Growth Opportunities Abound for Britesmile

| About: BriteSmile Inc. (BSML)

Yesterday, BriteSmile (BSML) released its 10Q and provided updated financial figures on continuing operations. According to the company, revenues from continuing operations increased 52% to $7.8 million and EBITDA, excluding one-time charges related to the company's sale of the Associated Center Business, came in at $800 thousand for the quarter. On a per share basis, EBITDA, excluding one-time charges, was equal to $0.07, or $0.28 on an annualized basis.

Overall, we think these results demonstrate quite clearly that with the sale of the company's Associated Center business, BriteSmile now has excellent organic growth opportunities in its retail/Spa business. As we have mentioned in the past, prior to the sale of the Associated Center business, BriteSmile was constrained, for years we may add, in its marketing/advertising initiatives by channel conflicts with the dental practices in the Associated business. However, with the dental practices now removed, the company can finally implement aggressive retail marketing campaigns which can unlock the value of the BriteSmile retail tooth whitening business.

As per the 10Q, the increase in sales: "Is due to two primary factors: 1) higher volume from a decrease in the procedure price in the second quarter of 2006; and 2) with the Associated Center (“AC”) business sold, calls to the call center were directed 100% to BriteSmile spas instead of a portion going to the AC dentists. " John Reed, BSML's New CEO, added in the press release:

We were able to significantly improve our advertising productivity as we reduced advertising expense by approximately 60% compared to the spend level in the second quarter of last year. We have also streamlined the spa operating expenses which, combined with the higher revenue levels, have improved the cash contribution of all spas. Looking forward, BriteSmile will continue to drive the Centers Business through advertising, promotions, and other retail strategies to maximize the performance of BriteSmile.

So where is BSML headed now? On the one hand, as the year progresses and the company's earnings statements become less complex, with fewer one-time charges, investors will begin to appreciate the strong underlying earnings and growth potential of BSML's Retail Spa and whitening product businesses. At less than 10X annualized earnings, and less than 5X our estimated 2007 earnings of $0.55 per share, the stock surely seems cheap at these levels, especially considering the $150 million+ tax loss carryforward asset and the various growth opportunities.

However, as we have noted in past posts, the major uncertainty with BriteSmile, is the company's remaining lawsuits. BriteSmile has set aside about $12 million in restricted cash to settle these lawsuits, but of course one can never be 100% certain about potential legal liabilities.

Despite these legal risks, though, we still think the risk/reward for BriteSmile's shares is very attractive. In reviewing the SEC filings, it seems to us that the company's restricted cash should be more than adequate to cover potential legal settlements. Considering the fact that BriteSmile's Retail/Spa business was already given a public value of $20 million, and another bidder recently offered $2 per share cash for the same operation ($4 overall, including the stock portion), it does not appear to us that there is much downside in the shares at current prices, even taking into account the legal risks.

At the same time, should the legal risks be removed favorably, and assuming the company continues to report strong bottom-line numbers over the next year, the stock could receive a multiple more in line with other fast-growing retail operations. We believe the stock could easily fetch 15X forward earnings ($4 to $9 per share) under those potential circumstances.

We own shares in the stock mentioned in this report. We first alerted subscribers to BriteSmile at an average share price of $1.75, as detailed in this post. This report includes market analysis. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets or in any particular stock. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. We maintain no legal responsibility to update this report or our holdings in the stock mentioned in this report.