UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended

June 30, 2020

or

 

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: 001-36385

 

BIOLASE, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

87-0442441

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

27042 Towne Center Drive, Suite 270

Lake Forest, California 92610

(Address of principal executive offices) (Zip Code)

(949) 361-1200

(Registrant’s telephone number, including area code)

 

Indicate by check mark 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      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes      No  

Securities registered pursuant to Section 12(b) of the Act

 

Title of each class

 

Trading

symbol(s)

 

Name of each exchange on which registered

Common stock at par value $0.001 per share

 

BIOL

 

The Nasdaq Stock Market LLC

(Nasdaq Capital Market)

 

As of August 11, 2020, the registrant had 92,190,630 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 


BIOLASE, INC.

INDEX

 

 

  

 

  

Page

PART I.

  

FINANCIAL INFORMATION

  

3

Item 1.

  

Financial Statements (Unaudited):

  

3

 

  

Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019

  

3

 

  

Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2020 and June 30, 2019

  

4

 

 

Consolidated Statements of Redeemable Preferred Stock and Stockholders’ Equity for the three and six months ended June 30, 2020 and June 30, 2019

 

5

 

  

Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and June 30, 2019

  

6

 

  

Notes to Consolidated Financial Statements

  

7

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

31

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

50

Item 4.

  

Controls and Procedures

  

50

PART II

  

OTHER INFORMATION

  

52

Item 1.

  

Legal Proceedings

  

52

Item 1A.

  

Risk Factors

  

52

Item 5

 

Other Information

 

54

Item 6.

  

Exhibits

  

55

Signatures

 

59

 

 

 

2


PART I. FINANCIAL INFORMATION

 

ITEM  1.

FINANCIAL STATEMENTS

 

BIOLASE, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

 

 

 

June 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

(unaudited)

 

 

(audited)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,437

 

 

$

5,789

 

Restricted cash

 

 

312

 

 

 

312

 

Accounts receivable, less allowance of $3,581 and $2,531 in 2020 and

   2019, respectively

 

 

4,119

 

 

 

8,760

 

Inventory

 

 

11,932

 

 

 

10,995

 

Prepaid expenses and other current assets

 

 

1,094

 

 

 

1,163

 

Total current assets

 

 

22,894

 

 

 

27,019

 

Property, plant, and equipment, net

 

 

781

 

 

 

1,193

 

Goodwill

 

 

2,926

 

 

 

2,926

 

Right of use asset

 

 

649

 

 

 

276

 

Other assets

 

 

506

 

 

 

433

 

Total assets

 

$

27,756

 

 

$

31,847

 

LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'

   EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,510

 

 

$

5,332

 

Accrued liabilities

 

 

3,549

 

 

 

4,744

 

Deferred revenue, current portion

 

 

1,486

 

 

 

2,237

 

Term loan (net of discount)

 

 

13,544

 

 

 

13,466

 

Total current liabilities

 

 

21,089

 

 

 

25,779

 

Deferred revenue

 

 

412

 

 

 

358

 

Warranty accrual

 

 

194

 

 

 

245

 

Non current term loans

 

 

3,140

 

 

 

 

Other liabilities

 

 

1,612

 

 

 

1,123

 

Total liabilities

 

 

26,447

 

 

 

27,505

 

Commitments and contingencies Note 11

 

 

 

 

 

 

 

 

Redeemable preferred stock:

 

 

 

 

 

 

 

 

Preferred stock, par value $0.001 per share; 1,000 shares authorized, 0

   and 70 shares issued and outstanding as of June 30, 2020 and

   December 31, 2019, respectively

 

 

 

 

 

3,965

 

Total redeemable preferred stock

 

 

 

 

 

3,965

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, par value $0.001 per share; 180,000 and 40,000 shares

   authorized, 50,387 and 31,439 shares issued and 50,342 and 31,439

   outstanding as of June 30, 2020 and December 31, 2019, respectively

 

 

50

 

 

 

31

 

Additional paid-in-capital

 

 

247,155

 

 

 

235,594

 

Accumulated other comprehensive loss

 

 

(645

)

 

 

(701

)

Accumulated deficit

 

 

(245,251

)

 

 

(234,547

)

Total stockholders' equity

 

 

1,309

 

 

 

377

 

Total liabilities, redeemable preferred stock and stockholders'

   equity

 

$

27,756

 

 

$

31,847

 

 

See accompanying notes to unaudited consolidated financial statements.

3


BIOLASE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited, in thousands, except per share data)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net revenue

 

$

2,938

 

 

$

8,645

 

 

$

7,721

 

 

$

18,971

 

Cost of revenue

 

 

1,997

 

 

 

5,265

 

 

 

5,427

 

 

 

12,070

 

Gross profit

 

 

941

 

 

 

3,380

 

 

 

2,294

 

 

 

6,901

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

2,093

 

 

 

3,272

 

 

 

4,797

 

 

 

7,151

 

General and administrative

 

 

2,137

 

 

 

2,511

 

 

 

5,147

 

 

 

4,903

 

Engineering and development

 

 

690

 

 

 

1,124

 

 

 

1,680

 

 

 

2,549

 

Change in fair value of patent litigation settlement liability

 

 

 

 

 

(190

)

 

 

 

 

 

 

Total operating expenses

 

 

4,920

 

 

 

6,717

 

 

 

11,624

 

 

 

14,603

 

Loss from operations

 

 

(3,979

)

 

 

(3,337

)

 

 

(9,330

)

 

 

(7,702

)

Loss on foreign currency transactions

 

 

40

 

 

 

5

 

 

 

126

 

 

 

48

 

Interest expense

 

 

625

 

 

 

529

 

 

 

1,214

 

 

 

1,007

 

Non-operating loss, net

 

 

665

 

 

 

534

 

 

 

1,340

 

 

 

1,055

 

Loss before income tax provision

 

 

(4,644

)

 

 

(3,871

)

 

 

(10,670

)

 

 

(8,757

)

Income tax provision

 

 

53

 

 

 

28

 

 

 

34

 

 

 

42

 

Net loss

 

 

(4,697

)

 

 

(3,899

)

 

 

(10,704

)

 

 

(8,799

)

Other comprehensive income item:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

74

 

 

 

14

 

 

 

56

 

 

 

(41

)

Comprehensive loss

 

$

(4,623

)

 

$

(3,885

)

 

$

(10,648

)

 

$

(8,840

)

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.12

)

 

$

(0.18

)

 

$

(0.31

)

 

$

(0.41

)

Diluted

 

$

(0.12

)

 

$

(0.18

)

 

$

(0.31

)

 

$

(0.41

)

Shares used in the calculation of net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

37,990

 

 

 

21,595

 

 

 

34,709

 

 

 

21,366

 

Diluted

 

 

37,990

 

 

 

21,595

 

 

 

34,709

 

 

 

21,366

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

4


 

BIOLASE, INC.

CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND

STOCKHOLDERS' (DEFICIT) EQUITY

(Unaudited, in thousands)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Total redeemable preferred stock, beginning balance

 

$

3,965

 

 

$

 

 

$

3,965

 

 

$

 

Conversion of redeemable preferred stock

 

$

(3,965

)

 

$

 

 

$

(3,965

)

 

$

 

Total redeemable preferred stock, ending balance

 

$

 

 

$

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

31

 

 

 

21

 

 

 

31

 

 

 

21

 

Issuance of common stock

 

 

19

 

 

 

1

 

 

 

19

 

 

 

1

 

Ending balance

 

 

50

 

 

 

22

 

 

 

50

 

 

 

22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional paid in capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

236,386

 

 

 

229,268

 

 

 

235,595

 

 

 

228,429

 

Sale of common stock

 

 

3,861

 

 

 

 

 

 

3,861

 

 

 

 

Sale of common stock warrants

 

 

3,031

 

 

 

 

 

 

3,031

 

 

 

 

Conversion of Series E Participating Convertible Preferred Stock

 

 

3,965

 

 

 

 

 

 

3,965

 

 

 

 

Issuance of common stock upon exercise of options

 

 

 

 

 

 

 

 

 

 

 

3

 

Settlement of liability awards

 

 

 

 

 

7

 

 

 

151

 

 

 

209

 

Stock offering costs

 

 

(863

)

 

 

 

 

 

(863

)

 

 

 

Stock-based compensation expense

 

 

708

 

 

 

488

 

 

 

1,348

 

 

 

1,122

 

Warrants issued in connection with debt instruments

 

 

67

 

 

 

209

 

 

 

67

 

 

 

209

 

Ending balance

 

 

247,155

 

 

 

229,972

 

 

 

247,155

 

 

 

229,972

 

Accumulated other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

(719

)

 

 

(725

)

 

 

(701

)

 

 

(670

)

Other comprehensive loss

 

 

74

 

 

 

14

 

 

 

56

 

 

 

(41

)

Ending balance

 

 

(645

)

 

 

(711

)

 

 

(645

)

 

 

(711

)

Accumulated deficit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 

(240,554

)

 

 

(221,592

)

 

 

(234,547

)

 

 

(216,692

)

Net loss

 

 

(4,697

)

 

 

(3,899

)

 

 

(10,704

)

 

 

(8,799

)

Ending balance

 

 

(245,251

)

 

 

(225,491

)

 

 

(245,251

)

 

 

(225,491

)

Total stockholders' equity, ending balance

 

$

1,309

 

 

$

3,792

 

 

$

1,309

 

 

$

3,792

 

 

See accompanying notes to unaudited consolidated financial statements.

5


 

BIOLASE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)  

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2020

 

 

2019

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(10,704

)

 

$

(8,799

)

Adjustments to reconcile net loss to net cash and cash equivalents used in

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

488

 

 

 

529

 

Provision for bad debts

 

 

1,008

 

 

 

111

 

Amortization of discounts on lines of credit

 

 

74

 

 

 

109

 

Amortization of debt issuance costs

 

 

121

 

 

 

86

 

Stock-based compensation

 

 

1,519

 

 

 

1,204

 

Deferred income taxes

 

 

 

 

 

(5

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

3,633

 

 

 

1,263

 

Inventory

 

 

(937

)

 

 

(86

)

Prepaid expenses and other current assets

 

 

(14

)

 

 

644

 

Accounts payable and accrued liabilities

 

 

(3,835

)

 

 

(1,720

)

Deferred revenue

 

 

(692

)

 

 

37

 

Net cash and cash equivalents used in operating activities

 

 

(9,339

)

 

 

(6,627

)

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Purchases of property, plant, and equipment

 

 

(81

)

 

 

(125

)

Net cash and cash equivalents used in investing activities

 

 

(81

)

 

 

(125

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from the sale of common stock

 

 

3,881

 

 

 

 

Proceeds from the sale of common stock warrants

 

 

3,031

 

 

 

 

Payments of equity offering costs

 

 

(991

)

 

 

(38

)

Borrowings on other long-term loans

 

 

3,140

 

 

 

 

Borrowings under term loan

 

 

 

 

 

2,500

 

Borrowings on credit facility

 

 

3,000

 

 

 

 

Repayment of credit facility

 

 

(3,000

)

 

 

 

Fees paid for debt instruments

 

 

(50

)

 

 

 

Proceeds from exercise of stock options

 

 

 

 

 

4

 

Net cash and cash equivalents provided by financing activities

 

 

9,011

 

 

 

2,466

 

Effect of exchange rate changes

 

 

57

 

 

 

(38

)

Decrease in cash, cash equivalents and restricted cash

 

 

(352

)

 

 

(4,324

)

Cash, cash equivalents and restricted cash, beginning of period

 

 

6,101

 

 

 

8,356

 

Cash, cash equivalents and restricted cash, end of period

 

$

5,749

 

 

$

4,032

 

Supplemental cash flow disclosure:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

466

 

 

$

831

 

Cash paid for income taxes

 

$

26

 

 

$

12

 

Cash paid for operating leases

 

$

188

 

 

$

414

 

Non-cash accrual for capital expenditures

 

$

35

 

 

$

17

 

Non-cash right-of-use assets obtained in exchange for lease obligation

 

$

570

 

 

$

824

 

Warrants issued in connection with debt instruments

 

$

67

 

 

$

209

 

 

See accompanying notes to unaudited consolidated financial statements.

6


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1—DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

The Company

BIOLASE, Inc. (“BIOLASE” and, together with its consolidated subsidiaries, the “Company”) is a medical device company that develops, manufactures, markets, and sells laser systems in dentistry and medicine. The Company’s products advance the practice of dentistry and medicine for patients and health care professionals. The Company’s proprietary dental laser systems allow dentists, periodontists, endodontists, oral surgeons, and other dental specialists to perform a broad range of minimally invasive dental procedures, including cosmetic, restorative, and complex surgical applications. The Company’s laser systems are designed to provide clinically superior results for many types of dental procedures compared to those achieved with drills, scalpels, and other conventional instruments. The Company has clearance from the Food and Drug Administration (“FDA”) to market and sell its laser systems in the United States and also has the necessary registration to market and sell its laser systems in Canada, the European Union, and many other countries outside the United States.

Basis of Presentation

The unaudited consolidated financial statements include the accounts of BIOLASE and its wholly-owned subsidiaries and have been prepared on a basis consistent with the December 31, 2019 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.

The consolidated results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results for the full year. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2019, included in BIOLASE’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2020 (the “2019 Form 10-K”).

Liquidity and Management’s Plans

The Company incurred losses from operations and net losses, and used cash in operating activities for the three and six months ended June 30, 2020. The Company’s recurring losses, level of cash used in operations, and need for additional capital in the future, including uncertainties surrounding the impact of COVID-19, raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

COVID-19 Risk and Uncertainties and CARES Act

The COVID-19 pandemic has severely impacted global economic activity, tax and many countries and many states in the United States have reacted to the pandemic by instituting quarantines, mandating business and school closures and restricting travel. These mandated business closures have included dental office closures in Europe and the United States for all but emergency procedures. The Company’s salespeople were unable to call on dental customers during these closures. In addition, most dental shows and workshops scheduled in the first and second quarters of 2020 were canceled. There is no assurance that the Company’s sales will return to normal levels during the second half 2020 or at any time thereafter.  The full impact of the COVID-19 outbreak continues to evolve and it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the global situation on the Company’s financial condition, liquidity, operations, suppliers, industry, and workforce and has taken actions to mitigate the impact including among other things, temporary reductions in pay, furloughs of certain positions and deferrals in payment for cash preservation. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2020.

 

7


 

On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (the “CARES Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property.

 

As of the date of issuance of these unaudited financial statements, the Company is unable to determine any future impact that the CARES Act will have on our financial condition, results of operations, or liquidity.

Paycheck Protection Program Loan (“PPP Loan”)

On April 14, 2020, BIOLASE, Inc., was granted a loan from Pacific Mercantile Bank in the aggregate amount of $2.98 million, pursuant to the Paycheck Protection Program (the “PPP”) under the CARES Act.  See Note 9 for additional information.

The PPP Loan, which was in the form of a Note dated April 13, 2020 issued by the Company, matures on April 13, 2022 and bears interest at a rate of 1.0% per annum, payable monthly commencing on November 1, 2020. The Note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Funds from the PPP Loan may only be used for payroll costs, costs used to continue group health care benefits, mortgage payments, rent, utilities, and interest on other debt obligations incurred before February 15, 2020. The Company intends to use the entire PPP Loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the PPP Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. However, there can be no assurance that the PPP loan will be forgiven.

The application for these funds requires the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. For further information on the PPP loan see Note 9 to these unaudited consolidated financial statements.

EIDL Loan

On May 22, 2020, the Company executed the standard loan documents required for securing a loan (the “EIDL Loan”) from the United States Small Business Administration (the “SBA”) under its Economic Injury Disaster Loan assistance program in light of the impact of the COVID-19 pandemic on the Company’s business. The principal amount of the EIDL Loan is $150,000, with proceeds to be used for working capital purposes. Interest on the EIDL Loan accrues at the rate of 3.75% per annum and installment payments, including principal and interest, are due monthly beginning twelve months from the date of the EIDL Loan in the amount of $731.00. The balance of principal and interest is payable thirty years from the date of the promissory note. In connection with the EIDL Loan, the Company executed the EIDL Loan documents, which include the SBA Secured Disaster Loan Note, dated May 22, 2020, the Loan Authorization and Agreement, dated May 22, 2020, and the Security Agreement, dated May 22, 2020, each between the SBA and the Company. For further information on the EIDL loan see Note 9 to these unaudited consolidated financial statements.

Amendments to the SWK Credit Agreement

As of December 31, 2019, the Company was not in compliance with its debt covenants under its credit agreement dated November 9, 2018 (as amended, the “Credit Agreement”) with SWK Funding, LLC (“SWK”). In March 2020, the Company entered into a Fourth Amendment dated as of March 25, 2020 to its Credit Agreement with SWK (the “Fourth Amendment”). Under the Fourth Amendment, the financial covenant is amended to require consolidated unencumbered liquid assets of no less than $3.0 million as of any date of determination. The Fourth Amendment also adjusted the Minimum Aggregate Revenue and EBITDA (as defined in the Credit Agreement) requirements. Pursuant to the Fourth Amendment to the Credit Agreement, SWK granted the Company a waiver of the Company’s noncompliance with certain financial covenants contained in the Credit Agreement through March 31, 2020.

8


 

On May 15, 2020, the Company entered into the Fifth Amendment to its Credit Agreement (the “Fifth Amendment”) with SWK. The Fifth Amendment amends the Credit Agreement by providing for minimum consolidated unencumbered liquid assets of $1.5 million prior to June 30, 2020 and $3.0 million on or after June 30, 2020; providing for a minimum aggregate revenue target of $41.0 million for the twelve month period ending June 30, 2020, a related waiver of such minimum revenue target in the event that the Company raises equity capital or issues subordinated debt of not less than $10.0 million on or prior to June 30, 2020, and quarterly revenue targets; and providing for a minimum EBITDA target of ($7.0 million) for the twelve month period ended June 30, 2020, a related waiver of such minimum EBIDTA target in the event that the Company raises equity capital or issues subordinated debt of not less than $10.0 million on or prior to June 30, 2020, and quarterly EBITDA targets. The Fifth Amendment contains representations, warranties, covenants, releases, and conditions customary for a credit agreement amendment of this type.

 

On June 8, 2020, SWK agreed to extend the deadline by which the Company is required to raise not less than $10.0 million in equity capital or subordinated debt to July 31, 2020 and agreed that the $6.9 million in proceeds from the offering completed on June 10, 2020 shall be counted toward the $10.0 million requirement. On July 22, 2020, the Company consummated the public offering of 18,000 units, each consisting of one share of Series F Convertible Preferred Stock, par value $0.001 per share (“Series F Convertible Preferred Stock”) and 2,500 warrants, each to purchase one share of Common Stock at an exercise price of $0.40 per share, for which it raised gross proceeds of $18,000,000 before the payment of dealer-manager fees and associated offering expenses of approximately $2.2 million. In connection with the Fifth Amendment, on May 15, 2020 the Company entered into the Third Consolidated, Amended and Restated Warrant pursuant to which the Company issued additional warrants to SWK to purchase 63,779 shares of the Company’s Common Stock with a warrant price per share of $0.39198, and adjusted the warrant price per share with respect to 487,198 existing warrant shares previously issued to SWK to $0.39198. For further information on the additional SWK warrants see Note 9 to these unaudited consolidated financial statements. Based on the extension of the compliance deadline to July 31, 2020, the Company was in compliance with or received a waiver for debt covenants as of June 30, 2020.

Due to the uncertainty surrounding the Company’s ability to meet debt covenants in light of the short and long-term impact of COVID-19 on the Company’s business, the Company is not forecasting compliance with its debt covenants in the next twelve months and has classified the Term Loan with SWK Funding, LLC (the “Term Loan”) as a short-term liability.

On August 12, 2020, the Company entered into the Sixth Amendment to the Credit Agreement (“Sixth Amendment”). Under the Sixth Amendment, the interest only period on the loan is extended to May 2022, the loan maturity date is extended to May 9, 2024, the financial covenants are adjusted, and a $0.7 million repayment of the principal amount was required upon execution of the agreement. See Note 15 for additional information.

Revolving Credit Facility

In April 2020, the Company borrowed $3.0 million in connection with its credit facility with Pacific Mercantile Bank under the PMB Loan (as defined below).

In May 2020 it was determined that the Company was not in compliance with the minimum unrestricted cash requirement under the PMB Loan’s existing covenants as of March 31, 2020. In July, 2020, the Company obtained a waiver for the covenant violation and entered into the First Amendment to the Loan and Security Agreement (the “First Amendment”). Under the First Amendment to the PMB Loan, the Company obtained a forbearance waiving non-compliance through August 1, 2020 subject to certain conditions. In addition, the First Amendment to the PMB Loan the loan covenants were modified to include (a) on or before July 31, 2020, the Borrower has received net cash proceeds in the amount of at least $8.0 million from the issuance of equity securities and those funds are deposited into accounts maintained by PMB and (b) the Company maintains unrestricted cash at PMB in an aggregate amount of $1.5 million.

The Company repaid the $3.0 million and as of June 30, 2020, there was no balance outstanding under the PMB Loan.

9


 

Registered Direct Offering and Concurrent Private Placement

On June 10, 2020, the Company consummated a registered direct offering of 10,800,000 shares of its common stock (the “Shares”) to certain accredited institutional investors and a concurrent private placement of warrants to purchase 10,800,000 shares of common stock with an exercise price of $0.515 per share (the “June 2020 Warrants”). The June 2020 Warrants are exercisable commencing on the date of their issuance and will expire on the five- year anniversary of the issuance date.

The combined purchase price for one Share and one June 2020 Warrant in the offering was $0.64. The Company received aggregate gross proceeds of approximately $6.9 million in the offering, before deducting approximately $0.8 million in fees to the placement agents and other offering expenses.  For additional information regarding this transaction, see Note 4 to these unaudited consolidated financial statements.

Rights Offering

On July 22, 2020, the Company completed its previously announced rights offering. Pursuant to the Rights Offering, the Company sold an aggregate of 18,000 units consisting of an aggregate of 18,000 shares of Series F Convertible Preferred Stock and 45,000,000 warrants, with each warrant exercisable for one share of Common Stock, resulting in net proceeds to the Company of approximately $15.8 million, after deducting expenses relating to the Rights Offering, including dealer-manager fees and expenses, and excluding any proceeds received upon exercise of any warrants. For additional information regarding this transaction, see Note 15 to these unaudited consolidated financial statements.

As of June 30, 2020, the Company had working capital of approximately $1.8 million. The Company’s principal sources of liquidity as of June 30, 2020 consisted of approximately $5.7 million in cash, cash equivalents and restricted cash and $4.1 million of accounts receivable, net, and approximately $1.0 million of availability under the PMB Loan.  

In order for the Company to continue operations beyond the next 12 months and be able to discharge its liabilities and commitments in the normal course of business, the Company must increase sales of its products, control or potentially reduce expenses and establish profitable operations in order to generate cash from operations or obtain additional funds when needed.

Although the Company consummated an equity raise of gross proceeds of $6.9 million in the second quarter of 2020, the Company may still have to raise additional capital in the future. Additional capital requirements may depend on many factors, including, among other things, the rate at which the Company’s business grows, the COVID-19 pandemic and the actions taken to contain it, demands for working capital, manufacturing capacity, and any acquisitions that the Company may pursue. From time to time, the Company could be required, or may otherwise attempt, to raise capital through either equity or debt offerings. The Company cannot provide assurance that it will be able to successfully enter into any such equity or debt financings in the future or that the required capital would be available on acceptable terms, if at all, or that any such financing activity would not be dilutive to its’ stockholders.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of these consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires the Company 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, goodwill and the ability of goodwill to be realized, revenue deferrals, 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.

10


 

Critical Accounting Policies

Information with respect to the Company’s critical accounting policies, which management believes could have the most significant effect on the Company’s reported results and require subjective or complex judgments by management as discussed in the Company’s 2019 audited financial statements included in the Company’s 2019 Form 10-K. Management believes that there have been no significant changes during the six months ended June 30, 2020 in the Company’s critical accounting policies from those disclosed in Item 7 of the 2019 Form 10-K.

Fair Value of Financial Instruments

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 is based on assumptions that market participants would use, including a consideration of non-performance risk. Under the accounting guidance for fair value hierarchy, there are three levels of measurement inputs. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable, either directly or indirectly. Level 3 inputs are unobservable due to little or no corroborating market data.

The Company’s financial instruments, consisting of cash, cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, and the SWK Loan as discussed in Note 9, approximate fair value because of the nature of these items.

Concentration of Credit Risk, Interest Rate Risk and Foreign Currency Exchange Rate

Financial instruments which potentially expose the Company to a concentration of credit risk consist principally of cash and cash equivalents, restricted cash, and trade accounts receivable. The Company maintains its cash and cash equivalents and restricted cash with established commercial banks. At times, balances may exceed federally insured limits. To minimize the risk associated with trade accounts receivable, management performs ongoing credit evaluations of customers’ financial condition and maintains relationships with the Company’s customers that allow management to monitor current changes in business operations so the Company can respond as needed. The Company does not, generally, require customers to provide collateral before it sells them its products. However, the Company has required certain distributors to make prepayments for significant purchases of products.

Substantially all of the Company’s revenue is denominated in U.S. dollars, including sales to international distributors. Only a small portion of its revenue and expenses is denominated in foreign currencies, principally the Euro and Indian Rupee. The Company’s foreign currency expenditures primarily consist of the cost of maintaining offices, consulting services, and employee-related costs. During the three and six month periods ended June 30, 2020 and 2019, the Company did not enter into any hedging contracts. Future fluctuations in the value of the U.S. dollar may affect the price competitiveness of the Company’s products outside the U.S.

Recent Accounting Pronouncements

Changes to GAAP are established by the Financial Accounting Standards Board (the “FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification.

The Company considers the applicability and impact of all ASUs. ASUs not listed below were assessed and determined not to be applicable or are expected to have minimal impact on the Company’s consolidated financial position and results of operations.

Recently Issued Accounting Standards

 

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform. This ASU was issued because the London Interbank Offered Rate (LIBOR) is a benchmark interest rate referenced in a variety of agreements that are used by all types of entities. At the end of 2021, banks will no longer be required to report information that is used to determine LIBOR. As a result, LIBOR could be discontinued. Other interest rates used globally could also be discontinued for similar reasons. ASU 2020-04 provides companies with optional guidance to ease the potential

11


 

accounting burden associated with transitioning away from reference rates that are expected to be discontinued. Companies can apply the ASU immediately. However, the guidance will only be available for a limited time (generally through December 31, 2022). The Company is currently evaluating alternative benchmark rates to replace LIBOR and is still in the process of evaluating the impact that adopting this new accounting standard will have on its consolidated financial statements and related disclosures.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard’s main goal is to improve financial reporting by requiring earlier recognition of credit losses on financing receivables and other financial assets in scope and to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company will be required to use a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The standard will be effective for the Company beginning January 1, 2023, with early adoption permitted beginning January 1, 2019. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements.

 

NOTE 3 – REVENUE RECOGNITION

Contracts with Customers

Revenue for sales of products and services is derived from contracts with customers. The products and services promised in customer contracts include delivery of laser systems, imaging systems, and consumables as well as certain ancillary services such as training and extended warranties. Contracts with each customer generally state the terms of the sale, including the description, quantity and price of each product or service. Payment terms are stated in the contract and vary according to the arrangement. Because the customer typically agrees to a stated rate and price in the contract that does not vary over the life of the contract, the Company’s contracts do not contain variable consideration. The Company establishes a provision for estimated warranty expense.

Performance Obligations

At contract inception, the Company assesses the products and services promised in its contracts with customers. The Company then identifies performance obligations to transfer distinct products or services to the customers. In order to identify performance obligations, the Company considers all of the products or services promised in contracts regardless of whether they are explicitly stated or are implied by customary business practices.

Revenue from products and services transferred to customers at a single point in time accounted for 66% and 71% of net revenue for the three and six months ended June 30, 2020 and 81% and 82% for the three and six months ended June 30, 2019, respectively. The majority of the Company’s revenue recognized at a point in time is for the sale laser systems and consumables. Revenue from these contracts is recognized when the customer is able to direct the use of and obtain substantially all of the benefits from the product which generally coincides with title transfer during the shipping process.

Revenue from services transferred to customers over time accounted for 34% and 29% of net revenue for the three and six months ended June 30, 2020 and 19% and 18% for the three and six months ended June 30, 2019, respectively. The majority of the Company’s revenue that is recognized over time relates to product training and extended warranties. Deferred revenue attributable to undelivered elements, which primarily consists of product training, totaled approximately $0.5 million and $0.6 million as of June 30, 2020 and December 31, 2019, respectively.

12


 

Transaction Price Allocation

The transaction price for a contract is allocated to each distinct performance obligation and recognized as revenue when, or as, each performance obligation is satisfied. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using the best estimate of the standalone selling price of each distinct good or service in a contract. The primary method used to estimate standalone selling price is the observable price when the good or service is sold separately in similar circumstances and to similar customers.

Significant Judgments

Revenue is recorded for extended warranties over time as the customer benefits from the warranty coverage. This revenue will be recognized equally throughout the contract period as the customer receives benefits from the Company's promise to provide such services. Revenue is recorded for product training as the customer attends a training program or upon the expiration of the obligation, which is generally after nine months.

The Company also has contracts that include both the product sales and product training as performance obligations. In those cases, the Company records revenue for product sales at the point in time when the product has been shipped. The customer obtains control of the product when it is shipped, as all shipments are made FOB shipping point, and after the customer selects its shipping method and pays all shipping costs and insurance. The Company has concluded that control is transferred to the customer upon shipment.

Accounts Receivable

Accounts receivable are stated at estimated net realizable value. The allowance for doubtful accounts is based on an analysis of customer accounts and the Company’s historical experience with accounts receivable write-offs. During the first quarter of 2020, the Company recorded an additional allowance for doubtful accounts of approximately $1.0 million due to the uncertainties stemming from the impact of COVID-19.

Contract Liabilities

The Company performs its obligations under a contract with a customer by transferring products and/or services in exchange for consideration from the customer. The Company typically invoices its customers as soon as control of an asset is transferred and a receivable for the Company is established. The Company, however, recognizes a contract liability when a customer prepays for goods and/or services and the Company has not transferred control of the goods and/or services. The opening and closing balances of the Company’s contract liabilities are as follows (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Undelivered elements (training, installation, product

   and support services)

 

$

521

 

 

$

559

 

Extended warranty contracts

 

 

1,377

 

 

 

2,063

 

Total deferred revenue

 

 

1,898

 

 

 

2,622

 

Less long-term portion of deferred revenue

 

 

412

 

 

 

385

 

Total deferred revenue — long -term

 

 

412

 

 

 

385

 

Deferred revenue — current

 

$

1,486

 

 

$

2,237

 

 

The balance of contract assets was immaterial as the Company did not have a significant amount of uninvoiced receivables at June 30, 2020 and December 31, 2019.

The amount of revenue recognized during the six month period ended June 30, 2020 and June 30, 2019 that was included in the opening contract liability balance related to undelivered elements was $0.4 million and $0.3 million, respectively and related to extended warranty contracts was $2.0 million and $0.4 million, respectively.

13


 

Disaggregation of Revenue

The Company disaggregates revenue from contracts with customers into geographical regions and by the timing of when goods and services are transferred. The Company determined that disaggregating revenue into these categories depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by regional economic factors.

The Company’s revenues related to the following geographic areas were as follows for the periods indicated (in thousands):

 

 

 

Three Months Ended

 

 

Six Months

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

United States

 

$

2,195

 

 

$

5,898

 

 

$

5,324

 

 

$

12,014

 

International

 

 

743

 

 

 

2,747

 

 

 

2,397

 

 

 

6,957

 

 

 

$

2,938

 

 

$

8,645

 

 

$

7,721

 

 

$

18,971

 

 

Information regarding revenues disaggregated by the timing of when goods and services are transferred is as follows (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenue recognized over time

 

$

985

 

 

$

1,646

 

 

$

2,006

 

 

$

3,415

 

Revenue recognized at a point in time

 

 

1,953

 

 

 

6,999

 

 

 

5,715

 

 

 

15,556

 

Total

 

$

2,938

 

 

$

8,645

 

 

$

7,721

 

 

$

18,971

 

 

The Company’s sales by end market were as follows for the periods indicated (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

End-customer

 

$

2,402

 

 

$

5,553

 

 

$

5,741

 

 

$

11,254

 

Distributors

 

 

536

 

 

 

3,092

 

 

 

1,980

 

 

 

7,717

 

 

 

$

2,938

 

 

$

8,645

 

 

$

7,721

 

 

$

18,971

 

 

The Company acts as the principal in all its imaging equipment distribution sales. The Company takes possession and control of the equipment before they are sold and transferred to the customer. The Company provides the equipment and any related services directly to the customer. The Company has inventory risk before the equipment is transferred to a customer. The Company purchases and obtains the goods before obtaining a contract with a customer. The Company also has discretion in establishing the price sold to the customer for the equipment.

The revenue and percentages of revenue of the Company’s sales by product line were as follows for the periods indicated:

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2020

 

 

2019

 

Laser systems

 

$

1,091

 

 

 

37.1

%

 

$

4,917

 

 

 

56.9

%

Imaging systems

 

 

 

 

 

%

 

 

63

 

 

 

0.7

%

Consumables and other

 

 

862

 

 

 

29.3

%

 

 

2,084

 

 

 

24.1

%

Services

 

 

985

 

 

 

33.6

%

 

 

1,578

 

 

 

18.3

%

License fees and royalties

 

 

 

 

 

%

 

 

3

 

 

 

%

Total revenue

 

$

2,938

 

 

 

100.0

%

 

$

8,645

 

 

 

100.0

%

 

14


 

Shipping and Handling Costs and Revenues

Shipping and freight costs are treated as fulfillment costs. For shipments to end-customers, the customer bears the shipping and freight costs and has control of the product upon shipment. For shipments to distributors, the distributor bears the shipping and freight costs, including insurance, tariffs and other import/export costs.

 

NOTE 4—REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

Common Stock

At the 2020 Annual Meeting, the Company’s stockholders’ approved a proposal to amend the Company’s Restated Certificate of Incorporation to increase the number of authorized shares of Common Stock from 40,000,000 shares to 180,000,000 shares. On May 28, 2020, the Company filed the amendment with the Secretary of State of the State of Delaware to effect such increase.

Redeemable Preferred Stock

The board of directors of BIOLASE (the “Board”), without further stockholder authorization, may from time to time authorize the issuance of up to 1,000,000 shares of the Company’s preferred stock. Of the 1,000,000 shares of preferred stock, 69,565 shares have been designated as Series E Participating Convertible Preferred Stock, par value $0.001 per share (“Series E Preferred Stock”), and 18,000 shares have been designated as Series F Convertible Preferred Stock, par value $0.001 per share (“Series F Preferred Stock”). In 2019, the Company sold 69,565 shares of Series E Preferred Stock in a private offering. All 69,565 shares of Series E Preferred Stock were automatically converted into 6,956,500 shares of Common Stock upon receipt of the requisite approval at the 2020 Annual Meeting. Upon the conversion, the net proceeds of $4.0 million were reclassified from mezzanine equity to permanent equity. As of June 30, 2020 and December 31, 2019, 0 and 69,565 shares of Series E Preferred Stock were issued and outstanding, respectively.

The shares of Series E Preferred Stock were offered in reliance upon exemptions from registration under the Securities Act of 1933, as amended, afforded by Regulation D and corresponding provisions of state securities laws. The Company subsequently filed a registration statement with the SEC to register the resale of the shares of Common Stock underlying the Series E Preferred Stock.

Stock-Based Compensation

2002 Stock Incentive Plan

The 2002 Stock Incentive Plan (as amended effective as of May 26, 2004, November 15, 2005, May 16, 2007, May 5, 2011, June 6, 2013, October 30, 2014, April 27, 2015, and May 6, 2016, the “2002 Plan”) was replaced by the 2018 Plan (as defined below) with respect to future equity awards. Persons eligible to receive awards under the 2002 Plan included officers, employees, and directors of the Company, as well as consultants. As of June 30, 2020, a total of approximately 3.1 million shares of the Company’s common stock have been authorized for issuance under the 2002 Plan, of which approximately 1.0 million shares of the Company’s common stock have been issued pursuant to options that were exercised and restricted stock units (“RSUs”) that were settled in common stock and 1.1 million shares of common stock have been reserved for outstanding options and unvested RSUs, and no shares are available for future grants.

2018 Stock Incentive Plan

At the annual meeting of stockholders, the Company’s stockholders approved the 2018 Long-Term Incentive Plan (as amended, the “2018 Plan”) which was amended by Amendment No. 1 to the 2018 Plan, approved by the Company’s stockholders at a special meeting on September 21, 2018 and Amendment No. 2 to the 2018 Plan, as approved by the Company’s stockholders on May 15, 2019 and Amendment No. 3 to the 2018 Plan, as approved by the Company’s stockholders on May 15, 2020. The purposes of the 2018 Plan are (i) to align the interests of the Company’s stockholders and recipients of awards under the 2018 Plan by increasing the proprietary interest of such recipients in the Company’s growth and success; (ii) to advance the interests of the Company by attracting and retaining non-employee directors, officers, other employees, consultants, independent contractors and agents; and (iii) to motivate such persons to act in the long-term best interests of the Company and its stockholders.

15


 

Subject to the terms and conditions of the 2018 Plan, the number of shares authorized for grants under the 2018 Plan is 12.2 million. As of June 30, 2020 a total 4.1 million shares of the Company’s common stock have been reserved for issuance upon the exercise of outstanding options and or settlement of unvested RSUs, and 8.1 million shares of the Company’s common stock remain available for future grants.

The Company recognized stock-based compensation expense of $0.8 million and $0.5 million, for the three months ended June 30, 2020 and 2019 and $1.6 million and $1.2 million for the six month period ended June 30, 2020 and June 30, 2019 respectively.   As of June 30, 2020, the Company had approximately $1.4 million of total unrecognized compensation expense, net of estimated forfeitures, related to unvested share-based compensation arrangements. The Company expects that expense to be recognized over a weighted-average period of 1.2 years.

The following table summarizes the income statement classification of compensation expense associated with share-based payments (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Cost of revenue

 

$

78

 

 

$

54

 

 

$

129

 

 

$

136

 

Sales and marketing

 

 

175

 

 

 

78

 

 

 

384

 

 

 

238

 

General and administrative

 

 

482

 

 

 

283

 

 

 

907

 

 

 

724

 

Engineering and development

 

 

66

 

 

 

32

 

 

 

99

 

 

 

106

 

 

 

$

801

 

 

$

447

 

 

$

1,519

 

 

$

1,204

 

 

The stock option fair values were estimated using the Black-Scholes option-pricing model with the following assumptions:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Expected term (years)

 

 

5.5

 

 

 

6.1

 

 

 

5.5

 

 

 

6.1

 

Volatility