UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended: JUNE 30, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ______ to _______
Commission File Number: 1-11064
BRITESMILE, INC.
------------------------
(Exact name of business issuer as specified in its charter)
UTAH 87-0410364
------------------------------------------------- --------------------------------------------------
(State or other jurisdiction of 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
--- ---
The Company had 35,850,701 shares of common stock outstanding at August 3,
2001.
BRITESMILE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
-------------------------------
ITEM 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2001 and December 30, 2000........... 3
Condensed Consolidated Statements of Operations for the 13 weeks and 26 weeks ended
June 30, 2001 and July 1, 2000............................................................ 5
Condensed Consolidated Statements of Cash Flows for the 26 weeks ended June 30, 2001 and
July 1, 2000, respectively................................................................ 6
Notes to Condensed Consolidated Financial Statements...................................... 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 9
PART II. OTHER INFORMATION
----------------------------
ITEM 2. Changes in Securities..................................................................... 15
ITEM 4. Submission of Matters to a Vote of Security Holders...................................... 16
ITEM 6. Exhibits and Reports on Form 8-K.......................................................... 16
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRITESMILE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
($ IN THOUSANDS, EXCEPT SHARE DATA)
June 30, 2001 December 30, 2000
------------------------ --------------------------
(Unaudited) (Note 1)
CURRENT ASSETS:
Cash and cash equivalents........................................... $19,901 $ 5,701
Cash, restricted as to use.......................................... 843 843
Trade accounts receivable, net of allowance for doubtful accounts
of $583 and $163, respectively..................................... 5,604 3,130
Inventories, primarily.............................................. 2,407 2,365
Prepaid expenses and other.......................................... 1,354 883
Notes receivable-current portion.................................... 335 335
------- -------
Total current assets.............................................. 30,444 13,257
------- -------
PROPERTY AND EQUIPMENT, net.......................................... 17,323 14,848
NOTE RECEIVABLE...................................................... 223 391
OTHER ASSETS......................................................... 1,731 1,635
------- -------
TOTAL ASSETS......................................................... $49,721 $30,131
======= =======
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated balance sheets.
3
BRITESMILE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
($ in thousands, except share data)
June 30, 2001 December 30, 2000
------------------------ --------------------------
(Unaudited) (Note 1)
CURRENT LIABILITIES:
Accounts payable.................................................... $ 5,989 $ 8,429
Accrued expenses.................................................... 3,150 3,538
Note payable, net of discount....................................... 150 4,747
Accrual for store closures.......................................... 553 778
Capital lease obligation-current portion............................ 395 181
-------- --------
Total current liabilities........................................ 10,237 17,673
-------- --------
Note payable......................................................... 2,204 -
Subordinated convertible debenture, net of discount.................. 719 709
Capital lease obligations............................................ 2,335 1,018
Other long-term liabilities.......................................... 583 436
-------- --------
Total long-term liabilities...................................... 5,841 2,163
-------- --------
Total liabilities................................................ 16,078 19,836
-------- --------
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value; 50,000,000 shares authorized;
35,431,284 and 28,816,515 shares issued and outstanding,
respectively....................................................... 35 29
Additional paid-in capital.......................................... 132,177 99,568
Accumulated deficit................................................. (98,569) (89,302)
-------- --------
Total shareholders' equity....................................... 33,643 10,295
-------- --------
Total liabilities and shareholders' equity.......................... $ 49,721 $ 30,131
======== ========
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated balance sheets.
4
BRITESMILE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
($ IN THOUSANDS EXCEPT SHARE DATA)
13 Weeks Ended 13 Weeks Ended 26 Weeks Ended 26 Weeks Ended
June 30, 2001 July 1, 2000 June 30, 2001 July 1, 2000
-------------------- -------------------- -------------------- ------------------
REVENUES:
Center whitening fees, net........... $ 4,197 $ 2,211 $ 8,203 $ 4,191
Associated Center whitening fees, net 6,932 1,885 11,745 3,113
Product sales........................ 1,208 229 2,093 369
----------- ----------- ----------- -----------
Total revenues, net................ 12,337 4,325 22,041 7,673
----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Operating and occupancy costs........ 4,383 2,826 8,076 5,560
Selling, general and administrative 10,824 8,384 19,678 15,158
expenses............................
Research and development expenses.... 19 386 586 855
Depreciation and amortization........ 1,166 1,010 2,380 1,694
----------- ----------- ----------- -----------
Total operating costs and expenses. 16,392 12,606 30,720 23,268
----------- ----------- ----------- -----------
Loss from operations............. (4,055) (8,281) (8,679) (15,595)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE), net:
Interest expense..................... (417) (4) (637) ---
Interest income...................... 102 72 106 263
----------- ----------- ----------- -----------
Total other income (expense), net.. (315) 68 (531) 263
----------- ----------- ----------- -----------
Loss before income tax provision. (4,370) (8,213) (9,210) (15,332)
INCOME TAX PROVISION.................. 4 23 57 10
----------- ----------- ----------- -----------
Net loss......................... $ (4,374) $ (8,236) $ (9,267) $ (15,343)
=========== =========== =========== ===========
BASIC AND DILUTED NET LOSS PER SHARE.. $ (0.13) $ (0.34) $ (0.30) $ (0.64)
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES - BASIC AND
DILUTED.............................. 33,301,498 23,920,694 31,059,007 23,920,694
=========== =========== =========== ===========
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statements of operations.
5
BRITESMILE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
($ IN THOUSANDS, EXCEPT SHARE DATA)
26 Weeks Ended 26 Weeks Ended
June 30, 2001 July 1, 2000
------------------ ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................. $ (9,267) $(15,343)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization........................................ 2,380 1,694
Cost for issuance of stock and stock options......................... 253 378
Changes in assets and liabilities.................................... (5,675) (7,688)
-------- --------
Net cash used in operating activities........................... (12,309) (20,959)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from assets held for sale, net.................................. - 798
Purchase of property and equipment....................................... (3,261) (5,569)
-------- --------
Net cash used in investing activities........................... (3,261) (4,771)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on borrowing.......................................... (146) (866)
Payments on line of credit............................................... - (843)
Proceeds from debt financing............................................. 2,500 15,584
Proceeds from common stock offering...................................... 26,629 19,816
-------- --------
Proceeds from exercise of stock options.................................. 788 1,447
-------- --------
Net cash provided by financing activities....................... 29,771 35,138
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................. 14,200 9,408
CASH AND CASH EQUIVALENTS AT BEGINNING
OF THE PERIOD......................................................... 5,701 2,878
-------- --------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD............................ $ 19,901 $ 12,286
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................................... $ 138 $ 7
======== ========
Cash paid for income taxes............................................... $ 57 $ 35
======== ========
Equipment acquired under capital lease................................... $ 1,618 -
======== ========
The accompanying notes to condensed consolidated financial statements
are an integral part of these condensed consolidated statements of cash flows.
6
BRITESMILE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2001
1. DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
BriteSmile, Inc., a Utah corporation (the "Company" or "BriteSmile"), and its
affiliates develop, produce, license and sell advanced teeth whitening products,
services and technology. Unless specified to the contrary herein, references to
BriteSmile refer to the Company and its subsidiaries on a consolidated basis.
The Company's operations include the development of technologically advanced
teeth whitening processes that are distributed in professional salon settings
known as BriteSmile Professional Teeth Whitening Centers ("Centers"). The
Company also offers its products and technologies through arrangements with
existing independent dental offices known as BriteSmile Professional Teeth
Whitening Associated Centers ("Associated Centers").
BriteSmile offers consumers a new, simple and safe way to return their teeth to
their optimal natural whiteness in a one and one-half hour visit to a Center or
Associated Center.
Centers are located in major metropolitan areas nationwide and offer clients a
salon-like environment dedicated solely to the business of teeth whitening.
Centers are staffed by licensed dentists and trained dental assistants.
Alternatively, consumers can visit an Associated Center, where a local dentist
administers the BriteSmile procedure in the dentist's established office.
The Company developed its current teeth whitening technology (the "BriteSmile
Light Activated Teeth Whitening System," "BS2000" or "LATW") and began
distribution in 1999. In November 1999 the Company introduced its new
BriteSmile 3000 LATW keycard system (the "BS3000") to Associated Centers. The
BS3000, a mobile version of the BS2000, can be installed quickly and provides
improved flexibility and mobility in dental offices. In May 2001, the Company
introduced its more versatile mobile device, the BS3000PB, which is the device
currently shipped to Associated Centers.
The BS2000, BS3000, and BS 3000PB teeth whitening devices utilize a light
technology. The unique fiberoptic delivery arm of these devices permits blue
green light to reach all 16 front teeth simultaneously, whitening the teeth by
activating BriteSmile's wavelength-specific gel during three consecutive twenty-
minute sessions.
In February 1999, the LATW was introduced in the Company's first Center in
Walnut Creek, California. In March 1999, the Company opened its first
Associated Center in Louisville, Kentucky. As of June 30, 2001, the Company had
14 Centers and 2,206 Associated Centers in operation.
The Company is not engaged in the practice of dentistry. Each licensed dentist
who operates a Center or Associated Center maintains full control over dental
matters, including the supervision of dental auxiliaries and the administration
of the LATW procedure.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions in
Form 10-Q and Article 10 of Regulations S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the 13 weeks and 26 weeks ended June 30, 2001 are not
necessarily indicative of the results that may be expected for the remainder of
the fiscal year ending December 29, 2001. The balance sheet at December 30,
2000 has been derived from the audited financial statements at that date but
does not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
Nine-Month Transition Period ended December 30, 2000.
7
BRITESMILE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. LOSS PER COMMON SHARE
The Company computes loss per common share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." In accordance
with FAS 128, basic net loss per share is calculated as net loss divided by the
weighted-average number of common shares outstanding, less shares subject to
repurchase. Diluted net loss per share is computed by dividing net loss by the
weighted-average number of common shares outstanding and dilutive common stock
equivalents outstanding during the period. Common equivalent shares from stock
options and warrants (using the treasury stock method) and convertible notes
payable have been excluded from the calculation of net loss per share as their
effect is anti-dilutive.
3. RECLASSIFICATIONS
Certain reclassifications have been made in the prior period's consolidated
financial statements to conform with the current period presentation.
4. BANK LINE OF CREDIT
The Company's revolving credit line agreement with the Bank of Hawaii expired
on May 25, 2001. The Company is currently in the process of negotiating a new
line of credit.
5. LONG TERM DEBT
As of June 30, 2001, $800,000 of an original aggregate of $20 million of
convertible promissory notes first issued in August 2000 remain outstanding, at
an adjusted conversion price of $5.00 per share. The unamortized discount on
these notes is $80,803 as of June 30, 2001, and is being amortized over the life
of the notes to interest expense.
On December 5, 2000, the Company sold to LCO Investments Limited ("LCO") in a
private placement a Convertible Promissory Note (the "December 2000 Note") in
the aggregate principal amount of $5,000,000. LCO is the Company's largest
shareholder. The December 2000 Note was convertible into shares of Common Stock
of the Company at a conversion price of $5.00 per share. In conjunction with the
issuance of the December 2000 Note, warrants to purchase 250,000 shares of
Common Stock were issued at an exercise price of $5.00 per share. The warrants
have a contractual life of 5 years. The fair value of the warrants issued of
$253,000 was recorded as a discount of the December 2000 Note and was being
amortized over the life of the note to interest expense. At June 30, 2001 the
warrants remain outstanding. Interest accrued at the annual rate of 7.52% and
was due and payable along with the principal balance on December 5, 2001. On
April 10, 2001, LCO elected to convert the December 2000 Note, together with
accrued interest totaling $132,644, into 1,026,529 shares of restricted common
stock. As a result of the conversion, the remaining discount of $253,000 was
recognized as interest expense on the date of the conversion.
On March 1, 2001, the Company borrowed $2,500,000 from Excimer Vision Leasing
L.P. ("EVL") for general working capital. The loan matures on May 10, 2006 and
is not prepayable. Payments under the loan consist of "fixed payments" of
interest, "variable payments" of principal and a "final payment" of principal.
An initial fixed payment of $10,416.60 was paid on April 1, 2001. Additional
monthly payments of $13,000 are due during the loan period. Variable payments
are twenty-five dollars for each LATW procedure performed at the Company's 14
current Centers. The final payment, due at maturity, will be the amount by which
the aggregate of variable payments paid during the term of the loan is less than
the original $2.5 million principal amount of the loan.
6. PRIVATE PLACEMENT
On April 30, 2001, the Company completed a private offering (the "Offering") of
its restricted common stock, par value $0.001 per share. The Offering involved
sales of a total of 5,371,428 shares of restricted common stock (the "Shares")
to 17 accredited investors and their affiliated funds (the "Investors"). None
of the Investors were affiliated with the Company before the completion of the
Offering. The Company sold the Shares for $5.25 per share, yielding gross
proceeds to the Company of $28,199,997.
8
In connection with the Offering, the Company engaged Stonegate Securities, Inc.,
of Dallas, Texas (the "Placement Agent") to act as placement agent for the
Offering. For its services, the Company agreed to pay the Placement Agent five
percent of the gross proceeds of the Offering, or $1,410,000, and issue to the
Placement Agent warrants to purchase a total of 537,143 shares of restricted
common stock for a per share purchase price of $5.25. The warrants have a five
year term. The fees paid to the Placement Agent and the fair value of the
warrants were netted against the Offering proceeds.
In connection with the Offering, the Company filed with the Securities and
Exchange Commission (the "SEC") a registration statement covering the Shares and
the common stock underlying the warrants issued to the Placement Agent. The SEC
declared the registration statement effective on June 11, 2001.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. Such forward-looking statements may be deemed to include
information that is not historical. The statements contained in this Report
that are not purely historical are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E
of the Securities Exchange Act. These statements relate to the Company's
expectations, hopes, beliefs, anticipations, commitments, intentions and
strategies regarding the future. They may be identified by the use of words or
phrases such as "believes," "expects," "anticipates," "should," "plans,"
"estimates," and "potential," among others. Forward-looking statements include,
but are not limited to, statements contained in Management's Discussion and
Analysis of Financial Condition and Results of Operations regarding the
Company's financial performance, revenue and expense levels in the future and
the sufficiency of its existing assets to fund future operations and capital
spending needs. Actual results could differ materially from the anticipated
results or other expectations expressed in such forward-looking statements. The
Company believes that many of the risks set forth here and in the Company's 10-K
Annual Reports filed with the SEC are part of doing business in the industry in
which the Company operates and competes and will likely be present in all
periods reported. The forward-looking statements contained in this Report are
made as of the date of this Report and the Company assumes no obligation to
update them or to update the reasons why actual results could differ from those
projected in such forward-looking statements. Among others, risks and
uncertainties that may affect the business, financial condition, performance,
development, and results of operations of the Company include:
. 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.
. 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;
. The loss of product market share to competitors and/or development of new
or superior technologies by competitors;
. Ongoing operating losses associated with the development, marketing and
implementation of new, light-activated teeth whitening technologies;
. Failure of the Company to secure additional financing to complete its
aggressive plan for the rollout of a broad base of Centers and Associated
Centers;
. 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;
. Failure to develop marketing strategies and delivery methods to penetrate
non-U.S. markets; and
. Lack of product diversity.
9
OVERVIEW
Operating and occupancy costs is composed primarily of three main groups: 1) the
cost of goods for both the Center and Associated Center whitening procedure kits
and retail products; 2) the financing costs for the devices in the Associated
Centers; and 3) the operating and occupancy costs for the Company Centers.
Selling, general and administrative expenses are composed of expenses associated
with all corporate and administrative functions that support existing operations
and provide an infrastructure to support future growth, including management and
staff salaries, employee benefits, travel, information systems, operating costs
of the Call Center, training, field support and marketing and advertising.
Expenses of recruiting and training sales, market support and training staff are
also included as general and administrative expenses.
The following discussion should be read in conjunction with the Financial
Statements and the Notes thereto included in Item 1 of this Quarterly Report on
Form 10-Q and in the Company's Annual Report on Form 10-K for the transition
period ended December 30, 2000.
As of June 30, 2001, the Company has 14 BriteSmile Centers. The following table
sets forth certain information relating to the status of the Associated Centers
as of June 30, 2001:
Associated Centers
Roll-out Status
As of June 30, 2001
-------------------------------------
GRAND
ASSOCIATED CENTERS AC'S INT'L TOTAL
---------------------------------------------------------- -------------------------------
Total Developed........... (1) 2,780 260 3,040
Active - In Business...... 1,956 260 2,216
-----------
(1) REPRESENTS ASSOCIATED CENTERS FOR WHICH A CONTRACT HAS BEEN RECEIVED BUT
WHERE THE DENTIST WHO WILL OPERATE THE ASSOCIATED CENTER IS EITHER AWAITING
TRAINING OR SHIPMENT OF THE BS3000 PB DEVICE.
The following table sets forth unaudited operating results for the thirteen week
period and twenty-six week period ended June 30, 2001 and July 1, 2000, as a
percentage of sales in each of these periods. This data has been derived from
the unaudited financial statements.
Thirteen Weeks Thirteen Weeks Twenty-Six Twenty-Six
ended ended Weeks ended Weeks ended
--------------- --------------- -------------- --------------
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
-------- ------- ------- -------
Income Statement Data:
Revenues:
Center whitening fees, net 34.0% 51.1% 37.2% 54.6%
Associated Center whitening fees, net 56.2% 43.6% 53.3% 40.6%
Product sales 9.8% 5.3% 9.5% 4.8%
------- ------- ------- -------
Total revenues, net 100.0% 100.0% 100.0% 100.0%
------- ------- ------- -------
Operating Costs and Expenses:
Operating and occupancy costs 35.5% 65.3% 36.6% 72.5%
Selling, general and administrative expenses 87.7% 193.8% 89.3% 197.6%
Research and development expenses 0.2% 8.9% 2.7% 11.1%
Depreciation and amortization 9.4% 23.4% 10.8% 22.1%
------- ------- ------- -------
Total operating costs and expenses 132.9% 291.4% 139.4% 303.3%
------- ------- ------- -------
Loss from operations -32.9% -191.4% -39.4% -203.3%
------- ------- ------- -------
Interest income (expense), net -2.6% 1.6% -2.4% 3.4%
------- ------- ------- -------
Loss before income tax provision -35.4% 189.9% -41.8% -199.8%
Provision for income taxes 0.0% 0.5% 0.3% 0.1%
------- ------- ------- -------
Net Loss -35.5% -190.4% -42.0% -200.0%
======= ======= ======= =======
10
THE FOLLOWING ARE EXPLANATIONS OF SIGNIFICANT PERIOD-TO-PERIOD CHANGES FOR THE
13 WEEKS ENDED JUNE 30, 2001 AND JULY 1, 2000:
REVENUES
TOTAL REVENUES, NET. Total revenues, net increased by $8.0 million, or 185.2%,
to $12.3 million for the 13 weeks ended June 30, 2001, from $4.3 million for
the 13 weeks ended July 1, 2000.
CENTER WHITENING FEES, NET. Center whitening fees, net increased by $1.9
million, or 89.9%, to $4.2 million for the 13 weeks ended June 30, 2001, from
$2.2 million for the 13 weeks ended July 1, 2000. This increase was primarily
due to a 60.4% increase in comparable Center sales for the second quarter of
2001. The number of procedures performed in the Centers increased 71.6% to
8,677 procedures in the second quarter of 2001 compared to 5,089 procedures in
the same quarter of 2000.
ASSOCIATED CENTER WHITENING FEES, NET. Associated Center whitening fees, net
increased by $5.0 million, or 267.7%, to $6.9 million for the 13 weeks ended
June 30, 2001, from $1.9 million for the 13 weeks ended July 1, 2000. This
increase was primarily due to the operation of 2,206 Associated Centers at the
end of the 13 weeks ended June 30, 2001 compared to 532 Associated Centers that
were in operation at the end of the 13 weeks ended July 1, 2000. Of the 2,206
Associated Centers in operation at June 30, 2001, 260 were international
locations. The number of procedures performed in the Associated Centers
increased 199.7% to 30,360 procedures in the second quarter of 2001 compared to
10,130 procedures in the same quarter of 2000.
During the 13 weeks ended June 30, 2001, the Company opened 544 new Associated
Centers. At June 30, 2001, there were 824 Associated Centers in the process of
being placed into operation. Due to training and shipping requirements, there
is presently approximately 45 days of lead-time between the signing of an
Associated Center agreement and the first paid procedures at an Associated
Center.
Although the Company does not believe that its business follows seasonal trends,
it has recognized that at various times during the months of July and August and
again during December and January, a substantial number of Associated Center
locations (both domestic and international) shut down their practices for
vacation. As a result, the frequency of key card purchases by Associated Centers
during these months declines as well.
The Company continues to execute its strategic plan of expanding distribution
into the professional dental practice channel through its Associated Centers.
This plan includes the expansion of strategic partnerships like the Orthodontic
Centers of America relationship and other special dental groups, identifying and
expanding the international distributor base, and expanding domestic direct
selling teams while enhancing the support of new and existing Associated
Centers. Additionally, the Company anticipates opening approximately 2,500
additional Associated Centers in domestic and international locations over the
next twelve months. As a result, Associated Center whitening fees are expected
to increase during the next twelve months. There can be no guarantee that the
Company will be successful in executing its business plan.
PRODUCT SALES. Product sales increased by $978,000, or 426.2% to $1.2 million
for the 13 weeks ended June 30, 2001 from $229,000 for the 13 weeks ended July
1, 2000. Product sales represent the Company's toothpaste, mouthwash and the
Sonicare toothbrush products sold at Centers and Associated Centers. Product
sales are expected to increase during the next twelve months as a result of the
introduction of additional oral care products to be sold at Centers, Associated
Centers, and through the Company's E-Commerce website.
OPERATING COSTS AND EXPENSES
OPERATING AND OCCUPANCY COSTS. Operating and occupancy costs decreased as a
percentage of revenues to 35.5% for the thirteen weeks ended June 30, 2001,
compared to 65.3% in the thirteen weeks ended July 1, 2000. This decrease as a
percentage of sales is a reflection of the significant increase in both Center
and Associated Center sales combined with decreases in product costs as a
percentage of sales as a result of improved purchasing along with the lower
fixed cost structure of the Associated Center sales channel.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased as a percentage of sales to 87.7% for the
second quarter of 2001 compared to 193.8% in the corresponding period in 2000.
This decrease was primarily due to improved leveraging of marketing and
advertising expenditures across a greater number of Associated
11
Center markets. The increase of $2.4 million in total selling, general and
administrative expenses to $10.8 million for the second quarter of 2001 from
$8.4 million in the second quarter of 2000 was primarily attributable to
increased expenses to support the Company's expansion, including: (i) salaries
and benefits, (ii) sales, training, marketing and advertising activities, and
(iii) enhancements to the Company's information systems and call center.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased
as a percentage of sales to 0.2% for the second quarter of 2001 compared to 8.9%
in the corresponding period in 2000.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased as a
percentage of sales to 9.4% for the second quarter of 2001 compared to 23.4% in
the corresponding period in 2000. This percentage decrease is primarily due
to the increase in both Center and Associated Center sales. The increase of
$155,000 in depreciation and amortization expense to $1.2 million for the first
quarter of 2001 is the result of a greater number of BS3000 and BS3000PB systems
in the Associated Centers.
INTEREST EXPENSE, NET. Interest expense, net increased to $314,000 for the
second quarter of 2001 compared to interest income, net of $67,000 in the
corresponding quarter of 2000. Interest expense for the second quarter of 2001
primarily represents the acceleration of interest expense for the December 2000
Note in the amount of $253,000, along with other debt incurred by the Company
and the amortization of the fair market value of the warrants issued with that
debt (see Note 5 of the Condensed Consolidated Financial Statements).
NET LOSS. The net loss decreased $3.9 million to $4.4 million for the second
quarter of 2001 compared to a net loss of $8.2 million in the corresponding
quarter of 2000. This represents a 46.9% improvement due to a combination of
the factors described above. Net loss per share for the second quarter of 2001
was ($0.13) versus ($0.34) reported for the second quarter of 2000, which
represents a 62.2% improvement over the second quarter of 2000.
THE FOLLOWING ARE EXPLANATIONS OF SIGNIFICANT PERIOD-TO-PERIOD CHANGES FOR THE
26 WEEKS ENDED JUNE 30, 2001 AND JULY 1, 2000:
REVENUES
TOTAL REVENUES, NET. Total revenues, net increased by $14.4 million, or 187.3%,
to $22.0 million for the 26 weeks ended June 30, 2001, from $7.7 million for
the 26 weeks ended July 1, 2000.
CENTER WHITENING FEES, NET. Center whitening fees, net increased by $4.0
million, or 95.7%, to $8.2 million for the 26 weeks ended June 30, 2001, from
$4.2 million for the 26 weeks ended July 1, 2000. This increase was primarily
due to a 41.8% increase in comparable Center sales for the first two quarters
of 2001. There were 14 Centers in operation during the second quarter of 2001
and 17 Centers were in operation during the first quarter of 2001. 14 Centers
were in operation during the twenty-six weeks ended July 1, 2000.
ASSOCIATED CENTER WHITENING FEES, NET. Associated Center whitening fees, net
increased by $8.6 million, or 277.2%, to $11.7 million for the 26 weeks ended
June 30, 2001, from $3.1 million for the 26 weeks ended July 1, 2000. This
increase was primarily due to the operation of 2,206 Associated Centers at the
end of the 26 weeks ended June 30, 2001 compared to 532 Associated Centers that
were in operation at the end of the 26 weeks ended July 1, 2000. Of the 2,206
Associated Centers in operation at June 30, 2001, 260 were international
locations. The number of procedures performed in the Associated Centers
increased 224.2% to 51,820 procedures during the twenty-six weeks ended June
30, 2001 compared to 15,984 procedures during the twenty-six weeks ended July 1,
2000.
Although the Company does not believe that its business follows seasonal trends,
it has recognized that at various times during the months of July and August and
again during December and January, a substantial number of Associated Center
locations (both domestic and international) shut down their practices for
vacation. As a result, the frequency of key card purchases by Associated Centers
during these months declines as well.
PRODUCT SALES. Product sales increased by $1.7 million, or 467.6% to $2.1
million for the 26 weeks ended June 30, 2001 from $369,000 for the 26 weeks
ended July 1, 2000. Product sales represent the Company's toothpaste, mouthwash
and Sonicare toothbrush products sold at Centers and Associated Centers. Product
sales are expected to increase during the next twelve months as a result of the
introduction of additional oral care products to be sold at Centers, Associated
Centers, and through the Company's E-Commerce website.
12
OPERATING COSTS AND EXPENSES
OPERATING AND OCCUPANCY COSTS. Operating and occupancy costs decreased as a
percentage of revenues to 36.6% for the 26 weeks ended June 30, 2001 compared
to 72.5% for the 26 weeks ended July 1, 2000. Similar to the second quarter of
2001, this decrease as a percentage of sales is a reflection of the significant
increase in both Center and Associated Center sales combined with decreases in
product costs as a percentage of sales as a result of improved purchasing along
with the lower fixed cost structure of the Associated Center sales channel.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased as a percentage of sales to 89.3% for the 26
weeks ended June 30, 2001 compared to 197.6% for the 26 weeks ended July 1,
2000. This decrease was primarily due to improved leveraging of marketing and
advertising expenditures across a greater number of Associated Center markets.
The increase of $4.5 million in total selling, general and administrative
expenses to $19.7 million for the twenty-six weeks ended June 30, 2001 from
$15.2 million in the twenty-six weeks ended July 1, 2000 was primarily
attributable to the increase in the Company's infrastructure as it prepared for
aggressive growth. This included salaries and benefits, and marketing and
advertising activities, to support the Company's expansion.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased
as a percentage of sales to 2.7% for the 26 weeks ended June 30, 2001 compared
to 11.1% for the 26 weeks ended July 1, 2000. Actual dollars spent on research
and development decreased $270 between the two periods. For the first two
quarters of 2001, the Company incurred expenses primarily related to American
Dental Association (ADA) comparative, safety, and efficacy studies along with
studies performed by Loma Linda University for the young adult market.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased as a
percentage of sales to 10.8% for the 26 weeks ended June 30, 2001 compared to
22.1% during the 26 weeks ended July 1, 2000. This percentage decrease is
primarily due to the increase in both Center and Associated Center sales. The
increase of $686,000 in depreciation and amortization expense is primarily the
result of a greater number of BS3000 and BS3000PB systems in the Associated
Centers.
INTEREST EXPENSE, NET. Interest expense, net increased to $531,000 for the 26
weeks ended June 30, 2001 compared to interest income, net of $263,000 in the 26
weeks ended July 1, 2000. Interest expense in 2001 primarily represents the
acceleration of interest expense for the December 2000 Note in the amount of
$253,000, along with other debt incurred by the Company and the amortization of
the fair market value of the warrants issued with that debt (see Note 5).
NET LOSS. The net loss decreased $6.1 million to $9.3 million for the 26 weeks
ended June 30, 2001 compared to a net loss of $15.3 million in the 26 weeks
ended July 1, 2000. This represents a 39.6% improvement due to a combination
of the factors described above. Net loss per share for the twenty-six weeks
ended June 30, 2001 was ($0.30) versus ($0.64) reported for the twenty-six weeks
ended July 1, 2000, which represents a 53.1% improvement.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company's principal sources of liquidity have been issuances of convertible
debt, common stock and common stock equivalents. At June 30, 2001, the Company
had $19.9 million of cash and cash equivalents. The Company expects to sign
contracts for additional Associated Centers during the next twelve months. This
expansion is contingent upon several factors, including available cash resources
and acceptance by consumers and Associated Center dentists of the Company's LATW
services. The Company expects that operating losses will continue through the
fiscal year ending December 29, 2001, and that it's principal uses of cash will
be to provide working capital, to finance capital expenditures, and to satisfy
other general corporate expenses. In particular, the Company plans to use its
cash to finance its marketing strategy and the continued rollout of Associated
Centers.
Cash flow used in operations improved by $8.65 million to $12.3 million for the
26 weeks ended June 30, 2001 from $21 million used in operating activities
during the 26 weeks ended July 1, 2000, primarily due to the decrease in the net
loss recognized and the net effect of timing differences in the collection and
disbursement of working capital components.
Net cash provided by financing activities was $29.8 million for the twenty-six
weeks ended June 30, 2001, as compared to $35.1 million for the same period in
2000. In March 2001, the Company engaged the services of Stonegate Securities,
Inc. to assist the Company in raising capital through a private placement. On
April 30, 2001, the Company completed a private placement of its common stock in
the aggregate amount of $28.2 million to 17 investors and their
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affiliated funds. The offering consisted of the sale of 5,371,428 shares of the
Company's restricted common stock at an offering price of $5.25 per share,
resulting in gross proceeds to the Company of $28,199,997. In addition, the
Company received $788,000 in cash from the issuance of common stock upon the
exercise of stock options during the first six months of 2001 compared to
$1,500,000 received from the issuance of common stock upon the exercise of stock
options during the same period in 2000.
Capital expenditures were $3.3 million for the twenty-six weeks ended June 30,
2001, compared to $5.6 million for the same period in 2000. The capital
expenditures in the first two quarters 2001 were primarily related to the
development and purchase of BS3000 and BS3000PB systems for the international
Associated Centers, expansion of the Company's call center and with final
payments for the build out of the New York Center.
While management believes that the Company can continue its current operating
strategy without additional funding, cash flows are difficult to forecast
accurately. Therefore, there can be no assurance that additional capital will
not be required, or that it will be available on terms that are acceptable to
the Company. Additionally, there can be no assurance that the Company's business
will generate cash flows at or above current levels. Accordingly, the Company
may choose to defer capital expenditure plans.
INFLATION
Most of the Company's products are purchased in finished form and packaged by
the supplier or at the Company's headquarters. The Company anticipates usual
inflationary increases in the price of its products and does not intend to pass
these increases along to its customers, primarily as a result of other operating
efficiencies gained through changing the sourcing of certain of its products.
In general, the Company does not believe that inflation has had a material
effect on its results of operations in recent years. However, there can be no
assurance that the Company's business will not be affected by inflation in the
future.
SEASONALITY
Although the Company does not believe that its business follows seasonal trends,
it has recognized that at various times during the months of July and August and
again during December and January, a substantial number of Associated Center
locations (both domestic and international) shut down their practices for
vacation. As a result, the frequency of key card purchases by Associated Centers
during these months declines as well. Additionally, the Company's Centers have
recognized some seasonality during the same months because of customer
vacations.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
Option Grants
-------------
During the period of March 31, 2000 to June 30, 2001, the Company granted non-
qualified stock options to key employees under its 1997 Stock Option and
Incentive Plan covering an aggregate of 219,000 shares of the Company's common
stock, at exercise prices ranging from $4.94 to $13.75 per share. The options
vest over a period of time following their respective dates of grant. The
Company claimed exemption from registration under the Securities Act of 1933
(the "Securities Act") for these grants in that the Company believes such grants
were not "sales" within the meaning of the Securities Act.
LCO Note Conversion
-------------------
On April 10, 2001, LCO Investments Limited converted its Promissory Note issued
December 5, 2000 in the original principal amount of $5 million, together with
accrued interest of $132,644, into 1,026,529 shares of restricted common stock.
Private Placement and Subsequent Registration of Shares
-------------------------------------------------------
On April 30, 2001, the Company completed a private offering (the "Offering") of
its restricted common stock, par value $0.001 per share ("Common Stock"). The
Offering involved sales of a total of 5,371,428 shares of restricted Common
Stock to 17 accredited investors and their affiliated funds (the "Investors").
None of the Investors was affiliated with the Company before the completion of
the Offering. The Company sold the shares of Common Stock issued in connection
with the Offering for $5.25 per share, yielding gross proceeds to the Company of
$28,199,997.
In connection with the Offering, the Company engaged Stonegate Securities, Inc.,
Dallas, Texas (the "Placement Agent"), to act as placement agent for the
Offering. For its services, the Company agreed to pay the Placement Agent five
percent of the gross proceeds of the Offering, or $1,410,000, and issue to the
Placement Agent warrants to purchase a total of 537,142 shares of restricted
Common Stock for a per share purchase price of $5.25. The warrants have a five
year term.
In connection with the Offering, the Company filed a registration statement
covering the shares of Common Stock issued to the Investors and underlying the
warrants issued to the Placement Agent with the Securities and Exchange
Commission (the "SEC"). The registration statement was declared effective by
the SEC on June 11, 2001. The terms of the Offering are set forth in full in
the forms of Subscription Agreements, and Warrants issued to the Placement
Agent, that are filed as exhibits to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001.
See also Note 6 of the Condensed Consolidated Financial Statements herein
regarding the Offering.
All issuances and sales of the Company's Common Stock in the Offering, and in
connection with the LCO Note Conversion 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 thereunder. 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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on June 20, 2001, the
shareholders of the Company voted on the following three proposals:
Proposal 1 - To elect the following ten directors, each to serve until the next
annual meeting of shareholders and until his successor is elected and shall have
qualified: Anthony M. Pilaro, John L. Reed, Gerald Poch, Dr. Gasper Lazzara,
Jr., Bradford Peters, Harry Thompson, Peter Schechter, Linda S. Oubre, Dennis F.
Hightower and R. Eric Montgomery.
Proposal 2 - To ratify and approve an amendment to the Company's Revised 1997
Stock Option and Incentive Plan. The amendment increases the aggregate number
of shares of common stock of the Company available for issuance under the Plan
from 5,000,000 shares to 7,000,000 shares.
Proposal 3 - To approve the Board of Directors' selection of Ernst & Young LLP
as the Company's independent auditors for the fiscal year ending December 29,
2001.
Voting results were as follows:
For Withheld
---------- --------
Proposal 1:
Mr. Pilaro 29,477,242 33,116
Mr. Reed 29,459,213 55,535
Mr. Poch 29,459,214 55,534
Mr. Lazzara, Jr. 29,493,065 21,683
Mr. Peters 29,470,747 44,001
Mr. Thompson 29,489,765 24,983
Mr. Schechter 29,493,265 21,483
Ms. Oubre 29,459,114 55,634
Mr. Hightower 29,493,265 21,483
Mr. Montgomery 29,493,265 21,483
For Against Abstain
---------- -------- -------
Proposal 2: 23,646,576 197,511 5,906
For Against Abstain
---------- -------- -------
Proposal 3: 29,507,778 3,251 3,719
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
None filed with this report.
(B) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the period for which this report is
filed.
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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 AUGUST 6, 2001
---------------- ---------------
JOHN L. REED DATE
CHIEF EXECUTIVE OFFICER
/S/ PETER P. HAUSBACK AUGUST 6, 2001
----------------------- ----------------
PETER P. HAUSBACK DATE
CHIEF FINANCIAL OFFICER
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