-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ASUTQS32GXmv5uRkLmyGP+w8/qClL2UEDsxE1WWNF3Kp1sv3RPtf3H41EfRs9DVJ ioHTGX1xRQf7L4aGbJ2z/w== 0001017062-98-002363.txt : 19981124 0001017062-98-002363.hdr.sgml : 19981124 ACCESSION NUMBER: 0001017062-98-002363 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981123 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIOLASE TECHNOLOGY INC CENTRAL INDEX KEY: 0000811240 STANDARD INDUSTRIAL CLASSIFICATION: DENTAL EQUIPMENT & SUPPLIES [3843] IRS NUMBER: 870442441 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19627 FILM NUMBER: 98757541 BUSINESS ADDRESS: STREET 1: 981 CALLE AMANECER CITY: SAN CLEMENTE STATE: CA ZIP: 92673 BUSINESS PHONE: 7143611200 MAIL ADDRESS: STREET 1: 981 CALLE AMANECER CITY: SAN CLEMENTE STATE: CA ZIP: 92673 10-Q 1 FORM 10-Q DATED SEPTEMBER 30, 1998 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 1998 ------------------ [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____________ to _____________ Commission File Number 0-19627 ------- BIOLASE TECHNOLOGY, INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 87-0442441 (State or other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 981 CALLE AMANECER, SAN CLEMENTE, CA 92673 (Address of Principal Executive Offices) (949) 361-1200 (Registrant's Telephone Number, Including Area Code) Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. COMMON STOCK, $.001 PAR VALUE 16,476,587 - ----------------------------- ---------------------------- Title Class Number of Shares Outstanding at November 18, 1998 BIOLASE TECHNOLOGY, INC.
Page Number ----------- PART 1. FINANCIAL INFORMATION ITEM 1. Financial Statements: Consolidated Condensed Balance Sheets 3 Consolidated Condensed Statements of Operations 4 Consolidated Condensed Statement of Stockholders' Equity 5 Consolidated Condensed Statements of Cash Flows 6 Notes to Consolidated Condensed Financial Statements 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 18 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 18 ITEM 2. Changes in Securities 18 ITEM 3. Defaults Upon Senior Securities 19 ITEM 4. Submission of Matters to a Vote of Security Holders 19 ITEM 5. Other Information 19 ITEM 6. Exhibits and Reports on Form 8-K 19 SIGNATURE PAGE 21
Page 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements. - ------------------------------ BIOLASE TECHNOLOGY, INC. CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, 1998 December 31, 1997 (Unaudited) ------------------ ----------------- Assets: Current assets: Cash and cash equivalents $ 214,707 $ 213,074 Marketable securities 1,033,658 627,817 Accounts receivable, less allowance of $116,998 in 1998 and $117,464 in 1997 145,779 1,060,252 Inventories, net of reserves of $620,949 in 1998 and 1997 2,136,808 1,008,777 Prepaid expenses and other current assets 379,036 110,094 ------------------ ----------------- Total current assets 3,909,988 3,020,014 Property and equipment, net 213,544 181,804 Patents, licenses and trademarks, less accumulated amortization of $119,675 in 1998 and $330,466 in 1997 149,453 95,508 Other assets 313,499 98,666 ------------------ ----------------- Total assets $ 4,586,484 $ 3,395,992 ================== ================= Liabilities and Stockholders' Equity: Current liabilities: Line of Credit $ 1,383,746 $ 301,233 Accounts payable 417,773 481,240 Accrued expenses 503,494 480,440 Accrued costs related to dissolution of foreign subsidiary 37,144 38,069 ------------------ ----------------- Total current liabilities 2,342,157 1,300,982 ------------------ ----------------- Stockholders' equity: Preferred stock, par value $.001, 1,000,000 shares authorized: Series A 6% Redeemable Cumulative Convertible Preferred Stock, 0 shares issued and outstanding at September 30, 1998 and 1 share outstanding at December 31, 1997. - - Common stock, par value, $.001, 50,000,000 shares authorized, issued 16,293,707 in 1998 and 13,462,636 in 16,294 13,463 Additional paid-in capital 38,553,967 29,755,652 Receivable from stockholders and unearned services (2,672) (50,766) Accumulated deficit (36,323,262) (27,623,339) ------------------ ----------------- Net stockholders' equity 2,244,327 2,095,010 ------------------ ----------------- Total liabilities and stockholders' equity $ 4,586,484 $ 3,395,992 ================== =================
See accompanying notes to consolidated condensed financial statements. Page 3 Item 1. Financial Statements (continued). - ----------------------------------------- BIOLASE TECHNOLOGY, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ---------------------------------- --------------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Sales $ 87,686 $ 604,681 $ 586,303 $ 1,172,027 Cost of sales 203,651 426,893 704,819 870,139 ------------- ------------ ------------ ------------- Gross profit (loss) (115,965) 177,788 (118,516) 301,888 ------------- ------------ ------------ ------------- Operating expenses: Sales and marketing 396,704 189,953 969,451 685,966 General and administrative 405,697 288,462 1,139,667 939,398 Engineering and development 621,565 245,916 1,330,416 801,119 Write-off of purchased research and development costs 5,134,920 - 5,134,920 - ------------- ------------ ------------ ------------- Total operating expenses 6,558,886 724,331 8,574,454 2,426,483 ------------- ------------ ------------ ------------- Loss from operations (6,674,851) (546,543) (8,692,970) (2,124,595) Other income (expense) Interest income (expense), net 7,190 33,296 (6,953) 165,752 ------------- ------------ ------------ ------------- Net loss $ (6,667,661) $ (513,247) $ (8,699,923) $ (1,958,843) ============= ============ ============ ============= Basic and diluted loss per share of common stock $ (0.41) $ (0.04) $ (0.59) $ (0.15) ============= ============ ============ ============= Weighted average shares outstanding 16,270,717 13,426,972 14,644,727 13,309,822 ============= ============ ============ =============
See accompanying notes to consolidated condensed financial statements. Page 4 ITEM 1. FINANCIAL STATEMENTS (CONTINUED). - ----------------------------------------- BIOLASE TECHNOLOGY, INC. CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
Additional Net Preferred Stock Common Stock Paid-in Unearned Accumulated Stockholders' Shares Amount Shares Amount Capital Services Deficit Equity ------ ------ ------ ------ ------- -------- ------- ------ Balance at January 1, 1998 - $ - 13,462,636 $13,463 $29,755,652 ($50,766) ($27,623,339) $ 2,095,010 Private placements of common stock - - 1,320,000 1,320 3,591,480 - - 3,592,800 Issuance of common stock for purchase of Laser Skin Toner, Inc. assets - - 1,467,120 1,467 5,133,453 - - 5,134,920 Issuance of common stock for services - - 5,000 5 14,995 - - 15,000 Exercise of stock options - - 38,950 39 58,387 - - 58,426 Earned escrow shares - - - - - 48,094 - 48,094 Issuance of shares for fractional interest on reverse split - - 1 - - - - - Net loss - - - - - - (8,699,923) (8,699,923) -------------------------------------------------------------------------------------------- Balance at September 30, 1998 - $ - 16,293,707 $16,294 $38,553,967 ($ 2,672) ($36,323,262) $ 2,244,327 ============================================================================================
See accompanying notes to consolidated condensed financial statements. Page 5 Item 1. Financial Statements (continued). - ----------------------------------------- BIOLASE TECHNOLOGY, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, ----------------------------------------------- 1998 1997 ---- ---- Cash flows from operating activities: Net loss $ (8,699,923) $ (1,958,843) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 65,934 80,658 Issuance of common stock for services 15,000 6,120 Earned escrow shares 48,094 - Non-cash write-off of purchased research and development costs 5,134,920 - Provision for bad debts 69,123 95,621 Changes in operating assets and liabilities: Accounts receivable 845,350 (526,294) Inventories (1,128,031) (120,250) Prepaid expenses and other assets (483,775) (104,652) Accounts payable (63,467) 159,533 Accrued expenses 23,054 (54,975) Accrued costs related to dissolution of foreign subsidiary (925) (7,224) Other current liabilities - (3,980) ----------------- ------------------ Net cash used by operating activities (4,174,646) (2,434,286) ----------------- ------------------ Cash flows from investing activities: Sale of marketable securities 2,119,159 1,632,703 Purchase of marketable securities (2,525,000) - Additions to property and equipment (87,742) (78,447) Additions to patents, licenses and trademarks (63,877) (55,208) ----------------- ------------------ Net cash provided (used) by investing activities (557,460) 1,499,048 ----------------- ------------------ Cash flows from financing activities: Borrowings under line of credit, net 1,082,513 - Proceeds from issuance of common stock, net 3,592,800 719,885 Proceeds from exercise of stock options 58,426 128,249 ----------------- ------------------ Net cash provided by financing activities 4,733,739 848,134 ----------------- ------------------ Increase (decrease) in cash and cash equivalents 1,633 (87,104) Cash and cash equivalents at beginning of period 213,074 349,457 ----------------- ------------------ Cash and cash equivalents at end of period $ 214,707 $ 262,353 ================= ================== Supplemental cash flow disclosure: Cash paid during the period for interest $ 53,710 $ 3,014 ================= ==================
See accompanying notes to consolidated financial statements. Page 6 BIOLASE TECHNOLOGY, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 Note 1 - ------ The accompanying consolidated condensed financial statements of BioLase Technology, Inc. (the "Company") have been prepared by the Company without audit and do not include all disclosures required by generally accepted accounting principles for complete financial statements. The consolidated condensed balance sheet at December 31, 1997 was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. In the opinion of management, the consolidated condensed financial statements include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial condition of the Company as of September 30, 1998 and the results of operations for the three and nine-month periods then ended. The Company's consolidated condensed financial statements have been presented on the basis that the Company will continue as a going-concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company reported net losses of $2,823,910, $2,463,259 and $2,023,822 for the years ended December 31, 1997, 1996 and 1995, respectively, and a net loss of $8,644,923 (inclusive of a $5,135,000 non-cash charge for purchased research and development costs) for the nine-month period ended September 30, 1998 and has an accumulated deficit of $36,323,262 at September 30, 1998. These recurring losses and the need for continued funding, discussed below, raise substantial doubt about the Company's ability to continue as a going-concern. The Company remains dependent upon its ability to obtain outside financing either through the issuance of additional shares of its common or preferred stock or through borrowings until it achieves sustained profitability through increased sales and product improvement through engineering and cost containment. The Company's business now emphasizes the marketing of its laser- based HydroKinetic(TM) tissue cutting system, the Millennium(TM), its recently- released home consumer tooth-whitening system, the LazerSmile(TM) toothbrush, a new reduced-power variation of the Millennium(TM), called DermaLase(TM), which is being configured to accommodate applications in dermatology and general soft- tissue surgery, and the SkinLaser, which is a laser-based system under development to provide a non-invasive procedure for the reduction of wrinkles and striae (stretch marks). Financing the development of laser-based medical and dental devices and instruments and the operations of the Company has been achieved principally through the private placements of preferred and common stock and the exercise of stock options and warrants. During the three years ended December 31, 1997, the Company has raised approximately $6,413,000 of equity funds. During the second quarter of 1998, the Company raised an additional $3,593,000 in equity funds (see Note 7). The Company's recent clearance to market its Millennium system for certain dental hard tissue procedures in the United States should contribute to the Company's ability to generate working capital through higher sales volume and associated increased gross profits. However, management believes that significant additional resources will be required by early 1999 to fund its present operations until increases in revenue and gross profit are sufficient to fund the Company's working capital needs. In the interim, the Company expects to generate the necessary capital resources through the issuance of equity Page 7 securities in either public or private placements, or debt financing. No assurance can be given, however, that the Company will be able to obtain such capital resources. If the Company were unable to obtain such financing, its ability to meet its obligations and to continue its operations would be adversely affected. Operating results for the three and nine-month periods ended September 30, 1998 are not necessarily indicative of the results to be expected for the year ending December 31, 1998. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 1997. Note 2 - ------
Inventories, net of reserves, September 30, 1998 consist of the following: (unaudited) December 31, 1997 ----------- ----------------- Raw materials $1,180,688 $ 804,631 Work-in-process and subassemblies 689,229 36,609 Finished goods 266,891 167,537 ---------- ---------- $2,136,808 $1,008,777 ========== ==========
Note 3 - ------
Property and equipment, September 30, 1998 at cost, consist of the following: (unaudited) December 31, 1997 ----------- ----------------- Leasehold improvements $ 155,731 $ 149,282 Equipment and computers 822,856 754,152 Furniture and fixtures 181,008 168,419 Demonstration units 247,354 247,354 ---------- ---------- Total cost 1,406,949 1,319,207 Less, accumulated depreciation and amortization (1,193,405) (1,137,403) ---------- ---------- $ 213,544 $ 181,804 ========== ==========
Note 4 - ------
Accrued expenses consist of the following: September 30, 1998 (unaudited) December 31, 1997 ----------- ----------------- Accrued professional fees $ 75,124 $ 82,876 Accrued legal costs 154,666 91,880 Accrued warranty provision 35,665 83,000 Other 238,039 222,684 ---------- ---------- $ 503,494 $ 480,440 ========== ==========
Page 8 Note 5 - ------ Basic and diluted loss per share is based on the weighted average number of common shares outstanding. Common stock equivalents, which consist of stock options and warrants, have been excluded from per share calculations, as the effect of the assumed exercise of these common stock equivalents is anti- dilutive at September 30, 1998 and 1997. Note 6 - ------ In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130, which is effective for fiscal years beginning after December 15, 1997, requires restatement of earlier periods presented, and establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. The implementation of SFAS No. 130 does not have a material effect on the Company's results of operations for the three and nine-month periods ended September 30, 1998. In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information". SFAS No. 131, which is effective for fiscal years beginning after December 15, 1997, requires restatement of earlier periods presented, and establishes standards for the way that a public enterprise reports information about key revenue-producing segments in the annual financial statements and selected information in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The implementation of SFAS No. 131 does not have a material effect on the Company's current reporting and disclosures for the three and nine-month periods ended September 30, 1998. Note 7 - ------ On May 19, 1998, the Company completed a private placement (the "Placement") pursuant to Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"). In the Placement, the Company issued and sold 132 units, each unit consisting of 10,000 shares of the Company's common stock and 5,000 redeemable common stock purchase warrants (the "Unit Warrants"), expiring April 30, 2000. Gross proceeds received from the Placement were $3,960,000; net proceeds were approximately $3,593,000 after commissions and expenses. The Company also issued to its Placement agents non-redeemable warrants to purchase an aggregate of 64,000 shares of common stock (collectively with the Unit Warrants, the "Warrants"), expiring April 30, 2000. The exercise price of the Warrants is $3.75 per share. The shares of common stock issued, included those underlying shares to be issued upon exercise of the Warrants, are or will be "restricted securities" as defined in Rule 144 promulgated under the Securities Act. Accordingly, such shares may be resold only pursuant to a registration statement under the Securities Act or in accordance with an exemption from such registration requirement. The Company filed a registration statement covering the resale of such shares of common stock on July 1, 1998 with the Securities and Exchange Commission (the "S.E.C.") and that registration statement is pending. Page 9 Note 8: - ------- On July 2, 1998, the Company acquired substantially all of the assets of Laser Skin Toner, Inc., a development stage company ("LSTI"). The assets acquired relate primarily to the proprietary laser-based technology being developed by LSTI for non-invasive laser treatment in the field of aesthetic skin rejuvenation, including all intellectual property rights consisting of patents, patent applications, a trademark application and certain know-how. As consideration for the assets acquired, the Company issued to LSTI an aggregate 1,600,000 shares of the Company's common stock (the `Shares"), including 182,880 Shares retained by the Company pending the achievement by the business of specified performance objectives. Pursuant to a separate agreement, the Company also issued 50,000 shares of its common stock to O'Donnell Eye Centers, Incorporated, a Missouri corporation ("OECI"), in consideration for the license of technology that is the subject of a pending patent application. In connection with the acquisition, an independent valuation has been obtained which valued current in-process research and development efforts acquired for which no alternative use exists at $5,134,920, which was charged to ongoing operations immediately following consummation of the acquisition. In accordance with Financial Accounting Standards Board ("FASB") Interpretation No. 4, "Applicability of FASB No. 2 to Business Combinations Accounted for by the Purchase Method", the costs assigned to in-process research and development for which no alternative use exists are charged to expense on the date of consummation of the business combination. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS. - -------------- The following discussion should be read in conjunction with the consolidated condensed financial statements and notes thereto. RESULTS OF OPERATIONS - NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998 AS COMPARED TO NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1997: Sales during the first nine months of 1997 were $1,172,000, compared to $586,000 during the first nine months of 1998. The decrease in sales reflects primarily a decrease in sales of the Company's laser-based systems. The drop in sales of laser-based systems was attributable principally to the deferral of most deliveries of the Millennium(TM) laser-based HydroKinetic(TM) tissue cutting system, particularly those to the Company's German distributor which has been the most significant customer for Millennium(TM) systems, while the Company is in the process of implementing a partial redesign of the hand piece for that system. The German distributor requested the partial redesign to enable Millennium(TM) to address more effectively the requirements of the German market, where Millennium had, prior to 1997, received all necessary approvals for use in both hard and soft tissue dental procedures. Commencing June 1997, sales of Millennium(TM) systems had been expected to replace sales of an earlier generation of laser system which had been phased out by early 1997 and are currently not being sold or marketed by the Company. The United States Food and Drug Administration ("FDA") in October 1998 granted clearance to the Company to market the Millennium(TM) system in the United States for certain Page 10 dental hard tissue applications. The FDA had previously granted clearance for the marketing of Millennium(TM) for certain soft tissue applications. The October 1998 action by the FDA has permitted the Company to commence active marketing of the Millennium(TM) system in the United States, and the Company expects those efforts to begin to generate domestic sales commencing with the fourth quarter of 1998. (The preceding sentence constitutes a forward-looking statement [hereinafter identified by "FLS"]. Each of the forward looking statements in this Quarterly Report on Form 10-Q is subject to various factors that could cause actual results to differ materially from the results anticipated in such forward looking statement, as more fully discussed in this Item 2 under "Forward Looking Statements".) The Company also expects that completion of the hand piece redesign effort and testing of the redesigned hand piece, which is expected by the end of 1998, will result in increased sales. (FLS) In July 1997, the Company received clearance from the United States Food and Drug Administration ("FDA") to market in the United States a laser-based surgical tissue cutting system that utilizes a variation of the Millennium technology for a broad range of dermatological and general surgical soft tissue applications. In response to this clearance, the Company intends to introduce to the domestic market a laser-based system in a configuration that is designed for lower power settings than those of the Millennium(TM) system, under the name DermaLase (TM). (FLS) The Company is presently developing its marketing plan for the DermaLase system and expects DermaLase to begin to contribute to sales in the first half of 1999. (FLS) In August 1998, the Company introduced its first consumer product, the LazerSmile(TM) Tooth Whitening System, which utilizes a monochromatic optical energy light source embedded within a toothbrush in conjunction with a clear, non-abrasive tooth whitening gel. The Company recognized a nominal amount of revenue from LazerSmile(TM) test marketing during the third quarter of 1998. The Company is attempting to establish marketing and distribution alliances with third parties to effect the distribution of LazerSmile(TM). (FLS) These alliances could include arrangements involving television shopping, specialty catalogs and traditional distribution arrangements. No assurances can be given that the Company will be successful in establishing these alliances or that, if they are established, they will result in the successful commercialization of LazerSmile(TM). The cost of sales decreased from $870,000 for the nine months ended September 30,1997 to $705,000 for the nine months ended September 30, 1998. The reduction in cost of sales is disproportionately small in relation to the reduction in revenue, primarily as a result of an increase in fixed overhead costs incurred to ready the Company for higher production levels. These costs included the design and manufacture of various test and production fixtures to improve manufacturing efficiencies and increased indirect costs to support higher levels of manufacturing. Gross profit decreased from a $302,000 gross profit for the nine months ended September 30, 1997 to a $119,000 gross loss for the nine months ended September 30, 1998. The decrease in gross profit is attributable primarily to lower absorption of fixed overhead costs resulting from both lower sales and an increase in the absolute amount of fixed overhead costs. Page 11 Operating expenses increased by $6,148,000 from the first nine months of 1997 to the first nine months of 1998. That increase was attributable principally to a non-recurring $5,135,000 write-off of purchased research and development associated primarily with the acquisition of substantially all of the assets of Laser Skin Toner, Inc. Excluding that write-off, operating expenses increased $1,013,000 from the first nine months of 1997 to the comparable 1998 period. Sales and marketing expense increased $283,000, or 41%, between those periods primarily as a result of the establishment of a domestic dental sales force during the second half of 1997 and the initial sales efforts associated with the introduction of LazerSmile(TM). General and administrative expense increased $200,000, or 21%, between those periods primarily as a result of increases related to advertising and promotion of the Company through various publications and investor forums together with increases in employee related expenses associated with increased staffing. Engineering and development expense increased $529,000, or 66%, between those periods principally as a result of costs associated with the 1998 redesign of the Millennium(TM) hand piece and the finalization of the design of LazerSmile(TM) in anticipation of its product launch. Loss from operations increased from $2,125,000 for the first nine months of 1997 to $8,693,000 for the first nine months of 1998. After excluding the non- recurring write-off of purchased research and development costs, the loss from operations increased $1,433,000 from the 1997 to the 1998 period, reflecting the lower sales, higher cost of sales and higher operating expenses in the 1998 period. Interest income, net decreased from $166,000 of net interest income for the first nine months of 1997 to a $7,000 net interest expense for the first nine months of 1998. This decrease reflects lower 1998 average balances of cash, cash equivalents and interest-bearing marketable securities and the existence of borrowings under a line of credit in the 1998 period. The Company's net loss increased from $1,959,000, or $0.15 per share, for the first nine months of 1997 to $8,700,000, or $0.59 per share, for the first nine months of 1998. Approximately 76% of the increase was attributable to the write-off of purchased research and development. The increase in the per share loss was to some extent ameliorated by a 10% increase in the weighted average number of shares outstanding. RESULTS OF OPERATIONS THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1998 AS COMPARED TO THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1997: Sales during the third quarter of 1998 were $88,000, compared to $605,000 during the third quarter of 1997. The decrease in sales reflects primarily the deferral of most deliveries of the Millennium(TM) laser-based HydroKinetic(TM) tissue cutting system, particularly those to the Company's German distributor which has been the most significant customer for Millennium(TM) systems, while the Company is in the process of implementing a partial redesign of the hand piece for that system. The $223,000 decrease in cost of sales from the third quarter of 1997 to the third quarter of 1998 is disproportionately small in relation to the reduction in revenue, primarily as a result of Page 12 an increase in fixed overhead costs incurred to ready the Company for higher production levels. These costs included the design and manufacture of various test and production fixtures to improve manufacturing efficiencies and increased indirect costs to support higher levels of manufacturing. Gross profit decreased from a $178,000 gross profit for the second quarter of 1997 to a $116,000 gross loss for the second quarter of 1998. The decrease in gross profit is attributable primarily to lower absorption of fixed overhead costs resulting from both lower sales and an increase in the absolute amount of fixed overhead costs. Operating expenses increased by $5,835,000 from the third quarter of 1997 to the third quarter of 1998. That increase was attributable principally to the $5,135,000 non-recurring write-off of purchased research and development. Excluding that write-off, operating expenses increased $700,000 from the 1997 third quarter to the comparable 1998 period. Sales and marketing expense increased $207,000, more than doubling between those periods primarily as a result of the establishment of a domestic dental sales force commencing in September 1997 and the initial sales efforts associated with the introduction of LazerSmile(TM) in the third quarter of 1998. General and administrative expense increased $117,000, or 41%, between those periods primarily as a result of increases related to advertising and promotion of the Company through various publications and investor forums together with increases in employee related expenses associated with increased staffing. Engineering and development expense increased $376,000, more than doubling between those periods principally as a result of costs associated with the 1998 redesign of the Millennium hand piece. Loss from operations increased from $547,000 for the third quarter of 1997 to $6,675,000 for the third quarter of 1998. After excluding the non-recurring write-off of purchased research and development, loss from operations increased $993,000 from the 1997 to the 1998 third quarter, reflecting principally the lower sales and higher operating expenses in the 1998 period. Interest income, net decreased from $33,000 for the third quarter of 1997 to $7,000 for the third quarter of 1998. This decrease reflects lower average balances of cash, cash equivalents and interest-bearing marketable securities during the 1998 quarter and the existence of borrowings under a line of credit in the 1998 quarter. The Company's net loss increased from $513,000, or $0.04 per share, for the third quarter of 1997 to $6,668,000, or $0.41 per share, for the third quarter of 1998. Approximately 83% of the increase was attributable to the write-off of purchased research and development costs in the third quarter of 1998. The increase in the per share loss was to some extent ameliorated by a 21% increase in the weighted average number of shares outstanding. FINANCIAL CONDITION Cash, cash equivalents and marketable securities in the aggregate increased from $841,000 at December 31, 1997 to $1,249,000 at September 30, 1998, primarily as a result of a Page 13 private placement of Company common stock and stock purchase warrants in May 1998 which generated net proceeds of approximately $3,593,000, and $1,083,000 of 1998 net borrowings under a line of credit, largely offset principally by cash used by operations of $4,175,000. The Company will require additional capital in the near future in order to fund its continued operations. (FLS) Use of the Company's current line of credit is limited to financing inventory, and proceeds from the sale of inventory equal to the cost of goods sold associated with such sale must be applied to reduce the revolving credit line. Accounts receivable decreased by $914,000 from December 31, 1997, when they totaled $1,060,000, to September 30, 1998. This decrease was due principally to payment of outstanding accounts by the German distributor of Millennium(TM) systems during the second quarter of 1998. Inventories increased from $1,009,000 at December 31, 1997 to $2,137,000 at September 30, 1998 due principally to the decision by the Company to continue to build subassemblies for its Millennium(TM) system while awaiting completion of the redesign of the hand piece and a build-up of inventory in connection with the August 1998 launch of LazerSmile(TM). The Company believes that its business does not presently operate in a normalized cycle in which information regarding inventory turns would be meaningful but that such information will become meaningful once normal deliveries of Millennium(TM) systems resume. (FLS) The Company's inventory reserve of $621,000 at December 31, 1997 and September 30, 1998 relates principally to the Company's Nylad(TM) and Laser 35 laser based systems, which are no longer being sold or marketed by the Company. The disposition of the remaining Nylad(TM) and Laser 35 inventory is not expected to have a material adverse effect upon the results of operations or financial condition of the Company. (FLS) Prepaid expenses and other current assets increased from $110,000 at December 31, 1997 to $379,000 at September 30, 1998, primarily as a result of deposits placed for medical trade shows scheduled for the final quarter of 1998 and the first half of 1999, and deposits placed for advertising of the Company's core technology. Current liabilities increased $1,041,000 from December 31, 1997 to September 30, 1998, primarily reflecting an increase in indebtedness under a line of credit used to finance inventory which increased $1,083,000 from December 31, 1997 to September 30, 1998, when it totaled $1,384,000. Accounts payable were reduced by $63,000 during the nine months ended September 30, 1998, while accrued expenses increased $23,000 during the same period. Working capital decreased from $1,719,000 at December 31, 1997 to $1,568,000 at September 30, 1998. The decrease in working capital is attributable principally to the decrease in accounts receivable, partially offset by the increase in cash, cash equivalents and marketable securities. The increases in inventory and in associated borrowings under the line of credit essentially offset one another. Patents, licenses and trademarks, net increased $54,000 from December 31, 1997 to September 30, 1998, when the balance was $149,000, principally as a result of the Company Page 14 pursuing patent and trademark protection for its proprietary technology, names and symbols. Other assets increased $215,000 during the same period to $313,000, reflecting primarily deposits on tooling for the manufacturing and packaging of LazerSmile(TM) coupled with the excess purchase price over the fair value of the net tangible assets purchased with the Laser Skin Toner acquisition. Stockholders' equity increased from $2,095,000 at December 31, 1997 to $2,244,000 at September 30, 1998, primarily as a result of the May 1998 private placements of Company securities which added $3,593,000 to stockholders equity and the acquisition of assets, essentially purchased research and development costs, for stock which added $5,135,000 to stockholders equity, largely offset by the net loss of $8,700,000 for the nine months ended September 30, 1998, including a $5,135,000 write-off of the purchased research and development costs. LIQUIDITY AND CAPITAL RESOURCES The Company remains dependent upon its ability to obtain outside financing either through the issuance of additional shares of its common or preferred stock or through borrowings until it achieves sustained profitability through increased sales and cost containment. (FLS) The Company's business now focuses and is expected to continue to focus on the manufacturing and marketing of its laser-based HydroKinetic(TM) tissue cutting system, the Millennium(TM); a new reduced-power variation of the Millennium(TM), called DermaLase(TM), which is being configured for applications in dermatology and general soft-tissue surgery; and its recently-released consumer tooth-whitening system, the LazerSmile(TM) toothbrush. (FLS) Financing the development of laser-based medical and dental devices and instruments and the operations of the Company has been achieved principally through the private placements of preferred and common stock and the exercise of stock options and warrants. During the three years ended December 31, 1997, the Company raised approximately $6,413,000 of equity funds in this manner. During the first nine months of 1998, the Company raised an additional $3,593,000 in equity funds (See Note 7 of Notes to Consolidated Condensed Financial Statements). Management believes that significant additional financial resources will be required by early 1999, principally to fund the Company's working capital needs and to complete the processes designed to lead to regulatory clearance to market the Company's laser-based technologies for various dental and medical applications in the United States and foreign countries. (FLS) The Company expects to generate the necessary capital resources through the issuance of equity securities in either public or private placements or debt financing, along with the gross profit on sales of inventory, until operations alone generate sufficient cash flow to meet the Company's requirements. (FLS) No assurance can be given, however, that the Company will be able to obtain such financial resources. (FLS) At September 30, 1998, the Company had $1,384,000 outstanding under a revolving credit agreement with a bank. The revolving credit agreement provides for borrowings of up to $2,500,000 for financing inventories, with outstanding balances bearing interest equal to LIBOR plus 0.5% (5.9% at September 30, 1998) and is collateralized by substantially all of the Page 15 Company's accounts receivable and inventories. The Company is required to reduce the outstanding loan balance by application of amounts equal to the cost of goods sold associated with sales of inventory. The current revolving credit agreement expires on December 1, 1998, and the Company has two six-month renewal options. Based on the Company's current business plan, the Company anticipates that it will need additional financing by early 1999 to support additional working capital requirements. (FLS) There are no assurances that the Company will be successful in obtaining such financing. (FLS) If the Company were unable to obtain such financing, its ability to meet its obligations and to continue its operations would be adversely affected. (FLS) The Company's financial statements have been prepared under the assumption of a going concern. Failure to arrange such financing on acceptable terms and to achieve profitability would have an adverse effect on the financial position, results of operations, cash flows and prospects of the Company and its ability to continue as a going concern. (FLS) During July 1998, the Company acquired the assets of Laser Skin Toner, Inc. in exchange for 1,600,000 shares of the Company's common stock, including shares deliverable only upon the achievement of specified future performance objectives. (See Note 8 of Notes to Consolidated Condensed Financial Statements.) The Company is presently continuing its analysis of its computer software and hardware requirements and anticipates capital expenditures to increase significantly during 1999 in connection with the acquisition of such software and hardware. (FLS) Included among the software to be purchased would be a new accounting system. That system, unlike the present system, would be Year 2000 compliant. The Company's present software and hardware is personal computer based and is unaltered from its original purchased state except for those upgrades offered by the suppliers of such software. The Company has received assurances from the suppliers of the software it employs, other than the accounting system software, that such software is Year 2000 compliant. The Company intends to obtain certification that any computer software and hardware purchased in 1999 is Year 2000 compliant. The Company does not believe that its insistence upon Year 2000 compliant hardware or software will materially increase the cost of any hardware or software acquired. The Year 2000 problem arises out of the convention by which years have been represented in computer programs by a two digit number representing the final two digits in the year's designation and concern that time sensitive components could fail or provide erroneous output if they do not correctly recognize years beginning with 20 rather than 19. The Company currently has limited information regarding the Year 2000 compliance status of its principal suppliers of goods and services and of its principal customers. The Company intends to initiate formal communications with all such suppliers and customers with respect to the status of such persons' computer systems in terms of Year 2000 compliance. If any principal suppliers lack systems that are Year 2000 compliant or programs that provide reasonable assurance that such systems will be Year 2000 compliant well before the end of 1999, the Company will seek to establish relationships with alternate suppliers. There is a Page 16 single source supplier of optic fiber for the Millennium(TM) which could not be easily replaced if it has non-compliant systems, and in the event such supplier had a non-compliant system, the Company would attempt to establish communications channels with such supplier that bypass the supplier's non- compliant computer system. If any principal customers lack systems that are Year 2000 compliant or programs that provide reasonable assurance that such systems will be Year 2000 compliant well before the end of 1999, the Company will attempt to establish communications channels with such customers that bypass the non-compliant computer systems. The Company believes that the costs associated with monitoring Year 2000 compliance by suppliers and customers and dealing with any non-compliance will not be material. The failure of the Company or any of its principal suppliers and customers to become Year 2000 compliant in a timely manner and the failure to establish alternate communications channels could have a material adverse effect on the Company's business, financial condition, results of operations and cash flow. FORWARD LOOKING STATEMENTS The forward looking statements contained in this Quarterly Report on Form 10-Q are subject to various risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated in such forward looking statements. Included among the important risks, uncertainties and other factors are those hereinafter discussed. Few of the forward looking statements in this Quarterly Report on Form 10-Q deal with matters that are within the unilateral control of the Company. There is substantial government regulation of the manufacture and sale of medical products, including many of the Company's products, by governmental agencies in both the United States and foreign countries. These governmental agencies often have considerable discretion in determining whether and when to approve the marketing of the Company's products that have not yet received such approval. The availability of equity and debt financing to the Company is affected by, among other things, domestic and world economic conditions and the competition for funds. Rising interest rates might affect the feasibility of debt financing that is offered. Potential investors and lenders will be influenced by their evaluations of the Company and its products and comparisons with alternative investment opportunities. The Company's products do not provide the exclusive means for accomplishing an objective, and customers may choose alternative means. Many of the Company's competitors have much greater financial resources and technical capabilities than does the Company, which may enable such competitors to design and produce superior products or to market their products in a manner that achieves commercial success even in the face of technical superiority on the part of the Company's products. The Company's patents may not offer effective protection against competitors. Competitors may be able to design around the Company's patents or employ technologies not covered by such patents. In addition, the Company's patents may be challenged, and even if such patents are upheld, the diversion of financial and human resources associated with patent Page 17 litigation could adversely affect the Company. The Company may be found to be violating the patents of others and forced to obtain a license under such patents or modify the design of its products. Rapid technological developments are expected to continue in the industries in which the Company competes. The Company may not be able to develop, manufacture and market products which meet changing user requirements or which successfully anticipate or respond to technological changes on a cost-effective and timely manner. While the Company believes that its technology incorporated into its Millennium(TM) surgical tissue cutting system should be effective in a broad range of medical and dental applications, this belief (except with respect to dental hard tissue and certain dermatological applications, for which clinical research has been and is being conducted) is based largely on preliminary in vitro and in vivo research and extrapolation of observations in such clinical research. No assurances can be given that the Company's Millennium(TM) technology will prove to be applicable to, or will find market acceptance in, any medical or dental fields or that the Company will receive clearance from the FDA or other regulatory agencies to market additional products embodying its HydroKinetic technology or variations thereof for any additional applications or in any additional jurisdictions. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. - -------------------------------------------------------------------- Not Applicable PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. - --------------------------- See Item 3 "Legal Proceedings" included within the Company's Annual Report on Form 10-K for fiscal year ended December 31, 1997 for information regarding certain pending legal proceedings. From time to time, the Company is involved in legal proceedings incidental to its business. It is management's opinion that pending actions, individually and in the aggregate, will not have a material adverse effect on the Company's financial condition, and that adequate provision has been made for the resolution of such actions and proceedings. ITEM 2. CHANGES IN SECURITIES. - ------------------------------- On July 2, 1998, the Company issued an aggregate of 1,650,000 shares of its Common Stock, par value $.001 per share. No underwriters were involved in the issuance and sale of such shares. 1,600,000 shares were issued to Laser Skin Toner, Inc. ("LSTI") in consideration for LSTI's transfer to the Company of substantially all of LSTI's assets, consisting principally of research and development in progress. Delivery to LSTI of 182,880 of the 1,600,000 shares Page 18 was deferred until the business based on the technology transferred achieves specifies performance objectives. 50,000 of the shares were issued to O'Donnell Eye Centers, Incorporated ("ODEC") in consideration for the exclusive license of a technology under development that was the subject of a pending patent application. The issuance of shares to LSTI was exempt from registration under the Securities Act of 1933, as amended (the "Act"), pursuant to Section 4(2) of the Act as a transaction by an issuer not involving any public offering. LSTI agreed that it will offer or resell the shares it received only if such shares are registered under the Act or an exemption from such registration is available, in which case it shall deliver to the Company an opinion of counsel, in form and substance reasonably satisfactory to the Company and its counsel, to such effect. Unless such registration has been effected or such an exemption is available, the Company will not permit the transfer of such shares. The Company endorsed restrictive legends on the share certificates delivered to LSTI and provided to the transfer agent for the Company's Common Stock "stop transfer" instructions with respect to the shares represented by such certificates. The issuance of shares to ODEC was exempt from registration under the Act pursuant to Section 4(2) of said Act as a transaction by an issuer not involving any public offering. ODEC represented that it was acquiring the shares for its own account and not for the account or benefit of any other person and for investment and not with a view to the distribution or resale thereof, except as permitted by the Act and other applicable securities laws. The Company endorsed restrictive legends on the share certificates delivered to ODEC and provided to the transfer agent for the Company's Common Stock "stop transfer" instructions with respect to the shares represented by such certificates. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. - ----------------------------------------- None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------------------------------------------------------------- None ITEM 5. OTHER INFORMATION. - --------------------------- None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. - ------------------------------------------ (A) EXHIBITS 27. Financial Data Schedule (electronic filing only) Page 19 (B) REPORTS ON FORM 8-K On July 2, 1998, the Company filed a Current Report on Form 8-K with the Securities and Exchange Commission reporting the acquisition of substantially all of the assets of Laser Skin Toner, Inc., a developmental stage company, for consideration of 1,600,000 shares of the Company's Common Stock, par value $.001. The Company filed Amendment No. 1 to Form 8-K on September 15, 1998 to reflect the unaudited pro forma combined financial condition of the Company at June 30, 1998 and December 31, 1997 and the pro forma combined results of operations for the six month period and fiscal year ended June 30, 1998 and December 31, 1997, respectively. Page 20 SIGNATURE PAGE 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. BIOLASE TECHNOLOGY, INC. a Delaware Corporation Date: September 18, 1998 /s/ Donald A. La Point ----------------------- ------------------------- Donald A. La Point President & Chief Executive Officer Date: September 18, 1998 /s/ Stephen R. Tartamella ----------------------- ------------------------- Stephen R. Tartamella Vice President & Chief Financial Officer Page 21 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED CONDENSED BALANCE SHEET AT SEPTEMBER 30, 1998 AND ITS CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 214,707 1,033,658 262,777 (116,998) 2,136,808 3,909,988 1,406,949 1,193,405 4,586,484 2,342,157 0 0 0 16,294 2,228,033 4,586,484 586,303 586,303 704,819 704,819 6,465,336 0 6,953 (8,699,923) 0 (8,699,923) 0 0 0 (8,699,923) (0.59) (0.59)
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