| BRITESMILE INC ITEM 1A RISK FACTORS Forward Looking Statements The statements contained in this Report that are not purely historical are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act |
| These statements relate to the Company’s expectations, hopes, beliefs, anticipations, commitments, intentions and strategies regarding the future |
| They may be identified by the use of words or phrases such as “believes,” “expects,” “anticipates,” “should,” “plans,” “estimates,” and “potential,” among others |
| Forward-looking statements include, but are not limited to, statements contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding the Company’s financial performance, revenue and expense levels in the future and the sufficiency of its existing assets to fund future operations and capital spending needs |
| Actual results could differ materially from the anticipated results or other expectations expressed in such forward-looking statements |
| The Company believes that many of the risks set forth here and in the Company’s filings with the Securities and Exchange Commission, (the “SEC”), are part of doing business in the industry in which the Company operates and competes and will likely be present in all periods reported |
| The forward-looking statements contained in this Report are made as of the date of this Report and the Company assumes no obligation to update them or to update the reasons why actual results could differ from those projected in such forward-looking statements |
| Among others, risks and uncertainties that may affect the business, financial condition, performance, development, and results of operations of the Company include: We have entered into an agreement to sell our sole remaining business – our Centers business |
| We have paid off our debt and intend to pay various transaction-related costs along with other unassumed liabilities from the proceeds of the sale of our Associated Centers business |
| We signed a purchase agreement with 5 ______________________________________________________________________ [29]Table of Contents Dental Spas, LLC to sell our Centers business and the right to operate BriteSmile branded Centers worldwide |
| Following the sale of our Centers business, our main assets will be cash, and loss carryforward |
| In addition, if we no longer have an operating business, we may choose to take various actions to reduce or eliminate costs, including actions that would allow us to deregister our common stock with the SEC such as an issuer self-tender offer or other purchases of our common stock or a cash-out merger |
| If we liquidate our assets, no assurance can be given that funds will be available to distribute to our shareholders at that time, whether from the proceeds of the sale of our Centers business or otherwise |
| We may not be able to obtain necessary third party consents to the transfer of certain contracts and leases required for closing of the sale of the Centers business |
| In addition to the other conditions that must be satisfied prior to closing the sale of the Centers business, we are obligated to obtain certain third party consents to the transfer of certain contracts or leases as part of the sale of the Centers business |
| The receipt of these consents depends upon parties over which we have no control |
| The Asset Purchase Agreement with Discus and the Purchase Agreement with Dental Spas will expose us to contingent liabilities |
| In connection with the sale of our Associated Center business to Discus, we agreed to indemnify Discus for a number of matters, including the breach of our representations, warranties and covenants contained in the Asset Purchase Agreement with Discus |
| In addition, in connection with the sale of our Centers business to Dental Spas, we have agreed to indemnify Dental Spas for a number of matters, including the breach of our representations, warranties and covenants contained in the Purchase Agreement with Dental Spas |
| A breach or inaccuracy of any of the representations, warranties and covenants in either the Asset Purchase Agreement or the Purchase Agreement could lead to an indemnification claim against us by Discus or Dental Spas, respectively |
| Any such indemnification claims could require us to pay substantial sums and incur related costs and expenses and have a material adverse effect on our liquidity, financial condition, future prospects and ability to distribute cash to shareholders upon a liquidation or ability acquire a new operating business |
| Our ability to utilize our net operating loss carryforward may be limited or eliminated in its entirety |
| We will recognize gains or losses for federal income tax purposes on the sale of the assets in the sales of our Associated Centers and Centers businesses |
| We have a substantial net operating loss carryforward that we plan to use to offset our federal tax liability to the extent allowable, other than alternative minimum tax, generated from the sales of our Associated Centers and Centers businesses |
| Based on the final determination of the purchase price allocation of the Associated Centers business, we may be subject to additional tax in the Republic of Ireland above the federal income tax |
| If our net operating loss carryforward is found to be subject to annual limitations, then our federal tax liability and available cash proceeds after the sale may be materially different and our financial position could be adversely affected |
| As of December 2005, we had net operating loss carryforwards of more than dlra150 million that we anticipate may be used in the future to reduce our federal tax liability |
| We established a full valuation allowance against the net operating loss carryforward, along with all other deferred tax assets, to reflect the uncertainty of the recoverability of this asset |
| The utilization of this asset in the future is dependent upon our having positive earnings |
| Furthermore, the likelihood of an annual limitation on our ability to utilize our net operating loss carryforward to offset future US federal taxable income is increased by (1) the issuance of certain convertible preferred stock, options, warrants, or other securities exercisable for common stock, (2) changes in our equity ownership occurring in the last three years and (3) potential future changes in our equity ownership |
| The amount of an annual limitation can vary significantly based on factors existing at the date of an ownership change |
| If such limitations were imposed, they could have a material adverse impact on our results of operations and cash flows |
| 6 ______________________________________________________________________ [30]Table of Contents The sale of our Centers business might adversely affect our ability to retain key management, technical and consulting personnel |
| Following the sale of our Centers business, we will no longer have an operating business |
| If we no longer have an operating business, we may not be able to retain, or may no longer have a need to retain, key management and personnel |
| Even if the sale of our Centers business is not consummated, the announcement of the sale may cause our customers to terminate or modify their relationships with us and these negative effects could continue indefinitely |
| We face possible delisting from the Nasdaq SmallCap Market, which would result in a limited public market for our common stock, and may adversely affect the price and trading volume of our common stock |
| There are several requirements for the continued listing of our common stock on the Nasdaq SmallCap Market, including, but not limited to, maintaining a minimum bid price of dlra1dtta00 per share, maintaining total shareholders’ equity of dlra2dtta5 million and maintaining an operating business |
| Following completion of the sale of our Centers business, we will cease to have an operating business |
| At this time, we do not intend to acquire a new business following completion of the sales |
| Furthermore, even if we acquire an operating business following the sale of our Centers business, we will still have to continue to meet the other requirements for continued listing on the Nasdaq SmallCap Market |
| We also received notice from The Nasdaq Stock Market informing us that our common stock would be subject to delisting from the Nasdaq SmallCap Market unless we provided a specific plan to achieve and sustain compliance with all listing requirements |
| We submitted to Nasdaq a plan to comply with the shareholders’ equity requirement, based upon the impact of the sale of our Associated Centers business on shareholders’ equity |
| However, we received a letter from The Nasdaq Stock Market on January 25, 2006, informing us that because we do not comply with the shareholders’ equity requirements of The Nasdaq Stock Market and we will no longer have an operating business following the sales of our Associated Centers and Centers businesses, our common stock would be delisted from the Nasdaq SmallCap Market at the opening of business on February 3, 2006 |
| We appealed Nasdaq’s decision to delist our common stock to a Nasdaq Listing Qualification Panel |
| On March 9, 2006, representatives of BriteSmile attended an oral hearing before the Nasdaq Listing Qualifications Panel regarding our continued listing on The Nasdaq SmallCap Market |
| On March 17, 2006, we received notification of the Panel’s decision |
| The Panel granted our request for continued listing, subject to the conditions that (1) on or before May 15, 2006, we report in our Form 10-Q for the fiscal period ended April 1, 2006, actual stockholders’ equity at April 1, 2006 of at least dlra2dtta5 million, and (2) on May 15, 2006, or on the day of the closing of the sale of our Centers business, whichever is sooner, we provide the Panel a written update containing a definitive plan addressing resolution of our potential status as a public shell |
| In addition, we must be able to demonstrate compliance with all requirements for continued listing on The Nasdaq SmallCap Market |
| If we are unable to meet these conditions, our common stock may be delisted from The Nasdaq Stock Market |
| If we were to be delisted, the Company would explore other listing alternatives such as the OTC Bulletin Board |
| If our common stock is delisted, trading our stock may become more difficult and our stock price could decrease even further |
| If our common stock is not listed on the Nasdaq SmallCap Market, many potential investors will not purchase it, which would further limit the trading market for our common stock |
| Our stock price may be volatile and you could lose all or part of your investment |
| We expect that the market price of our common stock will be volatile |
| Stock prices have risen and fallen in response to a variety of factors, including: • quarter-to-quarter variations in operating results; and • market conditions in the economy as a whole |
| 7 ______________________________________________________________________ [31]Table of Contents The market price for our common stock may also be affected by our ability to meet investors’ or securities analysts’ expectations |
| Any failure to meet these expectations, even slightly, may result in a decline in the market price of our common stock |
| In addition, the stock market is subject to extreme price and volume fluctuations |
| This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of these companies |
| In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against that company |
| If similar litigation were instituted against us, it could result in substantial costs and a diversion of our management’s attention and resources |
| We have a history of losses and accumulated deficit and this trend of losses may continue in the future |
| As of December 31, 2005, our accumulated deficit was dlra175dtta8 million |
| Following the sale of our Centers business, we will cease to have business operations |
| Following the sale, we do not currently intend to pursue acquisition of another operating business |
| We make no assurance that even if we were to acquire new business operations that we would be profitable in the future |
| RISKS OF OUR BUSINESS IF WE DO NOT COMPLETE THE SALE OF OUR CENTERS BUSINESS If we do not complete the sale of our Centers business and we continue to operate the Centers business, the risk factors listed below in italics would be applicable to us and our operation of the Centers business |
| However, even if we complete the sale of the Centers business, some of the risk factors below might still apply to us following the sale |
| If we do not complete the sale of our Centers business, we will continue to operate the Centers business as our sole operating business, and we may not be profitable |
| The closing of the sale of our Centers business is contingent on the occurrence of many things, several of which are out of our control, including the ability of Dental Spas to complete the financing of the purchase, no material change occurring to our Centers business and our obtaining consents from various third parties |
| If we do not complete the sale of our Centers business, we currently intend to continue to operate the business |
| We have not been able to operate profitably in the past, and while our business would initially consist of only our Centers business and not our Associated Center business, which we sold, we cannot guarantee that our business would be profitable |
| Inflation Most of our products are purchased in finished form and packaged by the supplier or at our headquarters |
| We anticipate usual inflationary increases in the price of our products and do not intend to pass these increases along to our customers |
| In general, we do not believe that inflation has had a material effect on our results of operations in recent years |
| However, there can be no assurance that our business will not be affected by inflation in the future |
| Seasonality We believe that our business follows seasonal trends due to increased consumer demand during the spring and early summer months, and around public and national holidays |
| As a result, our sales performance could potentially be affected |
| Our success will depend on acceptance of our LATW process and post-whitening maintenance products |
| We derive most of our revenues from our LATW procedures, a relatively new teeth-whitening concept for consumers |
| We also market BriteSmile branded toothpaste, electric toothbrushes, mouthwash, the BriteSmile To Go pen, and post-whitening procedure touchups through our Centers and on our website |
| Our success will depend 8 ______________________________________________________________________ [32]Table of Contents in large part on our ability to successfully encourage consumers to switch from traditional and less expensive bleaching tray whitening methods to our LATW system, and on our ability to successfully market our line of whitening and post-whitening maintenance products |
| There can be no assurance that consumers will accept our procedure or products |
| Typically, medical and dental insurance policies do not cover teeth whitening procedures, including the Company’s LATW procedure, or whitening maintenance products, which may have an adverse impact upon the market acceptance of our products and services |
| Our success will depend on our ability to update our technology to remain competitive |
| The dental device and supply industry is subject to technological change |
| As technological changes occur in the marketplace, we may have to modify our products in order to become or remain competitive or to ensure that our products do not become obsolete |
| We sold virtually our entire technology portfolio to Discus and although we have a license to use the existing technology in the Centers, we cannot give assurances that we will be able to either acquire or develop newer technology in the future |
| If we fail to anticipate or respond in a cost-effective and timely manner to government requirements, market trends or customer demands, or if there are any significant delays in product development or introduction, our revenues and profit margins may decline, which could adversely affect our cash flows, liquidity and operating results |
| We may have problems financing our future growth |
| If we were to continue to operate our Centers business, our growth strategy would include investment in and expansion of Centers throughout the United States and internationally, increasing awareness of the BriteSmile brand, and developing and marketing our brand name and retail products |
| To finance our prior growth we have sold debt and equity securities; however, additional funds may be needed in the future for continued expansion |
| We cannot give assurance that additional financing will be available or that, if available, it will be on terms favorable to our stockholders or us |
| If needed funds are not available, we may be required to close existing Centers, and/or limit or forego the establishment of new Centers and the development of new products, or limit the scope of our current operations, which could have a material adverse effect on our business, operating results and financial condition |
| We may be required to take other actions that may lessen the value of our common stock, including borrowing money on terms that are not favorable to us |
| Raising the needed funds through the sale of additional shares of our common stock or securities convertible into shares of common stock may result in dilution to current stockholders |
| We are subject to competition |
| The market for teeth whitening products and services is highly competitive |
| Competition in the market for teeth whitening products and services may intensify in the future |
| Numerous well-established companies and smaller entrepreneurial companies are focusing significant resources on developing and marketing products and services that will compete with our products and services |
| In addition, many of our current and potential competitors have greater financial, technical, operational and marketing resources |
| Teeth whitening products and services offered by our competitors include traditional and often less expensive bleaching tray methods and other forms of heat or light activated curing methods |
| We may not be able to compete successfully against these competitors in developing, marketing and distributing our services and products, which could result in the loss of customers and could have a material adverse effect on our business |
| Competitive pressures may also force prices for teeth whitening services down and such price reductions may adversely affect our potential future revenue and profitability |
| In addition, we recently sold our Associated Center business to Discus |
| BriteSmile products and services offered through our Centers will compete directly with BriteSmile products and systems offered through existing independent dental offices |
| 9 ______________________________________________________________________ [33]Table of Contents We may experience shortages of the supplies we need because we do not have long-term agreements with certain suppliers and rely on sole sources for key equipment |
| Successful operation of our Centers business depends to a degree on our ability to provide our Centers a sufficient supply of teeth whitening gels and maintenance products |
| Since our BS2000 was first used commercially, we have relied upon manufacturing and supply agreements with multiple suppliers and a single manufacturer of our LATW systems |
| Effective April 2001, the Company’s LATW systems are manufactured by Delphi Medical Systems Corporation, Longmont, Colorado, pursuant to an agreement between the Company and Delphi |
| We have no long-term purchase contracts or other contractual assurance of continued supply, pricing or access to new products |
| While we believe that we have good relationships with our suppliers and our manufacturer, if we are unable to extend or secure manufacturing services or to obtain component parts or finished products from one or more key vendors on a timely basis and on acceptable commercial terms, our results of operations could be seriously harmed |
| Our future growth will depend in part on adding new Centers |
| One driver of future growth will be expansion of the number of our Centers |
| We cannot give assurance that we will be successful in expanding the number of Centers or that such additions will achieve sales levels satisfactory to us |
| Demand for the Company’s services and products is driven by consumers whose broad spending patterns are affected by general economic conditions |
| Over recent years, we have observed some variability in demand as a result of changing economic conditions, which we believe may relate to fluctuations in the level of consumer discretionary spending |
| We believe that our performance will continue to be affected by such economic parameters |
| We operate our Centers using intellectual property under a license granted to us by Discus Dental, and we cannot guarantee that the underlying patents will not be infringed by competitors, or that certain patents that have been applied for will be granted |
| In connection with the sale of our Associated Center business to Discus, we sold all of our intellectual property relating to our business to Discus, but we retained a license from Discus permitting us to utilize the intellectual property to operate our Centers business |
| There is an expansive and growing portfolio of patents to protect the intellectual property rights licensed to us |
| In 2002, two patents relating to the LATW systems were granted, including a patent covering a method of whitening teeth by exposing teeth treated with transparent composition including a peroxide and photosensitizing compound to light, comprising of a bleaching composition exposed to light to accelerate whitening, and a patent covering the light source |
| There are also a number of patent applications related to the composition of our whitening gel, tissue isolation useful in light-activated teeth whitening, our business method and our unique system of delivery of light to all teeth simultaneously |
| We also filed patent applications related to the BriteSmile To Go pen |
| The rights relied upon to protect the intellectual property licensed to us by Discus underlying our products and services may not be adequate, which could enable third parties to use the technology used by us and would reduce our ability to compete in the market |
| The rights licensed to us by Discus rely on a combination of trade secrets, copyright and trademark laws, non-disclosure agreements and other contractual provisions and technical measures to protect our intellectual property rights |
| Nevertheless, these measures may not be adequate to safeguard the technology underlying our products and services |
| If these measures do not protect these rights, third parties could use the same technology we use, and our ability to compete in the market would be reduced |
| In addition, employees, consultants and others who participate in the development of our products and services may breach their agreements with us or Discus regarding intellectual property, and we may not have adequate remedies for the breach |
| We or Discus also 10 ______________________________________________________________________ [34]Table of Contents may not be able to effectively protect these intellectual property rights in some foreign countries |
| We also realize that our and Discus’ trade secrets may become known through other means not currently foreseen by us |
| Notwithstanding our and Discus’ efforts to protect this intellectual property, our competitors may independently develop similar or alternative technologies or products that are equal or superior to the technology and products used by us without infringing on any of the intellectual property rights or designs we use |
| Our products or services could infringe on the intellectual property rights of others, which may cause us to engage in costly litigation and, if we are not successful, could also cause us to pay substantial damages and prohibit us from selling our products or services |
| Third parties may assert infringement or other intellectual property claims against us |
| We may have to pay substantial damages, including treble damages, for past infringement if it is ultimately determined that our products or services infringe a third party’s proprietary rights |
| Further, we may be prohibited from selling our products before we obtain a license, which, if available at all, may require us to pay substantial royalties |
| Even if these claims are without merit, defending a lawsuit takes significant time, may be expensive and may divert management’s attention from other business concerns |
| Notwithstanding the foregoing, we are not aware of any infringement claims asserted against us by others |
| We are subject to government regulation regarding the corporate practice of dentistry |
| Our corporate structure, the operation of Centers and contractual relationships with the licensed dentists at our Centers are subject to government regulation and may be reviewed by applicable state agencies governing the practice of dentistry (such as a Board of Dental Examiners) |
| We believe that our present and contemplated operation of Centers is and will be in compliance in all material respects with applicable federal, state and local laws and regulations, and that favorable review of our corporate structure would be obtained from any state agency which chooses to review our operational structure |
| However, we cannot give assurance that such favorable review would be obtained in all instances |
| We continue to cooperate with state regulatory agencies to respond to any requests for information about our business structure and to obtain any necessary governmental approvals |
| We cannot give assurance that future enactments, amendments or interpretations of government regulations will not be more stringent, and will not require structural, organizational or operational modifications to our existing or future contractual relationships with the licensed dentists at our Centers who provide our services |
| We may become subject to government regulation regarding our teeth whitening services and products |
| The light used in the LATW systems is categorized as a Class I Medical Device as defined by the Food and Drug Administration (“FDA”) |
| As long as the light is used specifically to perform cosmetic dental procedures (teeth whitening), it is not subject to pre-market notification requirements, although we are subject to FDA requirements regarding handling of complaints and other general FDA record keeping standards |
| There can be no assurance that some or all of the existing government regulations will not change significantly or adversely in the future, or that we will not become subject to compliance with additional and stricter government regulations which could, in the future, affect our revenue |
| Ownership of our common stock is concentrated in a limited number of shareholders |
| Current directors and executive officers of the Company, or their affiliates, own and control more than a majority of the outstanding common stock of the Company and, therefore, have ultimate authority to make all major decisions affecting our business, including the identity and make-up of the Company’s board of directors and any other matters requiring approval of the shareholders of the Company |
| Our efforts to build strong brand identity and customer loyalty may not be successful |
| We believe that establishing and maintaining brand identity and brand loyalty is critical to attracting customers and strategic partners |
| In order to attract and retain these groups and respond to competitive pressures, we intend to continue advertising spending to create and maintain brand loyalty |
| However, as a result of the sale 11 ______________________________________________________________________ [35]Table of Contents of our Associated Centers business, we intend to reduce spending on advertising |
| We do not yet know if the reduced advertising will result in a material reduction in revenues |
| We believe that advertising rates, and the cost of advertising campaigns in particular, could increase substantially in the future |
| If our branding efforts are not successful, our results of operations could be adversely affected |
| Promotion and enhancement of the BriteSmile brand will also depend on our success in consistently providing a high-quality customer experience for our teeth whitening services and satisfaction with our products |
| If customers do not perceive our service and product offerings to be of high quality, or if we introduce new services and products that are not favorably received, the value of the BriteSmile brand could be harmed |
| Any brand impairment or dilution could decrease the attractiveness of BriteSmile, which could harm our reputation, reduce our net revenue and cause us to lose customers |
| Changes in required accounting practices may affect our reported operating results and stock price |
| Any future changes to applicable Generally Accepted Accounting Procedures or additional SEC statements on relevant accounting policies may require us to further change our practices |
| These uncertainties may cause our reported operating results and stock price to decline |
| Failures in our information technology systems or the systems of third parties could adversely affect our business and result in a loss of customers |
| Our web site and our Internet-based Scheduler system may experience slow response times, decreased capacity to accommodate a large number of customers or a temporary disruption in service for a variety of reasons |
| Additionally, power outages and delays in such service may interrupt or prevent us from immediately coordinating with the schedules of Centers, and may interrupt or prevent customers from arranging for our services or from ordering our products through our e-Commerce Internet site |
| Computer hardware and software components to our Scheduler system are located at a third party co-location |
| In addition, a back-up file server and tape back-ups of the Scheduler database reside both at our headquarters and off-site |
| Nevertheless, natural disasters such as floods, fires, and power outages, telecommunications failures, physical or electronic break-ins or vandalism, viruses and other similar events could damage our hardware and software systems, lead to a loss of data, cause substantial disruption in our business operations and have a material adverse effect on our business |
| We are susceptible to product liability suits and if a lawsuit is brought against us it could result in us having to pay large legal expenses and judgments |
| Because of the nature of the dental device industry, there can be no assurance that we will not be subject to claims against us related to our products or services |
| Our products come into contact with vulnerable areas of the human body, such as the mouth, tongue, teeth and gums, and, therefore, the sale and support of dental products makes us susceptible to the risk of such claims |
| A successful product liability claim or claim arising as a result of use of our products or services brought against us, or the negative publicity brought up by such claim, could have a material adverse effect on our business |
| We maintain product liability insurance with coverage limits of at least dlra5 million per occurrence and dlra5 million per year |
| While we believe that we maintain adequate insurance coverage that is reasonable and customary for our business, we cannot give assurance that the amount of insurance will be adequate to satisfy claims made against us in the future, or that we will be able to obtain insurance in the future at satisfactory rates or in adequate amounts |
| See Item 7 – Management’s Discussion of Financial Condition and Results of Operations, “Liquidity and Capital Resources |