<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Conformed Copy
--------------
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 June 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
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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)
(714) 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 16,473,587
- ----------------------------- ----------------------------
Title Class Number of Shares Outstanding
at August 14, 1998
<PAGE>
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....................... 16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.................................... 16
ITEM 2. Changes in Securities................................ 16
ITEM 3. Defaults Upon Senior Securities...................... 17
ITEM 4. Submission of Matters to a Vote of Security
Holders............................................. 17
ITEM 5. Other Information.................................... 17
ITEM 6. Exhibits and Reports on Form 8-K..................... 17
SIGNATURE PAGE.......................................................... 18
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
- ------------------------------
BIOLASE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
(Unaudited)
----------------- ----------------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 763,322 $ 213,074
Marketable securities 2,283,658 627,817
Accounts receivable, less allowance of $117,593 in 1998
and $117,464 in 1997 275,973 1,060,252
Inventories, net of reserves of $620,949 in 1998 and 1997 1,731,920 1,008,777
Prepaid expenses and other current assets 255,646 110,094
----------------- ----------------
Total current assets 5,310,519 3,020,014
Property and equipment, net 190,019 181,804
Patents, licenses and trademarks, less accumulated amortization of
$116,582 in 1998 and $330,466 in 1997 152,546 95,508
Other assets 137,523 98,666
----------------- ----------------
Total assets $ 5,790,607 $ 3,395,992
================= ================
Liabilities and Stockholders' Equity:
Current liabilities:
Line of Credit $ 1,162,191 $ 301,233
Accounts payable 230,468 481,240
Accrued expenses 626,768 480,440
Accrued costs related to dissolution of foreign subsidiary 37,144 38,069
Other current liabilities - -
----------------- ----------------
Total current liabilities 2,056,571 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 June 30, 1998
and December 31, 1997. - -
Common stock, par value, $.001, 50,000,000 shares
authorized, issued 14,813,587 in 1998 and 13,462,636 in 1997 14,814 13,463
Additional paid-in capital 33,393,526 29,755,652
Receivable from stockholders and unearned services (18,703) (50,766)
Accumulated deficit (29,655,601) (27,623,339)
----------------- ----------------
Net stockholders' equity 3,734,036 2,095,010
----------------- ----------------
Total liabilities and stockholders' equity $ 5,790,607 $ 3,395,992
================= ================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
Page 3
<PAGE>
Item 1. Financial Statements (continued).
- ------------------------------------------
BIOLASE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- --------------------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
---- ---- ---- ----
Sales $ 236,087 $ 432,941 $ 498,617 $ 567,346
Cost of sales 263,061 330,376 501,168 443,246
--------------- --------------- --------------- --------------
Gross profit (26,974) 102,565 (2,551) 124,100
--------------- --------------- --------------- --------------
Operating expenses:
Sales and marketing 267,488 222,210 572,747 496,013
General and administrative 480,190 409,365 733,970 658,944
Engineering and development 434,921 277,763 708,851 546,866
--------------- --------------- --------------- --------------
Total operating expenses 1,182,599 909,338 2,015,568 1,701,823
--------------- --------------- --------------- --------------
Loss from operations (1,209,573) (806,773) (2,018,119) (1,577,723)
Other income (expense)
Interest income (expense), net 6,422 128,911 (14,143) 132,127
--------------- --------------- --------------- --------------
Net loss $ (1,203,151) $ (677,862) $ (2,032,262) $ (1,445,596)
=============== =============== =============== ==============
Loss per share of common stock $ (0.08) (0.05) $ (0.15) (0.11)
=============== =============== =============== ==============
Weighted average shares outstanding 14,163,487 13,409,608 13,742,334 13,250,603
=============== =============== =============== ==============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
Page 4
<PAGE>
Item 1. Financial Statements (continued).
- ------------------------------------------
BIOLASE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Additional Net
Preferred Stock Common Stock Paid-in Unearned Accumulated Stockholders'
Shares Amount Shares Amount Capital Services Deficit Equity
------ ------ ------ ------ ------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Exercise of stock options - - 30,950 31 46,394 - - 46,425
Earned escrow shares - - - - - 32,063 - 32,063
Issuance of shares for fractional
interest on reverse split - - 1 - - - - -
Net loss - - - - - - (2,032,262) (2,032,262)
---------------------------------------------------------------------------------------------
Balance at June 30, 1998 - $ - 14,813,587 $14,814 $33,393,526 ($18,703) ($29,655,601) $3,734,036
=============================================================================================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
Page 5
<PAGE>
Item 1. Financial Statements (continued).
- ------------------------------------------
BIOLASE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,032,262) $(1,445,596)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 46,207 55,357
Issuance of common stock for services 32,063 -
Provision for bad debts 69,123 95,627
Changes in operating assets and liabilities:
Accounts receivable 715,156 (310,063)
Inventories (723,143) (103,337)
Prepaid expenses and other current assets (184,409) (110,982)
Accounts payable (250,772) (46,475)
Accrued expenses 146,328 (34,593)
Accrued costs related to dissolution of foreign subsidiary (925) (3,093)
Other current liabilities - (3,980)
------------ ------------
Net cash used by operating activities (2,182,634) (1,907,135)
------------ ------------
Cash flows from investing activities:
Sale of marketable securities 869,159 1,142,873
Purchase of marketable securities (2,525,000)
Additions to property and equipment (47,583) (75,161)
Additions to patents, licenses and trademarks (63,877) (44,759)
------------ ------------
Net cash provided (used) by investing activities (1,767,301) 1,022,953
------------ ------------
Cash flows from financing activities:
Borrowings under line of credit, net 860,958 -
Proceeds from issuance of common stock, net 3,592,800 719,885
Proceeds from exercise of stock options 46,425 128,249
------------ ------------
Net cash provided by financing activities 4,500,183 848,134
------------ ------------
Increase (decrease) in cash and cash equivalents 550,248 (36,048)
Cash and cash equivalents at beginning of period 213,074 349,457
------------ ------------
Cash and cash equivalents at end of period $ 763,322 $ 313,409
============ ============
Supplemental cash flow disclosure:
Cash paid during the period for interest $ 25,059 $ 2,276
============ ============
Noncash financing activities:
Issuance of common stock for earned services $ 32,063 $ -
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
Page 6
<PAGE>
BIOLASE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 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 June 30, 1998 and the results of its operations for the three and six-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 $2,032,262 for the six-month period ended June
30, 1998 and has an accumulated deficit of $29,655,601 at June30, 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 focus has been realigned to emphasize 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 and 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.
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). Management believes that significant additional resources will be
required, commencing in the first half of 1999, to complete the processes
designed to lead to FDA clearance to market the Company's laser-based
technologies for various dental and medical applications in the United States
and foreign countries, and to fund the Company's working capital needs. The
Company expects to generate the necessary capital resources through the sale of
its products, the issuance of equity 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.
Based on the Company's current business plan, the Company anticipates that it
will need additional financing during the first half of 1999 to support
additional working capital requirements should its existing and soon-to-be-
released products fail to achieve the level of market acceptance
Page 7
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anticipated by the Company or significantly exceed such level of market
acceptance. There are no assurances that the Company will be successful in
obtaining such financing. If unsuccessful in arranging such financing, the
Company may be able to extend the period before additional financing is required
by deferring the creation or satisfaction of various commitments and deferring
the introduction of various products or entry into various markets. 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 ultimately
its ability to continue as a going concern.
Operating results for the three and six-month periods ended June 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.
<TABLE>
<CAPTION>
Note 2
- ------
Inventories, net of reserves, June 30, 1998
consist of the following: (unaudited) December 31, 1997
----------- -----------------
<S> <C> <C>
Raw materials $1,594,740 $ 804,631
Work-in-process 66,527 36,609
Finished goods 70,653 167,537
---------- ----------
$1,731,920 $1,008,777
========== ==========
Note 3
- ------
Property and equipment, June 30, 1998
at cost, consist of the following: (unaudited) December 31, 1997
----------- -----------------
<S> <C> <C>
Leasehold improvements $ 155,731 $ 149,282
Equipment and computers 788,427 754,152
Furniture and fixtures 175,278 168,419
Demonstration units 247,354 247,354
----------- -----------
Total cost 1,366,790 1,319,207
Less, accumulated depreciation and amortization (1,176,771) (1,137,403)
----------- -----------
$ 190,019 $ 181,804
=========== ===========
Note 4
- ------
Accrued expenses consist of the following: June 30, 1998
(unaudited) December 31, 1997
----------- -----------------
<S> <C> <C>
Accrued professional fees $ 212,876 $ 174,756
</TABLE>
Page 8
<PAGE>
Accrued warranty 20,665 83,000
Accrued clinical studies 103,281 9,080
Other 289,946 213,604
-------- --------
$ 626,768 $ 480,440
======== ========
Note 5
- ------
Basic 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 June 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, and requires restatement of earlier periods presented,
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 six-month
periods ended June 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, and requires restatement of
earlier periods presented, 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 six-month periods ended June 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, as well as 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
Page 9
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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.
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
of 1,600,000 shares of the Company's common stock, (the "Shares"), including
182,800 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. The
acquisition will be accounted for using the purchase method of accounting. The
purchase price allocation is preliminary pending appraisals, evaluations and
other studies of fair value of the assets acquired.
The following table presents the unaudited consolidated pro forma financial
information for the six months ended June 30, 1998 and for the year ended
December 31, 1997, as though the acquisition had occurred on January 1, 1997 and
does not reflect any non-recurring costs that may result upon completion of the
final purchase price allocation.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Six months ended Year ended
(unaudited) June 30, 1998 December 31, 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
- -------------------------------------------------------------------------------
Sales $ 498,617 $1,786,285
- -------------------------------------------------------------------------------
Loss from operations $2,110,174 $2,320,660
- -------------------------------------------------------------------------------
Net loss $2,124,317 $2,337,354
- -------------------------------------------------------------------------------
Net loss per share $ 0.14 $ 0.15
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
The unaudited pro forma financial information is presented for information
purposes only and is not necessarily indicative of the operating results that
would have occurred had the acquisition taken place on January 1, 1997. In
addition, the pro forma results are not intended to be a projection of the
future results and do not reflect any synergies that might be achieved from the
combined operation.
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 - SIX-MONTH PERIOD ENDED JUNE 30, 1998 AS COMPARED TO SIX-
MONTH PERIOD ENDED JUNE 30, 1997:
Sales during the first six months of 1997 were $567,000, compared to
$499,000 during the first six months of 1998. The 12% decrease in sales was
attributable primarily to a $91,000 decrease in the Company's endodontic sales.
While sales of the Company's laser-based systems in the first half of 1998 were
comparable to the first half of 1997, such sales were lower than anticipated and
less than the second half of 1997. This was attributable to the Company's
decision to defer most deliveries of its Millennium laser-based HydroKinetic
system, particularly those to its German distributor which has been the most
significant customer for Millennium systems, while in the process of
implementing a partial redesign of the handpiece for that system. The German
distributor requested the partial redesign to enable Millennium to address more
effectively the requirements of the German market, where Millennium has received
all necessary approvals for use in both hard and soft tissue dental procedures.
Commencing June 1997, sales of Millennium 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 expects
sales to increase once the handpiece redesign effort has been completed, which
is scheduled for the second half of 1998. (The preceding sentence constitutes a
forward looking statement [hereinafter identified as "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 decrease in sales of endodontic
products during the first six months of 1998 was due to decreased demand for
these products in the Company's foreign markets.
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
Page 10
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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 system, under the name DermaLase(TM). (FLS) The Company
is presently developing its marketing plan for the DermaLase system and
anticipates commencement of production of DermaLase in the last half of 1998.
(FLS) The Company expects DermaLase to begin to contribute to sales in the first
half of 1999. (FLS)
In August, 1998, the Company introduced its first home 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 expects to begin
recognizing revenue, initially at modest levels, related to LazerSmile during
the third quarter of 1998.
The $58,000 increase in cost of sales from the six months ended June 30,
1997 to the six months ended June 30, 1998 is attributable primarily to 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 $124,000 for the six months ended June 30, 1997
to a $3,000 gross loss for the six months ended June 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. The gross profit from the sale of endodontic products
during the first six months of 1998 was comparable to that experienced in the
first six months of 1997.
Operating expenses increased by $314,000, or 18%, from the first six months
of 1997 to the first six months of 1998. Sales and marketing expense increased
$77,000, or 15%, between those periods primarily as a result of the
establishment of a domestic dental sales force subsequent to June 30, 1997.
General and administrative expense increased $75,000, or 11%, between those
periods primarily as a result of increases related to advertising and promotion
of the Company through various publications and investor forums combined with
increases in employee related expenses associated with increased staffing.
Engineering and development expense increased $162,000, or 30%, between those
periods principally as a result of costs associated with the 1998 redesign of
the Millennium handpiece and the finalization of the design of LazerSmile in
anticipation of its product launch.
Loss from operations increased from $1,578,000 for the first six months of
1997 to $2,018,000 for the first six months of 1998, reflecting the lower sales,
higher cost of sales and higher operating expenses in the 1998 period.
Interest income, net decreased from $132,000 of net interest income for the
first six months of 1997 to a $14,000 net interest expense for the first six
months of 1998. This decrease reflects lower 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 $1,446,000, or $0.11 per share, for
the first six months of 1997 to $2,032,000, or $0.15 per share, for the first
six months of 1998. The increase in the per share loss was slightly ameliorated
by a 4% increase in the weighted average number of shares outstanding.
Page 11
<PAGE>
RESULTS OF OPERATIONS THREE-MONTH PERIOD ENDED JUNE 30, 1998 AS COMPARED TO
THREE-MONTH PERIOD ENDED JUNE 30, 1997:
Sales during the second quarter of 1998 were $236,000, compared to $433,000
during the second quarter of 1997. The 45% decrease in sales was attributable
primarily to the Company's decision to defer most deliveries of its Millennium
laser-based HydroKinetic system, particularly those to its German distributor
which has been the most significant customer for Millennium systems, while in
the process of implementing a partial redesign of the handpiece for that system.
Commencing June 1997, sales of Millennium systems had been expected to replace
sales of an earlier generation of laser system which had been phased out by
early 1997 and is no longer being sold or marketed by the Company. The Company
expects sales to increase once the handpiece redesign effort has been completed,
which is scheduled for the second half of 1998. (FLS) Sales of endodontic
products during the second quarter of 1998 were $53,000 lower than the same
period in 1997 due to a decreased demand for these products in the Company's
foreign markets.
The $67,000 decrease in cost of sales from the second quarter of 1997 to
the second quarter of 1998 is attributable primarily to the lower cost of goods
sold associated with the substantially decreased sales, partially offset by 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 $103,000 for the second quarter of 1997 to a
$27,000 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. The gross profit from the sale of endodontic products during the second
quarter of 1998 was comparable to that experienced in the second quarter of
1997.
Operating expenses increased by $273,000, or 30%, from the second quarter
of 1997 to the second quarter of 1998. Sales and marketing expense increased
$45,000, or 20%, between those periods primarily as a result of the
establishment of a domestic dental sales force subsequent to June 30, 1997.
General and administrative expense increased $71,000, or 17%, between those
periods primarily as a result of increases related to advertising and promotion
of the Company through various publications and investor forums combined with
increases in employee related expenses associated with increased staffing and an
increase in patent/trademark costs. Engineering and development expense
increased $157,000, or 57%, between those periods principally as a result of
costs associated with the 1998 redesign of the Millennium handpiece and the
finalization of the design of LazerSmile in anticipation of its product launch.
Loss from operations increased from $807,000 for the second quarter of 1997
to $1,210,000 for the second quarter of 1998, reflecting principally the lower
sales and higher operating expenses in the 1998 period.
Interest income, net decreased from $129,000 for the second quarter of 1997
to $6,000 for the second quarter of 1998. This decrease reflects lower 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 $678,000, or $0.05 per share, for the
second quarter of 1997 to $1,203,000, or $0.08 per share, for the second quarter
of 1998. The increase in the per share loss was slightly ameliorated by a 6%
increase in the weighted average number of shares outstanding.
Page 12
<PAGE>
FINANCIAL CONDITION
Cash, cash equivalents and marketable securities increased from $841,000 at
December 31, 1997 to $3,047,000 at June 30, 1998, primarily as a result of a
private placement of Company common stock and stock purchase warrants in May
1998 which generated net proceeds of approximately $3,593,000, partially offset
principally by cash used by operations of $2,183,000.
Accounts receivable decreased by $784,000 from December 31, 1997, when they
totaled $1,060,000, to June 30, 1998. This decrease was due principally to
payment of outstanding accounts by the German distributor of Millennium systems
during the second quarter of 1998.
Inventories increased from $1,009,000 at December 31, 1997 to $1,732,000 at
June 30, 1998 due principally to a build-up of raw materials in anticipation of
the third-quarter launch of LazerSmile(TM) and the decision by the Company to
continue to build subassembly products for its Millennium system while awaiting
completion of the redesign of the handpiece. The Company's inventory reserve of
$621,000 at June 30, 1998 relates to previous releases of the Company's laser
based systems, Nylad and Laser 35, which are no longer being sold or marketed by
the Company.
Prepaid expenses and other current assets increased from $110,000 at
December 31, 1997 to $256,000 at June 30, 1998, primarily as a result of
deposits placed for medical trade shows scheduled for the last half of 1998.
Current liabilities increased $756,000 from December 31, 1997 to June 30,
1998, primarily reflecting an increase in indebtedness under a line of credit
used primarily to finance inventory which increased $861,000 from December 31,
1997 to June 30, 1998, when it totaled $1,162,000. Accounts payable were
reduced by $251,000 during the six months ended June 30, 1998, while accrued
expenses increased $146,000 during the same period.
Working capital increased from $1,719,000 at December 31, 1997 to
$3,254,000 at June 30, 1998. The increase in working capital is attributable
principally to the $2,206,000 increase in cash, cash equivalents and marketable
securities and $723,000 increase in inventories, partially offset by the
$784,000 decrease in accounts receivable and $861,000 increase in indebtedness
under the line of credit.
Patents, licenses and trademarks, net increased $57,000 from December 31,
1997 to June 30, 1998, when the balance was $153,000, principally as a result of
the Company pursuing patent and trademark protection for its proprietary
technology, names and symbols. Other assets increased $39,000 during the same
period to $138,000, reflecting primarily deposits on the manufacturing of
plastic injection moldings for the Company's LazerSmile Tooth Whitening System.
Stockholders' equity increased from $2,095,000 at December 31, 1997 to
$3,734,000 at June 30, 1998, primarily as a result of the May 1998 private
placements of Company securities which added $3,593,000 to stockholders equity,
partially offset by the net loss of $2,032,000 for the six months ended June 30,
1998.
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 product improvement through engineering and cost
containment. (FLS) The Company's focus has been realigned to emphasize the
marketing of its laser-based HydroKinetic(TM) tissue cutting system,
Page 13
<PAGE>
the Millennium(TM), its recently-released home consumer tooth-whitening system,
the LazerSmile(TM) toothbrush, and 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. (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 has raised approximately $6,413,000 of equity funds. During the first
half of 1998, the Company raised an additional $3,671,000 in equity funds (See
Note 7 of Notes to Consolidated Condensed Financial Statements). Management
believes that significant additional resources will be required, commencing in
the first half of 1999, to complete the processes designed to lead to FDA
clearance to market the Company's laser-based technologies for various dental
and medical applications in the United States and foreign countries, and to fund
the Company's working capital needs. (FLS) The Company expects to generate the
necessary capital resources through the sale of its products, the issuance of
equity securities in either public or private placements, or debt financing.
(FLS) No assurance can be given, however, that the Company will be able to
obtain such capital resources. (FLS)
At June 30, 1998, the Company had $1,162,191 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 monthly interest
equal to LIBOR plus 0.5% (6.2% at June 30, 1998) and requires collateral
consisting substantially of the Company's accounts receivable and inventories.
The revolving credit agreement expires on December 1, 1998 and has two six-month
renewal options.
Based on the Company's current business plan, the Company anticipates that it
will need additional financing during the first half of 1999 to support
additional working capital requirements should its existing and soon-to-be-
released products fail to achieve the level of market acceptance anticipated by
the Company or significantly exceed such level of market acceptance. (FLS) There
are no assurances that the Company will be successful in obtaining such
financing. (FLS) If unsuccessful in arranging such financing, the Company may be
able to extend the period before additional financing is required by deferring
the creation or satisfaction of various commitments and deferring the
introduction of various products or entry into various markets. (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 ultimately
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 analyzing various computer software and hardware
to meet its operational needs and anticipates capital expenditures to increase
significantly during 1998 in connection with the acquisition of such software
and hardware. (FLS) 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 manufacturer of such software. The Company
believes that its present software and hardware is Year 2000 compliant and
intends to obtain certification of such for any future purchases of computer
software and hardware. Additionally, the ability of third parties with whom the
Company transacts business to adequately address their Year 2000 issues is
outside the control of the Company. There can be no assurance that the failure
of the Company or such third parties to adequately address their
Page 14
<PAGE>
respective Year 2000 issues will not have a material adverse effect on the
Company's business, financial condition, results of operations or cash flows.
(FLS)
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 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 the Millennium(TM) system or other
products embodying its HydroKinetic(TM) technology or variations thereof for any
additional applications or in any additional jurisdictions.
Page 15
<PAGE>
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 May 19, 1998, the Registrant issued and sold an aggregate of 1,320,000
shares of its Common Stock, par value $.001 per share ("Common Stock"), and
660,000 Redeemable Stock Purchase Warrants (the "Warrants" and collectively with
the 1,320,000 shares, the "Securities"). Each of the Warrants entitles the
holder hereof to purchase one share of Common Stock at an exercise price of
$3.75 per share through April 30, 2000.
The Securities were sold to accredited investors exclusively. While no
underwriters were involved, some of the Securities were sold through placement
agents. The placement agents were PacVest Associates, Inc. and Eurocapital
Limited (the "Placement Agents").
The Securities were sold in units ("Units") consisting of 10,000 shares of
Common Stock and 5,000 Warrants at a price of $30,000 per Unit, or aggregate
consideration of $3,960,000 for all of the Securities sold. The aggregate
commissions paid to the Placement Agents amounted to approximately $307,000. In
addition, Registrant issued to the Placement Agents or their designees stock
purchase warrants (the "Placement Agent Warrants") entitling the holders thereof
to purchase up to an aggregate of 64,000 shares of Common Stock. The Placement
Agent Warrants are substantially identical to the Warrants except that the
Registrant has no right to redeem the Placement Agent Warrants.
The issuance and sale of the Securities was exempt from the registration
requirements of the Securities Act pursuant to Sections 4(2) and 4(6) of the
Securities Act as transactions by an issuer not involving any public offering
and as transactions involving offers and sales by an issuer solely to accredited
investors in which the aggregate offering price did not exceed the amount
allowed under Section 3(b) of the Securities Act, there was no advertising or
public solicitation in connection with the transactions, and the issuer filed
the prescribed notice with the Securities and Exchange Commission. Each
purchaser of Securities represented, with supporting information, that such
purchaser was an accredited investor; that such purchaser was acquiring the
Securities for such purchaser's own account and not for the account or benefit
of any other person; that the Securities were being acquired for investment and
not with a view to the distribution thereof; and that such purchaser did not
intend to sell or otherwise dispose of all or any part of the Securities at the
time of purchase or upon the occurrence or nonoccurrence of any predetermined
event. Each purchaser also agreed that such purchaser would offer or resell
Securities only if the Securities are registered under the Securities Act or an
exemption from such registration is available (and confirmed by an opinion of
counsel satisfactory to the Registrant). The Registrant placed restrictive
legends on the certificates
Page 16
<PAGE>
representing the Securities and placed "stop transfer" instructions with the
transfer agent for Common Stock. Since the Registrant is acting as transfer
agent for the Warrants, it will impose comparable procedures with respect to
requests for the transfer of Warrants.
The Warrants and the Placement Agent Warrants are exercisable at a price of
$3.75 per share of Common Stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
- -----------------------------------------
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- -------------------------------------------------------------
Following are the results of matters submitted to a vote at the Annual
Stockholders' Meeting held May 19, 1998:
(1) The election of the following individuals to the Company's Board of
Directors, to serve until the next Annual Meeting of Stockholders and until
their successors are duly elected and qualified:
<TABLE>
<CAPTION>
Votes For Votes Withheld
--------- --------------
<S> <C> <C>
Federico Pignatelli 8,962,554 31,488
Donald A. La Point 8,962,754 31,288
George V. d'Arbeloff 8,962,254 31,788
</TABLE>
(2) The ratification of the appointment of Coopers & Lybrand L.L.P. as the
Company's independent public accountants for the year ended December 31, 1998.
The number of votes cast for were 8,968,364; votes cast against were 20,578; and
5,100 votes abstained.
ITEM 5. OTHER INFORMATION.
- ---------------------------
The deadline for submission of stockholder proposals pursuant to Rule 14a-8
under the Securities Exchange Act of 1934, as amended, ("Rule 14a-8"), for
inclusion in the Company's proxy statement for its 1999 Annual Meeting of
Stockholders is December 14, 1998. After March 6, 1999, notice to the Company
of a stockholder proposal submitted otherwise than pursuant to Rule 14a-8 will
be considered untimely, and the persons named in proxies solicited by the Board
of Directors of the Company for its 1999 Annual Meeting of Stockholders may
exercise discretionary voting power with respect to any such proposal as to
which the Company does not receive timely notice.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------------------------------------------
(A) EXHIBITS
27. Financial Data Schedule (electronic filing only)
(B) REPORTS ON FORM 8-K
None
Page 17
<PAGE>
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: August 19, 1998 /s/ Donald A. La Point
--------------- ----------------------
Donald A. La Point
President & Chief Executive Officer
Date: August 19, 1998 /s/ Stephen R. Tartamella
--------------- -------------------------
Stephen R. Tartamella
Vice President & Chief Financial Officer
Page 18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S QUARTERLY REPORT FILED ON FORM 10-Q FOR THE THREE AND SIX-MONTH
PERIODS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 763,322
<SECURITIES> 2,283,658
<RECEIVABLES> 393,566
<ALLOWANCES> (117,593)
<INVENTORY> 1,731,920
<CURRENT-ASSETS> 5,310,519
<PP&E> 1,366,790
<DEPRECIATION> (1,176,771)
<TOTAL-ASSETS> 5,790,607
<CURRENT-LIABILITIES> 2,056,571
<BONDS> 0
0
0
<COMMON> 14,814
<OTHER-SE> 3,719,222
<TOTAL-LIABILITY-AND-EQUITY> 5,790,607
<SALES> 498,617
<TOTAL-REVENUES> 498,617
<CGS> 501,168
<TOTAL-COSTS> 501,168
<OTHER-EXPENSES> 708,851
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,143
<INCOME-PRETAX> (2,032,262)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,032,262)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,032,262)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
