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BIOL > SEC Filings for BIOL > Form 10-Q on 10-May-2012All Recent SEC Filings

Show all filings for BIOLASE TECHNOLOGY INC

Form 10-Q for BIOLASE TECHNOLOGY INC


10-May-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains "forward-looking statements" as defined in Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause the results of Biolase Technology, Inc. (the "Company," "we", "us" or "our" ) to differ materially and adversely from those expressed or implied by such forward-looking statements. Such forward-looking statements include any statements, predictions and expectations regarding our earnings, revenue, sales and operations, operating expenses, anticipated cash needs, capital requirements and capital expenditures, needs for additional financing, use of working capital, plans for future products and services and for enhancements of existing products and services, anticipated growth strategies, ability to attract customers, sources of net revenue, anticipated trends and challenges in our business and the markets in which we operate, the adequacy of our facilities, the impact of economic and industry conditions on our customers and our business, customer demand, our competitive position, the outcome of any litigation against us, the perceived benefits of any technology acquisitions, critical accounting policies, the impact of recent accounting pronouncements, statements pertaining to financial items, plans, strategies, expectations or objectives of management for future operations, our financial condition or prospects, and any other statement that is not historical fact. Forward-looking statements are often identified by the use of words such as "may," "might," "will," "intend," "should," "could," "can," "would," "continue," "expect," "believe," "anticipate," "estimate," "predict," "potential," "plan," "seek" and similar expressions and variations or the negativities of these terms or other comparable terminology. These forward-looking statements are based on the beliefs and assumptions of our management based upon information currently available to management. Such forward looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially and adversely from future results expressed or implied from such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified under "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011 (the "2011 Form 10-K") filed with the Securities and Exchange Commission (the "SEC"). Such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements for any reason except as otherwise required by law.

Overview

We are a medical technology company that develops, manufactures, and markets lasers, and markets and distributes dental imaging equipment and other related products designed to improve technologies for applications and procedures in dentistry and medicine. Our principal products provide dental laser systems that allow dentists, periodontists, endodontists, oral surgeons, and other specialists to perform a broad range of dental procedures, including cosmetic and complex surgical applications. Our systems are designed to provide clinically superior performance for many types of dental procedures with less pain and faster recovery times than are generally achieved with drills, scalpels, and other dental instruments. We have clearance from the FDA to market our laser systems in the United States and also have the necessary approvals to sell our laser systems in Canada, the European Union and various other international markets. Since 1998, we have sold over 8,900 Waterlase systems, including more than 4,900 Waterlase MD and iPlus systems, and more than 19,600 laser systems in over 60 countries.

We offer two categories of laser system products: Waterlase systems and Diode systems. Our flagship product category, the Waterlase system, uses a patented combination of water and laser energy to perform most procedures currently performed using dental drills, scalpels, and other traditional dental instruments for cutting soft and hard tissue. We also offer our Diode laser systems to perform soft tissue and cosmetic procedures, including tooth whitening. We currently have over approximately 160 issued and 120 pending U.S. and international patents, 70 percent of which are related to our core Waterlase technology and medical lasers.

We have suffered recurring losses from operations and have not generated cash from operations for the three years ended December 31, 2011. Our inability to generate cash from operations, the potential need for additional capital, and the uncertainties surrounding our ability to raise additional capital, raises substantial doubt about our ability to continue as a going concern. Accordingly, the accompanying financial statements have been prepared assuming that we will continue as a going concern, which contemplates that we will continue in operation for the next twelve months and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business. The consolidated financial statements do not include any adjustments to reflect the possible future effects of recoverability and classifications of assets or the amounts and classifications of liabilities that may result from our inability to continue as a going concern.


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In order for us to continue operations beyond the next twelve months and be able to discharge our liabilities and commitments in the normal course of business, we must sell our products directly to end-users and through multiple distributors; establish profitable operations through increased sales and reduced operating expenses; and potentially raise additional funds, principally through the sales of our securities or debt financings, to meet our working capital needs.

We intend to increase sales by increasing our product offerings, by expanding our direct sales force and our distributor relationships both domestically and internationally. In connection with this strategy, we intend to provide assistance to our domestic and international distribution partners to maximize revenue. However, we cannot guarantee that we will be able to increase sales, reduce expenses or obtain additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to us. If we are unable to increase sales, reduce expenses or raise sufficient additional capital we may be unable to continue to fund our operations, develop our products or realize value from our assets and discharge our liabilities in the normal course of business. These uncertainties raise substantial doubt about our ability to continue as a going concern.

On September 23, 2010, we entered into the D&S Agreement with HSIC, effective August 30, 2010, which terminated all prior agreements with HSIC. Under the D&S Agreement, we granted HSIC certain non-exclusive distribution rights in North America and several international markets with respect to our dental laser systems, accessories, and related support and services in certain circumstances. In addition, we granted HSIC exclusivity in selected international markets subject to review of certain performance criteria. In connection with the D&S Agreement, HSIC placed two irrevocable purchase orders totaling $9 million for our products. The first purchase order, totaling $6 million, was for the purchase of iLase systems and was required to be fulfilled by June 30, 2011. The first purchase order was fully satisfied during the first quarter of 2011. The second purchase order, totaling $3 million, was for the purchase of a combination of laser systems and was required to be fulfilled by August 25, 2011. The second purchase order was fully satisfied during the third quarter of 2011. The D&S Agreement granted HSIC a security interest in our inventory and assets, including our intellectual property.

On April 12, 2012, we completed a transaction with HSIC (the "2012 Termination Agreement") whereby we purchased HSIC's inventory of Waterlase MD Turbo laser systems and HSIC released its liens on our assets. Pursuant to the terms of the transaction, the entire purchase price was paid by offsetting certain accounts receivable currently due from HSIC from sales made in the normal course of business. None of the funds used to offset the purchase price were related to the original sales of the MD Turbo laser systems that were purchased. As a result of the transaction, we are no longer required to fulfill certain future service obligations and, accordingly, derecognized approximately $155,000 of accounts receivable due from HSIC related to support services and approximately $142,000 of accrued warranties as of March 31, 2012. We expect to record the remaining effects of the transaction in the second quarter ending June 30, 2012.

Critical Accounting Policies

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses reported during the period. Information with respect to our critical accounting policies which we believe could have the most significant effect on our reported results and require subjective or complex judgments by management is contained on pages 41 to 43 in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of the Company's Annual Report on Form 10K for the year ended December 31, 2011 (the "2011 Form 10-K"). Management believes that there have been no significant changes during the three months ended March 31, 2012 in our critical accounting policies from those disclosed in Item 7 of the 2011 Form 10-K.


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Results of Operations

The following table sets forth certain data from our consolidated statements of
operations expressed as percentages of net revenue:



                                               Three Months Ended
                                                    March 31,
                                               2012           2011
               Net revenue                       100.0 %       100.0 %
               Cost of revenue                    52.9          54.2

               Gross profit                       47.1          45.8

               Operating expenses:
               Sales and marketing                32.7          23.2
               General and administrative         18.0          16.1
               Engineering and development         9.6          10.3

               Total operating expenses           60.3          49.6

               Loss from operations              (13.2 )        (3.8 )
               Non-operating income, net          (0.2 )        (3.2 )

               Loss before income taxes          (13.4 )        (7.0 )
               Income tax provision                0.2           0.1

               Net loss                          (13.6 )%       (7.1 )%

The following table summarizes our net revenues by category for the three months ended March 31, 2012 and 2011 (dollars in thousands):

                                                    Three Months Ended
                                                        March 31,
                                               2012                    2011
          Waterlase systems             $  7,982        65 %    $  4,375        42 %
          Diode systems                    1,342        11 %       3,849        36 %

          Total laser systems              9,324        76 %       8,224        78 %
          Imaging systems                    143         1 %          -         -  %
          Consumables and service          1,506        12 %       1,276        12 %
          Warranty and training            1,339        11 %       1,046        10 %

          Total products and services     12,312       100 %      10,546       100 %
          License fees and royalty             8        -  %          15        -  %

          Net revenue                   $ 12,320       100 %    $ 10,561       100 %

Three months ended March 31, 2012 and 2011

Net Revenue. Net revenue for the three months ended March 31, 2012, ("First Quarter 2012") was $12.3 million, an increase of $1.7 million, or 17%, as compared with net revenue of $10.6 million for the three months ended March 31, 2011 ("First Quarter 2011"). Domestic revenues were $8.4 million, or 68% of net revenue, for First Quarter 2012 versus $8.6 million, or 81% of net revenue, for First Quarter 2011. International revenues for First Quarter 2012 were $3.9 million, or 32% of net revenue, as compared with $2.0 million, or 19% of net revenue, for First Quarter 2011. The increase in net revenue is primarily attributable to increases in international laser system sales volume which doubled year-over-year as well as increased domestic consumables and service and warranty and training sales which increased 24% year-over-year due to increased sales and marketing efforts.

Laser system net revenue increased by approximately $1.1 million, or 13% in the First Quarter 2012 compared to the same quarter of 2011. Sales of our Waterlase systems increased $3.6 million, or 82%, in the First Quarter 2012 compared to the same period in 2011 due to increased sales and marketing efforts. Net revenue from our Diode systems decreased by approximately $2.5 million, or 65%, in the First Quarter 2012 compared to the First Quarter 2011, primarily as a result of $3.0 million of iLase sales to HSIC in the First Quarter 2011 under the initial non-refundable prepaid purchase order under the D&S Agreement.


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Imaging system net revenue was $143,000 for the First Quarter 2012.

Consumables and service net revenue, which includes consumable products, advanced training programs and extended service contracts, and shipping revenue increased by approximately $523,000 or 23% for First Quarter 2012 as compared to the same period of 2011. Consumable products revenue increased $230,000, or 18%, and service revenues increased approximately $293,000, or 28%. The increased revenues are due to increased sales and marketing efforts.

License fees and royalty revenue of $8,000 for First Quarter 2012 was consistent with $15,000 for First Quarter 2011.

Cost of Revenue. Cost of revenue for First Quarter 2012 increased by $791,000, or approximately 14%, to $6.5 million, compared with cost of revenue of $5.7 million for First Quarter 2011. This increase is primarily attributable to increases in sales. Although cost of revenue increased in First Quarter 2012 on an absolute basis as compared to First Quarter 2011, cost of revenue decreased when expressed as a percentage of net revenues, from 54.2% of net revenues in First Quarter 2011 to 52.9% of net revenues in First Quarter 2012.

Gross Profit. Gross profit for First Quarter 2012 increased by $968,000 to $5.8 million, or 47% of net revenue, as compared with gross profit of $4.8 million, or 46% of net revenue, for First Quarter 2011. The increase was primarily due to higher sales volumes of the Waterlase iPlus system which had lower margins in the First Quarter 2011 due to higher costs associated with the product launch. First Quarter 2012 also included a one time warranty reduction of $142,000 related to 2012 Termination Agreement with HSIC which partially offset increased freight costs of $202,000.

Operating Expenses. Operating expenses for First Quarter 2012 increased by $2.2 million, or 42%, to $7.4 million as compared to $5.2 million for First Quarter 2011. The year-over-year increase in expense is explained in the following expense categories:

Sales and Marketing Expense. Sales and marketing expenses for First Quarter 2012 increased by $1.6 million, or approximately 64%, to $4.0 million, or 33% of net revenue, as compared with $2.4 million, or 23% of net revenue, for First Quarter 2011. The increase is primarily a result of increased payroll and consulting related expenses of $221,000, increased travel and entertainment expenses of $178,000, increased commission expenses of $330,000, increased media and advertising expenses of $271,000, and increased convention costs of $233,000.

General and Administrative Expense. General and administrative expenses for First Quarter 2012 increased by $512,000, or 30%, to $2.2 million, or 18% of net revenue, as compared with $1.7 million, or 16% of net revenue, for First Quarter 2011. The increase in general and administrative expenses resulted primarily from increased payroll and consulting related expenses of $339,000 and increased patent and legal expenses of $43,000.

Engineering and Development Expense. Engineering and development expenses for First Quarter 2012 increased by $97,000, or 9%, to $1.2 million, or 10% of net revenue, as compared with $1.1 million, or 10% of net revenue, for First Quarter 2011. The increase was primarily related to increased payroll and consulting related expenses of $75,000.

Non-Operating Income (Loss)

Gain (Loss) on Foreign Currency Transactions. We realized a $17,000 loss on foreign currency transactions for First Quarter 2012, compared to a $38,000 loss on foreign currency transactions for First Quarter 2011 due to the changes in exchange rates between the U.S. dollar and the Euro, the Australian dollar, and the New Zealand dollar.

Interest Income. Interest income results from interest earned on our cash and equivalents balances. Interest income totaled approximately $1,000 and $0 for First Quarter 2012 and 2011, respectively.

Interest Expense. Interest expense consists primarily of interest on the financing of our business insurance premiums and interest on our term loan payable which was repaid in full in February 2011. Interest expense totaled approximately $5,000 and $73,000 for First Quarter 2012 and 2011, respectively.

Nonrecurring Charge for the Expense of Unamortized Debt-Related Costs. Unamortized debt-related costs in the amount of $225,000 were expensed in First Quarter 2011 as a result of paying off the term loan payable in February 2011.


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Income Taxes. Our provision for income taxes was $29,000 for First Quarter 2012, compared to $8,000 for First Quarter 2011.

Net Loss. For the reasons stated above, our net loss was $1.7 million for First Quarter 2011 compared to a net loss of $750,000 for First Quarter 2011.

Liquidity and Capital Resources

At March 31, 2012, the Company had approximately $8.0 million in working capital. The Company's principal sources of liquidity at March 31, 2012 consisted of $2.8 million in cash and cash equivalents and $9.0 million of net accounts receivable. We define cash and cash equivalents as highly liquid deposits with original maturities of 90 days or less when purchased. The following table summarizes our statements of cash flows (in millions):

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