owned
subsidiary of the Company, in the Third Judicial District Court in Salt Lake
City, Utah. The Complaint alleges that BriteSmile Management breached its 1998
distributor agreement with Smile (exclusive as to Singapore and other
surrounding countries) by failing to fill orders placed and to perform other
obligations under the agreement. The Complaint also alleges that BriteSmile
Management and the Company fraudulently induced Smile to enter into the
distributor agreement, and includes claims for damages based on alleged unjust
enrichment, civil conspiracy, breach of the duty of good faith and fair dealing,
interference with contractual and economic relations, and fraudulent transfer.
On May 31, 2002, the Company and BriteSmile Management filed their answer and
counterclaim. The counterclaim alleges that Smile breached the distributor
agreement by, among other things, failing to operate using a licensed dentist in
good standing (the license of the principal of Smile, Dr. Tan, was revoked
during 1999) and using BriteSmile's names and marks in a fashion not permitted
by the distributor agreement.
The primary defense to Smile's claims is that the distributor agreement
expressly excludes "non-laser-aided teeth whitening products and processes" sold
by the Company. Accordingly, Smile has no rights to market and sell the
Company's current light activated in-office whitening products and cannot claim
damages for BriteSmile's marketing of its light activated system in the
exclusive territory described in the distributor agreement.
Discovery is proceeding; both parties have produced documents.
BriteSmile v. Discus Dental, filed in Contra Costa County Superior Court,
California. On May 31, 2002, the Company filed a complaint against Discus
Dental, Inc. in Contra Costa County Superior Court, California, alleging causes
of action for intentional interference with contractual relationship, negligent
interference with contractual relationship, violation of Unfair Business
Practice Act - Loss Leader, violation of Unfair Business Practice Act, trade
libel and injunctive relief. The complaint alleges that Discus Dental and other
defendants yet to be identified wrongfully interfered with the Company's
contractual relationships with its Associated Center dentists, in part by
writing letters with the purpose of inducing certain of the Company's Associated
Dentists to terminate their contracts with the Company and switch to Discus'
Zoom! system, and by making false and disparaging statements concerning the
Company's teeth whitening system. The Complaint seeks damages for loss of
business, punitive damages, injunctive relief, and costs of suit. On June 27,
2002, Discus filed a demurrer to the Company's complaint, challenging the legal
sufficiency of the complaint. On June 30, 2002, the court ruled that the Company
would be able to pursue its claims as alleged in the complaint except for the
second cause of action alleging negligent interference with contractual
relationship.
This case was stayed on March 11, 2003 and will remain stayed until a status
conference scheduled for September 2003.
Kalow & Springut v. BriteSmile et. al., filed in Supreme Court of the State of
New York, County of New York. In April 2003, the law firm of Kalow & Springut
("KS") filed a complaint against the Company, BriteSmile International, a
subsidiary of the Company, and A.M. Pilaro, the Company's Chairman. KS seeks to
recover alleged unpaid legal fees and expenses in the amount of $767,818.18.
Plaintiff also alleges that it was fraudulently induced to incur the legal fees
and expenses, and seeks to recover punitive damages of at least $5 million.
21
On June 13, 2003, BriteSmile answered the Complaint and asserted counterclaims
against KS for negligence, malpractice and breach of contract, including failure
to return Company files, and failure to inform the Company that Dr. Salim Nathoo
had been working for Discus Dental in violation of Dr. Nathoo's agreement with
the Company.
Discovery proceedings have commenced.
PracticeMasters, Inc. v. BriteSmile, Inc., filed in Superior Court in San Diego,
California. On May 21, 2003, PracticeMasters, Inc. ("PMI") filed a complaint
against the Company. PMI seeks compensatory damages in an unspecified amount for
BriteSmile's alleged breach of a Marketing Associate Agreement with PMI. PMI
alleges that BriteSmile failed to pay fees owed to PracticeMasters under the
agreement and that it failed to provide proper notice of termination of the
agreement. BriteSmile filed a demurrer and motion to strike on July 15, 2003. By
the demurrer, BriteSmile seeks dismissal of PMI' causes of action for breach of
fiduciary duty and constructive trust, which are the basis for its claim for
punitive damages. By the motion to strike, BriteSmile seeks to strike PMI's
claim for punitive damages. BriteSmile plans to file a cross-complaint against
PMI for breach of the Marketing Associate Agreement and fraudulent
misrepresentations and to seek compensatory damages arising from PracticeMasters
failure to set up viable accounts and from resulting damage to BriteSmile's
reputation.
No discovery has been taken.
In Management's opinion, based upon advice of counsel, the litigation matters
listed above in the aggregate will not have a material adverse effect on the
Company.
ITEM 2. CHANGES IN SECURITIES
During the period March 30, 2003 to June 28, 2003, the Company granted to key
employees under its 1997 Plan non-qualified options to purchase an aggregate of
30,134 shares of the Company's common stock, at exercise prices ranging from
$11.48 to $27.01 per share. The options vest over a period of time following
their respective dates of grant.
For all option grants, the Company claimed exemption from registration under the
Securities Act of 1933 in that the Company believes such grants were not "sales"
within the meaning of the Act. Shares issuable upon exercise of the options have
been or will be registered with the SEC pursuant to Registration Statements on
Form S-8.
On November 20, 2002, the Company sold to two investors in a private placement
2% convertible notes that are due and payable on November 20, 2005 (the
"November 2002 Notes") in a private placement. The November 2002 Notes are
convertible into shares of common stock of the Company at a conversion rate of
$6.00 per share. The two investors, who purchased the November 2002 Notes, both
affiliates of the Company, are: LCO Investments Limited ($2,500,000) and
Bradford G. Peters ($1,000,000). The CEO of the Company, John L. Reed, funded an
additional $500,000 in April 2003 under the same terms; pursuant to his
commitment to fund that amount dated November 20, 2002. Mr. Reed converted his
$500,000 note into shares of Common Stock of the Company on June 17, 2003. LCO
Investments Limited ("LCO") is the Company's major shareholder. LCO is a wholly
owned subsidiary of the ERSE Trust. CAP Advisers Limited is a co-trustee of the
ERSE Trust. Mr. Pilaro, a director of the Company, is Chairman of CAP. John L.
Reed is a shareholder, the Chief Executive Officer, and a director of the
Company. Mr. Peters is a shareholder and a director of the Company.
In April 2003, in connection with the financing of the Asset Purchase Agreement
with R. Eric Montgomery and his affiliates described below, the Company granted
to LCO warrants to purchase an aggregate of 66,667 shares of common stock of the
Company at $15.00 per share (see "Acquisition of Certain Human Oral Care
Intellectual Property," below).
All issuances and sales of the Company's Common Stock in connection with the
placement of the November 2002 Notes, the conversion of Mr. Reed's note into
shares of Common Stock, and the grant of warrants to LCO as described above,
were made in private transactions, exempt from the registration requirements of
the Securities Act of 1933 pursuant to Section 4(2) of the Act and Rule 506
promulgated by the Securities and Exchange Commission there under. Each person
acquired the shares for investment purposes only, with no present intent to
distribute the securities. The certificates representing the shares issued were
subject to standard restrictive legends with respect to transfer or resale. All
recipients received or had meaningful access to all Company reports filed with
the Commission pursuant to the Securities Exchange Act of 1934.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION.
CAP America Trust Center Loan
22
On May 7, 2003, Company and CAP America Trust entered into a Loan Agreement for
$2.5 million to be used for capital expenditures and other specific revenue
generating initiatives to be agreed and defined by BriteSmile and CAP America
Trust. The Company may make drawings on account of the loan from time to time
during the draw down period beginning on May 7, 2003 and ending on May 10, 2006.
Up to $1,700,000 of loan proceeds may be used for the specific revenue
generating initiatives, and up to $800,000 for general working capital. Interest
is fixed at 6%, payable monthly, with CAP America Trust having the right to
reset the interest rate to 200bps over 1 year London Interbank Offered Rate
("LIBOR") after giving the Company 30 days notice. A variable fee payment based
on the number of teeth whitening procedure performed at the Centers will
commence on May 11, 2006, and continue until May 10, 2011. Variable fees will be
payable 40 days after the end of the month in which the procedures are
performed, except for fees due for April/May 2011, which will become payable on
the maturity date.
LCO Investments Limited ("LCO") is the Company's major shareholder. LCO is a
wholly owned subsidiary of the ERSE Trust. CAP Advisers Limited is a co-trustee
of the ERSE Trust. Mr. Anthony Pilaro, a director and co-CEO of the Company, is
also Chairman of CAP Advisers Limited. CAP America Limited is a co-trustee of
CAP America Trust, the lender under the Center Loan described above. CAP America
Limited is owned and controlled by LCO.
Acquisition of Certain Human Oral Care Intellectual Property
Effective July 1, 2003, the Company and its wholly owned subsidiary, BriteSmile
Development, Inc. ("BDI"), entered into an Asset Purchase Agreement (the "APA")
with R. Eric Montgomery ("Montgomery") and certain entities owned and controlled
by him (collectively, the "REM Group"). Montgomery is a member of the board of
directors of the Company.
Pursuant to the APA, BDI acquired certain United States and foreign patents,
patent applications, continuations, continuations-in-part, trade secrets,
technologies, know-how, trademarks and trade names relating to human oral care
("HOC") for a purchase price of $5 million ($6 million under certain
contingencies), plus a 50% participation interest in third party royalties and
infringement recoveries relating to the HOC intellectual property acquired from
the REM Group. In addition, the REM Group conveyed certain other HOC
intellectual property, which is implicated by certain agreements between the
Company, the REM Group and a third party to a new entity, Oraceutical
Acquisition LLC, an entity owned and controlled by REM.
BDI agreed to pay purchase price to the REM Group as follows:
(i) $750,000 on May 9, 2003 in connection with the delivery to BDI of a
license from the REM Group to certain patents for a static mixer
device used in teeth whitening;
(ii) $1,000,000 on July 23, 2003, in connection with the closing of the
APA;
(iii)66,667 shares of Common Stock of the Company (the "Payment Shares")
issued to Montgomery on July 25, 2003; and
(iv) for a period of up to 5 years, BDI will pay to Oraceutical Innovative
Properties, ("OIP"), a REM Group member, 5% of worldwide net revenues
of the Company for a whitening crayon or pen product currently
referred to as "BriteSmile to Go," and 1% of worldwide net revenues of
the Company or its affiliates for light activated teeth whitening or
other in-office or chair side whitening procedures, until the
aggregate of such payments, together with the initial cash payment of
$1,750,000 and the value of the Payment Shares (calculated at
$1,930,010) equals $5,000,000. BDI may be required to pay OIP an
additional $1 million pursuant to the foregoing formula if REM Group
fulfills certain contingencies, in which event the total purchase
price would be $6 million. The foregoing net revenue payments will be
paid in cash, or at the option of BDI, up to 50% of any payment amount
may be made in the form of Common Stock of the Company (the "Net
Revenue Payment Shares"). All Net Revenue Payment Shares, if and when
issued by the Company, will be issued at the then current market price
as quoted on Nasdaq, and the balance in cash. The payments are due on
a quarterly basis, 15 days after the close of the Company's applicable
fiscal quarter.
23
With respect to third party infringement and/or licensing activities, BDI will
pay the REM Group 50% of such recoveries after payment of legal fees incurred in
prosecution of third party claims, all patent prosecution and maintenance costs,
and certain other amounts.
Financing Arrangements for the APA
On April 29, 2003 the Company, BDI, LCO, and Montgomery entered into a letter
agreement pursuant to which LCO agreed to loan a total of $2,000,000 to BDI to
fund a portion of the purchase price contemplated by the APA. The letter
agreement was later terminated as to Montgomery.
LCO is the Company's major shareholder. LCO is a wholly owned subsidiary of the
ERSE Trust. CAP Advisers Limited is a co-trustee of the ERSE Trust. Mr. Pilaro,
a director and Chairman of the Board of the Company, is Chairman of CAP Advisers
Limited.
Pursuant to the letter agreement, LCO loaned $1,000,000 to BDI on May 9, 2003.
BDI delivered a promissory note to LCO, with interest and principal due on May
9, 2008. Interest accrues at 200 basis points above the 1 year LIBOR as quoted
by the Bank of Nova Scotia. The interest rate on the note is reset every thirty
days.
Also, pursuant to the letter agreement, LCO loaned to BDI an additional
$1,000,000 on similar terms on July 23, 2003, the closing date of the APA.
In connection with the granting of the loans to BDI, LCO received warrants to
purchase 133,333 shares of Common Stock of the Company. All warrants granted to
LCO are exercisable at $15.00 per share and have a five year life. The
promissory notes issued to LCO by BDI were guaranteed by the Company. The shares
of Common Stock underlying the warrants granted to LCO are subject to certain
limited "piggyback" registration rights in the event of future registered public
offerings of Common Stock sold by the Company. On May 9, 2003, warrants to
purchase 66,666 shares were issued. The fair value of the warrants issued of
$704,378 was recorded as a discount of the note and is being amortized over the
life of the note to interest expense and is reflected in results as of June 28,
2003. The additional $1,000,000 loaned on July 23, 2003 also carried warrants to
purchase 66,667 shares issued at an exercise price of $15.00 per share. The fair
value of the warrants issued on July 23, 2003 is $1,829,789, which will be
recorded in the third quarter 2003 as a discount of the Note and will be
amortized over the life of the note to interest expense. The note has a
contractual life of five years.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
10.1 Note Purchase Agreement dated as of April 29, 2003 between the Company and
LCO Investments Limited (previously filed as Exhibit 10.1 to the Form 10-Q
of the Company for the 13 weeks ended June 28, 2003, filed on August 12,
2003 and by this reference incorporated herein).
10.2 Asset Purchase Agreement dated as of July 1, 2003 by and among R. Eric
Montgomery, Oraceutical Innovative Properties LLC, Oraceutical LLC, a and
Oraceutical Acquisition LLC, and, on the other hand, the Company and
BriteSmile Development, Inc., (previously filed as Exhibit 10.1 to the Form
10-Q of the Company for the 13 weeks ended June 28, 2003, filed on August
12, 2003 and by this reference incorporated herein). Portions of this
document have been redacted by the Company pursuant to a request for
confidential treatment filed or to be filed with the Securities and
Exchange Commission.
10.2.1 Consulting Agreement dated as of July 1, 2003 between BriteSmile
Development, Inc. and the Company, on one hand, and Oraceutical LLC,
Oraceutical Innovative Properties LLC and R. Eric Montgomery, on the other
hand (previously filed as Exhibit 10.1 to the Form 10-Q of the Company for
the 13 weeks ended June 28, 2003, filed on August 12, 2003 and by this
reference incorporated herein).
24
31 Certifications of John L. Reed, CEO and John C. Dong, CFO (filed herewith)
32 Certifications of John L. Reed, CEO, and John C. Dong, CFO, pursuant to
Section 906 of The Sarbanes-Oxley Act Of 2002 (filed herewith).
99.1 Earnings Release dated August 7, 2003 (previously filed as Exhibit 99.1 to
the Form 10-Q of the Company for the 13 weeks ended June 28, 2003, filed on
August 12, 2003).
99.2 Transcript of Earnings Conference Call of the Company held on August 7,
2003 (previously filed as Exhibit 10.1 to the Form 10-Q of the Company for
the 13 weeks ended June 28, 2003, filed on August 12, 2003).
(B) REPORTS ON FORM 8-K
On May 20, 2003, the Company filed a Current Report on Form 8-K for the
purpose of reporting its financial results for the first quarter ended March 28,
2003, including the transcript of the Earnings Conference Call of the Company
held on May 15th, 2003.
25
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 17, 2003
-------------------------------------- -----------------
John L. Reed Date
Chief Executive Officer
/s/ John C. Dong November 17, 2003
-------------------------------------- ------------------
John C. Dong Date
Chief Financial Officer