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: March 30, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the Transition Period from to
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Commission File Number: 1-11064
BRITESMILE, INC.
(Exact name of business issuer as specified in its charter)
UTAH 87-0410364
-------------------------------- ---------------------------------
(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
490 North Wiget Lane
Walnut Creek, California 94598
-------------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
(925) 941-6260
------------------
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
X yes no
--- -----
The Company had 36,414,461 shares of common stock outstanding at April 11, 2002.
1
BRITESMILE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 30, 2002 and December 29, 2001.................3
Condensed Consolidated Statements of Operations for the 13 weeks ended
March 30, 2002 and March 31, 2001................................................................5
Condensed Consolidated Statements of Cash Flows for the 13 weeks ended
March 30, 2002 and March 31, 2001, respectively..................................................6
Notes to Condensed Consolidated Financial Statements.............................................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................................................16
Item 2. Changes in Securities...........................................................................16
Item 5. Other Information...............................................................................16
Item 6. Exhibits and Reports on Form 8-K................................................................17
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRITESMILE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
($ in thousands, except share data)
March 30, 2002 December 29, 2001
----------------------- ---------------------
(Unaudited) (Note 1)
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 2,675 $ 7,162
Cash, restricted as to use....................................... 843 843
Trade accounts receivable, net of allowance for doubtful accounts of
$471 and $615, respectively................................... 2,681 4,311
Inventories...................................................... 3,008 2,540
Prepaid expenses and other....................................... 859 423
Notes receivable-current portion................................. 307 335
----------------------- ---------------------
Total current assets................................. 10,373 15,614
----------------------- ---------------------
----------------------- ---------------------
PROPERTY AND EQUIPMENT, net.......................................... 21,708 22,514
OTHER ASSETS......................................................... 1,614 1,719
----------------------- ---------------------
----------------------- ---------------------
TOTAL ASSETS......................................................... $ 33,695 $ 39,847
======================= =====================
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)
March 30, 2002 December 29, 2001
----------------------- ---------------------
(Unaudited) (Note 1)
CURRENT LIABILITIES:
Accounts payable................................................. $ 5,369 $ 5,512
Accrued expenses ................................................ 2,047 4,959
Deferred revenue ................................................ 1,375 763
Note payable to related party, net of discount................... 500 500
Accrual for store closures....................................... 310 310
Line of credit................................................... 117 -
Capital lease obligation with related party -current portion..... 641 641
----------------------- ---------------------
Total current liabilities.............................. 10,359 12,685
----------------------- --- ---------------------
Note payable to related party, less current portion.................. 1,528 1,583
Subordinated convertible debenture, net of discount.................. 734 729
Capital lease obligations with related party, less current portion... 2,435 2,537
Accrual for store closures........................................... 681 900
Other long-term liabilities.......................................... 871 857
----------------------- ---------------------
Total long-term liabilities...................... 6,249 6,606
----------------------- --- ---------------------
Total liabilities...................................... 16,608 19,291
----------------------- ---------------------
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value; 50,000,000 shares authorized;
36,404,461 and 36,226,961 shares issued and outstanding,
respectively.................................................. 36 36
Additional paid-in capital....................................... 137,760 137,097
Accumulated deficit.............................................. (120,709) (116,577)
----------------------- ---------------------
Total shareholders' equity ............................ 17,087 20,556
----------------------- ---------------------
Total liabilities and shareholders' equity........................... $ 33,695 $ 39,847
======================= =====================
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 March 31, 2001
March 30, 2002 (as Restated)
------------------- -------------------
REVENUES:
Center whitening fees, net................................... $ 3,065 $ 4,005
Associated Center whitening fees, net........................ 5,201 4,026
Product sales................................................ 1,067 886
------------------- -------------------
Total revenues, net....................................... 9,333 8,917
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OPERATING COSTS AND EXPENSES:
Operating and occupancy costs................................ 3,619 3,197
Selling, general and administrative expenses................. 7,867 9,833
Research and development expenses............................ 111 548
Depreciation and amortization................................ 1,483 1,214
------------------- -------------------
Total operating costs and expenses........................ 13,080 14,792
------------------- -------------------
Loss from operations................................... (3,747) (5,875)
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OTHER INCOME (EXPENSE), net:
Interest expense............................................. (393) (219)
Interest income.............................................. 26 4
------------------- -------------------
Total other income (expense), net......................... (367) (215)
------------------- -------------------
Loss before income tax provision....................... (4,114) (6,090)
INCOME TAX PROVISION............................................. 18 53
------------------- -------------------
Net loss .............................................. $ (4,132) $ (6,143)
=================== ===================
BASIC AND DILUTED NET LOSS PER SHARE............................. $ (0.11) $ (0.21)
=================== ===================
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED...................... 36,372,138 28,816,513
=================== ===================
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)
13 Weeks Ended
13 Weeks Ended March 31, 2001
March 30, 2002 (as Restated)
------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................ $ (4,132) $ (6,143)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................. 1,483 1,214
Store closure accrual......................................... (219) (57)
Cost for issuance of stock warrants and stock options......... 289 621
Changes in assets and liabilities.................................. (1,697) (1,079)
------------------- -------------------
Net cash used in operating activities................ (4,276) (5,444)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................................... (673) (1,069)
------------------- -------------------
Net cash used in investing activities................ (673) (1,069)
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Procceds from line of credit......................................... 118 700
Principal payments on long-term debt................................. (55) -
Proceeds from debt financing ........................................ - 2,500
Proceeds from exercise of stock options ............................. 399 -
------------------- -------------------
Net cash provided by financing activities............ 462 3,200
------------------- -------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,487) (3,313)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF THE PERIOD...................................................... 7,162 5,701
------------------- -------------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD......................... $ 2,675 $ 2,388
=================== ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................................. $ 238 $ 95
=================== ===================
Cash paid for income taxes......................................... $ 72 $ 53
=================== ===================
Equipment acquired under capital lease............................. $ - $ 683
=================== ===================
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)
March 30, 2002
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 March 30, 2002, the
Company had 14 Centers and 4,217 Associated Centers in operation.
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. To
date, the Company has entered into contracts with 4,217 Associated Centers,
including 3,375 in the United States, and 842 in 35 countries outside the United
States. 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 teeth whitening procedure.
The Company developed its current teeth whitening technology (the "BriteSmile
Light Activated Teeth Whitening System," "BS2000," or "LATW") and began
distribution in 1999. In November 1999 the Company introduced its new BriteSmile
3000 LATW keycard system (the "BS3000") to Associated Centers. The BS3000, a
mobile version of the BS2000, can be installed quickly and provides improved
flexibility and mobility in dental offices. In May 2001, the Company introduced
its more versatile mobile device, the BS3000PB, which is the device currently
shipped to Associated Centers. The BS2000, BS3000, and BS3000PB teeth whitening
devices utilize a light technology. The unique delivery arm of these devices
permits blue green light to reach all 16 front teeth simultaneously, whitening
the teeth by activating BriteSmile's wavelength-specific gel during three
consecutive twenty-minute sessions.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information," established standards for reporting
information about operating segments in financial statements. Operating segments
are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief decision
maker, or chief decision making group, in deciding how to allocate resources and
in assessing performance. Our President and CEO is our chief decision maker. Our
business is focused on one industry segment, products and procedures to whiten
teeth. All of our revenues and profits are generated through the sale,
licensing, and service of products for this one segment.
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 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 ended March 30, 2002 are not necessarily indicative of
the results that may be expected for the remainder of the fiscal year ending
December 28, 2002.
7
BRITESMILE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 30, 2002
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 29, 2001.
The accompanying consolidated financial statements include the accounts of the
Company, its subsidiaries, and entities (Centers) in which the Company has a
controlling interest. The Company consolidates 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 medical services. All intercompany balances and transactions have
been eliminated in consolidation.
Revenue Recognition
The Company recognizes revenue related to retail products at the time such
products are sold to customers.
The Company recognizes revenue from teeth whitening procedures performed at its
Centers when the procedures have been performed.
During the last quarter of the transition period ended December 30, 2000 and
retroactive to April 1, 2000, the Company has changed its method of accounting
to recognize revenue from Associated Centers, ratably over the estimated period
in which the Associated Centers perform the procedures, commencing when the key
card is shipped. Previously, the Company recognized revenues from Associated
Centers when the keycard to activate the machine was shipped. Revenue is
reported net of discounts and allowances. As of March 30, 2002, the Company
recorded deferred revenue totaling $1.4 million, which will be recognized as
revenue in the second quarter of 2002.
3. 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.
4. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consist primarily of dental supplies, retail products and component
parts for the repair of teeth whitening systems.
5. Reclassifications
Certain reclassifications have been made in the prior period's condensed
consolidated financial statements to conform with the current period
presentation.
6. Revisions to Previously Issued Financial Statements
The Company provides equipment and sells key card and supplies (procedure kits)
to Associated Centers to enable the Associated Center to perform the whitening
procedures for its customers. The Company also provides the use of whitening
equipment to the Associated Center. Prior to December 29, 2001, the Company
8
recognized revenue related to the sale of the procedure kits upon shipment of
the key cards and whitening supplies. Following discussion with the staff of the
Securities and Exchange Commission regarding application of Staff Accounting
Bulletin No. 101,
"Revenue Recognition in Financial Statements," the Company revised its revenue
recognition policy related to these agreements to defer revenues, and to
amortize these revenues into operations over the estimated period in which the
procedures are performed by the Associated Centers, which is generally 30 days.
As a result of this revision, the Company has restated its quarterly financials
for 2001. The following is the restatement for the comparative quarter ended
March 31, 2001:
As previously
reported As restated
Consolidated Statement of Operations Data:
Total Associated Centers revenue......................$.4,813 $ 4,026
Total revenues..........................................9,704 8,917
Net loss................................................4,893 6,143
Net loss per share, basic and diluted.................$(0.17) $(0.21)
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7. Financing Arrangements
Following is a summary of the Company's long and short term debt financing
arrangements (in thousands):
March 30, December 29,
2002 2001
---- ----
Note Payable to EVL, a related party,
due May 10, 2006 $ 2,028 $ 2,083
5% Subordinated Convertible Notes due and
payable on June 29, 2005 (including
discount of $66 and $71) 734 729
Line of credit 117 -
---------------- -----------------
---------------- -----------------
$ 2,879 $ 2,812
================ =================
8. Impact of Recently Issued Accounting Standards and Accounting Bulletins
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 eliminates the pooling of interests method of accounting
for business combinations, except for qualifying business combinations that were
initiated prior to July 1, 2001. Under SFAS No. 142, goodwill and indefinite
lived intangible assets are not longer amortized but are reviewed annually, or
more frequently if impairment indicators arise, for impairment. The Company
believes that SFAS Nos. 141 and 142 will not have a material impact on its
consolidated financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of the fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. The Company believe that SFAS no. 142 will not have a material
impact on its consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and provides a single accounting model for long-lived assets to be disposed
of. The Company adopted SFAS No. 144 on December 30, 2001, and believes that
SFAS No. 144 will not have a material impact on its consolidated financial
statements.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-looking Statements and Risk Factors
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 will likely be present in all periods reported. The
forward-looking statements contained in this Report are made as of the date of
this Report and the Company assumes no obligation to update them or to update
the reasons why actual results could differ from those projected in such
forward-looking statements. Among others, risks and uncertainties that may
affect the business, financial condition, performance, development, and results
of operations of the Company include:
o Government regulation of the Company's products and teeth whitening
procedures, including: (i) current restrictions or controls on the
practice of dentistry by general business corporations, and (ii)
future, unknown enactments or interpretations of current regulations
which could, in the future, affect the Company's operational structure
and relationships with licensed dentists.
o Failure of the Company to generate, sustain or manage growth, including
failure to develop new products and expand 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
aggressive plan for the rollout of a broad base of Associated Centers;
o Unproven market for the Company's new whitening products, whitening
process, and "Whitening Center" and "Associated Center" concepts, in
light of competition from traditional take-home whitening products and
bleaching tray methods;
o Failure to develop marketing strategies and delivery methods to
penetrate non-U.S. markets; and
o Lack of product diversity.
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 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
10
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 consolidated
financial statements.
Revenue Recognition
BriteSmile recognizes revenue related to retail products at the time such
products are sold to customers.
BriteSmile recognizes revenue at Company operated 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. Deferred revenue is recorded for the full value of
the key cards and access codes at the time of sale only if BriteSmile is
contractually entitled to invoice the Associated Center for the full value of
the sale and the Associated Center is obligated to pay such invoice, thereby
creating a corresponding account receivable. Deferred revenue is subsequently
recognized as revenue over the estimated period that the whitening procedures
which can be performed via the key cards and access codes are expected to be
used, currently 30 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; however, it does
provide credits to the ultimate whitening customer for a "whitening guarantee."
BriteSmile recognizes those credits by reducing its revenue.
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 were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Inventory
BriteSmile is required to state its inventories 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, Equipment and Improvements - Carrying Value Near Recoverability
Estimate
BriteSmile evaluates its property, equipment and improvements for impairment
whenever indicators of impairment exist. Management determined that impairment
indicators did exist in Fiscal 2001 based upon continued operating losses and
negative cash flow. BriteSmile's current estimates of recoverability for its
property, equipment and improvements indicated those assets would not have been
recoverable if management's estimates of future cash flows had been 295% lower
than its current estimate. BriteSmile's recoverability estimates are based on
current revenue levels continuing to grow at approximately 20% per annum
compared to an historical growth rate of approximately 114%. BriteSmile has
further assumed that operating costs will increase by approximately 3% per annum
compared to an historical increase of approximately 157%. The Company completed
a major restructuring of its cost structure in the fourth quarter of Fiscal 2001
with plans to reduce operating costs by approximately $14 million per year
compared to Fiscal 2001. Had BriteSmile's recoverability estimates resulted in a
determination that these assets were not recoverable, BriteSmile would have
recognized an impairment loss in Fiscal 2001.
11
Store Closures
During Fiscal 2001 (fiscal year ended December 2001) and the Transition Period
(nine-month transition period ended December 2000), BriteSmile recorded
significant reserves in connection with store closures. 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.
Legal Contingencies
BriteSmile is currently a party to certain legal action. Management does not
believe that current pending litigation will have a material adverse effect on
BriteSmile's consolidated financial position. This conclusion has been developed
in consultation with outside counsel handling BriteSmile's defense in the
matter. 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.
Expenses of recruiting and training sales, market support, and training staff
are also included in 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 fiscal year
ended December 29, 2001.
The following table sets forth unaudited operating results for the thirteen week
period ended March 30, 2002 and March 31, 2001, as a percentage of sales in each
of these periods. This data has been derived from the unaudited financial
statements.
Thirteen Thirteen
Weeks ended Weeks ended
March 30, March 31,
2002 2001
----------- -----------
Income Statement Data:
Revenues:
Center whitening fees, net 32.8% 44.9%
Associated Center whitening fees, net 55.8% 45.1%
Product sales 11.4% 10.0%
----- -----
Total revenues, net 100.0% 100.0%
------ ------
Operating Costs and Expenses:
Operating and occupancy costs 38.7% 35.9%
Selling, general and administrative expenses 84.3% 110.3%
Research and development expenses 1.2% 6.1%
Depreciation and amortization 15.9% 13.6%
----- -----
Total operating costs and expenses 140.1% 165.9%
------ ------
12
Loss from operations -40.1% -65.9%
------ ------
Interest income (expense), net -3.9% -2.4%
----- -----
Loss before income tax provision -44.0% -68.3%
Provision for income taxes 0.2% 0.6%
---- ----
Net Loss -44.2% -68.9%
=============================
The following are explanations of significant period-to-period changes for the
13 weeks ended March 30, 2002 and March 31, 2001:
Revenues
Total Revenues, net. Total revenues, net increased by $416,000, or 4.7%, to $9.3
million for the 13 weeks ended March 30, 2002, from $8.9 million for the 13
weeks ended March 31, 2001. As of March 30, 2002, the Company recorded deferred
revenue totaling $1.4 million. This revenue will be amortized into revenue in
April 2002 in accordance with the Company's revised policy of recognizing
revenue over the estimated 30-day period in which the whitening procedures are
performed after shipment of key cards to Associated Centers.
Center Whitening Fees, net. Center whitening fees, net decreased slightly by
$940,000, or 23.5%, to $3.1 million for the 13 weeks ended March 30, 2002, from
$4.0 million for the 13 weeks ended March 31, 2001. $265,000 of this decrease
was primarily due to the closure of three underperforming Centers that were open
for a portion of the first quarter of 2001, and $675,000 of the decrease was in
the existing 14 Centers. The number of procedures performed in the Centers
decreased to 6,850 in the first quarter of 2002, compared to 9,154 in the same
quarter of 2001.
Associated Center Whitening Fees, net. Associated Center whitening fees, net
increased by $1.2 million, or 29.2%, to $5.2 million for the 13 weeks ended
March 30, 2002, from $4.0 million for the 13 weeks ended March 31, 2001. This
increase was primarily due to the operation of 4,217 Associated Centers at the
end of the 13 weeks ended March 30, 2002 compared to 1,795 Associated Centers in
operation at the end of the 13 weeks ended March 31, 2001. Of the 4,217
Associated Centers in operation at March 30, 2002, 842 were international
locations. The number of procedures sold in the Associated Centers increased
49.2% to 32,025 procedures in the first quarter of 2002 compared to 21,460
procedures in the same quarter of 2001. During the 13 weeks ended March 30,
2002, the Company opened 258 new Associated Centers.
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 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.
The Company also anticipates opening additional Associated Centers in domestic
and international locations over the next twelve months, resulting in increased
Associated Center whitening fees. There can be no guarantee that the Company
will be successful in executing its business plan.
Product Sales. Product sales increased by 20.4% to $1.1 million for the 13 weeks
ended March 30, 2002, from $886,000 for the 13 weeks ended March 31, 2001.
Product sales represent the Company's toothpaste, mouthwash, whitening gum, and
the Sonicare toothbrush products sold at Centers and Associated Centers. Product
sales are expected to increase during the next twelve months as a result of the
introduction of additional oral care products to be sold at Centers, Associated
Centers, and through the Company's E-Commerce website.
Operating Costs and Expenses
Operating and Occupancy Costs. Operating and occupancy costs as a percentage of
revenues was 38.7% for the thirteen weeks ended March 30, 2002, compared to
35.9% in the thirteen weeks ended March 31, 2001. $104,000 of this increase was
the result of higher lease financing costs due to the higher number of
Associated Centers in operation. On a percentage basis, the 2.8% increase is a
result of the product mix and promotions.
13
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased significantly as a percentage of sales to
84.3% for the first quarter of 2002 compared to 110.3% in the corresponding
period in 2001. The $2.0 million decrease was in line with the expense
restructuring instituted in late fiscal 2001 as discussed in further detail in
the Liquidity and Capital Resources section. The Company expects that savings as
a result of the new infrastructure will continue to be achieved throughout
Fiscal 2002.
Research and Development Expenses. Research and development expenses decreased
as a percentage of sales to 1.2% for the first of 2002 compared to 6.1% in the
corresponding period in 2001. The $111,000 expense incurred in the first quarter
of 2002 was primarily related to research studies to expand the Company's
leadership position in the teeth-whitening industry.
Depreciation and Amortization. Depreciation and amortization decreased as a
percentage of sales to 15.9% for the first quarter of 2002 compared to 13.6% in
the corresponding period in 2001. The increase of $269,000 in depreciation and
amortization expense to $1.5 million for the first quarter of 2002 is the result
of a greater number of BS3000 and BS3000PB devices in operation as a result of
the increase in the number of active Associated Centers.
Interest Expense,net. Interest expense, net increased to $367,000 for the first
quarter of 2002 compared to interest expense, net of $215,000 in the
corresponding quarter of 2001. Interest expense increased primarily as a result
of recognizing $158,000 in non-cash interest expense for 80,000 warrants (see
Additional Working Capital Guarantees in the Liquidity and Capital Resources
section).
Net Loss. The net loss decreased $2.0 million to $4.1 million for the first
quarter of 2002 compared to a net loss of $6.1 million in the corresponding
quarter of 2001. This represents a 32.7% improvement due to a combination of the
factors described above. Net loss per share for the first quarter of 2002 was
($0.11) versus ($0.21) reported for the first quarter of 2001.
Liquidity and Capital Resources
The Company's principal sources of liquidity have been issuances of convertible
debt, common stock and common stock equivalents. At March 30, 2002, the Company
had $2.7 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 its principal uses of cash will be to provide
working capital, to finance capital expenditures, and to satisfy other general
corporate expenses. In particular, the Company plans to use its cash to finance
its marketing strategy.
During the first quarter of 2002, the Company obtained a $2.5 million line of
credit from CAP Advisers, and $4 million in shortfall guarantees. See "CAP
Advisers Line of Credit," and "Additional Working Capital Guarantees" below. The
Company also amended its EVL Lease Agreement to defer payment of monthly rental
on LATW devices to year 2003. See "EVL Lease Line Amendment" below.
Post September 11 Expense Reductions. During the weeks following the September
11, 2001 terrorist attacks, the Company saw an immediate drop in revenue. The
New York area Associated Centers, and the Company's own Center in New York, were
the hardest hit. The Company assessed the operating variables that could be
controlled and immediately responded to the decline in sales. Management has and
is implementing several cost saving initiatives totaling approximately $14
million over the next twelve months. Through the first three months of Fiscal
2002, the Company has hit its cost targets and expects to do the same throughout
Fiscal 2002 to achieve the $14 million cost reduction goal. The Company expects
to achieve these cost savings in the areas of Center operations, procedure kit
production, various selling, general and administrative costs including legal
and consulting fees, and leveraging its marketing spend more effectively by
utilizing smaller media specific agencies, thereby reducing agency fees. As a
result, management expects selling, general and administrative expenses to be
leveraged more efficiently as sales from Centers and Associated Centers increase
in the future. Depending upon the operating results, the Company may increase
its advertising spend.
CAP Advisers Line of Credit. In December 2001, as amended in March 2002,
BriteSmile International, a wholly-owned subsidiary of the Company, entered into
Credit and Security Agreements with CAP Advisers which provide for a $2.5
million line of credit facility to the Company and its subsidiary.
14
EVL Lease Amendment. The Company pays EVL a monthly rental for each LATW device
leased, consisting of a fixed amount, plus a "variable rent" payment in the
amount of $125 for each key card or access code sold to an Associated Center
where EVL is the lessor of the LATW device. Each key card or access code enables
Associated Center dentists to perform 5 teeth whitening procedures (i.e.
variable rent of $25 per procedure).
On March 8, 2002, the Company and EVL amended their lease agreement to provide
that the variable rent portion of the monthly rental payments during 2002, in
the amount of $25 for each BriteSmile procedure, will be deferred and paid to
EVL in twelve equal monthly installments beginning January 9, 2003, with
interest payable on the deferred amount at a rate equal to LIBOR, as quoted by
The Bank of Nova Scotia for the applicable adjustment dates for deposits in U.S.
Dollars for one month maturities, plus 200 basis points.
Additional Working Capital Guarantees. In March 2002 the Company received
Commitment Letters from the Guarantors to severally purchase, on or before
December 31, 2002, up to $4 million of additional shares of common stock of the
Company (or to otherwise secure, collateralize, or make available such funds to
the Company). The aggregate purchase amount committed by the Guarantors equals
the difference between $4 million, and the "Excess Cash Receipts" to be realized
by the Company in 2002. "Excess Cash Receipts," for this purpose, is defined to
mean cash received by the Company through sales of the Company's debt or equity
securities, additional borrowings, or cash receipts in excess of current
projections. In consideration for the Guarantors' Commitment Letters, the
Company issued to the Guarantors five-year warrants to purchase an aggregate of
80,000 shares of common stock of the Company at an exercise price of $5.00 per
share. See Item 5, "Other Information," below.
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 or further reduce operating expenditures.
Cash flow used in operations improved by $1.2 million to $(4.3 million) for the
first quarter of 2002 from $(5.5 million) used in operating activities during
the first quarter of 2001, 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 $462,000 for the first quarter of
2002, compared to $3.2 million for the same period in 2001. The $462,000 net
cash consisted of: 1) $399,000 of proceeds from the exercise of stock options,
2) $118,000 cash from proceeds from the Company's international line of credit
to fund the rollout of devices, and 3) $55,000 principal payment on long-term
debt.
Capital expenditures were $673,000 for the first quarter of 2002, compared to
$1.1 million for the same period in 2001. The capital expenditures in the first
quarter of 2002 were primarily related to the purchase of BS3000PB systems for
new domestic and international Associated Centers.
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 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.
15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 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.
The Company believes that the claims asserted by Smile are entirely without
merit. The Company intends to vigorously defend the lawsuit. The Company has not
yet filed its answer to the complaint, nor commenced discovery with regard to
Smile's claims.
ITEM 2. CHANGES IN SECURITIES.
Option Grants. During the period December 30, 2001 to March 30, 2002, the
Company granted to key employees under its 1997 Stock Option and Incentive Plan
non-qualified options to purchase an aggregate of 618,184 shares of the
Company's common stock, at exercise prices ranging from $4.13 to $9.69 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 for these grants in that the Company believes such grants were not
"sales" within the meaning of the Act.
ITEM 5. OTHER INFORMATION.
2002 Shortfall Guarantees. In March 2002 the Company received Commitment Letters
from the Guarantors to severally purchase, on or before December 31, 2002, up to
$4 million of additional shares of common stock of the Company (or to otherwise
secure, collateralize, or make available such funds to the Company). The
aggregate purchase amount committed by the Guarantors equals the difference
between $4 million, and the "Excess Cash Receipts" to be realized by the Company
in 2002. "Excess Cash Receipts," for this purpose, is defined to mean cash
received by the Company through sales of the Company's debt or equity
securities, additional borrowings, or cash receipts in excess of current
projections. As restated effective March 4, 2002, the Guaranty of Fiscal 2002
Shortfall Summary of Terms (the "Summary") provides that in consideration for
the Guarantors' Commitment Letters, the Company has agreed to issue to the
Guarantors five-year warrants to purchase an aggregate of 80,000 shares of
common stock of the Company at an exercise price of $5.00 per share. A copy of
the Summary is attached as an Exhibit. Originally, the Summary had provided that
the 80,000 warrants to be granted to the Guarantors would have an exercise price
of $4.75 per share, and that if called upon to purchase additional shares, the
Guarantors would have a specified per-share purchase price. In its restated
form, the Summary grants warrants at an exercise price of $5.00 per share, and
does not specify a per-share purchase price if the Guarantors are called upon to
provide any of the additional $4 million in guaranteed funds. Accordingly, the
issuance of the warrants to the Guarantors does not result in any adjustment to
the conversion price of certain Convertible Promissory Notes issued by the
Company in August 2000, nor to the exercise price of certain warrants previously
granted to the purchasers of the Convertible Promissory Notes in the same
transaction.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
10(a) Form of Restated Guaranty of Fiscal 2002 Shortfall Summary of
Terms, dated effective March 4, 2002, in connection with
commitments from certain shareholders and/or directors of the
Company to secure up to $4 million of additional working
capital (filed herewith).
(B) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the period for which this
report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BRITESMILE, INC.
/s/ John L. Reed May 10, 2002
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John L. Reed Date
Chief Executive Officer
/s/ Peter P. Hausback May 10, 2002
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Peter P. Hausback Date
Chief Financial Officer