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BIOL > SEC Filings for BIOL > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for BIOLASE, INC

Form 10-Q for BIOLASE, INC


9-Nov-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, 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") and in item 1A of this report. 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 biomedical company that develops, manufactures, and markets lasers in dentistry and medicine. Our principal products are 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 9,200 Waterlase systems, including more than 5,200 Waterlase MD and iPlus systems, and more than 20,600 laser systems in over 60 countries. We also market and distribute dental imaging equipment and other related products designed to improve technologies for applications and procedures in dentistry and medicine.

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 approximately 160 issued and 130 pending U.S. and international patents, the majority of which are related to our core Waterlase technology and dental 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 through our direct sales force 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.

Accordingly, we have taken steps during the period ending September 30, 2012, which we believe will improve our financial condition and ultimately improve our financial results, including increasing our product offerings with the launch of the new Epic diode laser system, which received the CE Mark in late September 2012 and which received U.S. Food and Drug Administration clearance in October 2012, executing the definitive five-year agreement with Copenhagen-based 3Shape Corporation ("3Shape"), making the Company a distributor of 3Shape's TRIOS intra-oral scanning technologies for digital impression-taking solutions in the United States and Canada, expanding our direct sales force and certain distributor relationships, and establishing two revolving credit facilities to meet working capital needs.

Credit Facilities Established

On May 24, 2012, we entered into two revolving credit facility agreements with Comerica Bank (the "Credit Agreements"), as amended on August 6, 2012, ("Amendment No. 1"), which provide for borrowings against certain domestic accounts receivable and inventory, as set forth in the $4.0 million revolving credit facility agreement (the "Domestic Revolver"), and borrowings against certain export related accounts receivable and inventory, as set forth in the $4.0 million revolving credit facility agreement (the "Ex-Im Revolver"), for a combined aggregate commitment of borrowings up to $8.0 million. The Credit Agreements mature on May 1, 2014 and are secured by substantially all assets now owned or hereinafter acquired. The Credit Agreements require compliance with certain financial and non-financial covenants, as defined therein. If a default occurs, Comerica Bank may declare the amounts outstanding under the Credit Agreements immediately due and payable. As of September 30, 2012, we were in compliance with these covenants.

As additional consideration for the lines of credit, we also issued warrants to Comerica Bank (the "Comerica Warrants") to purchase up to 80,000 shares of our common stock at an exercise price of $2.83 per share. The Comerica Warrants vest in four equal quarterly tranches beginning on May 24, 2012 and are exercisable once vested. The Comerica Warrants may be exercised with a cash payment from Comerica Bank, or, in lieu of a cash payment, Comerica Bank may convert the warrants into a number of shares, in whole or in part. These warrants will expire if unused on May 24, 2017. The $135,000 estimated fair value of the warrants was recorded as equity, resulting in a discount to the credit facilities at issuance. The discount is being amortized to interest expense over the term of the lines of credit. In connection with Amendment No. 1, we reduced the exercise price of the Comerica Warrants from $2.83 to $2.00 per share. The modification to the Comerica Warrants resulted in an incremental expense of $7,000 which was added to the discount and is being amortized on a straight-line basis over the remaining term of the Credit Agreements.

Termination of Master Distribution Agreement

On September 23, 2010, we entered into a Distribution and Supply Agreement with HSIC, effective August 30, 2010, (the "D&S Agreement"), 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 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 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 for approximately $1.1 million and HSIC released its liens on our


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assets. The arrangement enabled us to remove lien restrictions on our assets which allowed us to secure the Credit Agreement with Comerica Bank and also enabled us to reacquire 153 MD Turbo laser systems at a cost well below market for the parts. 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 previously provided and approximately $142,000 of accrued warranties during the quarter ended March 31, 2012. During the quarter ended June 30, 2012, the Company reversed accrued sales and marketing service liabilities of approximately $350,000 because the liability was extinguished with the closing of the 2012 Termination Agreement.

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 nine months ended September 30, 2012 in our critical accounting policies from those disclosed in Item 7 of the 2011 Form 10-K, except with regard to restricted cash as set forth below.

Restricted Cash. We maintain bank controlled depository accounts to be held for repayment of lines of credit and accrued interest expense or disbursement to our operating bank account, pursuant to the terms of two revolving credit facility agreements with Comerica Bank. There were no restricted cash balances as of September 30, 2012.

Results of Operations

The following table sets forth certain data from our operating results expressed
as percentages of net revenue:



                                       Three Months Ended            Nine Months Ended
                                          September 30,                September  30,
                                       2012           2011           2012          2011
  Products and services revenue           99.5 %        99.9 %        102.6 %        98.8 %
  Non-recurring event                      0.0           0.0           (2.9 )         0.0
  License fees and royalty revenue         0.5           0.1            0.3           1.2

  Net revenue                            100.0         100.0          100.0         100.0
  Cost of revenue                         54.4          59.3           57.0          55.8
  Non-recurring event                      0.0           0.0           (3.0 )         0.0

  Net cost of revenue                     54.4          59.3           54.0          55.8

  Gross profit                            45.6          40.7           46.0          44.2

  Operating expenses:
  Sales and marketing                     26.4          24.6           29.7          24.3
  General and administrative              13.3          15.2           16.4          16.6
  Engineering and development              8.7           8.1            9.6           9.1

  Total operating expenses                48.4          47.9           55.7          50.0

  Loss from operations                    (2.8 )        (7.2 )         (9.7 )        (5.8 )
  Non-operating gain (loss), net          (0.9 )         0.3           (0.7 )        (0.9 )

  Loss before income tax provision        (3.7 )        (6.9 )        (10.4 )        (6.7 )
  Income tax provision                     0.3           0.4            0.3           0.2

  Net loss                                (4.0 )%       (7.3 )%       (10.7 )%       (6.9 )%


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The following table summarizes our net revenue by category (dollars in thousands):

                                          Three Months Ended September 30,                   Nine Months Ended September 30,
                                            2012                      2011                   2012 (1)                   2011
Waterlase systems                   $    9,255         67 %    $  8,214        63 %    $   24,304        64 %    $ 20,204        57 %
Diode systems                              896          7 %       2,169        17 %         3,556         9 %       7,643        21 %

Total laser systems                     10,151         74 %      10,383        80 %        27,860        73 %      27,847        78 %
Imaging systems                            675          5 %         100         1 %         1,722         5 %         100         0 %
Consumables and service                  1,490         11 %       1,457        11 %         4,470        11 %       4,065        11 %
Warranty and training                    1,394         10 %       1,107         8 %         4,095        11 %       3,270         9 %

Total products and services             13,710        100 %      13,047       100 %        38,147       100 %      35,282        99 %
License fees and royalty                    71          0 %          14         0 %           129         0 %         419         1 %

Net revenue                         $   13,781        100 %    $ 13,061       100 %    $   38,276       100 %    $ 35,701       100 %

(1) The summary of net revenue includes the non-recurring event of approximately $1.1 million, which if excluded would result in Waterlase systems revenue of $25.4M and 65%, total laser systems revenue of $29.0M and 74%, and net revenue of $39.4M and 100% for the nine months ended September 30, 2012; the remaining categorical percentages would decrease accordingly.

Net revenue by geographic location based on the location of customers was as follows (in thousands):

                  Three Months Ended September 30,           Nine Months Ended September 30,
                     2012                  2011              2012 (1)                2011
United States   $         9,433       $         6,551     $        25,842       $        23,685
International             4,348                 6,510              12,434                12,016

Net revenue     $        13,781       $        13,061     $        38,276       $        35,701

(1) The net revenue by geography includes the non-recurring event of $1.1 million, which if excluded would result in United States net revenue of $27.0M, for the nine months ended September 30, 2012.

Three months ended September 30, 2012 and 2011

Net Revenue. Net revenue for the three months ended September 30, 2012 was $13.8 million, an increase of $720,000, or 6%, as compared to net revenue of $13.1 million for the three months ended September 30, 2011. The increase in net revenue was primarily attributed to continued demand for our all-tissue Waterlase systems and increased sales of imaging systems, consumables and service and warranty and training, and royalty revenues. These increases, fueled by increased sales and marketing efforts, were offset by decreased sales of diode laser systems.

Laser system net revenue decreased by approximately $232,000, or 2%, for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. Revenues from Waterlase systems increased $1.0 million, or 13%, in the three months ended September 30, 2012 compared to the three months ended September 30, 2011. The increase was primarily due to increased sales and marketing efforts. Revenues from our diode systems decreased $1.3 million, or 59%, during the three months ended September 30, 2012 compared to the three months ended September 30, 2011. The decrease was primarily attributed to lower sales of the ezlase laser due to market anticipation of the new Epic laser which was launched at the end of September 2012, after unexpected delays in obtaining regulatory clearances.

Imaging system net revenue increased by approximately $575,000, or 575%, for the three months ended September 30, 2012 compared to the three months ended September 30, 2011, which was the initial period imaging systems were included in our product offerings. The addition of the intra-oral scanning technologies to our imaging system product offerings is expected to enhance revenue growth in future periods.

Consumables and services net revenue, which includes consumable products, product services, extended warranty service contracts, advanced training programs, and shipping revenue increased by approximately $320,000, or 13%, for the three months ended September 30, 2012, as compared to the three months ended September 30, 2011. Consumable products and product services revenue increased $33,000, or 2%, and extended warranty service contracts, advanced training programs, and shipping revenue increased approximately $287,000 or 26%. The increased revenues were consistent with our increased Waterlase revenues and were due to increased sales and marketing efforts.


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License fees and royalty revenue remained relatively flat, for the three months ended September 30, 2012, as compared to the three months ended September 30, 2011. We are currently engaged in an active collaboration with P&G to commercialize a consumer product utilizing our patents.

Net Cost of Revenue. Net cost of revenue for the three months ended September 30, 2012 decreased by $243,000, or 3%, to $7.5 million, compared with cost of revenue of $7.7 million for the three months ended September 30, 2011. This decrease was primarily attributed to continued quality improvements, and efficiencies gained in the manufacturing process.

Gross Profit. Gross profit for the three months ended September 30, 2012 increased by $963,000 to $6.3 million, or 46% of net revenue, from $5.3 million, or, 41% of net revenue, for the three months ended September 30, 2011. The increase was primarily due to increased sales, quality improvements, and efficiencies gained through improvements in the manufacturing process.

Operating Expenses. Operating expenses for the three months ended September 30, 2012 increased by $413,000, or 7%, to $6.7 million as compared to $6.3 million for the three months ended September 30, 2011 and remained flat at 48% of net revenue. The reasons for the year-over-year increase in expense are broken out into the following expense categories:

Sales and Marketing Expense. Sales and marketing expenses for the three months ended September 30, 2012 increased by $418,000, or approximately 13%, to $3.6 million, or 26% of net revenue, as compared with $3.2 million, or 25% of net revenue, for the three months ended September 30, 2011. The increase was primarily due to increased sales commissions of $285,000, increased convention costs of $166,000, and increased payroll and consulting costs of $74,000, offset by decreased supplies expenses of $72,000.

General and Administrative Expense. General and administrative expenses for the three months ended September 30, 2012 decreased by $148,000, or 7%, to $1.8 million, or 13% of net revenue, as compared with $2.0 million, or 15% of net revenue, for the three months ended September 30, 2011. The decrease in general and administrative expenses resulted primarily from decreased allowance for doubtful accounts of $129,000 and decreased payroll and consulting related expenses of $72,000, offset by increased bank fees of $43,000 and patent costs of $32,000.

Engineering and Development Expense. Engineering and development expenses for the three months ended September 30, 2012 increased by $143,000, or 14%, to $1.2 million, or 9% of net revenue, as compared with $1.1 million, or 8% of net revenue, for the three months ended September 30, 2011. The increase was primarily related to continued efforts in new product development, which we expect to continue in the future.

Non-Operating Income (Loss)

Loss on Foreign Currency Transactions. We recognized a $28,000 loss on foreign currency transactions for the three months ended September 30, 2012, compared to a $44,000 gain on foreign currency transactions for the three months ended September 30, 2011, due to exchange rate fluctuations between the U.S. dollar and other currencies.

Interest Expense. Interest expense consists primarily of interest on our revolving credit facilities, amortization of debt issuance costs and debt discount, and the financing of our business insurance premiums. Interest expense totaled approximately $98,000 and $2,000 for the three months ended September 30, 2012 and 2011, respectively. The increase in interest expense was due to borrowings under the revolving credit facilities that were established in May 2012.

Income Taxes. Our provision for income taxes was $34,000 for the three months ended September 30, 2012, compared to $57,000 for the three months ended September 30, 2011.

Net Loss. For the reasons stated above, our net loss was $548,000 for the three months ended September 30, 2012, compared to a net loss of $953,000 for the three months ended September 30, 2011.

Nine months ended September 30, 2012 and 2011

Net Revenue. Net revenue for the nine months ended September 30, 2012 was $38.3 million, an increase of $2.6 million, or 7%, as compared with net revenue of $35.7 million for the nine months ended September 30, 2011. Excluding the non-recurring event resulting from the 2012 Termination Agreement with HSIC, net revenue for the nine months ended September 30, 2012 was $39.4 million, an increase of $3.7 million, or 10%, as compared to net revenue of $35.7 million for


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the nine months ended September 30, 2011. The increase in net revenue, excluding the non-recurring event, was primarily attributed to continued demand for our all-tissue Waterlase systems, increased sales of imaging systems, and increases in consumables and service and warranty and training. These increases, fueled by increased sales and marketing efforts, were offset by decreased sales of diode laser systems and lower royalty revenues.

Laser system net revenue remained relatively flat for the nine months ended September 30, 2012 compared to the same period of 2011. Sales of our Waterlase systems increased $4.1 million, or 20%, in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. Excluding the non-recurring event, laser system net revenue increased by approximately $1.2 million, or 4%, for the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011. Sales of our Waterlase systems, excluding the non-recurring event, increased $5.2 million, or 26%, in the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011. The increase, excluding the non-recurring event, was primarily due to increased sales and marketing efforts. Revenues from our diode systems decreased $4.1 million, or 54%, in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The decrease was primarily attributed to lower sales of the ilase and ezlase lasers due to market anticipation of the new epic laser which was launched at the end of September 2012, after unexpected delays in obtaining regulatory clearances.

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