Basis of Presentation |
9 Months Ended |
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Sep. 30, 2011 | |
| Basis of Presentation [Abstract] | |
| BASIS OF PRESENTATION |
NOTE 1 — BASIS OF PRESENTATION
The Company
BIOLASE Technology Inc. (the “Company”), incorporated in Delaware in 1987, is a medical
technology company operating in one business segment that develops, manufactures and markets
lasers, and markets and distributes dental imaging equipment and other products designed to improve
technologies for applications and procedures in dentistry and medicine.
Basis of Presentation
The unaudited consolidated financial statements include the accounts of BIOLASE Technology,
Inc. and its consolidated subsidiaries and have been prepared on a basis consistent with the
December 31, 2010 audited consolidated financial statements and include all material adjustments,
consisting of normal recurring adjustments and the elimination of all material intercompany
transactions and balances, necessary to fairly present the information set forth therein. These
unaudited, interim, consolidated financial statements do not include all the footnotes,
presentations and disclosures normally required by accounting principles generally accepted in the
United States of America (“GAAP”) for complete consolidated financial statements. Certain amounts
have been reclassified to conform to current period presentations.
Use of Estimates
The preparation of these consolidated financial statements in conformity with GAAP requires us
to make estimates and assumptions that affect amounts reported in the consolidated financial
statements and the accompanying notes. Significant estimates in these consolidated financial
statements include allowances on accounts receivable, inventory and deferred taxes, as well as
estimates for accrued warranty expenses, indefinite-lived intangible assets and the ability of
goodwill to be realized, revenue deferrals for multiple element arrangements, effects of
stock-based compensation and warrants, contingent liabilities and the provision or benefit for
income taxes. Due to the inherent uncertainty involved in making estimates, actual results
reported in future periods may differ materially from those estimates.
Critical Accounting Policies
Information with respect to our critical accounting policies which we believe could have the
most significant effect on our reported results and require subjective or complex judgments by
management is contained on pages 41 to 43 in Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations, of the Company’s Annual Report on Form 10-K for the
Year Ended December 31, 2010 (the “2010 Form 10-K”). Management believes that there have been no
significant changes during the nine months ended September 30, 2011 in our critical accounting
policies from those disclosed in Item 7 of the 2010 Form 10-K, except as noted below.
Revenue Recognition. Through August 2010, the Company sold its products in North America
through an exclusive distribution relationship with Henry Schein, Inc. (“HSIC”). Effective August
30, 2010, the Company began selling its products in North America directly to customers through its
direct sales force and through non-exclusive distributors, including HSIC. The Company sells its
products internationally through exclusive and non-exclusive distributors as well as to direct
customers in certain countries. Sales are recorded upon shipment from the Company’s facility and
payment of the Company’s invoices is generally due within 30 days or less. Internationally, the
Company sells products through independent distributors, including HSIC in certain countries. The
Company records revenue based on four basic criteria that must be met before revenue can be
recognized: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred and title
and the risks and rewards of ownership have been transferred to our customer, or services have been
rendered; (iii) the price is fixed or determinable; and (iv) collectability is reasonably assured.
Sales of the Company’s laser systems include separate deliverables consisting of the product,
disposables used with the laser systems, installation and training. For these sales, effective
January 1, 2011, the Company applies the relative selling price method, which requires that
arrangement consideration be allocated at the inception of an arrangement to all deliverables using
the relative selling price method. This requires the Company to use (estimated) selling prices of
each of the deliverables in the total arrangement. The sum of those prices is then compared to the
arrangement, and any difference is
applied to the separate deliverable ratably. This method also establishes a selling price
hierarchy for determining the selling price of a deliverable, which includes: (1) vendor-specific
objective evidence (“VSOE”) if available, (2) third-party evidence if vendor-specific objective
evidence is not available, and (3) estimated selling price if neither vendor-specific nor
third-party evidence is available. VSOE is determined based on the value the Company sells the
undelivered element to a customer as a stand-alone product. Revenue attributable to the undelivered
elements is included in deferred revenue when the product is shipped and is recognized when the
related service is performed. Disposables not shipped at time of sale and installation services
are typically shipped or installed within 30 days. Training is included in deferred revenue when
the product is shipped and is recognized when the related service is performed or upon expiration
of time offered under the agreement, typically within six months from date of sale. The adoption
of the relative selling price method does not significantly change the value of revenue recognized.
The key judgments related to revenue recognition include the collectability of payment from
the customer, the satisfaction of all elements of the arrangement having been delivered, and that
no additional customer credits and discounts are needed. The Company evaluates a customer’s credit
worthiness prior to the shipment of the product. Based on the Company’s assessment of the
available credit information, the Company may determine the credit risk is higher than normally
acceptable, and will either decline the purchase or defer the revenue until payment is reasonably
assured. Future obligations required at the time of sale may also cause the Company to defer the
revenue until the obligation is satisfied.
Although all sales are final, the Company accepts returns of products in certain, limited
circumstances and record a provision for sales returns based on historical experience concurrent
with the recognition of revenue. The sales returns allowance is recorded as a reduction of
accounts receivable and revenue.
Extended warranty contracts, which are sold to non-distributor customers, are recorded as
revenue on a straight-line basis over the period of the contracts, which is typically one year.
For sales transactions involving used laser trade-ins, the Company recognizes revenue for the
entire transaction when the cash consideration is in excess of 25% of the total transaction. The
Company values used lasers received at their estimated fair market value at the date of receipt.
The Company recognizes revenue for royalties under licensing agreements for our patented
technology when the product using our technology is sold. The Company estimates and recognizes the
amount earned based on historical performance and current knowledge about the business operations
of our licensees. Historically, the Company’s estimates generally have been consistent with
amounts reported by the licensees. Licensing revenue related to exclusive licensing arrangements
is recognized concurrent with the related exclusivity period.
From time to time, the Company may offer sales incentives and promotions on its products. The
cost of sales incentives are recorded at the date at which the related revenue is recognized as a
reduction in revenue, increase in cost of revenue or as a selling expense, as applicable, or later,
in the case of incentives offered after the initial sale has occurred.
Fair Value of Financial Instruments
The Company’s financial instruments, consisting of cash, accounts receivable, accounts payable
and other accrued expenses, approximate fair value because of the short maturity of these items.
Financial instruments consisting of short term debt approximate fair value since the interest rate
approximates the market rate for debt securities with similar terms and risk characteristics.
Fair value is defined as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants in the principal market or, if
none exists, the most advantageous market, for the specific asset or liability at the measurement
date (referred to as the “exit price”). The fair value should be based on assumptions that market
participants would use, including a consideration of nonperformance risk. Level 1 measurement of
fair value is quoted prices in active markets for identical assets or liabilities. All of the
Company’s investments at September 30, 2011 are valued as Level 1 investments.
Money market securities. Money market securities are cash equivalents, which are included in
cash and cash equivalents, and consist of highly liquid investments with original maturities
of three months or less. The Company uses quoted active market prices for identical assets to
measure fair value. The Company held $774,000 in money market securities at September 30, 2011.
The Company had no investments at December 31, 2010.
Liquidity and Management’s Plans
The Company has suffered recurring losses from operations and had declining revenues during
the three years ended December 31, 2010. As of December 31, 2010, the Company had a working
capital deficit. Although the Company’s revenues increased for the three and nine months ended
September 30, 2011, compared to the comparable periods in 2010, the Company still incurred a loss
from operations and a net loss.
The Company’s need for additional capital and the uncertainties surrounding its ability to
obtain such funding at December 31, 2010, raised substantial doubt about its ability to continue as
a going concern, which contemplates that the Company will realize its assets and satisfy its
liabilities and commitments in the ordinary course of business. The Company’s financial statements
do not include adjustments relating to the recoverability of recorded asset amounts or the amounts
or classification of liabilities that might be necessary should the Company be unable to continue
as a going concern. In order for the Company to discharge its liabilities and commitments in the
normal course of business, the Company must sell its products directly to end-users and through
distributors; establish profitable operations through increased sales and a reduction of operating
expenses; and potentially raise additional funds, principally through the additional sales of
securities or debt financings to meet its working capital needs.
The Company intends to increase sales by increasing its product offerings, expanding its
direct sales force and expanding its distributor relationships both domestically and
internationally. However, the Company cannot guarantee that it will be able to increase sales,
reduce expenses or obtain additional funds when needed or that such funds, if available, will be
obtainable on terms satisfactory to the Company. If the Company is unable to increase sales,
reduce expenses or raise sufficient additional funds it may be unable to continue to fund its
operations, develop its products or realize value from its assets and discharge its liabilities in
the normal course of business.
At September 30, 2011, the Company had approximately $11.2 million in working capital. The
Company’s principal sources of liquidity at September 30, 2011 consisted of approximately $5.8
million in cash and cash equivalents and $8.1 million of net accounts receivable.
On April 16, 2010, the Company filed a shelf registration statement (the “2010 Shelf
Registration Statement”) with the Securities and Exchange Commission (the “SEC”) to enable the
Company to offer for sale, from time to time, in one or more offerings, an unspecified amount of
common stock, preferred stock or warrants up to an aggregate public offering price of $9.5 million.
The 2010 Shelf Registration Statement (File No. 333-166145) was declared effective by the SEC on
April 29, 2010.
In accordance with the terms of a Controlled Equity Offering Agreement (the “Offering
Agreement”) entered into with Ascendiant Securities, LLC (“Ascendiant”), as sales agent, on
December 23, 2010, the Company was entitled to issue and sell up to 3,000,000 shares of Common
Stock pursuant to the 2010 Shelf Registration Statement. Sales of shares of the Company’s common
stock, could be made in a series of transactions over time as the Company may direct Ascendiant in
privately negotiated transactions and/or any other method permitted by law, including sales deemed
to be an “at the market” offering as defined in Rule 415 under the Securities Act of 1993, as
amended (the “1933 Act”). “At the market” sales include sales made directly on the NASDAQ Capital
Market, the existing trading market for our common stock, or sales made to or through a market
maker other than on an exchange.
Pursuant to the Offering Agreement, Ascendiant agreed to make all sales using its commercially
reasonable best efforts consistent with its normal trading and sales practices, and on terms on
which we and Ascendiant mutually agree. Unless the Company and Ascendiant agree to a lesser amount
with respect to certain persons or classes of persons, the compensation to Ascendiant for sales of
common stock sold pursuant to the Offering Agreement will be 3.75% of the gross proceeds of the
sales price per share.
During the quarter ended March 31, 2011, the Company sold approximately 2.2 million shares of
common stock with gross proceeds of approximately $7.5 million and net proceeds of approximately
$7.1 million, net of commission and direct costs, through the Offering Agreement with Ascendiant.
No additional sales under the Offering Agreement have been made since the quarter ended March 31,
2011 and no additional sales will be made under the Offering Agreement.
On April 7, 2011, the Company entered into an agreement with Rodman & Renshaw, LLC (“Rodman &
Renshaw”), pursuant to which Rodman & Renshaw agreed to arrange for the sale of shares of the
Company’s common stock in a registered direct placement (the “April 2011 Registered Direct
Placement”) pursuant to the 2010 Shelf Registration Statement with a fee of 4.5% of the aggregate
gross proceeds. In addition, on April 7, 2011, the Company and certain institutional investors
entered into a securities purchase agreement arranged by Rodman & Renshaw, pursuant to which the
Company
agreed to sell in the April 2011 Registered Direct Placement an aggregate of 320,000 shares of
its common stock with a purchase price of $5.60 per share for gross proceeds of approximately $1.8
million. The net proceeds to the Company from the April 2011 Registered Direct Placement totaled
approximately $1.7 million. The costs associated with the April 2011 Registered Direct Placement
totaled approximately $124,000 and were paid in April 2011 upon the closing of the transaction.
The shares of common stock sold in connection with the April 2011 Registered Direct Placement were
issued pursuant to a prospectus supplement dated April 11, 2011 to the 2010 Shelf Registration
Statement, which was filed with the SEC.
The transactions described above exhausted the securities available for sale under the
Company’s 2010 Shelf Registration Statement.
On June 24, 2011, the Company entered into a securities purchase agreement (the “June 2011
Securities Purchase Agreement”) with certain institutional investors (the “June 2011 Purchasers”)
whereby the Company agreed to sell, and on June 29, 2011 the Company sold, an aggregate of
1,625,947 shares of the Company’s common stock at a price of $5.55 per share, together with
five-year warrants to purchase 812,974 shares of the Company’s common stock having an exercise
price of $6.50 per share (the “June 2011 Warrants”). The June 2011 Warrants are not exercisable for
six months following their issuance. Gross proceeds from the offering totaled approximately $9
million, and net proceeds to the Company, after commissions and other offering expenses of
approximately $610,000, totaled approximately $8.4 million. The Company will use the proceeds for
working capital and general corporate purposes. In connection with the June 2011 Securities
Purchase Agreement, the Company entered into an agreement on June 22, 2011 with Rodman & Renshaw in
which Rodman & Renshaw agreed to act as the Company’s exclusive placement agent for the offering
and the Company agreed to pay Rodman & Renshaw commissions in the amount of 5.0% of the gross
proceeds of the offering, or approximately $451,000, and reimburse Rodman & Renshaw’s expenses up
to a maximum amount of $50,000. Commissions and expenses paid to Rodman and Renshaw are included
in the $610,000 of offering expenses noted above.
The common stock and the June 2011 Warrants were offered and sold, and the common stock
issuable upon exercise of the June 2011 Warrants were offered, pursuant to exemptions from
registration set forth in section 4(2) of the 1933 Act and Rule 506 of Regulation D promulgated
under the 1933 Act. The common stock, the June 2011 Warrants and the common stock issuable upon
exercise of the June 2011 Warrants may not be re-offered or resold absent either registration under
the 1933 Act or the availability of an exemption from the registration requirements.
In connection with the June 2011 Securities Purchase Agreement, the Company entered into a
registration rights agreement with the June 2011 Purchasers pursuant to which the Company undertook
to file a resale registration statement, on behalf of the June 2011 Purchasers with respect to the
resale of the common stock and the common stock issuable upon the exercise of the June 2011
Warrants (collectively, the “Registerable Securities”), no later than July 19, 2011 and to use its
reasonable best efforts to cause such registration statement to be declared effective by the SEC
not later than September 7, 2011 (or October 7, 2011, if the SEC comments upon the registration
statement). If the Company were unable to timely satisfy such deadlines, it could incur penalties
of up to 3.0% of the offering proceeds for such non-compliance.
On July 19, 2011, the Company filed a registration statement on Form S-3 (the “Selling
Stockholders Registration Statement”) with the SEC to register the Registerable Securities. The
Selling Stockholders Registration Statement (File No. 333-175664) was declared effective by the SEC
on August 25, 2011.
On August 2, 2011, the Company repurchased 90,000 of the June 2011 Warrants for $99,900 or
$1.11 per underlying share, plus non-accountable expenses of $30,000.
On February 8, 2011, the Company repaid all outstanding balances under a Loan and Security
Agreement dated May 27, 2010, as amended, (the “Loan and Security Agreement”) with MidCap
Financial, LLC (whose interests were later assigned to its affiliate MidCap Funding III, LLC) and
Silicon Valley Bank, which included $2.6 million in principal, $30,000 of accrued interest and
$169,000 of loan related expenses. In connection with the repayment, MidCap Funding III, LLC and
Silicon Valley Bank released their security interest in the Company’s assets. Unamortized costs
totaling approximately $225,000, excluding interest, associated with the term loan payable were
expensed in February 2011. MidCap Financial, LLC and Silicon Valley Bank also exercised all of
their warrants on a cashless basis during February 2011 for 78,172 shares of common stock.
On September 23, 2010, the Company entered into a Distribution and Supply Agreement (the “D&S
Agreement”) with HSIC, effective August 30, 2010. In connection with the D&S Agreement, as
amended, HSIC placed two irrevocable purchase orders for the Company’s products totaling $9
million. The first purchase order, totaling $6 million, was for the iLase system and was required
to be fulfilled by June 30, 2011. The first purchase order was fully satisfied during the first
quarter of 2011. The second purchase order, totaling $3 million, required that the products
ordered there under be delivered by August 25, 2011, and was also for the iLase system, but could
be modified without charge and applied to other laser products. During April 2011, HSIC modified
the type of laser systems ordered on the second purchase order. The second purchase order was
fully satisfied during the third quarter of 2011.
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